-----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, LzJfxeFTeP8NgbE/QfC10j1sMoTMZwKRo+ZL6JPHAqy5D9IzqbU7pxUnRS58QMPn DH9x8prIPEr55WFsqy50Og== 0000950152-02-002603.txt : 20020415 0000950152-02-002603.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-002603 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11174 FILM NUMBER: 02594587 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 1 l92970ae10-k405.txt WARWICK VALLEY TELEPHONE COMPANY 10-K405/12-31-01 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------- FORM 10-K X ANNUAL REPORT FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR - --- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 ammendment to this form 10-K. X --- Aggregate market value of voting stock held by non-affiliates of the registrant as of March 20, 2002 - $ 98,747,722 . Common stock outstanding, as of March 20, 2002 -1,803,282 DOCUMENTS INCORPORATED BY REFERENCE Name Incorporated Into Annual Report to Shareholders for the fiscal year ended December 31, 2001 Part II Proxy Statement for the 2002 Annual Meeting of Shareholders Part III The Exhibit Index for this Annual Report is located on page 10. The total number of pages contained in this Annual Report is 50. 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 communication services with 19,647 access lines in New York State and 10,665 in the state of New Jersey at December 31, 2001. The Company manages its operations as two business segments, telephone service (including local and long distance) and internet service. Financial information regarding the Company's two business segments is found in Note 15 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 (12,751 access lines), Florida (4,038 access lines) Pine Island (1,747 access lines) and Middletown (1,111), New York and Vernon (7,489 access lines) and Upper Greenwood Lake (3,176 access lines), New Jersey. The Company's service area is primarily rural and has an estimated population of 50,000. Business customers represent 7,188 (or 23.7%) 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 and leases telephone equipment both within its territory and within the territories of other telephone companies. Residential telephone equipment sales are made through the Company's retail stores, which are located in the Company's main office in Warwick, New York and at Route 515 and Guthrie Drive in Vernon, New Jersey. The Company also sells and leases business telephone systems both in its own territory and elsewhere. The sale of telephone and other equipment does not constitute a material part of the Company's business. 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, 2001 was $67,220,000 representing an increase of $22,319,000 (or 49.7%) from $12,231,107 (or 39.2%) in 2000. The Company's share of that pre-tax income was $4,985,703. The Company has an 8.9% ownership interest in Hudson Valley DataNet ("HVDN"), L.L.C., a competitive telecommunications company that offers high-speed bandwidth throughout the region in which the company competes. In February, 2001, the Company entered into an agreement with Hudson United Bank as a Guarantor of $250,000 in HVDN debt to Hudson United Bank. The Company is confident in DataNet's business strategy and in their ability to successfully execute such strategy. As such, the Company is pleased to assist DataNet efforts to obtain necessary financing for its expanding business needs. The Company also has a 17.0% interest in Zefcom, L.L.C., a licensed reseller of wireless services. In addition to a capital contribution of $1,200,000, the Company has a commitment to contribute another $800,000 to Zefcom, L.L.C. in the form of a promissory note payable on demand. During 2001, the Company had two wholly-owned subsidiaries that belonged to the telephone segment of its operations. Warwick Valley Mobile Telephone Company, Inc. ("WVMT"), operations were closed during the fourth quarter of 2001. Remaining subscribers were transferred to WVMT's cellular provider. The Company is currently revising its wireless strategy in the face of significant competition from larger providers. For the fiscal year ended December 31, 2001 WVMT had a pre-tax profit of $13,374 a decrease of $54,936 (or 80.4%) from $39,725 (or 36.8%) in 2000. 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, 2001 WVLD had a pre-tax profit of $742,968, a decrease of $207,886 (or 38.9%) from $113,466 (or 17.5%) in 2000. Hometown Online, Inc. ("Online"), another wholly-owned subsidiary of the Company, was established to provide customers with 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 $1,227,910 in the fiscal year ended December 31, 2001, a decrease of $719,712 (or 37.0%) from $568,257 (or 41.2%) in 2000. The decrease was due to increasing competition from high speed providers in areas where the company was unable to provide such service as well as higher operating costs related to Digitial Subscriber Line ("DSL") services. At December 31, 2001 Online had approximately 23,347 customers. On January 10, 2002, the Company's Petition with the New York State Public Service Commission ("NYSPSC") seeking authority to issue unsecured promissory notes (the "Notes") was approved. Similar approval was received from the state of New Jersey Board of Public Utilities ("NJBPUC") on August 8, 2001. The NYSPCS has authorized the Company to issue $18,475,000 of unsecured promissory notes. The proceeds of the Notes will be used to replace existing plant, to refinance existing indebtedness and to purchase equipment used in connection with the Company's new video business. On March 6, 2002 The New Jersey Board of Public Utilities Commission approved the Hometown Online Certificate of Approval (franchise) to operate in Vernon Township. The approval by the NJBPUC now enables the Company to operate as a cable television provider in New Jersey. Hometown Online is currently seeking similar approval in West Milford and Hardyston, New Jersey as well as several municipalities in the state of New York. The Company is now in the process of finalizing cable television construction projects with expected launch of services in the second quarter of 2002. 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 and Sprint-United Telephone, all of which offer residential and business telephone equipment. There are also several interconnect companies located within a 30-mile radius of Warwick, New York. The Telecommunications Act of 1996 (the "Act") created a nationwide structure in which competition is allowed and encouraged between local exchange carriers, interexchange carriers, competitive access providers, cable TV companies and other entities. The markets affected first have been the regional toll areas in both states. Regional toll competition has had the effect of reducing the Company's revenues. The reduction in regional toll revenues for the year ended December 31, 2001 was $123,820 (or 12.3%) in New York and $154,502 (or 10.6%) 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. The Company currently provides access to the national and international calling markets as well as intrastate calling markets through all interested inter-exchange carriers, including WVLD. Equal access ("one-plus") service to all toll carriers has been available to the Company's customers since August 1, 1991. Access to the remainder of the intrastate calling markets is provided by the Company as well as other exchange carriers. WVLD, as an inter-exchange carrier, competes against all such other carriers, providing full toll services to its customers at discounted rates. Online competes both on the basis of service and price. There are numerous competitors throughout Online's market area whose services are available to customers. During 2001, the Company's DSL product enjoyed strong growth growing to a 6.67% penetration of its telephone customers . For the year ended December 31, 2001, Online's revenues were $6,388,392 an increase of $419,085 (or 7.0%) from 2000. 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. 2 STATE AND FEDERAL REGULATION The Company's New York telephone service operations are subject to the jurisdiction of the New York State Public Service Commission ("NYSPSC"), the Company's New Jersey telephone service operations, to the jurisdiction of the New Jersey Board of Public Utilities ("NJBPU"). These two bodies have regulatory authority over the Company with respect to rates, facilities, services, reports, issuance of securities and other matters. Interstate toll and access services are subject to the jurisdiction of the Federal Communications Commission ("FCC"). Video operations are also under NYSPC, NJBPU and FCC jurisdiction. The Company depends heavily on its network access revenues, receiving approximately $7,445,014 (or 27.0%) 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, 2001 was $133,387 and for 2002 will be approximately $130,000. 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 $2,520,000 during the fiscal year ended December 31, 2001 and expects to receive $3,100,000 in the fiscal year ending December 31, 2002. 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 $147,000 to the NYSASP during the fiscal year ending December 31, 2001 and is expected to contribute approximately $137,000 in the fiscal year ending December 31, 2002. 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, 2001 was $19,978 and is expected to be approximately $22,000 in the fiscal year ended December 31, 2002. In the Company's two New Jersey exchanges, intrastate toll revenues are retained by toll carriers, of which the Company is one. The associated access charges are retained by the Company. Revenues resulting from traffic between the Company and Bell Atlantic and United Telephone are adjusted by charges payable to each company for terminating traffic. In addition to charging for access to and from the Company's local network, the Company bills and collects charges for most interstate and intrastate toll messages carried on its facilities. Interstate billing and collection services provided by the Company are not regulated. They are provided under contract by the Company. Intrastate billing and collection remain partly regulated in New York and fully regulated in New Jersey. The regulated services are provided under tariff. Some carriers provide their own billing and collection services. IMPACT OF INFLATION Although inflation has slowed in recent years, it is still a factor in our economy and the Company continues to seek ways to mitigate its inpact. To the extent permitted by competition or regulation, the Company passes increased costs on to its customers by increasing sales prices over time. EMPLOYEES As of March 20, 2002 the Company had 106 full-time and 14 part-time employees, including 84 non-management employees. 3 On November 5, 2001 employees belonging to the Warwick Valley Telephone Company Employees' Association ("WVTEA") elected to become affiliated with Local 503 of the International Brotherhood of Electrical Workers ("IBEW"). As such, the Company now has 69 full-time and 13 part-time employees whose current five-year agreement with the Company expires on April 30, 2003. During the fourth quarter of 2001, the Company offered an early retirement package to certain eligible employees. Special termination benefits of $320,873 resulted from this offer, four employees accepted the Company's offer. The Company considers its relations with its employees to be good. CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. The following factors could cause our future results to differ materially from those expressed in any forward-looking statements: -Adverse economic changes in the markets served by WVTC. -Changes in available technology and the effects of such changes including product substitutions and deployment costs. -The final outcome of state regulatory proceedings. -Enactment of additional state or federal regulatory laws and regulations pertaining to the Company and its subsidiaries. Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially impact our future earnings. EXECUTIVE OFFICERS NAME AGE POSITION AND PERIOD SERVED M. Lynn Pike 54 President since January 2000 Herbert Gareiss, Jr. 56 Vice President since 1989; Secretary since October 2001; Assistant Treasurer 1989-1997; Larry D. Drake 58 Vice President since August 1998; Brenda Schadt 57 Vice President since September 1999 Philip A. Grybas 54 Vice President, CFO, since August 2001; Treasurer since October 2001; Colleen Shannon 45 Assistant Secretary since 1998; There are no arrangements between any officer and any other person pursuant to which he or she was selected an officer. 4 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. The Company also owns a building at 24 John Street in Middletown, New York in order to support its expanded dial tone operations in its Middletown exchange. The Company rents store space located at Route 515 and Guthrie Drive in Vernon, New Jersey. Of the Company's investment in telephone plant in service, central office equipment represents approximately 40.6%; connecting lines and related equipment, 34.3%; telephone instruments and related equipment; 3.0%; land and buildings; 3.1%; internet equipment 9.3%;; and other plant equipment, 9.7%. 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 derivative instruments for any purposes or other financial instruments for trading purposes. The Company's only assets exposed to market risk are its interest bearing bank accounts, into which the Company deposits its excess operating funds on a daily basis. The Company's mortgage liabilities currently bear interest at a fixed rates. If the Company refinances its liabilities when they mature the nature and amount of the applicable interest rate or rates will be determined at that time. The Company also has a line of credit which accrues interest at 0.75% below the prime rate. On May 1, 2000 the Company repaid its $3,000,000 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) Quarterly information :
FISCAL YEAR QUARTERS FIRST SECOND THIRD FOURTH TOTAL Year ended December 31, 2001 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) Revenue $ 6,968,443 $ 6,814,585 $ 6,905,974 $ 6,849,087 $27,538,089 Operating Income 1,738,445 1,610,432 2,049,347 1,347,929 6,746,153 Net Income 1,724,612 1,912,786 2,086,956 1,848,004 7,572,358 Earnings per share .96 1.06 1.15 1.01 4.18 Year ended December 31, 2000 Revenue 6,242,364 6,320,427 7,420,482 6,708,125 26,691,398 Operating Income 1,511,256 1,548,479 2,717,475 1,859,736 7,636,946 Net Income 1,420,962 1,492,337 2,343,388 1,760,812 7,017,499 Earnings per share .77 .83 1.32 .96 3.88
5 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 page 4, the material called for by Items 10-13 is included in the Company's definitive proxy statement, incorporated by reference herein, for its 2002 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, 2001, 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, 2001, 2000 and 1999 21 Consolidated Balance Sheet - December 31, 2001 and 2000 20 Consolidated Statement of Stockholders' Equity - Years Ended December 31, 2001, 2000 and 1999 22 Consolidated Statement of Cash Flows - Years 23 Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 24-32 2. Financial Statement Schedules: Report of Independent Certified 34 Public Accountants on 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 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 7 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, 2001, together with separate manually executed Independent Auditor's Report. 21 Subsidiaries of Registrant: Filed herewith 23 Consent of Independent Auditors Filed herewith (b) No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 2001. (d) Orange County-Poughkeepsie Filed herewith Limited Partnership Financial Statements for the years ended December 31, 2001 and 2000 8 WARWICK VALLEY TELEPHONE COMPANY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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 2001 $65,155 $97,511 $106,226 $203,737 $65,155 Year 2000 $65,155 $40,274 $66,249 $106,523 $65,155 Year 1999 $65,155 $35,712 $74,325 $110,037 $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. 9 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE 13 Annual Report to Shareholders for the fiscal year ended December 31, 2001 21 Subsidiaries of Registrant 23 Consent of Independent Auditors-Bush & Germain 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. 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WARWICK VALLEY TELEPHONE COMPANY Dated: March 29, 2002 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 29 day of March, 2002. SIGNATURE TITLE /s/ Herbert Gareiss, Jr. Vice President, Secretary and Director - --------------------------------- Herbert Gareiss, Jr. /s/ Philip A. Grybas Vice President and Treasurer - --------------------------------- Philip A. Grybas (Principal Financial and Accounting Officer) Director - --------------------------------- Fred M. Knipp /s/ Wisner H. Buckbee Director - --------------------------------- Wisner H. Buckbee /s/ Howard Conklin, Jr. Director - --------------------------------- Howard Conklin, Jr. /s/ Joseph E. DeLuca Director - --------------------------------- Joseph E. DeLuca /s/ Philip S. Demarest Director - --------------------------------- Philip S. Demarest /s/ Robert J. DeValentino Director - --------------------------------- Robert J. DeValentino Director - --------------------------------- Corinna S. Lewis /s/ Henry L. Nielsen, Jr. - --------------------------------- Henry L. Nielsen, Jr. Director 11 WARWICK VALLEY TELEPHONE COMPANY List of Subsidiaries of Registrant As of December 31, 2001 Warwick Valley Mobile Telephone Company, Inc. Warwick Valley Long Distance Company, Inc. Hometown Online, Inc. 12 WVT COMMUNICATIONS - ------------------------------------------------------------------------------- PRESIDENT'S SUMMARY [Photo] M. Lynn Pike President and C.E.O. of the Company The year 2001 closed the door on the first century of service for WVT Communications (WVTC). As I write this letter looking forward to our second century, the door is opening onto a landscape which presents many challenges and opportunities for independent telecommunications providers such as WVTC. The past year was a year of positive accomplishments in our various business endeavors. In spite of several negative events, in both our community and in our nation, our Company had yet another year of solid earnings growth. Our stock also showed stellar performance, climbing from $40.50 at December 31, 2000, to $58.50 per share at year-end. Finally, WVTC remained focused by leveraging our assets and pursuing our strategy to seek growth opportunities. CORE BUSINESS [LOGO] Local service, Warwick Valley Long Distance (WVLD), and network access services, our core businesses, produced revenue increases over 2000 results. This is in spite of the fact that the Company ended the year with 30,312 access lines, a net loss of 289, or 0.9%. This loss of access lines was driven by three primary causes: (1) the general economic downturn; (2) a building moratorium in the Town of Warwick, our primary service territory in New York; and (3) the cancellation of second access lines by customers purchasing high speed internet connections (DSL). Despite the loss in access lines, local service revenues grew 7.1%. WVLD revenues increased 3.7%, although the total number of long distance customers decreased by 197. Network access revenues (revenues the company receives from long distance carriers) increased by $649,000, or 9.5%. Warwick Online (WOL), our internet subsidiary, expanded DSL service availability to 95% of its telco customers in 2001 and experienced significant growth. At year-end there were 1,994 DSL customers, a 6.67% penetration. These DSL coverage and penetration levels are rarely achieved by the regional Bell companies or the 13 PRESIDENT'S SUMMARY WVT COMMUNICATIONS - ------------------------------------------------------------------------------- other independent telcos. WOL ended the year with 23,347 dial-up and DSL customers, a loss of 1,032. This loss in accounts was primarily in areas where WVT is unable to offer high speed interconnections (DSL), and dial-up customers opted to move to other providers that do. WOL revenues increased 7%, although net income was down 37% over 2000, primarily due to acquisition costs and depreciation expense associated with the DSL product. WVT Communications' Directory Services department continues to produce a more successful book each year. Gross sales for the 2001 book increased 11.9% over 2000 to $1.1 million, contributing net revenues of $550,000. The new e-yellow pages have proven to be a great product for the directory team. Sales are generated throughout the year. OPERATING RESULTS The Company's clear strategic focus delivered another year of solid financial growth in 2001. Although revenues grew only 3% over 2000, earnings increased 8% after one-time items. Shareholder dividends increased 9.0% to $1.70 per share. COMPETITIVE VENTURES WVT Communications began operations of the CLEC (Competitive Local Exchange Carrier) in Middletown, NY, in mid-1999. Services were extended into Scotchtown, NY, during 2001. The customer base grew by 46%, or 351 new access lines, for a total of 1,111 at the end of 2001. Revenues, at $2.2 million, were slightly less than the prior year due to an anticipated reduction in reciprocal compensation revenues mandated by the FCC. Expansion of CLEC operations into New Jersey began in earnest during 2001 when WVT entered into a multi-year $16.3 million contract to be the exclusive provider of voice, video and data services to IntraWest, the operator of Mt. Creek Resort in Vernon, NJ. Beginning in February 2002 and continuing for a 10-year build-out period, the Company will provide the trilogy of services to 840 condominium units and 1,139 business access lines. The resort will serve as our anchor customer, facilitating expansion into other areas of Vernon Township, NJ, currently served by Sprint. During 2001, our Company embarked on a comprehensive project to install a fiber optic ring throughout our serving area to provide a self-healing network for our operations. The intent is to provide interruption-free service in the event of a downed pole, cut cable, or other damage to our network. This increased reliability has allowed us to supply broadband service to two Fortune 500 companies from their Vernon, NJ, earth stations to New York City. A large amount of national and international internet, radio, and television network services ride over these facilities. These services are provided through an interconnection of our fiber optic network with the fiber networks of Hudson Valley DataNet, L.L.C. ("HVDN") and Northeast Optical Networks (NEON). These two contracts provide gross revenues of $990,900 over five years, with an upside potential of adding more capacity to both earth stations in the near future. At year-end, the Company was poised to launch its digital television product throughout the ILEC (Incumbent Local Exchange Carrier) territory. This broadcast quality product will compete head-to-head with the local cable providers and satellite services by bringing voice, video and data to our customers over the existing copper facilities. April 1, 2002 will be the commercial launch date in Vernon, NJ, pending regulatory approvals. STRATEGIC PARTNERS WVT Communications purchased a 9% share of Hudson Valley DataNet, L.L.C. ("HVDN") in 2000. HVDN connected its first customers in February 2001 and currently has broadband facilities throughout Orange County and portions of Dutchess and Ulster Counties. The Company closed out 2001 with customer contracts totaling $4 million in annual revenues. HVDN management expects continued customer growth and has told WVTC that they may be cashflow-positive before year-end 2002. [Hudson Valley DataNet Logo] 14 WVT COMMUNICATIONS PRESIDENT'S SUMMARY - -------------------------------------------------------------------------------- [WVT COMMUNICATIONS SERVICE AREA MAP] Looking to the future, WVT Communications plans to leverage our WVT's investment in ZefCom, L.L.C., position as a respected local provider a consortium of independent telephone of telecommunications services to companies that will resell Sprint PCS develop new growth businesses and new under the label "Telispire PCS", is revenue sources. We will continue to now moving beyond the usual start-up deploy new broadband services. We will challenges. The events of 2001 increase our share in the data transport, significantly slowed actual growth internet and video markets, continue our CLEC edge-out strategy, and maintain [Telispire(SM)PCS Logo] an excellent level of service in our telephone operations. In 2002 we are and, coupled with Sprint connectivity met with the challenge to manage our issues, resulted in shortfalls from new ventures and to continue to deliver a our original business plan. However, respectable return for the shareholders. experience over the last 90 days has With our management team and quality tracked more closely with the employees, I am confident we are well business plan. If this trend continues, positioned to meet or exceed these prospects for on-track growth in goals. 2002 are very promising. /s/ Lynn Pike M. Lynn Pike As we closed the door on our first 100 years, we also closed the door on President and C.E.O. the era of local operator services. WVT was the last independent telco in the state to furlough operators due to the high cost of upgrading obsolete [FIBER OPTIC NETWORK AREA MAP] equipment. Our customers will miss this personal touch, and WVT will miss our operators.
15 MESSAGE FROM WVT COMMUNICATIONS - ------------------------------------------------------------------------------- THE CHAIRMAN OF THE BOARD TABLE OF CONTENTS Fellow Shareholders: President's Summary .............1 Though the Year 2001 was very challenging for Message From your Company, management and staff produced a The Chairman ........4 respectable increase in earnings and dividends paid to shareholders. Highlights ..........5 As we go forward into our second century of Management's operation, capital requirements will continue Discussion ........6-7 to increase as we invest in new unregulated and highly competitive areas of our business. WVT Consolidated will continue to use its funds prudently to earn Balance Sheet .......8 the best returns for shareholders. Consolidated WVT's 100th Anniversary Committee has Statement scheduled many exciting events for 2002 which of Income ...........9 will help promote our many new products and services to our customers. I hope that you can Consolidated partake in the celebration. Statement of Stockholders' /s/ Wisner H. Buckbee Equity .............10 Wisner H. Buckbee Consolidated Chairman of the Board Statement of Cash Flows .........11 Notes to Financial Statements ......12-20 Performance Highlights .........21 Report of Independent Certified Public Accountants ........22 Concerning The Company's Common Stock .......23 Board of Directors and Officers .......24 16 WVT COMMUNICATIONS HIGHLIGHTS - ------------------------------------------------------------------------------- 2001 2000 Total Revenues $27,538,089 $26,691,398 Net Income $7,572,358 $7,017,499 Earnings Per Share $4.18 $3.88 Book Value $16.85 $14.29 Cash Dividend per Common Share $1.70 $1.56 Access Lines in Service 30,312 30,601 Online Subscribers 23,347 24,379 WVT Long Distance Subscribers 11,056 11,253 [Graph] [Graph] REVENUE SOURCES EXPENDITURES Long Distance Access Wages & Benefits Warwick Online Retained Earnings Taxes Other Revenues Depreciation Local Service Dividends WVT Long Distance Cost of Goods Sold Cellular Other Operating Expenses 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF WVT COMMUNICATIONS - -------------------------------------------------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 2001 VS. 2000 The Company's net income from all sources increased $554,859 (or 7.9%) to $7,572,358 for the twelve-month period ended December 31, 2001, as compared to the same period in 2000. Operating revenues increased $846,691 (or 3.2%) to $27,538,089 for the year ended December 31, 2001, as compared to $26,691,398 for 2000, as a result of a $419,085 (or 7.0%) increase in Online revenues due to the Company continually offering customers new services, an increase in Network Access Service revenues of $648,496 (or 9.5%) primarily due to the sale of dedicated trunks and Local Service revenues increasing by $281,415 (or 7.1%) as a result of continuous increased use of newly marketed services. These increases were offset by a reduction of $448,572 (or 26.3%) for reciprocal compensation due to rate decreases effective July and December in 2001 for the Company's Competitive Local Exchange Carrier (CLEC) in Middletown. Total operating expenses increased $1,737,484 (or 9.1%) to $20,791,936 for the year ended December 31, 2001, as compared to $19,054,452 for the previous year. An increase in wages and benefits of $801,674 (or 9.0%) and an increase in both telecommunication and internet facilities of $734,118 (or 35.9%) were the main factors in the increase. Other income (expenses) increased to $4,627,650 in 2001 from $2,810,638 in 2000. This increase resulted from an increase in income of the Bell Atlantic Orange County/Poughkeepsie Limited Partnership, a cellular partnership in which the Company has a 7.5% interest, which earned $4,991,042 in 2001 as compared to $3,255,217 in 2000. 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 the 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. LIQUIDITY AND CAPITAL RESOURCES We had $580,492 of cash and cash equivalents available at December 31, 2001. The Company has lines of credit with two banks totaling $10,000,000 of which $3,750,000 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 2001, 2000 and 1999 our primary source of funds continued to be cash generated from operations, as shown in the consolidated statements of cash flows. For 2001, net cash from operating activities was less than our capital expenditures due to 18 WVT COMMUNICATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF - -------------------------------------------------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS the Company's entrance into the video business. For 2000 and 1999 net cash provided by operating activities exceeded our capital expenditures; this excess is referred to as free cash flow, a supplemental measure of liquidity. We generated free cash flow of $1,466,487 and $268,712 in 2000 and 1999. 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 $9,396,079, $5,068,161 and $6,449,273 in 2001, 2000, and 1999. The majority of our 2001 and 2000 expenditures can be attributed to the expansion of our local exchange service into new markets, DSL and digital and broadband network upgrades. In 2002, management expects total capital spending to be between $12,000,000 and $13,000,000. These capital expenditures will relate primarily to the continued upgrade of our network, expansion of our DSL service and entrance into the provision of video services to New Jersey customers. The 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 $5,282,843, $2,625,000 and $1,791,305 in 2001, 2000, and 1999. It is expected that these significant distributions from the Partnership will continue in the near future. On July 28, 2000 the Company purchased an 8.9% ownership interest in Hudson Valley DataNet, L.L.C. ("HVDN"), for $1,000,000. HVDN is a competitive telecommunications company that will offer high-speed bandwidth throughout the region. The Company had a 17.0% interest in Zefcom, L.L.C., a licensed reseller of wireless services, during 2001. In addition to our capital contribution of $1,200,000, the Company has a commitment to contribute another $800,000 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 $1.70 per share in 2001, $1.56 per share in 2000 and $1.34 per share in 1999. The total dividends paid for common stock by WVT Communications were $3,065,913 in 2001, $2,806,623 in 2000 and $2,435,571 in 1999. WVT Communications' dividend policy considers both the expectations and requirements of shareowners and the internal requirements of the Company. SEGMENTED OPERATIONS In 1998 the Company began business segment reporting to reflect the predominance of its two major operating segments, telephone operations 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 $1,050,340 (or 4.8%) for the year ended December 31, 2001 as compared to $2,426,574 (or 12.4%) for 2000 was due to the sale of dedicated trunklines and an increase use of newly marketed services. Internet revenues increased $419,085 (or 7.0%) for the year ended December 31, 2001 as compared to $1,329,443 (or 28.7%) for 2000 largely due to a continuous increase in new services. The telephone operations expenses increased $1,226,378 (or 7.5%) for the year ended December 31, 2001 as compared to $1,413,298 (or 9.5%) for 2000 due to normal increases in expenses. Internet expenses increased $1,133,840 (or 28.1%) for the year ended December 31, 2001 as compared to $764,397 (or 23.4%) for 2000 largely due to an increase in costs for internet facilities and wages and benefits. Comparative financial information regarding the operation of the Company's two business segments for the period from 1999 through 2001 can be found in Note 16 of the consolidated financial statements. 19 CONSOLIDATED BALANCE SHEET WVT COMMUNICATIONS - -------------------------------------------------------------------------------
DECEMBER 31 December 31 ASSETS 2001 2000 --------------------------------- Current Assets: Cash $ 580,492 $ 738,495 Accounts receivable - net of reserve for uncollectibles (Note 1) 3,438,192 4,090,401 Materials and supplies 2,271,316 1,665,679 Prepaid expenses 545,069 487,805 --------------------------------- Total Current Assets 6,835,069 6,982,380 --------------------------------- Noncurrent Assets: Unamortized debt issuance expense 10,347 15,630 Other deferred charges 197,492 93,613 Investments (Note 4) 5,396,802 5,488,603 --------------------------------- Total Noncurrent Assets 5,604,641 5,597,846 --------------------------------- Property, Plant & Equipment: (Notes 1, 2 and 5) Plant in service 56,461,551 49,338,440 Plant under construction 4,455,113 2,454,882 --------------------------------- 60,916,664 51,793,322 Less: Depreciation reserve (Notes 1 and 3) 25,846,794 22,360,624 --------------------------------- Total Property, Plant & Equipment 35,069,870 29,432,698 --------------------------------- TOTAL ASSETS $ 47,509,580 $ 42,012,924 ================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable (Note 6) 6,250,000 4,950,000 Accounts payable 1,918,618 2,799,229 Advance billing and payments 202,162 193,862 Customer deposits 127,665 130,990 Accrued taxes 64,801 26,432 Accrued interest 30,155 28,563 Other accrued liabilities 294,362 381,023 --------------------------------- Total Current Liabilities 8,887,763 8,510,099 --------------------------------- --------------------------------- 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 2,348,140 2,207,871 Unamortized investment tax credits 46,590 81,047 Other deferred credits 60,203 47,218 Post retirement benefit obligation 1,270,895 772,756 --------------------------------- Total Deferred Credits and Other Long-term Liabilities 3,725,828 3,108,892 --------------------------------- Stockholders' Equity: (Notes 4, 5, 10, 11, and 12) Preferred stock-5% cumulative; $100 par value; Authorized 7,500 shares; Issued and outstanding 5,000 shares 500,000 500,000 Common stock - no par value; Authorized shares: 2,160,000 3,471,076 3,450,465 Issued 1,994,080 (2001) and 1,993,593 (2000) Treasury stock at cost, 190,497 shares for 2001 and 2000, respectively (3,384,800) (3,384,800) Retained earnings 30,309,713 25,828,268 --------------------------------- Total Shareholders Equity 30,895,989 26,393,933 --------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,509,580 $ 42,012,924 =================================
Please see the accompanying notes, which are an integral part of the financial statements. 20 WVT COMMUNICATIONS CONSOLIDATED STATEMENT OF INCOME - --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 2000 1999 OPERATING REVENUES: ------------------------------------------------------------ Local network service $ 4,249,452 $ 3,968,037 $ 3,545,976 Network access service 7,445,014 6,796,518 5,999,920 Long distance network service 2,124,913 2,357,125 2,624,569 Directory advertising 1,160,157 1,060,398 972,739 Long distance sales 2,089,693 2,016,057 1,884,557 Internet services 6,388,392 5,969,307 4,639,864 Other services and sales (Note 1) 4,080,468 4,523,956 3,518,304 ------------------------------------------------------------ Total operating revenues 27,538,089 26,691,398 23,185,929 ------------------------------------------------------------ OPERATING EXPENSES: Plant specific 3,494,295 3,195,789 2,670,835 Plant non-specific: Depreciation 3,764,190 3,247,711 3,324,079 Other 2,017,856 1,506,607 1,330,865 Customer operations 4,686,974 4,279,191 4,122,826 Corporate operations 3,079,330 3,051,221 2,414,961 Cost of services and sales 2,214,671 2,101,218 1,807,209 Property, revenue and payroll taxes 1,534,620 1,672,715 1,456,530 ------------------------------------------------------------ Total operating expenses 20,791,936 19,054,452 17,127,305 ------------------------------------------------------------ OPERATING INCOME 6,746,153 7,636,946 6,058,624 OTHER INCOME (EXPENSES): Interest expense (651,213) (612,263) (611,625) Interest income 12,557 24,753 17,330 Income from cellular partnership 4,991,042 3,255,218 2,338,843 Other income (expense) 275,264 142,930 146,819 ------------------------------------------------------------ Total other income (expense) - net 4,627,650 2,810,638 1,891,367 ------------------------------------------------------------ Income before income taxes 11,373,803 10,447,584 7,949,991 FEDERAL INCOME TAXES (Note 7) 3,801,445 3,430,085 2,368,375 NET INCOME 7,572,358 7,017,499 5,581,616 PREFERRED DIVIDENDS 25,000 25,000 25,000 ------------------------------------------------------------ INCOME APPLICABLE TO COMMON STOCK $ 7,547,358 $ 6,992,499 $ 5,556,616 ============================================================ NET INCOME PER AVERAGE SHARE OF OUTSTANDING COMMON STOCK (Note 10) $ 4.18 $ 3.88 $ 3.06 ============================================================ AVERAGE SHARES OF COMMON STOCK OUTSTANDING (Note 10) 1,803,936 1,811,653 1,817,531 ============================================================
Please see the accompanying notes, which are an integral part of the financial statements. 21 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY WVT COMMUNICATIONS - --------------------------------------------------------------------------------
Treasury Preferred Common Retained Stock Stock Stock Earnings Total ------------------------------------------------------------------------------------ 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 Net income for the year -- -- -- 7,572,358 7,572,358 Dividends: Common ($1.70 per share) -- -- -- (3,065,913) (3,065,913) Preferred ($5.00 per share) -- -- -- (25,000) (25,000) Sale of Common Stock -- -- 20,611 -- 20,611 Purchase of Treasury Stock -- -- -- -- -- ------------------------------------------------------------------------------------ Balance December 31, 2001 ($3,384,800) $ 500,000 $ 3,471,076 $30,309,713 $30,895,989 ====================================================================================
Please see the accompanying notes, which are an integral part of the financial statements. 22 WVT COMMUNICATIONS CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
2001 2000 1999 ------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 7,572,358 $ 7,017,499 $ 5,581,616 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 3,764,190 3,247,711 3,324,078 Deferred income tax and investment tax credit 118,797 73,786 (264,352) Interest charged to construction (283,315) (84,746) (143,480) Income from partnerships (4,991,042) (3,255,217) (2,338,843) Change in assets and liabilities (Increase) Decrease in accounts receivable 652,209 (74,728) (306,226) (Increase) Decrease in materials and supplies (605,637) (682,457) 615,221 (Increase) Decrease in prepaid expenses (57,264) (86,715) (47,492) (Increase) Decrease in deferred charges (103,879) 131,232 (44,239) Increase (Decrease) in accounts payable (880,611) 82,801 95,571 Increase (Decrease) in customers' deposits (3,325) 1,330 (3,773) Increase (Decrease) in advance billing and payment 8,300 193,862 (100,146) Increase (Decrease) in accrued expenses 39,961 (40,240) (66,033) Increase (Decrease) in post retirement benefit obligations 498,139 (13,403) 401,522 Increase (Decrease) in other liabilities (86,661) 24,033 14,561 ------------------------------------------------------------- Net cash provided by operating activities 5,642,220 6,534,748 6,717,985 ------------------------------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (9,396,079) (5,068,161) (6,449,273) Interest charged to construction 283,315 84,746 143,480 Distribution from partnerships 5,282,843 2,625,000 1,791,305 Purchases of investments (200,000) (2,000,084) (8,016) ------------------------------------------------------------- Net cash used in investing activities (4,029,921) (4,358,499) (4,522,504) ------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Increase (Decrease) in notes payable 1,300,000 4,050,000 500,000 Repayment of long-term debt 0 (3,000,000) 0 Dividends (3,090,913) (2,831,623) (2,460,573) Sale of common stock 20,611 82,858 36,746 Purchase of treasury stock 0 (604,510) 0 ------------------------------------------------------------- Net cash provided by (used in) financing activities (1,770,302) (2,303,275) (1,923,827) ------------------------------------------------------------- Increase (Decrease) in cash and cash equivalents (158,003) (127,026) 271,654 Cash and cash equivalents at beginning of year 738,495 865,521 593,867 ------------------------------------------------------------- Cash and cash equivalents at end of year $ 580,492 $ 738,495 $ 865,521 =============================================================
Please see the accompanying notes, which are an integral part of the financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WVT COMMUNICATIONS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company provides communications services to customers in the Towns of Warwick, Goshen, and Wallkill, New York and the Townships of Vernon and West Milford, New Jersey. Its services include providing local, toll and cellular telephone service to residential and business customers, access and billing collection services to interexchange carriers, the sale and leasing of telecommunications equipment, paging and internet access. 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 2001 financial statement presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations". This pronouncement eliminated the use of the "pooling of interests" method of accounting for all mergers and acquisitions. As a result, all mergers and acquisitions will be accounted for using the "purchase" method of accounting. SFAS No. 141 is effective for all mergers and acquisitions initiated after June 30, 2001. Adoption of this pronouncement has no impact on our results from operations or our financial position. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement addresses financial accounting and reporting for intangible assets (excluding goodwill) acquired individually or with a group of other assets at the time of their acquisition. It also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. We currently estimate the adoption of SFAS No. 142 will have no impact on our results from operations or our financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 will have no impact on our results of operation or our financial position. Warwick Valley Telephone Company's review of asset impairment under FASB No. 121 for year end December 31, 2001 focused upon the carrying value of Property, Plant and Equipment. Since approximately 89% of the Company's fixed assets are used for its regulated operations as a telecommunications service provider and fall under the requirements of FASB No. 71, the impairment tests of FASB No. 121 do not apply to these assets. Warwick Valley Telephone Company is a regulated telephone company. As noted in FASB No. 71 Section 5 paragraphs a-c, Warwick Valley Telephone Company's rates for regulated services/products are subject to approval by an independent third party regulator, such rates are designed to recover the costs of providing the regulated service and it is reasonable to assume that the rates are set at levels that will recover Warwick Valley Telephone Company's costs. As a rate regulated enterprise, the Company's plant used in regulated operations is used as a basis in setting rates. The carrying value of these fixed assets will be recovered in the rates charged to customers in the long run. The deregulated plant and equipment of the Company is depreciated over a short life cycle. Our examination of the carrying value of these assets has determined that the value on our books is well less than the future expected cash flow from them. The Company believes that the carrying value of all other long lived assets are lower than the recoverable amount as measured at the higher of net selling price and value in use as prescribed in FASB No. 21. 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 No. 101). SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting 24 WVT COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- principles to revenue recognition in financial statements. We were required to adopt the provisions of SAB No. 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 No. 101 did not require a change in those policies nor did it materially affect the timing or amount of revenue recognition. COMPREHENSIVE INCOME The Company does not have any components of comprehensive income as stated in SFAS No. 130 and consequently net income is comprehensive income. 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 7.39%, 6.86%, and 7.80%, for the years 2001, 2000, and 1999, 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. 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, 2001 and 2000, 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, 2001 the amount of cash in excess of these F.D.I.C. insured limits was approximately $1,053,000. The following is a list of interest and federal income tax payments for each of the three years in the period ending December 31:
2001 2000 1999 -------------------------------------------- Interest $ 649,621 $ 656,767 $ 612,643 Federal income taxes $3,688,964 $3,360,000 $2,787,991
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, 2001 and 2000 the Material and Supplies inventory consisted of the following:
2001 2000 --------------------------------- Inventory for outside plant $ 653,245 $ 488,113 Inventory for inside plant 1,157,445 678,186 Inventory for online plant 204,565 95,195 Inventory of equipment held for sale or lease 256,061 404,185 ------------------------------- $2,271,316 $1,665,679 ===============================
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. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WVT COMMUNICATIONS - ------------------------------------------------------------------------------- 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:
2001 2000 1999 ---------------------------------------------------- Rent revenue $ 430,887 $ 343,180 $ 296,498 Billing and collection revenue 891,343 966,288 1,096,779 Other 2,758,238 3,214,488 2,125,027 ---------------------------------------------------- $ 4,080,468 $ 4,523,956 $ 3,518,304 ====================================================
2. PROPERTY, PLANT AND EQUIPMENT Plant in service, at cost, consisted of the following at December 31:
2001 2000 --------------------------------- Land, buildings, furniture and office equipment $ 5,327,468 $ 4,512,991 Vehicles and work equipment 1,838,866 1,661,980 Central office equipment 22,946,674 20,521,852 Customer premise equipment 1,710,107 1,526,923 Outside plant equipment 19,386,589 17,222,690 Internet equipment 5,251,847 3,892,004 -------------------------------- $ 56,461,551 $ 49,338,440 ================================
It is our policy to capitalize certain costs incurred in connection with developing or obtaining internal use software. Capitalized software costs are included in Property, Plant and Equipment and are amortized using estimated service lives of the various classes of telephone plant. 3. DEPRECIATION RESERVE Depreciation reserve consisted of the following at December 31:
2001 2000 -------------------------------- Buildings, furniture and office equipment $ 2,448,837 $ 2,304,022 Vehicles and work equipment 1,040,599 895,616 Central office equipment 12,696,756 11,041,581 Customer premise equipment 985,414 899,008 Outside plant equipment 5,640,621 4,991,031 Internet equipment 3,034,567 2,229,366 -------------------------------- $ 25,846,794 $ 22,360,624 ================================
4. INVESTMENTS Investments consisted of the following at December 31:
2001 2000 -------------------------------- Investment in cellular partnership $ 3,196,802 $ 3,461,099 Investment in Hudson Valley DataNet 1,000,000 1,000,000 Investment in wireless company 1,200,000 1,000,000 Other investments 0 27,504 -------------------------------- $ 5,396,802 $ 5,488,603 ================================
The cellular partnership investment represents the Company's 7.5% interest as a limited partner in the Orange County/Poughkeepsie Limited Partnership, a cellular telephone operation which is recorded on the equity method. Income from this investment amounted to $4,991,042 and $3,255,218 and $2,338,843 for the three years ended December 31, 2001. Distributions received from the partnership amounted to $5,250,000 and $2,625,000 for 2001 and 2000, respectively. Undistributed earnings included in retained earnings related to this investment amounted to $2,947,052 and $3,211,349 for December 2000 and 2001, respectively. The following is a summary of financial position and results of operations of the Orange County/Poughkeepsie Limited Partnership as of and for the years ending December 31, 2001 and 2000: 2001 2000 -------------------------------- Current assets $ 20,249,000 $ 25,954,000 Property, plant and equipment, net 26,057,000 24,753,000 Total assets 46,311,000 50,713,000 Current liabilities 530,000 2,153,000 Partners capital 45,781,000 48,560,000 Revenues 81,952,000 57,678,000 Net income 67,220,000 44,901,000
26 WVT COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 4. INVESTMENTS (CONTINUED) The Company has an 8.9% ownership interest in Hudson Valley DataNet, L.L.C. ("HVDN"), a competitive telecommunications company that will offer high-speed bandwidth throughout the region. The wireless investment represents the Company's 17.0% interest in Zefcom, L.L.C., a licensed reseller of wireless services. In addition to the initial capital contribution of $1,200,000, the Company has a commitment to contribute another $800,000 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. 5. LONG-TERM DEBT Long-term debt consisted of the following at December 31:
2001 2000 Amount Amount -------------------------------- First Mortgage Bonds 7.05% Series "J" (due 12/01/2003) $ 4,000,000 $ 4,000,000 -------------------------------- 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 2001 on long-term debt outstanding as of December 31, 2001, are as follows: 2002 -- 2005 -- 2003 $ 4,000,000 2006 -- 2004 -- 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 $4,000,000 with the Warwick Savings Bank, which expires in June 2002. 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, 2001 was $2,750,000. The balances outstanding as of December 31, 2001 and 2000 were $1,250,000 and $1,950,000 respectively, bearing interest at rates of 4.0% and 8.75%, respectively. The Company has an outstanding line of credit in the amount of $6,000,000 with the Bank of New York, which expires on September 30, 2002. 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 base rate. The interest rate on the outstanding balance of $5,000,000 as of December 31, 2001 was 3.94%. 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.
2001 2000 1999 ---------------------------------------------------- Current federal income taxes $ 3,713,383 $ 3,357,641 $ 2,634,196 ---------------------------------------------------- Deferrals, net of reversals: Depreciation 227,982 162,178 25,367 Cost of removal 6,187 2,655 (5,946) Pension & Deferred Compensation (112,754) (53,889) (236,786) Amortization of investment tax credit (34,457) (37,200) (40,200) Other 1,104 (1,300) (8,256) ---------------------------------------------------- 88,062 72,444 (265,821) ---------------------------------------------------- Total F.I.T. expense $ 3,801,445 $ 3,430,085 $ 2,368,375 Reversals of deferred taxes 56,790 58,411 167,374 Other 8,858 63,683 167,248 ---------------------------------------------------- FEDERAL INCOME TAX AT STATUTORY RATE $ 3,867,093 $ 3,552,179 $ 2,702,997 ====================================================
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WVT COMMUNICATIONS - -------------------------------------------------------------------------------- 7. FEDERAL INCOME TAXES (CONTINUED) The following components comprise the net deferred tax liability reported as of December 31:
2001 2000 -------------------------------------- Deferred tax liabilities $ 2,817,265 $ 2,583,096 Deferred tax assets 469,125 375,225 -------------------------------------- Net deferred tax liability $ 2,348,140 $ 2,207,871 ======================================
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. Per regulatory requirements, the amounts expensed were $369,803, $101,829, and $250,963 for the years ended December 31, 2001, 2000, and 1999, respectively. The Company sponsors a non-contributory, defined benefit postretirement medical benefit plan that covers all employees that retire directly from active service on or after age 55 with at least 10 years of service or after age 65 with at least 5 years of service. The projected unit credit actuarial method was used in determining the cost of future benefits. The Company's funding policy is to contribute the maximum allowed under current Internal Revenue Service regulations. Due to regulatory requirements the Company is allowed to expense the amount actually funded, with any difference between the funding amount and the SFAS No. 106 expense amount being deferred as a regulatory asset or liability. Amounts expensed were $89,372, $63,102, and $197,668 for the years ended December 31, 2001, 2000, and 1999, respectively. 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 2001 2000 1999 2001 2000 1999 --------------------------------------------------------------------------- Service cost $ 334,061 $ 252,952 $ 267,535 $ 77,064 $ 62,963 $ 71,446 Interest cost on benefit obligation 787,809 679,920 642,092 154,213 136,697 129,247 Amortization of transition obligation 53,267 53,263 53,263 51,496 51,496 51,496 Amortization of prior service (credit) cost 68,802 40,637 48,282 (19,964) (19,964) (19,964) Recognized net actuarial (gain) loss (205,427) (309,700) (35,719) 28,267 12,729 39,817 Expected return on plan assets (914,632) (873,300) (705,469) (102,057) (94,664) (78,071) Special termination benefits 320,873 -- -- -- -- -- --------------------------------------------------------------------------- Net periodic (credit) expense $ 444,753 $ (156,228) $ 269,984 $ 189,019 $ 149,257 $ 193,971 ===========================================================================
28 WVT COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following table presents a summary of plan assets, projected benefit obligation and funded status of the plans at December 31:
Pension Benefits Postretirement Benefits 2001 2000 2001 2000 ------------------------------------------------------------------- Fair value of plan assets at beginning of year $ 11,655,220 $ 10,376,258 $ 1,269,820 $ 1,173,563 Employer contributions 0 58,074 89,372 89,372 Actual return on plan assets (421,263) 1,556,698 (41,387) 48,678 Benefits paid (381,049) (335,810) (58,593) (41,793) ------------------------------------------------------------------- Fair value of plan assets at end of year 10,852,908 11,655,220 1,259,212 1,269,820 ------------------------------------------------------------------- Projected benefit obligation at beginning of year 10,131,328 8,453,470 2,077,400 1,737,385 Benefits earned 327,061 252,952 77,064 62,963 Interest cost on projected benefit obligation 787,809 679,920 154,213 136,697 Amendments 721,145 0 0 0 Actuarial (gain) loss 780,789 1,080,796 94,318 182,148 Benefits paid (381,049) (335,810) (58,593) (41,793) Special Termination Benefits 320,873 0 0 0 ------------------------------------------------------------------- Projected benefit obligation at year end 12,687,956 10,131,328 2,344,402 2,077,400 ------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation (1,835,048) 1,523,892 (1,085,190) (807,580) Unrecognized actuarial (gain) loss 86,763 (2,228,348) 791,685 582,190 Unrecognized prior service (credit) cost 1,025,552 373,209 (344,891) (364,855) Unrecognized net transition obligation 0 53,267 566,452 617,948 ------------------------------------------------------------------- Prepaid (accrued) benefit cost $ (722,733) $ (277,980) $ (71,944) $ 27,703 ==================================================================
Actuarial assumptions used to calculate the projected benefit obligation were as follows for the years ended December 31:
Pension Benefits Postretirement Benefits 2001 2000 2001 2000 -------------------------------------------------------- Discount rate 7.50% 7.50% 7.25% 7.50% Expected return on plans 8.00% 8.00% 8.00% 8.00% Rate of compensation increase 5.50% 5.50% -- -- Health care cost trend -- -- 8.00% 8.50%
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WVT COMMUNICATIONS - -------------------------------------------------------------------------------- 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The increase in pension expense in 2001 was due to special termination benefits provided under an early retirement program and due to certain amendments increasing the benefits under the plan. There was a liability established for $219,782 for certain post-employment benefits to be paid to terminated employees in addition to the additional benefits provided under the pension plan above, as of December 31, 2001. The health care cost trend rate was expected to decrease gradually (.5% per year) to an ultimate rebate 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, 2001 approximately $397,000 and the aggregate of the service and interest cost components of postretirement expense for the year then ended by approximately $43,000. A 1.0% decrease in the health care cost trend rate would decrease these components by approximately $320,000 and $34,000, 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 2001 the Company made a matching contribution up to 9.0% 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 $433,482, $388,636, and $320,795 for the years ended December 31, 2001, 2000, and 1999, 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 $339,582 and $367,260 as of December 31, 2001 and 2000, respectively. 9. RELATED PARTY TRANSACTIONS The Company expended approximately $322,717, $255,860, and $225,031 during 2001, 2000, and 1999, 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, where 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 1,803,936, 1,811,653, and 1,817,531 for the years ended December 31, 2001, 2000, and 1999, respectively. The following schedule summarizes the changes in the number of shares issued of capital stock for the year ended December 31, 2001:
Treasury Stock Preferred Stock Common Stock ---------------------------------------------------- Balance, January 1, 2001 190,497 5,000 1,993,593 Additional shares issued 0 0 487 Shares redeemed 0 0 0 ---------------------------------------------------- Balance, December 31, 2001 190,497 5,000 1,994,080 ====================================================
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. 30 WVT COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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 $146,771 for 2001 and is expected to be $137,000 for 2002. 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 cost areas of the state. The amount the Company contributed to TAF for 2001 was $19,978 and the expected contribution for 2002 is approximately $22,000. The Company also contributes to the Universal Service Administration Co. (USAC). For 2001 the Company's contribution to USAC was $133,387 and for 2002 it will be approximately $130,000. 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 online segment accounted for approximately 23% of total operating revenue. 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. The following information summarizes the Company's business segments for the years 2001, 2000, and 1999:
2001 ------------------------------------------------------------------------------------------------ Revenues from: Intercompany Consolidated Telephone Internet Elimination Total ------------------------------------------------------------------------------------------------ Unaffiliated customers $21,149,697 $ 6,388,392 $ $27,538,089 Intersegment revenues 1,883,777 (1,883,777) ------------------------------------------------------------------------------------------------ Total revenues 23,033,474 6,388,392 (1,883,777) 27,538,089 ------------------------------------------------------------------------------------------------ Operating expenses 14,487,787 4,423,736 (1,883,777) 17,027,746 Depreciation & amortization 3,021,148 743,042 0 3,764,190 Federal income taxes 3,383,956 417,489 0 3,801,445 Other income (expenses) 4,621,354 6,296 0 4,627,650 ------------------------------------------------------------------------------------------------ Net income $ 6,761,937 $ 810,421 $ 0 $ 7,572,358 ================================================================================================ Assets $43,221,931 $ 4,287,649 $ 0 $47,509,580 Capital expenditures $ 8,036,238 $ 1,359,841 $ 0 $ 9,396,079
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WVT COMMUNICATIONS - ------------------------------------------------------------------------------- 15. BUSINESS SEGMENTS (CONTINUED)
2000 ----------------------------------------------------------------------------------------------------- Revenues from: Intercompany Consolidated Telephone Internet Elimination Total ----------------------------------------------------------------------------------------------------- Unaffiliated customers $20,722,091 $ 5,969,307 $ $26,691,398 Intersegment revenues 1,261,043 (1,261,043) ---------------------------------------------------------------------------------------------------- Total revenues 21,983,134 5,969,307 (1,261,043) 26,691,398 ---------------------------------------------------------------------------------------------------- Operating expenses 13,708,465 3,359,319 (1,261,043) 15,806,741 Depreciation & amortization 2,574,092 673,619 0 3,247,711 Federal income taxes 2,767,893 662,192 0 3,430,085 Other income (expenses) 2,799,384 11,254 0 2,810,638 ---------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------- Revenues from: Telephone Internet Intercompany Consolidated Elimination Total ---------------------------------------------------------------------------------------------------- Unaffiliated customers $18,546,065 $ 4,639,864 $ $23,185,929 Intersegment revenues 1,010,495 (1,010,495) ---------------------------------------------------------------------------------------------------- Total revenues 19,556,560 4,639,864 (1,010,495) 23,185,929 ---------------------------------------------------------------------------------------------------- Operating expenses 12,161,466 2,652,255 (1,010,495) 13,803,226 Depreciation & amortization 2,707,793 616,286 0 3,324,079 Federal income taxes 1,899,391 468,984 0 2,368,375 Other income (expenses) 1,883,325 8,042 0 1,891,367 ---------------------------------------------------------------------------------------------------- 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
32 WVT COMMUNICATIONS PERFORMANCE HIGHLIGHTS - -------------------------------------------------------------------------------
For years ended or at December 31, 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - ---------------------------------------------------------------------------------------------------------------------------- Total revenues $ 27,538,089 $ 26,691,398 $ 23,185,929 $ 21,362,100 $ 19,796,696 Telephone operating revenues 23,033,474 21,983,134 19,556,560 16,189,377 15,590,455 Total expenses 20,791,936 19,054,452 17,127,305 14,409,432 13,395,700 Telephone operating expenses 17,508,935 16,282,557 14,869,259 11,079,344 10,881,196 Net income 7,572,358 7,017,499 5,581,616 4,042,497 3,683,709 Total assets 47,509,580 42,012,924 36,976,530 33,241,392 31,387,996 Current assets 6,835,069 6,982,380 6,265,507 6,255,355 5,919,948 Current liabilities 8,887,763 8,510,099 7,198,313 3,758,134 4,502,782 Long-term obligations 4,000,000 4,000,000 4,000,000 7,000,000 7,000,000 Percentage of debt to total capital 24.9 25.3 25.8 27.4 33.3 Shareholders' equity $ 30,895,989 $ 26,393,933 $ 22,729,708 $ 19,571,919 $ 17,203,139 COMMON STOCK DATA - ---------------------------------------------------------------------------------------------------------------------------- Income applicable to common stock $ 7,547,358 $ 6,992,499 $ 5,556,616 $ 4,017,497 $ 3,658,709 Income per share(*) 4.18 3.88 3.06 2.21 1.97 Book value(*) 16.85 14.29 12.23 10.51 9.01 Cash dividends per common share(*) $ 1.70 $ 1.56 $ 1.34 $ 1.12 $ 0.93 Shareholders of record(*) 673 642 655 648 616 Average shares outstanding(*) 1,803,936 1,811,653 1,817,531 1,813,792 1,853,298 GENERAL - ---------------------------------------------------------------------------------------------------------------------------- Access lines in service 30,312 30,601 28,935 26,786 25,154 Carrier access minutes 198,234,021 185,006,652 174,174,099 151,797,771 138,984,054
(*)Adjusted for 3-for-1 common stock split in 1997. 33 REPORT OF INDEPENDENT WVT COMMUNICATIONS - -------------------------------------------------------------------------------- CERTIFIED PUBLIC ACCOUNTANTS BUSH & GERMAIN, PC CERTIFIED PUBLIC ACCOUNTANTS 901 LODI STREET SYRACUSE, NEW YORK 13203 PHONE: (315) 424-1145 FAX: (315) 424-1457 February 7, 2002 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with generally accepted accounting principles. /s/ Bush & Germain, PC Bush & Germain, PC 34 WVT COMMUNICATIONS CONCERNING 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 673 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 2000, the Company paid a dividend on its common stock of $1.56 per share. In 2001, the common stock dividend was $1.70 per share. The NASDAQ high and low bid prices for the Company's common stock for the first, second, third and fourth quarters of 2001 and 2000 were as follows:
------------------------------------------------------------------------- PRICE OF THE COMPANY'S COMMON STOCK ------------------------------------------------------------------------- QUARTER ENDED ------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 ------------------------------------------------------------------------- High $44.00 $43.75 $53.95 $58.50 ------------------------------------------------------------------------- Low $38.25 $39.25 $41.00 $50.25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 -------------------------------------------------------------------------
35 BOARD OF DIRECTORS AND OFFICERS OF THE COMPANY WVT COMMUNICATIONS - -------------------------------------------------------------------------------- [Photo] [Photo] [Photo] Wisner H. Buckbee Corinna S. Lewis Larry D. Drake Chairman of the Board Board Director Vice President of the Company Retired Public of the Company President, Wisner Farms, Inc., Relations Consultant Warwick, N.Y. [Photo] [Photo] Brenda A. Schadt [Photo] Robert J. DeValentino Vice President Henry L. Nielsen, Jr. Board Director of the Company Vice Chairman of the Board Executive Director Horton of the Company Healthcare Foundation, [Photo] President, Nielsen Construction Middletown, N.Y. Philip A. Grybas Co., Inc., Warwick, N.Y. Vice President, [Photo] Treasurer and [Photo] M. Lynn Pike Chief Financial Officer Howard Conklin, Jr. Board Director of the Company Board Director President and C.E.O. Retired, Former President of the Company [Photo] Conklin & Strong, Inc., Colleen Shannon Warwick, N.Y. [Photo] Assistant Secretary Herbert Gareiss, Jr. of the Company [Photo] Board Director Fred M. Knipp Vice President Board Director and Secretary Retired, Former of the Company President & C.E.O. of the Company [Photo] Philip S. Demarest Board Director [WVT COMMUNICATIONS LOGO] Retired, Former Vice President, CORPORATE OFFICE Secretary & Treasurer 47 Main Street of the Company PO Box 592 Warwick, NY 10990 [Photo] 845-986-8080 Joseph E. DeLuca, M.D. Visit us online at www.wvtc.com Board Director Physician, Vernon Urgent Care Center, Vernon, N.J.
36 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP INDEPENDENT AUDITORS' REPORT FINANCIAL STATEMENTS Years Ended December 31, 2001 and 2000 The information contained herein is confidential and should not be disclosed to unauthorized persons. It is intended solely for the use by authorized Verizon Wireless and Orange County -Poughkeepsie Limited Partnership personnel. 37 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP TABLE OF CONTENTS - -------------------------------------------------------------------------------- PAGE INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000: Balance Sheets 2 Statements of Operations 3 Statements of Partners' Capital 4 Statements of Cash Flows 5 Notes to Financial Statements 6-11 38 INDEPENDENT AUDITORS' REPORT To the Partners of Orange County - Poughkeepsie Limited Partnership We have audited the accompanying balance sheet of Orange County - Poughkeepsie Limited Partnership (the "Partnership") as of December 31, 2001, and the related statements of operations, partners' capital, and cash flows for the year then ended. 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 audit. The financial statements of the Partnership for the year ended December 31, 2000 were audited by other auditors whose report, dated April 20, 2001 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Orange County - Poughkeepsie Limited Partnership as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. February 13, 2002 39 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (Dollars in Thousands) - -------------------------------------------------------------------------------- ASSETS 2001 2000 CURRENT ASSETS: Accounts receivable, net of allowances of $0 and $31 in 2001 and 2000, respectively $ 495 $ 2,259 Unbilled revenue 1,545 1,112 Due from general partner 18,072 22,475 Prepaid expenses and other current assets 137 107 ------- ------- Total current assets 20,249 25,953 PROPERTY, PLANT AND EQUIPMENT - Net 26,057 24,753 DEFERRED CHARGES AND OTHER ASSETS - Net 5 7 ------- ------- TOTAL ASSETS $46,311 $50,713 LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Accounts payable and accrual liabilities $ 334 $ 1,980 Advance billings 196 172 ------- ------- Total current liabilities 530 2,152 COMMITMENTS AND CONTINGENCIES (NOTES 5 and 7) PARTNERS' CAPITAL 45,781 48,561 ------- ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $46,311 $50,713 ======= ======= See notes to financial statements. 40 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001 AND 2000 (Dollars in Thousands) - -------------------------------------------------------------------------------- 2001 2000 OPERATING REVENUES: Service revenues $81,952 $57,678 OPERATING COSTS AND EXPENSES: Cost of service 6,879 6,509 General and administrative 5,437 4,455 Depreciation and amortization 3,583 3,077 ------- ------- Total operating costs and expenses 15,899 14,041 ------- ------- OPERATING INCOME 66,053 43,637 OTHER INCOME - Net 1,167 1,264 ------- ------- NET INCOME $67,220 $44,901 ======= ======= See notes to financial statements. 41 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 2001 AND 2000 (Dollars in Thousands) - --------------------------------------------------------------------------------
GENERAL PARTNER LIMITED PARTNERS --------------- ---------------- NYNEX WARWICK MOBILE TACONIC VALLEY TOTAL LIMITED TELEPHONE TELEPHONE PARTNERS' PARTNERSHIP 2 CORPORATION COMPANY CAPITAL BALANCE, JANUARY 1, 2000 $ 32,862 $ 2,899 $ 2,899 $ 38,660 Net income 38,165 3,368 3,368 44,901 Distribution to partners (29,750) (2,625) (2,625) (35,000) ------- ------ ------ ------ BALANCE, DECEMBER 31, 2000 41,277 3,642 3,642 48,561 Net income 57,138 5,041 5,041 67,220 Distribution to partners (59,500) (5,250) (5,250) (70,000) ------- ------ ------ ------ BALANCE, DECEMBER 31, 2001 $ 38,915 $ 3,433 $ 3,433 $ 45,781 ======= ====== ====== ======
See notes to financial statements. 42 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000 (Dollars in Thousands) - --------------------------------------------------------------------------------
2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 67,220 $ 44,901 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense 31 6 Depreciation and amortization 3,583 3,077 Changes in certain assets and liabilities: Accounts receivable 1,733 (984) Unbilled revenue (433) (464) Prepaid expenses and other current assets (30) 10 Deferred charges and other assets 2 2 Accounts payable and accrued liabilities (1,646) 197 Advance billings 24 100 -------- -------- Net cash provided by operating activities 70,484 46,845 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,887) (4,654) Proceeds from sale of property, plant and equipment -- 275 -------- -------- Net cash used in investing activities (4,887) (4,379) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease (increase) in due from general partner, net 4,403 (7,466) Distribution to partners (70,000) (35,000) -------- -------- Net cash used in financing activities (65,597) (42,466) INCREASE IN CASH -- -- CASH, BEGINNING OF YEAR -- -- -------- -------- CASH, END OF YEAR $ -- $ -- ======== ========
See notes to financial statements. 43 ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND MANAGEMENT ORANGE COUNTY - POUGHKEEPSIE LIMITED PARTNERSHIP - Orange County - Poughkeepsie Limited Partnership (the "Partnership") was formed in 1987. The principal activity of the Partnership is providing wholesale cellular service to resellers who operate principally in the Orange County and Poughkeepsie, New York service areas. The partners and their respective ownership percentages as of December 31, 2001 are as follows: Managing and general partner: NYNEX Mobile Limited Partnership 2 ("NYNEX Mobile LP 2")* 85.0% Limited partners: Taconic Telephone Corporation ("Taconic") 7.5% Warwick Valley Telephone Company ("Warwick) 7.5% *NYNEX Mobile LP 2 is a partnership between Cellco Partnership ("Cellco," doing business as Verizon Wireless), the Utica - Rome Cellular Partnership and Bell Atlantic Mobile Systems of Allentown, Inc., with ownership interests of 54%, 45%, and 1%, respectively. GENERAL PARTNER - On April 3, 2000, Bell Atlantic and Vodafone Group Plc ("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 Cellco Partnership, 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. Bell Atlantic maintained control of Cellco. As of April 3, 2000, Cellco began conducting business as Verizon Wireless. 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 (the "Merger"). On June 30, 2000, the newly merged entity changed its name to Verizon Communications, Inc. ("Verizon Communications"). Under the Alliance Agreement, Verizon Communications contributed GTE Corp.'s wireless net assets and operations increasing its partnership interest to 55% and decreasing Vodafone's partnership interest to 45%. 2. SIGNIFICANT ACCOUNTING POLICIES 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, liabilities, revenues, and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon 44 management's evaluation of relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. REVENUE RECOGNITION - The Partnership earns revenue by providing access to the network (access revenue) and for usage of the network (airtime/usage revenue), which includes roaming and long distance revenue. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings. Airtime/usage revenue, roaming revenue and long distance revenue are recognized when service is rendered and included in unbilled revenue until billed. The Partnership's revenue recognition policies are in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. Cellular service revenues resulting from a cellsite agreement with Cellco are recognized based upon an allocation of airtime minutes (See Note 4). OPERATING EXPENSES - Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of administrative and operating costs incurred by the managing partner or its affiliates on behalf of the Partnership. Services performed on behalf of the Partnership are provided by employees of Cellco. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. The Partnership believes such allocations are reasonable. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment primarily represents costs incurred to construct and enhance Mobile Telephone Switching Offices ("MTSOs") and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. 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. Upon the sale or retirement of property, 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 Statements 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 Statements of Operations. Interest expense and network engineering costs incurred during the construction phase of the Partnership's network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction in progress until the projects are completed and placed into service. FCC LICENSES - The Federal Communications Commission ("FCC") issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. 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 reward 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 licenses expire on January 27, 2008 and January 29, 2008 for the Poughkeepsie and 45 Orange County FCC licenses, respectively. The general partner believes it will be able to meet all requirements necessary to secure renewal of the Partnership's cellular licenses. VALUATION OF ASSETS - The Partnership follows the provision of the Financial Accounting Standards Board ("FASB") Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When such events occur, the undiscounted expected future cash flows are compared to the carrying amount of the asset. If the comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows. The discount rate applied to these cash flows is based on the Partnership's weighted average cost of capital. CONCENTRATIONS - To the extent the Partnership's customer receivables become delinquent, collection activities commence. The managing general partner accounts for 76% and 93% of the accounts receivable balance at December 31, 2001 and 2000, respectively. The Partnership maintains an allowance for losses based on the expected collectibility of accounts receivable. The managing partner relies on local and long-distance telephone companies and other companies to provide certain communication services. Although management believes 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. Although the managing partner attempts to maintain multiple vendors for equipment, which are important components of its operations, they are currently 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 suppliers are unable to meet the managing partner's needs as it builds out its network infrastructure and sells service 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 trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value. 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 of the Partnership. As such, the change in 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 is based on the average monthly outstanding balance in this account and is calculated by applying Cellco's average borrowing rate which was approximately 4.6% and 6.7% at December 31, 2001 and 2000, respectively. Included in Other Income, Net is net interest income related to the Due from General Partner balance of $1,167 and $1,264 for the years ended December 31, 2001 and 2000, respectively. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2001, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This standard requires entities to recognize the fair value of any legal obligation associated with the retirement of long-lived assets and to capitalize that amount as a part of the book value of the long-lived 46 asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. The partnership is required to adopt the standard effective January 1, 2003. The partnership is currently evaluating its long-lived assets retirement obligation in relation to the provisions of SFAS No. 143 to determine the impact, if any, on its future results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This standard re-addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It concludes that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The Partnership is required to adopt the standard effective January 1, 2002. The Partnership does not expect the impact of the adoption of SFAS No. 144 to have a material effect on its results of operations or financial position. RECLASSIFICATIONS - Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, 2001 2000 Buildings and improvements (10-40 years) $ 9,451 $ 8,555 Cellular plant equipment (3-15 years) 33,803 29,811 Furniture, fixtures and equipment (2-7 years) 381 381 -------- -------- 43,635 38,747 Less accumulated depreciation (17,578) (13,994) -------- -------- Property, plant and equipment, net $ 26,057 $ 24,753 ======== ========
Property, plant, and equipment includes the following: Capitalized network engineering costs of $112 and $176 were recorded during the years ended December 31, 2001 and 2000, respectively. Construction-in-progress included in certain of the classifications shown above, principally cellular plant equipment, amounted to $1,598 and $1,819 at December 31, 2001 and 2000, respectively. Depreciation expense for the years ended December 31, 2001 and 2000 was $3,582 and $3,075, respectively. 47 4. TRANSACTIONS WITH AFFILIATES Significant transactions with affiliates are summarized as follows: YEARS ENDED DECEMBER 31, 2001 2000 Cellsite allocated revenues $1,316 $1,312 Direct telecommunication and data processing charges 335 555 Allocation of certain general and administrative expenses 3,234 2,764 Allocation of switch usage cost 3,760 3,540 5. COMMITMENTS The 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 that include rent expense adjustments based on the Consumer Price Index. For the years ended December 31, 2001 and 2000, the Partnership recognized a total of $934 and $914, respectively, as rent expense related to payments under these operating leases, which is included in selling, general and administrative expenses in the accompanying Statements of Operations. Future minimum rental commitments under noncancelable operating leases, excluding renewal options which the Partnership intends to exercise, for the years shown are as follows: YEARS AMOUNT 2002 $ 907 2003 808 2004 754 2005 661 2006 612 Thereafter 1,740 ------ Total minimum payments $5,482 ====== 6. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS WRITE-OFFS BALANCE AT BEGINNING CHARGED TO NET OF END OF THE YEAR OPERATIONS RECOVERIES OF THE YEAR Accounts Receivable Allowances: 2000 $ 24 $ 7 $ -- $ 31 2001 31 -- 31 --
7. 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 action lawsuits allege that the Cellco breached contracts with consumers, violated certain 48 state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. 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, 2001 cannot be ascertained. The potential effect, if any, on the financial condition and results of operations of the Partnership, in the period in which these matters are resolved, may be material. In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco's legal counsel cannot give assurance as to the outcome of each of these matters, in management's opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial position or operating results of the Partnership. ****** 49 [BUSH & GERMAIN, PC LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS February 7, 2002 We consent to the incorporation by reference in this Annual Report (Form 10-K) of Warwick Valley Telephone Company of our report dated February 7, 2002, included in the 2001 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 7, 2002 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) for the year ended December 31, 2001. /s/ Bush & Germain, P.C. Bush & Germain, P.C. Syracuse, New York 50 -----END PRIVACY-ENHANCED MESSAGE-----