-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lQaPndnhtv2aYzvdmE5sfhyMYR9YeaNqYkXemvXbniFqwJuUI/tGR99PU/1DCoyu Q5pzfysycYvC3j1OI8pLSw== 0000096966-94-000006.txt : 19940121 0000096966-94-000006.hdr.sgml : 19940121 ACCESSION NUMBER: 0000096966-94-000006 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940119 ITEM INFORMATION: 5 ITEM INFORMATION: 7 FILED AS OF DATE: 19940120 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC CENTRAL INDEX KEY: 0000096966 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 362669023 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 34 SEC FILE NUMBER: 001-08251 FILM NUMBER: 94501971 BUSINESS ADDRESS: STREET 1: 30 N LASALLE ST STE 4000 CITY: CHICAGO STATE: IL ZIP: 60602 BUSINESS PHONE: 3126301900 MAIL ADDRESS: STREET 1: 301 S. WESTFIELD RD STREET 2: PO BOX 5158 CITY: MADISON STATE: WI ZIP: 53705-0158 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC STOCK OPTION PLANS DATE OF NAME CHANGE: 19741118 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE SYSTEMS INC DATE OF NAME CHANGE: 19740509 8-K 1 CURRENT REPORT ON FORM 8-K FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): January 19, 1994 ------------------ TELEPHONE AND DATA SYSTEMS, INC. --------------------------------- (Exact name of registrant as specified in its charter) Iowa 1-8251 36-2669023 ------ -------- ------------ (State or other (Commission (IRS Employer jurisdiction of File Number) Identification incorporation) No.) 30 North LaSalle Street, Chicago, Illinois 60602 ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 630-1900 Not Applicable --------------- (Former name or former address, if changed since last report) Item 5. Other Events ------------- Telephone and Data Systems, Inc. ("TDS"), together with its majority-owned subsidiaries, TDS Telecommunications Corporation, United States Cellular Corporation (AMEX symbol "USM") and American Paging, Inc., are referred to in this report as the "Company." From January 1 through September 30, 1993, the Company acquired controlling interests in two telephone companies, one paging company and 19 cellular markets and several minority cellular interests representing a total of approximately 3.3 million population equivalents. The total consideration paid for these acquisitions was approximately $304.1 million, consisting of 5.9 million TDS Common Shares, 30,000 TDS Preferred Shares, 157,000 USM Common Shares, 29,000 shares of subsidiary preferred stock (which are exchangeable into approximately 73,000 TDS Common Shares), the obligation to deliver 140,000 USM Common Shares in the future, and $55.0 million in cash. The financial statements of the following companies acquired prior to September 30, 1993, were filed in the Company's report on Form 8-K dated November 20, 1992: Arizona Telephone Company, Camden Telephone Company, Inc., Randolph Cellular Corporation, Cellular of Indiana, Inc., Northern Illinois Cellular Communications, Inc., RSA II Partnership (d/b/a NC Cellular), and Illinois Four Limited Partnership. The financial statements of the following companies acquired prior to September 30, 1993, were filed in the Company's report on Form 8-K dated February 15, 1993: Oklahoma Cellular, Inc., G.M.D. Partnership and G.M.D. Partnership II. The financial statements for JHP Partnership, which was acquired prior to September 30, 1993, were filed in the Company's report on Form 8-K dated July 28, 1993. As of September 30, 1993, the Company had pending agreements to acquire two telephone companies and controlling interests in ten cellular markets and a minority interest in one market representing a total of approximately 1.3 million population equivalents. From October 1 through December 31, 1993, the Company entered into additional agreements to acquire two telephone companies, a controlling interest in one cellular market and one minority cellular interest representing approximately 70,000 population equivalents. The total consideration to be paid for the acquisitions described in this paragraph, valued at the time such agreements were entered into, is approximately $194.7 million. If these acquisitions are completed as planned, the Company and/or USM will issue approximately 4.2 million TDS Common Shares, 50,000 USM Common Shares and will pay approximately $4.6 million in cash. The financial statements for California Two Cellular Corporation, Winsted Telephone Company and Tsaconas Cellular, Inc., which are included above, were filed in the Company's report on Form 8-K dated July 28, 1993. The financial statements for Mo-Tel Cellular, Inc., Canton Cellular Corporation and The Vanlue Telephone Company, which are included above, were filed in the Company's report on Form 8-K dated October 18, 1993. The financial statements for Arvig Telcom, Inc. and Vernon Telephone Co., Inc. for which the Company has agreements to acquire are filed under Item 7 of this report. Pursuant to Rule 3-05 and Rule 11-01 of Regulation S-X, the completed and pending acquisitions of businesses described in the foregoing paragraphs are not individually significant. The following pro forma financial information is included pursuant to Article 11 of Regulation S-X: Item Page ---- ---- Telephone and Data Systems, Inc. Unaudited Condensed Pro Forma Consolidated Financial Statements: Unaudited Condensed Pro Forma Consolidated Balance Sheet as of September 30, 1993 4-5 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Nine Months Ended September 30, 1993 6 Unaudited Condensed Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1992 7 Notes to Unaudited Condensed Pro Forma Consolidated Financial Statements 8-9 3 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Balance Sheet September 30, 1993 Unaudited --------- (In Thousands) ASSETS
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated(a) Acquisitions (Decrease) Consolidated --------------------------- -------------------------- CURRENT ASSETS $ 186,743 $ 16,288 $ (129)(1) $202,902 ----------- ---------- ---------- --------- INVESTMENTS Cellular limited partnership interests 97,028 361 (1,458)(1) 95,931 Cellular license acquisition costs, net 109,983 1,387 60,619 (1) 171,989 Marketable equity securities 19,994 50 -- 20,044 Other 117,060 3,549 -- 120,609 ----------- ---------- ---------- --------- 344,065 5,347 59,161 408,573 ----------- ---------- ---------- --------- PROPERTY, PLANT AND EQUIPMENT Telephone plant and franchise costs, net 616,961 33,846 41,616(1) 692,423 Cellular telephone plant and license costs, net 923,245 8,989 75,429(1) 1,007,663 Radio paging, net 53,602 -- -- 53,602 Other, net 32,832 -- -- 32,832 ----------- ---------- ---------- --------- 1,626,640 42,835 117,045 1,786,520 ----------- ---------- ---------- --------- OTHER ASSETS AND DEFERRED CHARGES 10,324 3,660 -- 13,984 ----------- ---------- ---------- --------- $2,167,772 $ 68,130 $ 176,077 $ 2,411,979 =========== ========== ========== =========== The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
4 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Balance Sheet September 30, 1993 Unaudited ---------- (In Thousands) STOCKHOLDERS' EQUITY AND LIABILITIES
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated(a) Acquisitions (Decrease) Consolidated ------------- --------------------------------------- CURRENT LIABILITIES $ 169,418 $ 12,999 $ 3,940 (1)$ 186,357 ----------- ---------- ---------- --------- DEFERRED LIABILITIES AND CREDITS 94,190 4,383 -- 98,573 ----------- ---------- ---------- --------- LONG-TERM DEBT, excluding current portion 522,009 32,250 -- 554,259 ----------- ---------- ---------- --------- REDEEMABLE PREFERRED STOCK, excluding current portion 27,674 -- -- 27,674 ----------- ---------- ---------- --------- MINORITY INTEREST in subsidiaries 153,334 -- 1,511 (1) 154,845 ----------- ---------- ---------- --------- NONREDEEMABLE PREFERRED STOCK 15,796 -- -- 15,796 ----------- ---------- ---------- --------- COMMON STOCKHOLDERS' EQUITY Common Shares, par value $1 per share 42,265 537 3,710 (1) 46,512 Series A Common Shares, par value $1 per share 6,877 -- -- 6,877 Capital in excess of par value 1,047,677 4,461 180,416 (1)1,232,554 Retained earnings 88,532 13,500 (13,500) (1) 88,532 ----------- ---------- ---------- --------- 1,185,351 18,498 170,626 1,374,475 ----------- ---------- ---------- --------- $2,167,772 $ 68,130 $ 176,077 $ 2,411,979 =========== ========== ========== =========== The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
5 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Statement of Income For the Nine Months Ended September 30, 1993 Unaudited ----------- (In Thousands, except per share amounts)
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated Acquisitions(b) (Decrease) Consolidated ----------------------------- ------------------------ OPERATING REVENUES Telephone $ 199,843 $ 31,886 $ -- $ 231,729 Cellular telephone 175,208 12,160 -- 187,368 Radio paging 55,082 485 -- 55,567 ----------- ---------- ---------- --------- Total operating revenues 430,133 44,531 -- 474,664 ----------- ---------- ---------- --------- OPERATING EXPENSES Telephone 138,200 26,730 858 (3) 165,788 Cellular telephone 177,800 14,431 3,280 (3) 195,511 Radio paging 56,747 331 214 (3) 57,292 ----------- ---------- ---------- --------- Total operating expenses 372,747 41,492 4,352 418,591 ----------- ---------- ---------- --------- OPERATING INCOME 57,386 3,039 (4,352) 56,073 ----------- ---------- ---------- --------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 5,837 120 (337) (5) 5,620 Minority share of income (1,111) -- (495) (2) (514) 1,092 (6) Cellular investment income, net of license cost amortization 10,595 -- (203) (3) 10,649 257 (4) Gain on sale of cellular properties and investments 4,970 -- -- 4,970 Other, net (45) 4,680 -- 4,635 ----------- ---------- ---------- --------- 20,246 4,800 314 25,360 ----------- ---------- ---------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 77,632 7,839 (4,038) 81,433 Interest expense 27,881 2,633 (337) (5) 31,025 848 (7) ----------- ---------- ---------- --------- INCOME BEFORE INCOME TAXES 49,751 5,206 (4,549) 50,408 Income tax expense 21,890 1,882 (3,949) (8) 19,823 ----------- ---------- ---------- --------- NET INCOME 27,861 3,324 (600) 30,585 Preferred Dividend Requirement (1,789) -- -- (1,789) ----------- ---------- ---------- --------- NET INCOME AVAILABLE TO COMMON $ 26,072 $ 3,324 $ (600) $ 28,796 =========== =========== ========== ========= WEIGHTED AVERAGE COMMON SHARES (000s) 46,339 5,997 52,336 =========== ========== ========= EARNINGS PER COMMON SHARE $ .56 $ .55 =========== ========= The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
6 TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES Condensed Pro Forma Consolidated Statement of Income For the Year Ended December 31, 1992 Unaudited ---------- (In Thousands, except per share amounts)
Combined Pro Forma Completed Adjustments Pro Forma TDS and Pending Increase TDS Consolidated (d) Acquisitions (Decrease) Consolidated ----------------------------------------------------- OPERATING REVENUES Telephone $ 249,928 $ 35,810 $ -- $ 285,738 Cellular telephone 177,946 10,112 -- 188,058 Radio paging 53,928 1,631 -- 55,559 ----------- ---------- ---------- --------- Total operating revenues 481,802 47,553 -- 529,355 ----------- ---------- ---------- --------- OPERATING EXPENSES Telephone 173,135 32,748 809 (3) 206,692 Cellular telephone 197,366 14,454 4,326 (3) 216,146 Radio paging 59,376 991 428 (3) 60,795 ----------- ---------- ---------- --------- Total operating expenses 429,877 48,193 5,563 483,633 ----------- ---------- ---------- --------- OPERATING INCOME 51,925 (640) (5,563) 45,722 ----------- ---------- ---------- --------- INVESTMENT AND OTHER INCOME (EXPENSE) Interest and dividend income 7,337 30 (22) (5) 7,345 Minority share of income (2,688) -- (266) (2) (1,307) 1,647 (6) Cellular investment income, net of license cost amortization 9,632 -- (379) (3) 9,160 (93) (4) Gain on sale of cellular properties and other investments 31,396 -- -- 31,396 Other, net 2,597 494 -- 3,091 ----------- ---------- ---------- --------- 48,274 524 887 49,685 ----------- ---------- ---------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 100,199 (116) (4,676) 95,407 Interest expense 37,202 2,732 (22) (5) 40,825 913 (7) ----------- ---------- ---------- --------- INCOME BEFORE INCOME TAXES 62,997 (2,848) (5,567) 54,582 Income tax expense 28,717 783 (4,476) (8) 25,024 ----------- ---------- ---------- --------- NET INCOME (c) 34,280 (3,631) (1,091) 29,558 Preferred Dividend Requirement (2,462) -- -- (2,462) ----------- ---------- ---------- --------- NET INCOME AVAILABLE TO COMMON (c) $ 31,818 $ (3,631) $ (1,091) $ 27,096 ========== =========== ========= ========== WEIGHTED AVERAGE COMMON SHARES (000s) 42,347 6,906 49,253 ========== ========= ========== EARNINGS PER COMMON SHARE (c) $ .75 $ .55 ========== ========== The accompanying notes to condensed pro forma consolidated financial statements are an integral part of this statement.
7 TELEPHONE AND DATA SYSTEMS, INC. NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (a) Includes the balance sheets of the entities discussed in the second paragraph of Item 5 of this report. (b) Includes the income statements of the entities discussed in the second paragraph of Item 5 of this report prior to the date of acquisition by the Company, as well as each of the income statements of the entities for which acquisition by the Company was completed subsequent to September 30, 1993, or is pending as of the date of this Form 8-K. (c) Net income, net income available to common and earnings per share are presented prior to extraordinary items and the cumulative effect of accounting changes. (d) Reflects the Pro Forma Consolidated Statement of Income, including completed audited acquisitions, as shown in the Company's report on Form 8-K dated July 28, 1993. (e) The pro forma adjustments are described in the following paragraphs: 1) Reflects TDS's acquisition of the telephone and cellular telephone interests described in the third paragraph of Item 5 of this report. Also reflects the elimination of the equity of these interests in purchase transactions and the allocation of the purchase price in excess of book value (in thousands). Purchase price (aggregate) $ 194,701 Less: TDS's proportionate share of acquired companies' equity at September 30, 1993 (17,037) ----------- Purchase price to be allocated $ 177,664 =========== Purchase price in excess of book value-- Cellular operations--consolidated $ 75,429 Cellular operations--equity method 60,619 Telephone operations 41,616 ----------- $ 177,664 =========== The pro forma allocations of the purchase prices to the acquired entities' assets as set forth above are based upon preliminary estimates of the values of those assets. 2) Reflects the minority shareholders' portion of acquired companies' net income. 3) Reflects the amortization of assumed costs in excess of book value. Excess cost amounts are primarily assumed to be amortized over 40 years. 4) Reflects the elimination of the equity-method losses of acquired entities which are consolidated in the Pro Forma Consolidated Statements of Income. 8 TELEPHONE AND DATA SYSTEMS, INC. NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5) Reflects the elimination of intercompany interest income and interest expense between the Company and an acquired entity. The acquired entity was previously accounted for by the equity method of accounting (see Note 4). 6) Reflects the minority shareholders' portion of USM's net income due to the addition of the cellular entities and the related pro forma adjustments in (2)-(4) above. 7) Reflects the estimated interest expense incurred as a result of increases in Notes Payable in connection with the acquisitions included in the Condensed Pro Forma Consolidated Statements of Income. 8) Reflects the estimated income tax effects of the pro forma adjustments in (2)-(4) and (7) above. 9 Item 7. Financial Statements, Pro Forma Financial Information and -------------------------------------------------------- Exhibits -------- (c) The following exhibits are filed as a part of this report and incorporated herein by reference: Exhibit No. Description ----- ---------------------- 23 Consents of Independent Accountants 99.1 Audited financial statements of Arvig Telcom, Inc. and Subsidiaries pursuant to Rule 3-05 of Regulation S-X. Independent Auditors' Reports including Independent Auditors Reports on the Financial Statements of three subsidiaries not audited by Arvig Telcom, Inc.'s auditors Financial Statements: Statements of Income for the Years Ended December 31, 1992, 1991 and 1990 Statements of Cash Flows for the Years Ended December 31, 1992 and 1991 and 1990 Balance Sheets as of December 31, 1992 and 1991 Statements of Stockholders' Equity for the Years Ended December 31, 1992, 1991 and 1990 Notes to Financial Statements 99.2 Unaudited interim financial statements of Arvig Telcom, Inc. and Subsidiaries pursuant to Rule 3-05 of Regulation S-X Financial Statements: Statements of Income for the Nine Months Ended September 30, 1993 and 1992 Statements of Cash Flows for the Nine Months Ended September 30, 1993 and 1992 Balance Sheets as of September 30, 1993 and December 31, 1992 Notes to Unaudited Financial Statements 10 Exhibit No. Description ------ ------------------- 99.3 Audited financial statements of Vernon Telephone Company, Inc. pursuant to Rule 3-05 of Regulation S-X Independent Auditors' Report Financial Statements: Statement of Income for the Years Ended June 30, 1993 and 1992 Statement of Cash Flows for the Years Ended June 30, 1993 and 1992 Balance Sheets as of June 30, 1993 and 1992 Statement of Retained Earnings for the Years Ended June 30, 1993 and 1992 Notes to Financial Statements 99.4 Unaudited interim financial statements of Vernon Telephone Company, Inc. pursuant to Rule 3-05 of Regulation S-X Financial Statements: Statements of Operations for the Three Months Ended September 30, 1993 and 1992 Statements of Cash Flows for the Three Months Ended September 30, 1993 and 1992 Balance Sheets as of September 30, 1993 and June 30, 1993 Notes to Unaudited Financial Statements 11 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Telephone and Data Systems, Inc. (Registrant) Date: January 19, 1994 ---------------- By: /s/ GREGORY J. WILKINSON ------------------------ Gregory J. Wilkinson Vice President and Controller (principal accounting officer) INDEX TO EXHIBITS Exhibit No. Description Page ----- ----------------------- ---- 23 Consents of Independent Public Accountants 99.1 Audited financial statements of Arvig Telcom, Inc. and Subsidiaries 99.2 Unaudited interim financial statements of Arvig Telcom, Inc. and Subsidiaries 99.3 Audited financial statements of Vernon Telephone Company, Inc. 99.4 Unaudited interim financial statements of Vernon Teleophone Company, Inc. EX-23 2 EXHIBIT 23 - CONSENTS OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion of our report dated September 13, 1993, on the financial statements of Vernon Telephone Company, Inc. as of June 30, 1993 and 1992, and for the years then ended into this Form 8-K of Telephone and Data Systems, Inc. (the Company), and to the incorporation of our report into the Company's previously filed S-8 Registration Statements, File No. 33-4420, File No. 33-1192, File No. 33-35172, and File No. 33-50747 and into the Company's previously filed S-3 Registration Statements, File No. 33-28348, File No. 33-8564, File No. 33-8857, File No. 33-8858, and File No. 33-68456, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570, File No. 33-58404, File No. 33-65986, File No. 33-68988 and File No. 33-50627. BUSH & GERMAIN, PC Syracuse, NY January 17, 1994 15 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion of our report dated February 18, 1993, which included reliance on opinions by another auditor, on the financial statements of Arvig Telcom, Inc. and Subsidiaries as of December 31, 1992, 1991, and 1990 and for the years then ended into this Form 8-K of Telephone and Data Systems, Inc. (the Company), and to the incorporation of our report into the Company's previously filed S-8 Registration Statements, File No. 33-4420, File No. 33-1192, File No. 33-35172, and File No. 33-50747 and into the Company's previously filed S-3 Registration Statements, File No. 33-28348, File No. 33-8564, File No. 33-8857, File No. 33-8858, and File No. 33-68456, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570, File No. 33-58404, File No. 33-65986, File No. 33-68988 and File No. 33-50627. OLSEN, THIELEN & CO., LTD. St. Paul, Minnesota January 18, 1994 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion of our report dated February 26, 1993, on the financial statements of U.S. Link, Inc. and Subsidiary, Velstar Systems, Inc., and Interlake Cablevision, Inc. (all wholly owned subsidiaries of Arvig Telcom, Inc.) as of December 31, 1992, and 1991, and for the years then ended, which were relied upon by other auditors in giving their opinion on the financial statements of Arvig Telcom, Inc. and Subsidiaries as of December 31, 1992 and 1991, and for the years then ended, into this Form 8-K of Telephone and Data Systems, Inc. (the Company), and to the incorporation of our reports into the Company's previosuly filed S-8 Registration Statements, File No. 33-4420, File No. 33-1192, File No. 33-35172, and File No. 33- 50747 and into the Company's previously filed S-3 Registration Statements, File No. 33-28348, File No. 33-8564, File No. 33-8857, File No. 33-8858, and File No. 33-68456, and into the Company's previously filed S-4 Registration Statements, File No. 33-45570, File No. 33-58404, File No. 33-65986, File No. 33-68988 and File No. 33-50627. LARSON, ALLEN, WEISHAIR & CO. St. Paul, Minnesota January 18, 1994 EX-99 3 EXHIBIT 99.1 - ARVIG TELCOM, INC. AUDITED STMTS Exhibit 99.1 INDEPENDENT AUDITORS' REPORT Board of Directors Arvig Telcom, Inc. Pequot Lakes, Minnesota We have audited the accompanying consolidated balance sheet of Arvig Telcom, Inc. and subsidiaries as of December 31, 1992 and 1991, and the related consolidated statements of income, stockholders' equity, and cash flows for the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain consolidated subsidiaries which statements reflect total assets of $17,292,330 and $16,855,506 as of December 31, 1992 and 1991, respectively, and total revenues of $24,212,075 for 1992, $15,951,992 for 1991, and $10,293,488 for 1990. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those consolidated subsidiaries, is based solely on the reports of the other auditors. 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 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 audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arvig Telcom, Inc. and subsidiaries as of December 31, 1992 and 1991, and the consolidated results of their operations and their cash flows for the three years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. OLSEN, THIELEN & CO., LTD. St. Paul, Minnesota February 18, 1993 INDEPENDENT AUDITOR'S REPORT Board of Directors Interlake Cablevision, Inc. (A Wholly Owned Subsidiary of Arvig Telcom, Inc.) Pequot Lakes, Minnesota We have audited the accompanying balance sheets of INTERLAKE CABLEVISION, INC. (A Wholly-Owned Subsidiary of Arvig Telcom, Inc.) as of December 31, 1992 and 1991, and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits and the reports of the other auditors provide 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 INTERLAKE CABLEVISION, INC. (A Wholly-Owned Subsidiary of Arvig Telcom, Inc.) as of December 31, 1992 and 1991, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO. St. Cloud, Minnesota February 26, 1993 INDEPENDENT AUDITOR'S REPORT Board of Directors U.S. Link, Inc. (A Wholly Owned Subsidiary of Arvig Telcom, Inc.) Pequot Lakes, Minnesota We have audited the accompanying consolidated balance sheets of U.S. LINK, INC. and subsidiary (A Wholly-Owned Subsidiary of Arvig Telcom, Inc.) as of December 31, 1992 and 1991, and the related consolidated statements of income, retained earnings and cash flows for the years then ended. 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 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 and the reports of the other auditors 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 U.S. LINK, INC. and subsidiary (A Wholly-Owned Subsidiary of Arvig Telcom, Inc.) as of December 31, 1992 and 1991, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO. St. Cloud, Minnesota February 26, 1993 INDEPENDENT AUDITOR'S REPORT Board of Directors Velstar Systems, Inc. (A Wholly Owned Subsidiary of Arvig Telcom, Inc.) Pequot Lakes, Minnesota We have audited the accompanying balance sheets of VELSTAR SYSTEMS, INC. (A Wholly-Owned Subsidiary of Arvig Telcom, Inc.) as of December 31, 1992 and 1991, and the related statements of operations, related deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits and the reports of the other auditors provide 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 VELSTAR SYSTEMS, INC. (A Wholly-Owned Subsidiary of Arvig Telcom, Inc.) as of December 31, 1992 and 1991, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO. St. Cloud, Minnesota February 26, 1993 ARVIG TELCOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1992 AND 1991 ASSETS
1992 1991 ------------ ------------ CURRENT ASSETS: Cash and Cash Equivalents $ 4,080,262 $2,375,026 Marketable Securities 1,962,359 1,494,952 Due from Customers, Net of Allowance for Doubtful Accounts of $145,000 and $97,000 2,786,467 2,617,923 Income Taxes Receivable 338,191 316,569 Other Accounts Receivable 1,260,512 1,287,342 Inventories 345,272 448,090 Prepaid Expenses 162,965 86,959 ------------ ----------- Total Current Assets 10,936,028 8,626,861 ------------ ----------- INVESTMENTS AND OTHER ASSETS: Notes Receivable 344,202 312,202 Investments 2,703,111 2,079,696 Noncompete Covenants, Net of Amortization of $882,720 and $324,694 1,607,360 2,165,386 Excess of Cost Over Net Assets of Consolidated Subsidiaries, Net of Amortization of $470,624 and $442,803 642,198 670,019 Other Intangibles, Net of Amortization of $166,956 and $342,441 603,898 950,932 Other Assets 294,486 163,517 ------------ ----------- Total Investments and Other Assets 6,195,255 6,341,752 ------------ ----------- PROPERTY, PLANT AND EQUIPMENT: Telecommunications Plant in Service 42,619,407 37,752,200 Cable Television Plant in Service 3,278,931 3,173,238 Other Property 3,511,706 3,436,084 Plant Under Construction 376,990 1,610,341 Accumulated Depreciation (20,459,171) (19,274,483) ------------ ----------- Net Property, Plant and Equipment 29,327,863 26,697,380 ------------ ----------- TOTAL ASSETS $46,459,146 $41,665,993 ============ =========== The accompanying notes are an integral part of the consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
1992 1991 ----------- ----------- CURRENT LIABILITIES: Current Portion of Long-Term Debt $ 1,330,000 $1,200,000 Notes Payable - 2,059,374 Accounts Payable 3,003,707 1,995,134 Accrued Taxes 240,866 295,907 Accrued Pension 278,344 392,715 Other Current Liabilities 795,653 775,141 ------------ ----------- Total Current Liabilities 5,648,570 6,718,271 ------------ ----------- LONG-TERM DEBT 20,706,510 15,367,081 ------------ ----------- DEFERRED CREDITS AND LIABILITIES: Investment Tax Credits 730,805 873,986 Income Taxes 2,988,153 3,112,322 Other Liabilities 19,773 18,483 ------------ ----------- Total Deferred Credits and Liabilities 3,738,731 4,004,791 ------------ ----------- STOCKHOLDERS' EQUITY: Common Stock - Class A Voting, $1 Par Value, 500,000 Shares Authorized, 4,370 Shares Issued and Outstanding 4,370 4,370 Common Stock - Class B Nonvoting, $1 Par Value, 500,000 Shares Authorized, 39,330 Shares Issued and Outstanding 39,330 39,330 Retained Earnings 16,321,635 15,532,150 ------------ ----------- Total Stockholders' Equity 16,365,335 15,575,850 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,459,146 $41,665,993 ============ ===========
ARVIG TELCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
1992 1991 1990 ------------- ----------- ------------- REVENUES: Long-Distance Carrier Services $ 21,911,853 $13,815,597 $ 9,021,650 Local Exchange Company Services 9,350,512 9,981,322 9,283,585 Cable Television Services 890,010 769,054 628,774 Other Services 600,793 571,622 633,310 ------------- ----------- ------------ Total Revenues 32,753,168 25,137,595 19,567,319 ------------- ----------- ------------ COSTS AND EXPENSES: Cost of Long-Distance Carrier Services 14,805,925 7,901,151 5,160,871 Maintenance and Rents 3,018,004 2,881,470 3,031,004 Depreciation and Amortization 4,657,926 4,437,580 3,250,701 Sales, Marketing and Customer Services 2,715,206 3,007,740 1,440,036 General and Administrative 4,824,418 4,564,524 3,236,607 ------------- ----------- ------------ Total Costs and Expenses 30,021,479 22,792,465 16,119,219 ------------- ----------- ------------ OPERATING INCOME 2,731,689 2,345,130 3,448,100 OTHER INCOME 288,899 250,594 306,133 INTEREST EXPENSE (1,147,482) (1,121,709) (936,282) ------------- ----------- ------------ INCOME BEFORE INCOME TAXES 1,873,106 1,474,015 2,817,951 INCOME TAXES 646,621 422,023 932,726 ------------- ----------- ------------ NET INCOME $ 1,226,485 $ 1,051,992 $ 1,885,225 ============= =========== ============ EARNINGS PER SHARE $ 28.07 $ 24.07 $ 43.04 ============= =========== ============ DIVIDENDS PER SHARE $ 10.00 $ 10.00 $ 10.00 ============ =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
ARVIG TELCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
Class A Class B Common Stock Common Stock Total -------------------------------------- Retained Stockholders' Shares Amount Shares Amount Earnings Equity --------- ------- ------- ------- ----------- ---------- BALANCE on December 31, 1989 4,414 $ 4,414 39,726 $39,726 $13,653,967 $13,698,107 Company Stock Reacquired (44) (44) (396) (396) (181,834) (182,274) Net Income 1,885,225 1,885,225 Dividends (440,200) (440,200) ------- ------- ------- -------- ------------ ------------ BALANCE on December 31, 1990 4,370 4,370 39,330 39,330 14,917,158 14,960,858 Net Income 1,051,992 1,051,992 Dividends (437,000) (437,000) ------- ------- ------- -------- ------------ ------------ BALANCE on December 31, 1991 4,370 4,370 39,330 39,330 15,532,150 15,575,850 Net Income 1,226,485 1,226,485 Dividends (437,000) (437,000) ------- ------- ------- -------- ------------ ------------ BALANCE on December 31, 1992 4,370 $ 4,370 39,330 $39,330 $16,321,635 $16,365,335 ======= ======= ======= ======== ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
ARVIG TELCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
1992 1991 1990 -------------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,226,485 $ 1,051,992 $ 1,885,225 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation and Amortization 4,657,926 4,437,580 3,250,701 Loss on Cellular Partnerships 12,005 185,085 181,378 Loss on Sale of Property and Equipment 128,399 -- -- Gain on Sale of Investment (2,600) (27,278) (27,500) Changes in Assets and Liabilities: (Increase) Decrease in: Due from Customers (168,544) (1,304,332) (23,179) Income Taxes Receivable (21,622) (43,999) (272,570) Other Accounts Receivable 26,830 643,709 268,763 Inventories 102,818 (72,401) (34,132) Prepaid Expenses (76,006) 129,229 (151,614) Increase (Decrease) in: Accounts Payable 1,008,573 (348,550) 274,778 Accrued Taxes (55,041) 97,258 (352,712) Accrued Pension (114,371) 142,442 127,534 Other Current Liabilities 20,512 390,787 32,056 Deferred Investment Tax Credits (143,181) (145,367) (146,333) Deferred Income Taxes (124,169) (299,456) (20,252) Other Liabilities 1,290 (6,760) (1,761) ------------- ----------- ------------ Net Cash Provided By Operating Activities 6,479,304 4,829,939 4,990,382 ------------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to Property, Plant and Equipment, Net (6,454,818) (4,645,301) (5,052,050) Issuance of Notes Receivable -- -- (80,000) Collection of Notes Receivable -- 85,000 29,526 Decrease in Equipment Contracts -- (255,192) -- Purchase of Investments (635,420) (713,291) (697,653) Sale of Investments -- 26,077 21,245 Purchase of Marketable Securities (569,047) (1,086,774) (82,995) Sale of Marketable Securities 104,240 194,245 60,999 (Increase) Decrease in Other Assets (164,597) (38,473) 11,346 Increase in Other Intangibles (27,481) (1,268,673) (21) Purchase of Noncompete Covenants -- (2,326,080) -- ------------- ----------- ------------ Net Cash Used in Investing Activities (7,747,123) (10,028,462) (5,789,603) ============= =========== ============ The accompanying notes are an integral part of the consolidated financial statements.
ARVIG TELCOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
1992 1991 1990 ------------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Issuance of Long-Term Debt $ 4,686,062 $ 4,710,301 $ 2,024,893 Principal Payments of Long-Term Debt (1,216,633) (687,195) (545,835) Dividends Paid (437,000) (437,000) (440,200) Company Stock Reacquired -- -- (182,274) Principal Payment of Note Payable (59,374) (214,626) (100,000) ------------- ----------- ------------ Net Cash Provided By Financing Activities 2,973,055 3,371,480 756,584 ------------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,705,236 (1,827,043) (42,637) CASH AND CASH EQUIVALENTS At Beginning of Year 2,375,026 4,202,069 4,244,706 ------------- ----------- ------------ CASH AND CASH EQUIVALENTS At End of Year $ 4,080,262 $ 2,375,026 $ 4,202,069 ============= =========== ============ NONCASH INVESTING ACTIVITY: Sale of Property, Plant and Equipment $ 32,000 $ -- $ -- ============= =========== ============ NONCASH FINANCING ACTIVITY: Acquisition of Long-Distance Carrier $ -- $ 124,000 $ -- ============= =========== ============ Refinancing of Note Payable by Issuance of Long-Term Debt $ 2,000,000 $ -- $ -- ============= =========== ============ The accompanying notes are an integral part of the consolidated financial statements.
ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Description of Business - Arvig Telcom, Inc. owns and operates two independent telecommunications companies, Arvig Telephone Company and Bridge Water Telephone Company; one inter-exchange telecommunications carrier, U.S. Link, Inc; one cable television company, Interlakes Cable Vision, Inc.; one cellular telephone investing company, Arvig Cellular, Inc.; and two support service companies, North Country Data, Ltd. and Velstar Systems, Inc. In addition, U.S. Link, Inc. owns another inter- exchange telecommunications carrier, ABT Long Distance Service and Arvig Telephone Company owns a finance support company, Arvig Finance, Inc. B. Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles including certain accounting practices prescribed by the Federal Communications Commission (FCC) and the state regulatory commission in Minnesota. C. Cash Equivalents - For purposes of the statement of cash flows, the Company considers all temporary cash investments to be cash equivalents. These temporary cash investments are highly liquid debt securities held for cash management purposes that have insignificant risk of changes in value. Temporary cash investments at December 31, 1992 and 1991 totaled $1,175,674 and $446,994, respectively. D. Property and Depreciation - Property and equipment are recorded at original cost. Additions, improvements or major renewals are capitalized. If telecommunication or cable television plant assets are sold, retired or otherwise disposed of, the cost plus removal costs less salvage, is charged to accumulated depreciation. Any gains or losses on other property retirements are reflected in the current year operations. Depreciation is computed using the straight-line method based on estimated service or remaining useful lives. Depreciation expense was $3,545,760 in 1992, $3,735,961 in 1991, and $3,663,936 in 1990. During 1990, the Company reduced the life for certain central office equipment in order to depreciate the remaining balance of the central office equipment by December 31, 1991. This resulted in $537,000 of additional depreciation expense in 1991 and 1990. Composite depreciation rates are as follows: 1992 1991 1990 ------- ------ ------ Telecommunications Plant 7.0% 8.5% 8.2% Cable Television Plant 7.3 7.4 6.6 Other Property 17.5 13.1 10.6 E. Inventories - Materials and supplies are recorded at average cost. Merchandise for resale inventories are recorded at the lower of average first-in, first-out cost or market. Inventories consisted of the following: 1992 1991 -------- --------- Materials and Supplies $ 91,752 $159,445 Merchandise for Resale 253,520 288,645 -------- --------- Total $345,272 $448,090 ======== ========= ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) F. Investments - Cellular partnerships and the investment in Northern Fiber, Inc. are recorded on the equity method of accounting, which reflects original cost and recognition of the Company's share of income or losses from the investments. Other investments are recorded at cost which approximates market value. G. Revenue Recognition - Revenues are recognized when earned. Telephone network access and long-distance services are furnished jointly with other companies. Local exchange companies access charges are billed to long distance toll carriers based on interstate tariffs filed with the FCC by the National Exchange Carrier Association, and state tariffs filed with the state regulatory body. Access charge revenues and settlements are based on cost studies and on average schedules. Revenues based on cost studies are estimated pending finalization of the studies. H. Income Taxes and Investment Credit - Income taxes are provided based on income reported in the financial statements. Deferred income taxes are provided to reflect the effect of the recognition of revenue and expense in different periods for financial and tax reporting purposes. Investment tax credits have been deferred and reduce income tax expense over the estimated service lives of the related assets. I. Intangible Assets - The Company is amortizing intangible assets using the following periods: Noncompete Covenants 3-5 Years Excess of Cost Over Net Assets of Consolidated Subsidiaries 40 Years Other Intangible Assets 3-5 Years J. Earnings Per Share - Earnings per share have been calculated by dividing net income by the weighted average number of common shares outstanding during each year. The weighted average shares outstanding were 43,700 for both 1992 and 1991 and 43,806 for 1990. NOTE 2 - MARKETABLE SECURITIES Marketable securities are recorded at the lower of aggregate cost or market value. Market values on December 31, 1992 and 1991 were approximately $2,067,000 and $1,566,000. Other income includes gains on sales of marketable securities of $2,600, $27,278 and $27,500 in 1992, 1991 and 1990. At December 31, 1992, gross unrealized gains pertaining to the marketable securities in the portfolio were approximately $105,000. ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - NOTES RECEIVABLE The Company has several unsecured notes receivable from Cellular Mobile Systems of St. Cloud, a partnership which is partially owned by Arvig Cellular, Inc. The notes are due at various times during 1998. Interest rates fluctuate following the First Bank Minneapolis prime rate. On December 31, 1992, the rate was 6%. Interest is due annually; however, the partnership has elected to defer annual interest payments. The balance receivable was $203,000 at December 31, 1992 and 1991. The Company has two unsecured notes receivable from Northern Fiber, Inc., which is 30% owned by the Company. The notes are due in 1993 and 1995. The interest rate on these notes is 8.5% and is due annually. The balance receivable was $109,202 in 1992 and 1991. The note due in 1993 was refinanced by a note receivable in 1998. The Company sold property on a contract for deed basis in 1992. The contract requires monthly payments of principal and 8% interest through January, 1998. The balance receivable was $32,000 and $-0- in 1992 and 1991. NOTE 4 - INVESTMENTS Investments consist of the following: 1992 1991 ----------- --------- Cellular Partnerships $ 629,092 $ 305,090 Northern Fiber, Inc. 57,963 57,963 Rural Telephone Bank Stock 735,625 605,575 Independent Telecommunications Network, Inc. Stock 257,040 257,040 U.S. Intelco Networks, Inc. Stock 39,497 39,497 Minnesota Equal Access Network System, Inc. Stock 292,210 292,210 Rural Cellular Corporation Stock 261,919 261,919 RTFC Capital Term Certificates 324,900 236,810 St. Paul Bank for Cooperatives Stock 23,368 9,611 Other 81,497 13,981 ----------- ---------- $2,703,111 $ 2,079,696 =========== ========== Cellular Partnerships consist of the following:
1992 1991 ----------------------------------------------- Percent of Cumulative Company Ownership Cost Income (Loss) Total Total ------------------ ------------------------ ------------- --------- ---------- Duluth MSA Limited 16.33% $1,343,423 $(785,284) $558,139 $303,233 CMS of St. Cloud 14.29% 43,000 27,953 70,953 1,857 ---------- --------- --------- --------- Total $1,386,423 $(757,331) $629,092 $305,090 ========== ========= ========= =========
ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - INVESTMENTS (Continued) For the above partnership, the Company's share of operating losses, net of operating income was $12,005, $181,012 and $158,656 in 1992, 1991 and 1990. The Partnerships may require future capital contributions from the limited partners. Prior to April 1, 1991, the Company had partnership interests in two partnerships that operated rural cellular franchises. The Company's share of operating losses was $4,073 in 1991 and $22,722 in 1992. On April 1, 1991, six partnerships (including the two referred to above) formed the Rural Cellular Corporation. The Company's investment in the partnerships was transferred to the new corporation. The Company has a 4.04% ownership, so the investment is recorded at cost. NOTE 5 - NONCOMPETE COVENANTS On July 1, 1991, ABT Long Distance Services, Inc. entered into an agreement with former key individuals of Advanced Business Telephone, Inc. in which the Company agreed to make payments to these individuals in exchange for their agreement not to compete with the Company for periods of three to five years. The aggregate amount of these payments was $2,300,000. Additional noncompete covenants exist pertaining to the acquisition of Alexander Long Distance in 1991 and Brainerd Telecom, Ltd. in 1988. These amounts are being amortized over periods of three to five years. NOTE 6 - LONG-TERM DEBT Long-term debt is as follows: 1992 1991 ----------- ------------- REA: 2% $ 1,869,217 $ 2,012,321 5% 1,464,223 1,509,732 RTB: 6.14% 2,731,050 -- 6.5% 1,687,360 1,745,595 7.5% 5,101,646 3,656,615 8.0% 1,043,702 1,072,057 Deferred Interest 37 177 RTFC Notes 3,533,119 1,753,390 St. Paul Bank for Cooperatives: Variable 3,673,500 4,358,000 Fixed 459,194 459,194 Contracts Payable 473,462 -- ----------- ------------- Total 22,036,510 16,567,081 Less Amount Due Within One Year 1,330,000 1,200,000 ----------- ------------- Long-Term Debt $20,706,510 $ 15,367,081 =========== ============= ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - LONG-TERM DEBT (Continued) The mortgage notes payable to the Rural Electrification Administration (REA), and the Rural Telephone Bank (RTB) are secured by substantially all assets of the Company's two telephone subsidiaries. The REA and RTB notes are payable in equal monthly and quarterly installments of principal and interest beginning two and three years after the date of the issue and will be fully repaid at various times from 1993 to 2021. Advance payments of $42,369 may be applied to these installments. Unadvanced loan funds on an RTB loan commitment of $510,300 are available to the Company at December 31, 1992. These funds are expected to be used to pay the outstanding balance of contracts payable for plant additions. The mortgage notes to the Rural Telephone Finance Company (RTFC) are payable in quarterly principal payments based on an amortization schedule. The final payments on the notes will be in 2004 and 2008. The interest rates are variable based on the cost of funds and are at 5.0% at December 31, 1992. The notes are secured by the stock of Bridge Water Telephone Company and substantially all assets of Arvig Telephone Company. The notes payable to the St. Paul Bank for Cooperatives are payable in quarterly principal installments of $171,125 plus interest. The principal payments will be applied to the variable portion of the loans until the variable portion is paid in full. At that time, the fixed rate balance will convert back to the variable rate. The interest rate for the variable portion is 1.75% above the Bank's cost of funds and was at 5.8% at December 31, 1992 and 6.3% at December 31, 1991. The rate for the fixed portion is 8.2%. These notes are secured by equipment, inventory and intangibles of ABT Long Distance Services, Inc., intangibles of U.S. Link, Inc. and substantially all of the assets of Interlake Cablevision, Inc. Unadvanced loan funds on St. Paul Bank for Cooperatives loan commitments of $310,806 are available to the Company as of December 31, 1992. The RTB stock, RTFC certificates, and St. Paul Bank for Cooperatives stock were purchased pursuant to loan agreements and have redemption restrictions. The terms of the various notes have restrictions on investments, reacquisition of capital stock, and the payment of cash dividends. Principal payments required during the next five years are: 1993 - $1,330,000; 1994 - $1,410,000; 1995 - $1,460,000; 1996 - $1,370,000; and 1997 - $1,370,000. ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - NOTES PAYABLE The Company has a sixty-month revolving line of credit from the RTFC which enables the Company to borrow up to $900,000. The obligations on the line are unsecured and require quarterly interest payments at the prevailing bank prime rate plus 1.5%. The agreement also requires that the loan balances be reduced to zero for at least five consecutive business days at least once a year. There have been no borrowings on this line of credit. In 1991 and part of 1992, the Company had another line of credit with identical terms for $3,500,000. The Company had borrowed $2,000,000 against this line of credit, and in 1992 it refinanced the $2,000,000 with the RTFC mortgage note discussed in Note 6. At that time, this line of credit was terminated. The Company had an unsecured note payable to Alexandria Long Distance Company due in variable monthly payments until December 31, 1992. The balance as of December 31, 1992 and 1991 was $-0- and $59,374. NOTE 8 - EMPLOYEE RETIREMENT BENEFITS The Company has a defined benefit pension plan covering employees who meet certain age and service requirements. The benefits are based upon years of service and the employee's compensation during the five consecutive years of the last ten years of employment that the employee's compensation was the highest. The following table shows the plan's funded status and amounts recognized in the Company's balance sheet: Actuarial Present Value of Benefit Obligations: 1992 1991 ---------- ---------- Vested $ 986,039 $1,065,532 Nonvested 57,879 33,082 ----------- ---------- Accumulated Benefit Obligation 1,043,918 1,098,614 Effect of Assumed Rate of Compensation Increases 1,234,721 1,021,844 ----------- ---------- Projected Benefit Obligation for Service Rendered to Date 2,278,639 2,120,458 Plan Assets at Fair Value Consisting of Group Annuity Contracts (1,825,492) (1,768,483) ----------- ---------- Projected Benefit Obligation in Excess of (Less Than) Plan Assets 453,147 351,975 Unrecognized Net Gain (Loss) From Past Experience Different From That Assumed and Effects of Changes in Assumptions (Being Recognized Over 10 Years) (162,498) 53,558 Unrecognized Obligation at January 1, 1989 (Being Recognized Over 10 Years) (12,305) (12,818) ----------- ---------- Accrued Pension Expense $ 278,344 $ 392,715 =========== ========== ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - EMPLOYEE RETIREMENT BENEFITS (Continued)
1992 1991 1990 ---------- ---------- ----------- Pension expense included the following components: Service Cost - Benefits Earned During the Period $ 241,710 $ 164,706 $ 119,014 Interest Cost on Projected Benefit Obligation 143,050 120,066 129,359 Actual Return on Plan Assets (115,685) (156,565) (142,323) Amortization and Deferral, Net (4,600) 27,772 21,484 ---------- ---------- ----------- Net Pension Expense $ 264,475 $ 155,979 $ 127,534 ========== ========== =========== The following assumptions were used to determine the funded status of plan: Discount Rate 7.5% 8.0% 8.0% Rate of Increase in Compensation 5.5 5.5 5.5 Expected Long-Term Rate of Return on Plan Assets 7.5 8.0 8.0
NOTE 9 - INCOME TAXES AND INVESTMENT TAX CREDITS Differing depreciation methods used for financial statement reporting and income tax reporting result in timing differences between income reported for tax and financial statement purposes. Other timing differences are created by differing tax and financial statement treatment of deferred retirements, interest charged to construction, cellular partnership losses, and certain expense accruals. The provision for income tax expense consists of the following:
1992 1991 1990 ---------- ---------- ----------- Current Income Taxes: Federal $ 718,117 $ 677,732 $ 843,019 State 195,854 189,114 256,292 Deferred Income Taxes: Federal (91,757) (256,678) (26,099) State (32,412) (42,778) 5,847 Investment Tax Credit: Amortized (143,181) (145,367) (146,333) --------- --------- ---------- Total Income Tax Expense $ 646,621 $ 422,023 $ 932,726 ========= ========= ==========
ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - INCOME TAXES AND INVESTMENT TAX CREDITS (Continued) The differences which cause the effective tax rate to vary from the statutory federal income tax rate of 34 percent in 1992, 1991 and 1990 are as follows:
1992 1991 1990 --------- --------- ----------- Statutory Rate 34.0% 34.0% 34.0% Effect of State Income Taxes, Net of Federal Tax Benefit 8.7 6.6 6.1 Amortization of Investment Tax Credits (7.6) (9.9) (5.2) Other (.6) (2.1) (1.8) ----- ----- ----- Effective Rate 34.5% 28.6% 33.1% ===== ===== =====
Sources of deferred taxes and related tax effects are as follows:
1992 1991 1990 ----------- ---------- ----------- Depreciation $(114,990) $ (71,203) $ 140,512 Uniform Cost Capitalization (33,424) (4,832) -- Accrued Expenses 20,327 (111,639) (90,341) Alternative Minimum Tax 27,315 (62,115) (89,496) Bad Debts (13,289) (18,041) 13,339 Cellular Partnership Loss (5,761) (19,467) 9,378 Other (4,347) (12,159) (3,644) --------- ---------- ----------- Total $(124,169) $(299,456) $ (20,252) ========= ========== ===========
Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes", effective in 1993, amends the income tax accounting rules. Under existing rules, deferred income taxes are provided at the tax rates in effect for the year in which timing differences originate and are not adjusted for subsequent changes in tax rates. The new standard, however, will require that deferred income tax balances be adjusted for changes in the income tax rates. The adoption of Statement No. 109 will not have a material effect on the Company's financial position or results of operations. ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - LEASES The Company has entered into various agreements to lease office space, fiber optic cable, and conduit space from independent third parties. The terms of the leases are from four to ten years. All leases will expire by October 1, 1998, but renewal options are available. Future minimum lease payments consist of the following: Year Ending December 31, Amount ------------------------ ----------- 1993 $ 437,415 1994 173,709 1995 147,314 1996 121,797 1997 121,797 Later Years 101,034 ---------- Total $1,103,066 ========== Lease expense for 1992, 1991 and 1990 was $1,533,933, $1,090,979 and $698,512. The Company has entered into various agreements to lease fiber optic cable and conduit space to independent third parties at a fixed cost for a period of 4 to 10 years. All leases are operating leases. These leases are accounted for on an as-earned basis and any prepayments are recorded as deferred lease income. Future minimum rentals to be received on non-cancelable leases are as follows: Year Ending December 31, Amount ------------------------ ---------- 1993 $1,214,144 1994 591,856 1995 416,301 1996 190,697 1997 190,697 Later Years 393,946 ---------- Total $2,997,641 ========== NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
1992 1991 1990 ---------- ---------- ----------- Cash Payments For: Interest $1,163,084 $1,036,379 $ 963,312 Income Taxes 930,500 1,120,443 1,570,937
EX-99 4 EXHIBIT 99.2 - ARVIG TELCOM, INC. INTERIM STMTS Exhibit 99.2 ARVIG TELCOM, INC. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED BALANCE SHEET -------------------------------
(Unaudited) September 30, 1993 December 31, 1992 -------------------- ------------------ ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 4,779,838 $ 4,080,262 Marketable Securities 2,138,575 1,962,359 Due from Customers, Net of Allowance for Doubtful Accounts of $238,000 and $145,000 3,078,743 2,786,467 Income Taxes Receivable 130,237 338,191 Other Accounts Receivable 1,453,752 1,260,512 Inventories 326,841 345,272 Prepaid Expenses 151,361 162,965 -------------- ---------------- Total Current Assets 12,059,347 10,936,028 -------------- ---------------- INVESTMENTS AND OTHER ASSETS: Notes Receivable 442,123 344,202 Investments 3,022,799 2,703,111 Noncompete Covenants, Net of Amortization of $1,301,239 and $882,720 1,188,840 1,607,360 Excess of Cost Over Net Assets of Consolidated Subsidiaries, Net of Amortization of $491,490 and $470,624 621,332 642,198 Other Intangibles, Net of Amortization of $241,935 and $166,956 528,919 603,898 Other Assets 496,639 294,486 -------------- ---------------- Total Investments and Other Assets 6,300,652 6,195,255 -------------- ---------------- PROPERTY, PLANT AND EQUIPMENT: Telecommunications Plant in Service 43,357,719 42,619,407 Cable Television Plant in Service 3,352,426 3,278,931 Other Property 2,929,221 3,511,706 Plant Under Construction 2,230,704 376,990 Accumulated Depreciation (22,408,717) (20,459,171) -------------- ---------------- Net Property, Plant and Equipment 29,461,353 29,327,863 -------------- ---------------- TOTAL ASSETS $ 47,821,352 $ 46,459,146 ============== ================
ARVIG TELCOM, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED BALANCE SHEET --------------------------
(Unaudited) September 30, 1993 December 31, 1992 ------------------ ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Portion of Long-Term Debt $ 1,332,271 $ 1,330,000 Accounts Payable 3,860,619 3,003,707 Accrued Taxes 253,155 240,866 Accrued Pension 324,431 278,344 Other Current Liabilities 1,154,706 795,653 ------------- ------------ Total Current Liabilities 6,925,182 5,648,570 ------------- ------------ LONG-TERM DEBT 19,499,180 20,706,510 ------------- ------------ DEFERRED CREDITS AND LIABILITIES: Investment Tax Credits 639,291 730,805 Income Taxes 3,358,919 2,988,153 Other Liabilities 16,185 19,773 ------------- ------------ Total Deferred Credits and Liabilities 4,014,395 3,738,731 ------------- ------------ STOCKHOLDERS' EQUITY: Common Stock - Class A Voting, $1 Par Value 500,000 Shares Authorized, 4,370 Shares Issued and Outstanding 4,370 4,370 Common Stock - Class B Voting, $1 Par Value, 500,000 Shares Authorized, 39,330 Shares Issued and Outstanding 39,330 39,330 Retained Earnings 17,338,895 16,321,635 ------------- ------------ Total Stockholders' Equity 17,382,595 16,365,335 ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,821,352 $ 46,459,146 ============= =============
ARVIG TELCOM, INC. AND SUBSIDIARIES ----------------------------------- CONSOLIDATED STATEMENT OF INCOME -------------------------------- UNAUDITED ---------
Nine Months Ended Nine Months Ended September 30, 1993 September 30, 1992 ------------------ ------------------ REVENUES: Long-Distance Carrier Services $ 17,574,122 $ 16,428,934 Long Exchange Company Services 7,750,444 6,866,565 Cable Television Services 713,314 652,834 Other Services 637,706 555,315 ------------- ------------ Total Revenues 26,675,586 24,503,648 ------------- ------------ COST AND EXPENSES: Cost of Long-Distance Carrier Services 12,047,401 11,309,183 Maintenance and Rents 2,207,666 2,032,763 Depreciation and Amortization 3,271,922 3,257,210 Sales, Marketing and Customer Services 1,962,696 2,320,305 General and Administrative 3,651,791 3,475,626 ------------- ------------ Total Costs and Expenses 23,141,476 22,395,087 ------------- ------------ OPERATING INCOME 3,534,110 2,108,561 ------------- ------------ OTHER INCOME 213,300 298,524 INTEREST EXPENSE (890,635) (912,732) ------------- ------------ INCOME BEFORE INCOME TAXES 2,856,775 1,494,353 INCOME TAXES 1,184,015 515,970 ------------- ------------ NET INCOME $ 1,672,760 $ 978,383 ============= ============= WEIGHTED AVERAGE COMMON SHARES 43,700 43,700 EARNINGS PER COMMON SHARE $ 38.28 $ 22.39 ============= ============= DIVIDENDS PER COMMON SHARE $ 15.00 $ 10.00 ============= =============
ARVIG TELCOM, INC. AND SUBSIDIARIES ------------------------------------ CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ UNAUDITED ---------
Nine Months Ended Nine Months Ended September 30, 1993 September 30, 1992 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,672,760 $ 978,383 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 3,271,922 3,257,210 Loss (Gain) from Cellular Partnerships (93,949) 41,184 Changes in Assets and Liabilities: (Increase) Decrease in: Due from Customers (292,276) (723,091) Income Taxes Receivable 207,954 (162,198) Other Accounts Receivable (193,240) 171,408 Inventories 18,431 (36,018) Prepaid Expenses 11,604 (82,703) Increase (Decrease) in: Accounts Payable 856,912 1,849,493 Accrued Taxes 12,289 (37,183) Accrued Pension 46,087 23,262 Other Current Liabilities 359,053 40,974 Deferred Investment Tax Credits (91,514) (91,689) Deferred Income Taxes 370,766 (101,281) Other Liabilities (3,588) 1,392 ------------- ------------ Net Cash Provided By Operating Activities 6,153,211 5,129,143 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to Property, Plant and Equipment, Net (2,891,047) (4,450,379) Purchase of Investments (137,309) (210,498) Purchase of Marketable Securities (176,216) (816,415) Investment in Cellular Partnership (88,430) (124,480) Issuance of Note Receivable (100,000) -- Collection of Note Receivable 2,079 -- (Increase) Decrease in Other Assets (202,153) (73,389) ------------- ------------ Net Cash Used in Investing Activities (3,593,076) (5,675,161) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Issuance of Long-Term Debt 308,950 3,811,234 Principal Payments of Long-Term Debt (1,514,009) (912,475) Dividends Paid (655,500) (437,000) Principal Payments of Notes Payable -- (59,374) ------------- ------------ Net Cash Provided By Financing Activities (1,860,559) 2,402,385 ------------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 699,576 1,856,367 CASH AND CASH EQUIVALENTS At Beginning of Year 4,080,262 2,375,026 ------------- ------------ CASH AND CASH EQUIVALENTS At September 30, 1993 $ 4,779,838 $ 4,231,393 ============= ============
ARVIG TELCOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 1993, and the results of operations and cash flows for the nine months ended September 30, 1993 and 1992. The results of operations for the nine months ended September 30, 1993 and 1992, are not necessarily indicative of the results to be expected for the full year. 2. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires companies to record all deferred tax liabilities or assets for the deferred tax consequences of all temporary differences. Additionally, the statement requires that deferred tax balances be adjusted to reflect new tax rates when they are enacted into law. The cumulative effect of the implementation of SFAS 109 on years prior to 1993 is estimated to have no material effect on net income. Income tax expense for 1993 reflects the new method of accounting; income tax expense for 1992 has not been restated. The cumulative effect of adopting SFAS 109 did not materially effect net income or income tax expense for the nine months ended September 30, 1993. 3. On December 14, 1993, Telephone and Data Systems, Inc., an Iowa corporation (TDS), Arvig Acquisition Corp., a Minnesota corporation and wholly-owned subsidiary of TDS (TDS Sub.) and Arvig Telcom, Inc. signed an agreement and plan of merger providing for the merger of the TDS Sub into the Company, which would result in the Company becoming a wholly-owned subsidiary of TDS. The agreement and plan of merger includes certain closing conditions precedent to consummation of the transaction. EX-99 5 EXHIBIT 99.3 - VERNON TELEPHONE AUDITED STMTS Exhibit 99.3 INDEPENDENT AUDITORS' REPORT To The Board of Directors Vernon Telephone Company, Inc. P.O. Box 900, 1 Curtis Road Vernon, New York 13476 We have audited the accompanying consolidated balance sheets of Vernon Telephone Company, Inc. as of June 30, 1993 and 1992, and the related consolidated statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards and the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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. At the present time, the Company does not have continuing property records for their telephone plant in service and the related studies of depreciation reserves. When these records are available it will then be possible to determine if any major changes should be made to the net carrying value of such telephone plant, as explained in Note 2 of the notes to the consolidated financial statements. In our opinion, except for any adjustment to the net carrying value of telephone plant in service as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vernon Telephone Company, Inc. at June 30, 1993 and 1992, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. BUSH & GERMAIN, PC Syracuse, New York September 13, 1993 VERNON TELEPHONE COMPANY, INC. ------------------------------ CONSOLIDATED BALANCE SHEET -------------------------- JUNE 30, 1993 AND 1992 ----------------------
1993 1992 ----------------- ----------------- ASSETS CURRENT ASSETS Cash $ 103,381 $ 163,110 Telecommunications accounts receivable, net of uncollectibles 198,146 146,008 Other accounts receivable 229,027 70,324 Materials and supplies 51,956 56,326 Materials and supplies held for resale 81,642 75,014 Prepaid expenses 40,790 31,408 -------------- -------------- 704,942 542,190 -------------- -------------- NONCURRENT ASSETS Unamortized debt issuance expense 3,680 3,878 Other investments (Note 9) 6,246,854 (553,480) -------------- -------------- 6,250,534 (549,602) -------------- -------------- TELEPHONE PLANT - AT COST (Notes 1, 2, 3 and 5) Telephone plant in service 4,265,358 4,387,923 Telephone plant under construction 185,178 -- -------------- -------------- 4,450,536 4,387,923 Less: Depreciation reserve (Notes 1 and 2) 1,992,204 1,927,211 -------------- -------------- $ 2,458,332 $ 2,460,712 -------------- -------------- TOTAL ASSETS $ 9,413,808 $ 2,453,300 ============== ============== The accompanying notes are an integral part of the financial statements.
VERNON TELEPHONE COMPANY, INC. Exhibit A ------------------------------ CONSOLIDATED BALANCE SHEET -------------------------- JUNE 30, 1993 AND 1992 ----------------------
1993 1992 ----------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 61,916 $ 58,746 Notes payable (Note 5) 511,923 195,882 Accounts payable 188,999 111,019 Accrued dividends 1,065 1,065 Accrued taxes 290,891 (2,256) Accrued interest 13,225 13,700 Other current liabilities 32,210 32,753 -------------- -------------- 1,100,229 410,909 -------------- -------------- LONG-TERM DEBT (Note 3) 1,871,802 1,933,974 -------------- -------------- DEFERRED CREDITS (Notes 1 and 4) Deferred federal income taxes 2,069,378 13,299 Unamortized investment tax credits 71,066 77,302 -------------- -------------- 2,140,444 90,601 -------------- -------------- STOCKHOLDERS' EQUITY: Preferred stock - 6% cumulative; (Note 7) $50 par value; Authorized 2,000 shares; Issued and outstanding 710 shares 35,500 35,500 Common stock - no par value; Authorized 6,000 shares; Issued and outstanding 2,800 shares 70,000 70,000 Retained earnings (Note 3) 4,195,833 (87,684) -------------- -------------- 4,301,333 17,816 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,413,808 $ 2,453,300 ============== ============== The accompanying notes are an integral part of the financial statements.
VERNON TELEPHONE COMPANY, INC. Exhibit B ------------------------------ CONSOLIDATED STATEMENT OF INCOME --------------------------------- FOR THE YEARS ENDED JUNE 30, 1993 AND 1992 -------------------------------------------
1993 1992 ----------------- ---------------- OPERATING REVENUES Local network service $ 573,640 $ 540,515 Network access and long distance network service 852,234 1,020,832 Miscellaneous 296,494 209,042 Less: Uncollectible operating revenues (22,000) (24,000) -------------- -------------- Total operating revenues 1,700,368 1,746,389 -------------- -------------- OPERATING EXPENSES Plant specific 456,921 486,691 Plant nonspecific: depreciation 249,794 275,531 other 136,072 141,004 Customer operations 227,761 219,565 Corporate operations 416,643 413,177 -------------- -------------- Total operating expenses 1,487,191 1,535,968 -------------- -------------- OPERATING TAXES Other operating taxes 128,250 143,679 Federal income taxes (Notes 1 and 4) (4,492) (4,492) -------------- -------------- Total operating expenses 123,758 139,187 -------------- -------------- Net operating income 89,149 71,234 OTHER NONOPERATING INCOME AND EXPENSES - NET 49,542 4,922 -------------- -------------- Income available for fixed charges 138,961 76,156 -------------- -------------- FIXED CHARGES Interest on funded debt 104,865 108,615 Other interest charges 19,761 15,878 Amortization 198 198 -------------- -------------- Total fixed charges 124,824 124,691 -------------- -------------- Net Income (Loss) from telephone operations 14,137 (48,535) Net gain on sale of subsidiary (Note 11) 4,381,404 -- Net loss from subsidiary operations (109,894) (142,194) -------------- -------------- Net Income (Loss) $ 4,285,647 $ (190,729) ============= ============== The accompanying notes are an integral part of the financial statements.
VERNON TELEPHONE COMPANY, INC. Exhibit C ------------------------------ CONSOLIDATED STATEMENT OF RETAINED EARNINGS ------------------------------------------- FOR THE YEARS ENDED JUNE 30, 1993 AND 1992 ------------------------------------------
1993 1992 ----------------- ---------------- Retained earnings, beginning of year $ (87,684) $ 105,175 Net Income (Loss) (Exhibit B) 4,285,647 (190,729) Dividends: Preferred ($3.00 per share) 2,130 2,130 -------------- -------------- Retained earnings, end of year $ 4,195,833 $ (87,684) -------------- -------------- The accompanying notes are an integral part of the financial statements.
VERNON TELEPHONE COMPANY, INC. Exhibit D ------------------------------ CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED JUNE 30, 1993 AND 1992 -------------------------------------------
1993 1992 --------------- ---------------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income (Loss) $ 4,285,647 $ (190,729) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 249,794 275,531 Deferred income taxes & investment tax credit 2,049,843 (6,227) Amortization 198 198 (Gain) on sale of subsidiary (6,904,731) -- Loss on investment 104,397 138,130 Change in assets and liabilities: (Increase) Decrease in accounts receivable (210,841) 76,515 (Increase) Decrease in materials held for resale (6,628) 8,054 (Increase) Decrease in prepaid expenses (9,382) 27,080 Increase (Decrease) in accounts payable 77,980 19,773 Increase (Decrease) in adv. billings & customer deposits -- (561) Increase (Decrease) in other liabilities 292,129 (30,481) -------------- -------------- Net cash provided by operating activities (71,594) 317,283 -------------- -------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (247,414) (111,212) (Increase) Decrease in material and supplies 4,370 7,582 (Increase) Decrease in investments -- (36,720) -------------- -------------- Net cash used in investing activities (243,044) (140,350) -------------- -------------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from notes payable 335,178 -- Reduction of notes payable (19,137) (13,992) Reduction of long-term debt (59,002) (56,545) Dividends (2,130) (2,130) -------------- -------------- Net cash provided (used) by financing activities 254,909 (72,667) -------------- -------------- Increase (Decrease) in cash and cash equivalents (59,729) 104,266 Cash and cash equivalents at beginning of year 163,110 58,844 -------------- -------------- Cash and cash equivalents at end of year $ 103,381 $ 163,110 -------------- -------------- The accompanying notes are an integral part of the financial statements.
VERNON TELEPHONE COMPANY, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------- General The Company maintains its accounts in accordance with the Uniform Systems of Accounts prescribed for telephone companies by the New York State Public Service Commission (PSC). The accounting policies conform to generally accepted accounting principles as applied to New York State public utilities giving effect to the rate making and accounting practices and policies of the PSC. A summary of significant accounting policies is described in this note. Consolidation -------------- The consolidated financial statements include the accounts of the Company and its wholly-owned, non-regulated subsidiary, Vernon Cellular, Inc. This subsidiary was sold on April 15, 1993 and the results of its operations is included in these financial statements up to that date. All material intercompany transactions and balances have been eliminated in the consolidated financial statements. Material and Supplies Inventory ------------------------------- Inventories are stated at the lower of cost or market. Cost is determined using the moving weighted average method. Property, Plant and Equipment ----------------------------- Property, plant and equipment is stated at original cost. Maintenance and repairs are charged to expense as incurred; expenditures that extend an asset's life are capitalized. Upon retirement of telephone plant, the cost is removed from the asset account and the accumulated depreciation reserve. Cost of removal of telephone plant, net of salvage, is charged to the accumulated depreciation reserve. Depreciation ------------ Depreciation is computed for financial statement purposes using the straight-line method over the estimated useful lives of the assets. Total depreciation charged to operations for the years ended June 30, 1993 and 1992 amounted to $249,794 and $275,531, respectively. Depreciation rates were changed on certain categories of plant effective January 1, 1993, resulting in a decrease in annual accruals of approximately $26,000. Capitalization of Certain Expenses ---------------------------------- The Company has consistently followed the practice of capitalizing certain costs related to construction, including pension, payroll, payroll related costs and significant costs of capital incurred during construction. Federal Income Tax ------------------ The Company uses the normalization method of accounting for federal income tax reductions resulting from timing differences in the recognition of certain income and expenses for tax and book purposes. These differences result mainly from accelerated depreciation. VERNON TELEPHONE COMPANY, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- Excess deferrals resulting from the reduction in tax rates due to TRA-86 are to be normalized and will be amortized over the remaining life of the asset generating the deferral at an average deferral rate. This will result in these excess deferrals being taken into income as timing differences are reversed. Investment tax credits have been normalized and are being amortized to income over the average life of the related telephone plant and other equipment. Toll Settlements ---------------- Toll and access revenues are often pooled by telephone companies on a national and a state wide basis and are apportioned back to the companies based upon cost to provide services. This process is known as "toll settlements". The computations are very complex, and on a routine basis these toll settlement are adjusted for previous quarters and years. When calculations are changed, the companies are notified of a "retroactive" toll settlement (plus or minus) which applies to previously reported periods. Retroactive toll settlements may have a material effect on current net income. It is industry practice to record retroactive toll settlements in the years discovered rather than restating previous year's net income. There are no known material unrecorded retroactive toll settlements as of the balance sheet date. Reserve for Uncollectibles -------------------------- The Company uses the reserve method to record the write-off of uncollectibles. The reserve balance is determined principally by an analysis of prior years net write-offs. The balances as of June 30, 1993 and 1992 were $26,047 and $15,237, respectively. 2. TELEPHONE PLANT IN SERVICE -------------------------- The Telephone plant in service is stated at values reflected per the Company's books, which is principally cost. The Company presently does not have continuing property records and related depreciation reserve studies which may affect the net carrying value of telephone plant in service. When the records are available, the Company intends to report any material adjustments resulting therefrom as either a prior period adjustment of retained earnings, or, if permitted by the New York State Public Service Commission, as an adjustment of depreciation charges to future operations. The telephone plant in service at June 30, 1993 and 1992 is as follows: 1993 1992 --------------- ------------ Land and buildings $ 446,644 $ 444,652 Central office equipment 1,340,646 1,422,937 Station connections and equipment 330,097 394,518 Outside plant - poles, cable and wire 1,644,525 1,619,585 Office furniture and equipment 133,321 146,448 Vehicles and work equipment 370,125 359,783 -------------- ------------ $ 4,265,358 $ 4,387,923 ============== ============ VERNON TELEPHONE COMPANY, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- The related accumulated depreciation reserve at June 30, 1993 and 1992 is as follows: Building and improvements $ 170,396 $ 161,597 Central office equipment 344,167 303,993 Station connections and equipment 273,797 340,137 Outside plant - poles, cable and wire 904,618 812,355 Office furniture and equipment 73,090 95,564 Vehicles and work equipment 226,136 213,565 -------------- ------------ $ 1,992,204 $ 1,927,211 ============== ============ 3. LONG-TERM DEBT -------------- At June 30, 1993, the Company had outstanding first mortgage notes under an agreement with the Rural Electrification Administration (REA) and the Rural Telephone Bank (RTB) as follows: Rural Electrification Administration ------------------------------------ 5% note due March 25, 2011, requiring quarterly principal and interest payments of $28,275 $ 1,403,264 5% note due March 25, 2011, requiring monthly principal and interest payments of $2,249 $ 890,944 Less: Unadvanced amount (590,735) 300,209 ------------- Rural Telephone Bank -------------------- 8% note due March 25, 2011, requiring quarterly principal and interest payments of $6,064 230,245 ------------ $ 1,933,718 Less: Current Maturities (61,916) ------------ Total Long-Term Debt $ 1,871,802 ============ Quarterly payments of principal and interest are paid currently on the above advanced funds. Principal payments for the 12 month periods ending June 30 on the above advanced funds over the next five years are as follows: 1994 61,916 1995 65,263 1996 68,795 1997 72,525 1998 76,463 These mortgage notes are collateralized by all of the telephone plant. VERNON TELEPHONE COMPANY, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- The first mortgage agreement contains certain restrictions on dividends and stock redemptions. All requirements were compiled with at June 30, 1993, and under the most restrictive of such agreements, none of the retained earnings at that date were available for dividends. 4. FEDERAL INCOME TAX ------------------ The provision for federal income taxes for the years ended June 30, 1993 and 1992 consisted of amortization of deferred investment tax credits of $4,492 for both years. There was no other operating federal income tax expense recorded due to the operating losses for both years. Deferred federal income taxes have been provided on the gain on the sale of the Company's subsidiary. This deferral amounts to $2,056,079 and it will reverse when the stock the company received is sold or otherwise disposed of. This amount has been netted against the gain on the sale. The Company has a net operating loss carryforward as of December 31, 1992 of $225,634 available for 1993 and future years. If not used, the carryovers will expire at December 31 of the following years: 2004 $ 2,467 2006 $108,685 2005 109,947 2007 4,535 There are also investment tax credit carryforwards as of December 31, 1992 amounting to $42,742. These will begin to expire in 1996, if not used up to that date. 5. NOTES PAYABLE The Company has a note payable in the amount of $361,923 with Siemans Stromberg-Carlson as of June 30, 1993. This is a demand note bearing interest at 2.5% above the three month London Interbank Offered Rate ("LIBOR"). It is payable within 180 days upon demand or until such demand, at $2,195 a month including interest. The interest rate at June 30, 1993 was 5.875% and the note is secured by certain machinery and equipment of the Company. The Company also has a note payable in the amount of $150,000 with Oneida Savings Bank. This is a 30 day note maturing on July 15, 1993. The interest rate at June 30, 1993 was 8% and the note is secured by shares of stock held by the principal stockholder. 6. CASH FLOW STATEMENT ------------------- The Company considers all checking and savings accounts and liquid investments with a maturity of three months or less when purchased to be "cash equivalents". The following is a list of interest and federal income tax payments for the years ending June 30, 1993 and 1992: 1993 1992 ------------ -------------- Interest $ 125,101 $131,181 Federal Income Taxes -- -- 7. PREFERRED STOCK --------------- The preferred stock may be redeemed at any time at the option of the Company at the redemption prices fixed for the shares. Preferred stock ranks prior to the common stock both as to dividends and on liquidation, but has no general voting rights. Effective July 1, 1993, the Company exercised its option to redeem the outstanding preferred stock and all 710 shares were redeemed at par value. VERNON TELEPHONE COMPANY, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- 8. PENSION PLAN ------------- The Company has noncontributory defined benefit pension plan covering substantially all employees. The funding policy of this trusteed plan is currently to invest in Government and Corporate Bonds, Loans and Insurance Policies. The pension plan year end is December 31. The Company records as net pension cost its required funding contribution to the plan for the year. Net pension cost for the plan for the years ending June 30, 1993 and 1992 amounted to $48,162 and $59,853, respectively. This is the amount of pension expense used for rate making purposes, as required by the New York State Public Service Commission. Generally accepted accounting principles (GAAP) require pension costs for defined benefit plans to be determined in accordance with Statement of Financial Accounting Standards No. 87 (SFAS 87). Due to the New York State Public Service Commission's position and Statement of Financial Accounting Standards No. 71, the Company has not adopted SFAS 87. Had pension expense been determined in accordance with SFAS 87, it would not have varied materially from the amount recorded on the Company's books. 9. OTHER INVESTMENTS ----------------- Other investments as of June 30, 1993 and 1992 are as follows: 1993 1992 ------------ ----------- Rural Telephone Bank Stock $ 18,500 $ 18,500 Investment in deregulated activities -- (571,980) Investment in Rochester Telephone Corp. Stock 6,228,354 -- ------------- ---------- $ 6,246,854 $ (553,480) ============= ========== Under the equity method of accounting for investments, a loss was recorded relating to the investment in deregulated activities for the years ended June 30, 1993 and 1992 amounting to $104,397 and $138,130, respectively. The investment in Rochester Telephone Corporation common stock is from the Company's sale of its subsidiary, Vernon Cellular, Inc. It is recorded at cost, which is the value of the stock at the date of sale. Market value at June 30, 1993, is approximately $7,017,500. VERNON TELEPHONE COMPANY, INC. ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- 10. RECENTLY ISSUED ACCOUNTING STANDARD YET TO BE ADOPTED ------------------------------------------------------ Accounting for Income Taxes under SFAS No. 109 ---------------------------------------------- Accounting For Income Taxes (SFAS No. 109) was issued in February, 1992 and is effective for fiscal years beginning after December 15, 1992. This statement supersedes SFAS No. 96 and subsequent pronouncements dealing with this issue and it generally provides for a liability approach towards accounting for income taxes. It will require certain reclassifications and accounting for income taxes. It will require certain assets and liabilities to reflect the impact of the establishment of certain assets and liabilities to reflect the impact of regulatory requirements. This change in accounting will not have a material impact on the Company's financial position or results of operations. 11. GAIN ON SALE OF SUBSIDIARY -------------------------- The Company sold its investment in its wholly-owned subsidiary, Vernon Cellular, Inc., on April 15, 1993 to Rochester Telephone Corporation. The sale was structured as a stock for stock exchange, with Vernon Telephone Company, Inc. receiving 162,726 shares of Rochester Telephone Corporation common stock. New York State taxes are currently due, while Federal income taxes are due upon the future sale or other disposition of the stock. The gain recorded is net of the provision for New York State taxes of $295,712 and deferred Federal income taxes of $2,056,079. 12. SUBSEQUENT EVENT ---------------- Subsequent to the balance sheet date, the Company settled a lawsuit that had been pending concerning a prior proposed sale of the Company's interest in its cellular investment. An agreement was reached whereby the Company will receive approximately $360,000 to settle this suit and there will be no further action in this claim. This will be recorded in the fiscal year ending June 30, 1994. 13. NONCASH INVESTING AND FINANCING TRANSACTIONS -------------------------------------------- Noncash investing and financing transactions consisted of the acquisition of Rochester Telephone Corporation common stock in exchange for the stock of the Company's 100% owned subsidiary, Vernon Cellular, Inc. The acquired stock is included in Other Investments at a value of $6,228,354. EX-99 6 EXHIBIT 99.4 - VERNON TELEPHONE INTERIM STMTS Exhibit 99.4 VERNON TELEPHONE COMPANY, INC. -------------------------------- CONSOLIDATED BALANCE SHEET -------------------------- UNAUDITED ----------
September 30, 1993 June 30, 1993 ------------------ -------------- ASSETS CURRENT ASSETS Cash $ 184,465 $ 103,381 Accounts receivable, net of uncollectibles 538,180 427,173 Materials and supplies 124,963 133,598 Prepaid expenses 56,995 40,790 ------------- ------------- 904,603 704,942 ------------- ------------- NONCURRENT ASSETS Unamortized debt issuance expense 3,630 3,680 Other investments 6,246,854 6,246,854 ------------- ------------- 6,250,484 6,250,534 ------------- ------------- TELEPHONE PLANT - AT COST Telephone plant in service 4,292,316 4,265,358 Telephone plant under construction 185,331 185,178 ------------- ------------- 4,477,647 4,450,536 Less: Depreciation reserve 2,055,945 1,992,204 ------------- ------------- 2,421,702 2,458,332 ------------- ------------- Total Assets $ 9,576,789 $ 9,413,808 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 61,916 $ 61,916 Notes payable 355,338 511,923 Accounts payable 243,327 188,999 Accrued taxes 290,708 290,891 Other current liabilities 11,421 46,500 ------------- ------------- 962,710 1,100,229 ------------- ------------- LONG-TERM DEBT 1,856,815 1,871,802 ------------- ------------- DEFERRED CREDITS Deferred federal income taxes 2,069,378 2,069,378 Unamortized investment tax credits 71,066 71,066 ------------- ------------- 2,140,444 2,140,444 ------------- ------------- STOCKHOLDERS' EQUITY Preferred stock -- 35,500 Common stock 70,000 70,000 Retained earnings 4,546,820 4,195,833 ------------- ------------- 4,616,820 4,301,333 ------------- ------------- Total Liabilities and Stockholders' Equity $ 9,576,789 $ 9,413,808 ============= =============
VERNON TELEPHONE COMPANY, INC. -------------------------------- CONSOLIDATED INCOME STATEMENT -------------------------------
Three Months Three Months Ended Ended September 30, 1993 September 30, 1992 ----------------------------------------------------- OPERATING REVENUES Local network service $ 141,335 $ 140,403 Network access and long distance network service 223,137 268,374 Miscellaneous 28,922 27,554 Less: Uncollectible operating revenues 6,000 4,000 ------------------- --------------- Total operating revenues 387,394 432,331 ------------------- --------------- OPERATING EXPENSES Plant specific 115,166 101,469 Plant non-specific: Depreciation 63,803 68,747 Other 43,622 29,491 Customer operations 49,209 47,782 Corporate operations 78,164 83,891 ------------------- --------------- Total operating expenses 349,964 331,380 ------------------- --------------- OPERATING TAXES 33,622 33,221 ------------------- --------------- Net operating income 3,808 67,730 OTHER NONOPERATING INCOME AND EXPENSES - NET 378,745 46,417 ------------------- --------------- Income available for fixed charges 382,553 114,147 INTEREST EXPENSE 31,566 20,998 ------------------- --------------- Net Income (Loss) $ 350,987 $ 93,149 =================== ===============
VERNON TELEPHONE COMPANY, INC. ------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------
Three Months Three Months Ended Ended September 30, 1993 September 30, 1992 ----------------------- --------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 350,987 $ 93,149 Add (Deduct) adjustments to reconcile net Income to net cash provided by operating activities: Depreciations and amortization 63,803 68,747 Other non-cash expense -- (19,972) Change in: Accounts receivable (111,007) (94,946) Materials and supplies 8,635 10,186 Prepaid expenses (16,205) (14,564) Accounts payable 54,328 (50,521) Other current liabilities (35,262) (25,737) ------------------- --------------- 315,279 (33,658) CASH FLOW FROM FINANCING ACTIVITIES: Change in notes payable (156,585) (3,498) Change in long-term debt (14,987) (14,274) ------------------- --------------- (171,572) (17,772) CASH FLOW FROM INVESTING ACTIVITIES: Additions to telephone plant (27,123) (15,911) Redemption of preferred stock (35,500) -- ------------------- --------------- (62,623) (15,911) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 81,084 (67,341) CASH AND CASH EQUIVALENTS Beginning of Period 103,381 163,110 ------------------- --------------- End of Period $ 184,465 $ 95,769 =================== ===============
VERNON TELEPHONE COMPANY, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. The financial statements as of September 30, 1993 and 1992, included herein have been prepared by Vernon Telephone Company, Inc. (the "Company"), without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest audited financial statements. The accompanying unaudited financial statements of September 30, 1993 and 1992, and audited financial statements as of June 30, 1993, contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 1993, and June 30, 1993, and the results of operations and cash flows for the next three months ended September 30, 1993 and 1992. The results of operations for the three months ended September 30, 1993 and 1992, are not necessarily indicative of the results to be expected for the full year. 2. Pursuant to a merger contemplated by an Asset Purchase Agreement, dated December 15, 1993, between Telephone and Data Systems, Inc. ("TDS"), Vernon Telephone Company, Inc. and Diane P. Laube, an individual and presently the sole stockholder of the Company, a wholly-owned subsidiary of TDS will merge with and into the Company with the Company being the surviving entity. As a result of this transaction, which is subject to regulatory approval, TDS will acquire an 100% interest in the Company. -----END PRIVACY-ENHANCED MESSAGE-----