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
============ ===========
<FN>
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
============ =========== ===========
<FN>
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
======= ======= ======= ======== ============ ============
<FN>
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)
============= =========== ============
<FN>
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 $ -- $ --
============= =========== ============
<FN>
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