UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 333-23435
CHORUS COMMUNICATIONS GROUP, LTD.
(Exact Name of Registrant as Specified in Its Charter)
WISCONSIN 39-1880843
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8501 Excelsior Drive, Madison, Wisconsin 53717-0070
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (608) 828-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class Registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value
(Title of Class)
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ________.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of February 28, 1998, there were 2,704,303 shares of Common Stock
outstanding. The aggregate market value (based upon unrelated party non-broker
transactions which the Company was familiar with) of Common Stock held by
nonaffiliates on that date was $110,876,423.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
Part I.
Item 1. BUSINESS.
(a) Chorus Communications Group, Ltd., (Chorus or the Company) is a
telecommunications company which was formed on June 1, 1997 by the
mergers of Mid-Plains, Inc. (Mid- Plains) and Pioneer Communications,
Inc. (Pioneer). Chorus' primary operations include local exchange
carrier services and system sales and services.
Local exchange carrier services are provided by Mid-Plains and Pioneer
subsidiaries, The Farmers Telephone Company (Farmers) and Dickeyville
Telephone Corporation (Dickeyville). These subsidiaries are public
utilities providing telephone and data services to customers in local
exchanges located in southern Wisconsin. Mid-Plains, Farmers and
Dickeyville were incorporated in 1901, 1898 and 1956, respectively.
System sales and services are provided by a subsidiary of Chorus,
Mid-Plains Communications Systems, Inc. (MPCS), and Pioneer. These
companies market and install deregulated communications systems and
provide maintenance services related to their continued use. Their
primary markets are in southern Wisconsin. MPCS and Pioneer were
incorporated in 1980 and 1987, respectively.
Chorus also provides Internet access and resells long distance services
through MPCS and Pioneer in southern Wisconsin. Additionally, Pioneer
operates a directory service division that publishes telephone
directories for various telephone companies in Wisconsin as well as
Minnesota and Iowa.
Mid-Plains has an 18% interest in a limited partnership which provides
cellular telephone service in Madison, Janesville and Beloit,
Wisconsin, and bordering areas. Farmers own a 2% interest in a limited
partnership providing cellular telephone service in southwestern
Wisconsin.
Mid-Plains also has a 75% interest in PCS Wisconsin, LLC (PCS-WI). This
limited liability company was formed in 1996. In April of 1997, PCS-WI
was granted the F- block license by the FCC, which allows PCS-WI to
construct and operate a Personal Communication System (PCS) in 10
counties in Southern Wisconsin. Management is currently analyzing
alternative business plans as to development, construction and
introduction of PCS services.
In January of 1998, Chorus acquired Executive Systems and Software,
Inc. d/b/a The ComputerPLUS, and IntraNet, Inc. The ComputerPLUS is a
network systems integrator and computer reseller. IntraNet, Inc. is
an Internet provider. Both companies sell and provide service primarily
in Dane County, Wisconsin.
As further discussed in Item 8 - Chorus Communications Group, Ltd.
Consolidated Financial Statements (Note 15), Mid-Plains is in dispute
with the Public Service Commission of Wisconsin (PSCW) regarding the
authorizing by the PSCW of competitors into Mid-Plains service
territory. While Mid-Plains intends to continue to defend its rights to
have its state franchise and federal rural telephone exemption
determined under due process of law, it expects that it may have
significant competition in late 1998 or in 1999 which will have some
adverse effect on its revenues. The extent of that effect is unknown at
this time.
There were no other material changes in the nature of the business
conducted by Chorus during 1997.
<PAGE>
Information regarding the recent development of the Company's business
in the number of access lines is shown below:
Access
Year Lines in Service
1995 36,000
1996 38,500
1997 42,000
(b) Chorus operates in two primary industry segments: local exchange
carrier (LEC) services and system sales and services. The financial
information regarding Chorus' industry segments is provided in Item 8 -
Chorus Communications Group, Ltd. Consolidated Financial Statements
(Note 13) for the year ended December 31, 1997.
(c) Chorus is a telecommunications company operating in southern Wisconsin.
Chorus' business development strategy is to expand existing operations
through internal growth, develop other businesses that management
believes will complement Chorus operations and to become a growing
coalition of independent communications companies through future
mergers with other independent telephone companies. Chorus operates in
the segments listed below.
LEC - Chorus operates the following local exchange carrier
subsidiaries, which provide telephone service to 42,000 access lines:
Mid-Plains, Inc.
The Farmers Telephone Company
Dickeyville Telephone Corporation
System Sales and Services - As a result of acquisitions in January
1998, Chorus' system sales and services operations, which provide the
sale, installation and servicing of business phone systems, were
expanded to include computer network systems integration and computer
sales. The following operations now serve approximately 3,000
customers.
Mid-Plains Communications Systems, Inc. (MPCS)
The ComputerPLUS
Pioneer
Internet - January 1998 acquisitions also expanded Chorus' Internet
base to approximately 9,200 accounts through the following operations:
Mid-Plains Internet (MPI)
IntraNet, Inc.
pcii.net
Long Distance - Through the following operations, Chorus provides long
distance service to over 8,200 customers:
Mid-Plains Long Distance (MPLD)
Pioneer Telecom
Directory Publishing - Chorus publishes telephone directories for 21
local exchange carriers in three states through the following
subsidiary:
Pioneer Communications, Inc.
<PAGE>
LEC services revenues consist of three major classes: local service
revenues, interstate network access and intrastate network access. Local
service revenues are based upon fees charged to customers for providing
local telephone exchange service within designated franchise areas.
Interstate and intrastate network access revenues are based on fees
charged to interexchange carriers that use the LEC's local network to
provide long distance service to their customers. System sales and
services sell business telephone systems along with the related
installation and maintenance services.
The percent of revenues from each of these primary classes included in the
Consolidated Statements of Income over the last three years are as
follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
LEC Services
Local service revenues 23.6% 19.7% 18.0%
Interstate network access 24.5% 25.2% 25.9%
Intrastate network access 12.4% 16.0% 17.3%
System Sales and Services 19.6% 22.7% 22.2%
</TABLE>
As noted above, PCS-WI was granted the F-block license by the FCC, which
allows PCS- WI to construct and operate a Personal Communication System
(PCS) in 10 counties in southern Wisconsin. Management is currently
analyzing alternative business plans as to development, construction and
introduction of PCS services with preliminary cost estimates ranging from
$30-$50 million over a five-year period. Management is also considering
financing alternatives, which include the issuance of debt, equity
financing and the inclusion of additional partners in PCS-WI.
The business of Chorus is not seasonal to any significant extent.
For discussion of competitive conditions, see Item 7 - Management's
Discussion and Analysis of Financial Conditions and Result of Operations -
Other Matters Regulation and Competition.
Information regarding the Company's major customers is provided in Item 8
- Chorus Communications Group, Ltd. Consolidated Financials Statements
(Note 13) for the year ended December 31, 1997.
Order backlog is not a significant consideration in the Company's
business, and the Company has no contracts or subcontracts which may be
subject to renegotiation of profits or termination at the election of the
Federal government.
Information regarding the Company's working capital practice is provided
in Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The number of employees as of February 28, 1998 was 284.
Item 2. PROPERTIES
Information regarding the Company's properties is provided in Item 8 - Chorus
Communications Group, Ltd. Consolidated Financial Statements (Note 6) for the
year ended December 31, 1997. During 1997, Chorus acquired a headquarters
building for $4.4 million. Substantially all other property of the Company's
properties are necessary to provide LEC services in the Company's serving areas.
Between January 1, 1995 and December 31, 1997, the Company made property
additions of $25.4 million and retirements of $6.4 million. Virtually all of
this property is subject to liens securing long-term debt. In management's
opinion, the plant is in good repair and suitably equipped for its intended
purpose.
<PAGE>
Item 3. LEGAL PROCEEDINGS
Information regarding legal proceedings the Company is currently engaging in is
provided in Item 8 - Chorus Communications Group, Ltd. Consolidated Financial
Statements (Note 15) for the year ended December 31, 1997.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were none in the fourth quarter of 1997.
<PAGE>
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
As explained in Item 8 - Chorus Communications Group, Ltd. Consolidated
Financial Statements (Note 1), effective June 1, 1997, Mid-Plains and Pioneer
merged into subsidiaries of Chorus (the Mergers). Pursuant to the Mergers,
Mid-Plains shareholders received one share of Chorus stock for each share of
Mid-Plains stock and Pioneer shareholders received four shares of Chorus stock
for each share of Pioneer stock. The below stock prices are for Mid-Plains stock
prior to the June 1997 Mergers and for Chorus stock beginning June 1997.
There is no established trading market for Chorus stock nor was there one for
Mid-Plains or Pioneer stock prior to the Mergers. Furthermore, there are no
principal market makers for Chorus stock nor were there any for Mid-Plains or
Pioneer stock prior to the Mergers. Prices are based only on unrelated party
transactions which have been voluntarily reported to Chorus and Mid-Plains.
Transactions may include both those handled privately (non- broker) and those
handled by stock brokers. Non-broker prices do not include retail markup,
markdown or commissions which are included in broker prices. Average prices are
the weighted average of the transactions described below. These prices should
not be relied upon as an indication of the price at which Chorus stock may be
traded in the future.
<TABLE>
CASH
TRANSACTIONS PRICE PER SHARE DIVIDENDS
NUMBER SHARES HIGH LOW AVERAGE PER SHARE<F1>
<S> <C> <C> <C> <C> <C> <C>
1997
Chorus 4th Quarter 68 23,619 $42.00 $37.00 $41.40 $0.29
Chorus 3rd Quarter 62 23,284 42.25 41.00 41.70 0.27
Chorus June 3 1,328 42.00 42.00 42.00 -
Mid-Plains April-May 4 3,061 42.00 40.00 41.00 0.27
Mid-Plains 1st Quarter 11 14,092 44.00 41.00 41.92 0.27
1996
Mid-Plains 4th Quarter 17 6,763 $42.00 $35.00 $40.95 $0.27
Mid-Plains 3rd Quarter 9 3,570 42.00 40.00 41.87 0.27
Mid-Plains 2nd Quarter 7 2,702 43.00 41.50 41.70 0.27
Mid-Plains 1st Quarter 12 5,634 41.00 38.00 39.38 0.25
<FN>
<F1> There were 3,551 shareholders of record as of February 1, 1998.
Both Mid- Plains and Pioneer have regularly paid dividends to
their shareholders and Chorus expects it will continue to do so in
the future. The above cash dividends per share are for Mid-Plains
stock prior to the June 1997 Mergers and the Chorus stock
beginning June 1997. For 1997 and 1996, Pioneer paid cash
dividends of $0.54 and $0.94 per share in the 2nd Quarter 1997 and
4th Quarter 1996, respectively, based on the number of Chorus
shares Pioneer shareholders received in merging.
</FN>
</TABLE>
At December 31, 1997, all of the consolidated retained earnings were available
for the payment of cash dividends on shares of Chorus common stock. However,
certain LECs may not transfer funds to the parent in the form of cash dividends,
loans or advances until certain financial requirements of their mortgages have
been met. Of the $13.7 million underlying retained earnings of all Chorus
subsidiaries at December 31, 1997, $5.7 million was available for the payment of
dividends on the subsidiaries common stock.
As further discussed in Item 8 - Chorus Communications Group, Ltd. Consolidated
Financial Statements (Note 14), Chorus issued 20,000 shares of common stock to
three individuals, each of whom were Wisconsin residents at the time of
issuance, in connection with the simultaneous acquisitions of Executive Systems
& Software, Inc., d/b/a The ComputerPLUS and IntraNet, Inc. There were no
underwriters used in these transactions. The securities were exempt from
registration under the Securities Act of 1933 (the "33 Act") pursuant to Section
4(2) of the '33 Act, 15 U.S.C. Section 77d(2) (the "Section 4(2) Private
Placement Exemption"). The securities were also exempt from registration
pursuant to Section 3(a)(11) of the '33 Act, Section 77 c(a)(11)(the "Intrastate
Offering Exemption") and Rule 505, 17 C.F.R. Section 230.505 (a "Regulation D
Exemption"). The securities are "restricted securities" pursuant to the rules
promulgated under the '33 Act, and cannot be resold for an indefinite period of
time.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the five years in
the period ended December 31, 1997 have been derived from the audited
consolidated Financial Statements of the Company included herein. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated Financial Statements and notes thereto included
elsewhere in this report. All financial data has been reported as if the merged
companies, described Item 8 - Chorus Communications Group, Ltd., Consolidated
Financial Statements (Note 1), have always been one.
<TABLE>
Dollars in thousands,
except per share data 1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Access Lines 41,940 38,504 35,894 33,304 31,270
Total Assets $62,754 $51,705 $52,046 $44,618 $43,574
Shareholders' Equity $28,773 $26,485 $26,051 $23,912 $21,934
Long-Term Debt,
Including Current
Maturities $22,626 $15,860 $12,195 $10,762 $11,485
Short-Term Notes
Payable to Banks $ 1,328 $ - $ 4,440 $ 1,300 $ 2,400
Ratio of Earnings to
Interest Expense<F1><F2> 7.42 6.45 7.11 6.52 6.23
Revenues and Sales $36,337 $33,181 $30,539 $27,166 $24,824
Net Income<F2> $ 5,136 $ 4,741 $ 4,572 $ 3,888 $ 3,937
Earnings Per Share<F2> $ 1.91 $ 1.77 $ 1.71 $ 1.48 $ 1.50
Cash Dividends
Per Share $ 1.100 $ 1.030 $ 1.050 $ .848 $ .788
Average Common Shares
Outstanding 2,684 2,678 2,671 2,627 2,616
Shareholders of Record 3,531 3,434 3,287 3,217 3,128
These financial highlights should not be relied upon as an indication of future
financial condition or results of operations.
<FN>
<F1> For the purpose of this ratio, earnings have been calculated by adding net
income, interest expense and income taxes.
<F2> For 1996, the amount is before the extraordinary charge.
</FN>
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Effective June 1, 1997, Mid-Plains, Inc. (Mid-Plains) and Pioneer
Communications, Inc. (Pioneer) merged into subsidiaries of a new holding
company, Chorus Communications Group, Ltd. The mergers have been accounted for
as a pooling-of-interests and, accordingly, historical financial data has been
reported as if the companies have always been one.
RESULTS OF OPERATIONS
OVERVIEW
Chorus' reported net income increased $2.2 million, to $5.1 million in 1997. The
increase was primarily due to an extraordinary charge against income relating to
the discontinuance of regulatory accounting principles for one of the company's
local exchange carriers (LEC), which decreased net income by $1.8 million in
1996. Excluding the extraordinary charge, net income increased $0.4 million in
1997 primarily due to growth in LEC services.
Net income decreased $1.6 million in 1996 principally due to the extraordinary
charge noted above. Excluding the extraordinary charge, net income increased
$0.2 million, which was due to an increase in sales of systems and services.
Revenues increased $3.2 million in 1997, to $36.3 million and $2.6 million in
1996, to $33.1 million. The increase in 1997 was due to growth in LEC services
offset by a decrease in system sales and services. The increase in 1996 was due
to growth in LEC services and system sales and services.
Operating costs and expenses increased $2.7 million in 1997, to $27.0 million
and $2.2 million in 1996, to $24.3 million. The increase in 1997 was primarily
related to merger related expenditures of $0.3 million, costs related to
regulatory matters of $0.3 million and growth of internal operations. The
increase in 1996 was primarily due to the growth of internal operations.
Chorus took an extraordinary charge in 1996. Mid-Plains, a LEC subsidiary of
Chorus, discontinued applying Statement of Financial Accounting Standards No. 71
(FAS 71), "Accounting for the Effects of Certain Types of Regulation".
Management determined that Mid-Plains no longer met the criteria for following
FAS 71 due to changes in legislative, regulatory and competitive environments.
(See Item 8 - Chorus Communications Group, Ltd.
Consolidated Financial Statements Notes 1 and 3).
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
Chorus' primary operations are local exchange carrier services and system sales
and services.
<PAGE>
Local Exchange Carrier Services
LEC services provide telephone and data services to customers in local exchanges
located in southern Wisconsin. LEC services operating income consisted of the
following:
<TABLE>
In Thousands 1997 1996 1995
---- ------ -----
<S> <C> <C> <C>
Revenues and Sales
Local service revenues $ 8,571 $ 6,546 $5,499
Interstate network access 9,162 8,590 8,159
Intrastate network access 4,917 5,471 5,416
Other 2,638 2,895 2,983
------ ------ ------
25,288 23,502 22,057
------ ------ ------
Operating Costs and Expenses
Cost of services 3,387 3,115 2,984
Selling, general & administrative 8,518 7,482 6,725
Depreciation 4,521 4,158 3,786
------ ------ ------
16,426 14,755 13,495
------ ------ ------
LEC Services Operating Income 8,862 8,747 8,562
Less: Intercompany eliminations
Revenues (1,282) (635) (577)
Expenses 153 - -
------ ------ ------
Operating Income $7,733 $8,112 $7,985
====== ====== ======
</TABLE>
LEC services revenues are derived from local network services, interstate
network access, intrastate network access and other services. Local service
revenues are based on fees charged to customers for providing local telephone
exchange service within designated franchise areas. Local service revenues
increased 30.9% in 1997. This growth was principally due to Mid-Plains'
implementation of its Alternative Regulation Plan on September 1, 1996, which
had the effect of increasing local service revenues in 1997 by $1.1 million.
Additionally, the LECs experienced a greater demand for service as evidenced by
an 8.9% increase in the number of access lines in service.
Local service revenues increased 19.0% in 1996. The revenues increased
principally as a result of a 7.3% growth in access lines. Additionally,
Mid-Plains implementation of its Alternative Regulation Plan had the effect of
increasing local network services revenues $0.4 million for the year.
Interstate and intrastate network access revenues are based on fees charged to
interexchange carriers that use the LEC's local network to provide long distance
service to their customers. Interstate revenues increased 6.7% in 1997 and 5.3%
in 1996. These increases are largely due to higher demand for access services as
evidenced by a 9.7% and 8.8% increase in minutes of use for 1997 and 1996,
respectively. These increases were offset by slightly lower average access rates
charged to the interexchange carriers during the years.
Intrastate network access revenues decreased 10.1% in 1997, while increasing
1.0% in 1996. The 1997 decrease was due to Mid-Plains' Alternative Regulation
Plan, which had the effect of decreasing intrastate access revenue $1.0 million.
This decrease was offset in part by higher demand as evidenced by increased
minutes-of-use of 5%. The 1996 increase was primarily due to a 5% increase in
minutes of use, which was offset by $0.3 million due to the effects of the rate
reduction under the Alternative Regulation Plan.
Other revenues decreased 8.9% in 1997 and 2.9% in 1996. The decreases were due
to lower billing and collection rates that went into effect in October of 1996.
Cost of service increased 8.7% in 1997 and 4.4% in 1996. The growth in 1997 and
1996 was due primarily to growth in internal operations.
<PAGE>
Selling, general and administrative expenses increased 13.8% in 1997 and 11.3%
in 1996. The 1997 and 1996 increases were due to growth in internal operations
and $0.3 million in 1997 which was related to regulatory matters more fully
discussed in Item 8 - Chorus Communications Group, Ltd. Consolidated Financial
Statements (Note 15). Management anticipates that similar amounts will be
expended on regulatory matters in 1998.
Depreciation increased 8.7% in 1997 and 9.8% in 1996. The increases were due to
increased levels of depreciable property.
System Sales and Services
System sales and services sell business systems and provide installation and
services throughout southern Wisconsin. System sales and services operating
income consisted of the following:
<TABLE>
In Thousands 1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Revenues and Sales $7,123 $7,538 $6,768
------ ------ ------
Operating Costs and Expenses
Cost of goods sold 4,267 4,475 4,268
Selling, general and administrative 2,151 2,197 1,987
Depreciation 122 108 115
------ ------ ------
6,540 6,780 6,370
------ ------ ------
System Sales & Services Operating Income 583 758 398
Less: Intercompany eliminations - Expenses 37 37 37
------ ------ ------
Operating Income $ 620 $ 795 $ 435
====== ====== ======
</TABLE>
System sales and services revenues decreased 5.5% in 1997 and increased 11.4% in
1996. The 1997 decrease in revenues relates to the cancellation in 1996 of a
commission arrangement. The increase in 1996 revenues was due to the growth of
new system sales.
As a percentage of system sales and services revenues, cost of goods sold was
59.9%, 59.3% and 63.1% for 1997, 1996 and 1995, respectively. The lower cost of
sales in 1997 and 1996 as compared to 1995 was the result of the changes in
system markups.
<PAGE>
Other Services and Sales
Other services and sales include long distance, Internet and directory
publishing operations. Other services and sales operating income consisted of
the following:
<TABLE>
In Thousands 1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Revenues and Sales $5,456 $2,826 $2,341
------ ------ ------
Operating Costs and Expenses
Cost of services 3,986 2,151 1,703
Selling, general and administrative 1,494 1,269 1,158
Depreciation 121 68 54
------ ------ ------
5,601 3,488 2,915
------ ------ ------
Other Services & Sales Operating Income (Loss) (145) (662) (574)
Less: Intercompany eliminations
Revenues (248) (50) (50)
Expenses 1,340 648 590
------ ------ ------
Operating Income (Loss) $ 947 ($ 64) ($ 34)
====== ====== ======
</TABLE>
Revenues from other services and sales increased 93.1% in 1997 and 20.7% in
1996. A temporary arrangement to resell intraLATA toll accounted for $1.0
million of the increase in 1997 with the remainder due to growth in customers.
The increase in 1996 was primarily due to growth of customers.
Cost of services increased 85.2% in 1997 and 26.3% in 1996. The increases in
1997 were primarily due to increased costs of $0.9 million associated with
intralata toll traffic and an increase in the customer base. The increase in
1996 was due to an increase in the number of customers served.
The increases in selling, general and administrative expenses during 1997 and
1996 were due to growth in internal operations.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Chorus requires funds primarily for its construction programs, the maturity and
retirement of long-term debt, dividend payments and investments. The capital
resources available to meet these requirements are provided through operating
and financing activities. Net cash from operating activities of Chorus and its
subsidiaries for the years 1995 - 1997 was $28.8 million. External financing
activities for the same period totaled $15.3 million.
INFLATION
Management believes that inflation affects Chorus' business to no greater extent
than the general economy.
INVESTING ACTIVITIES AND CAPITAL REQUIREMENTS
The primary capital requirement of Chorus has historically consisted of
expenditures under its construction program. Total construction expenditures for
the years 1995-1997 were $25.4 million. Total capital expenditures for 1998 are
expected to be $10.5 million.
On April 28, 1997, PCS-WI, a 75% owned subsidiary of Mid-Plains, was granted the
F-block license by the FCC (see Item 8 - Chorus Communications Group, Ltd.
Consolidated Financial Statements Note 15). The license allows PCS-WI to
construct and operate a personal communications service system (PCS) in 10
counties in Southern Wisconsin. PCS-WI bid for the license was $3.2 million. At
<PAGE>
December 31, 1997, $2.6 million remains payable through 2007.
Under the terms of the license, PCS-WI is required to construct an operating
system that will be capable of providing service to at least 25% of the
population in the license area within five years of the grant of the license.
Management is currently analyzing alternative business plans as to development,
construction and introduction of PCS services with preliminary cost estimates
ranging between $30 - $50 million over a five-year period. Management is also
considering financing alternatives, which include the issuance of debt, equity
financing and the inclusion of additional partners in PCS-WI.
In addition to the risks associated with startup operations of PCS-WI, it is
anticipated that the Company will encounter stiff competition from two existing
cellular providers as well as from five new PCS license holders.
In 1995, Mid-Plains contributed $2 million in response to a capital call to the
cellular limited partnership in which it has an investment. Cash distributions
in 1996 and 1997 totaled $0.7 million. Due to a dispute with the general
partner, as discussed in Item 8 Chorus Communications Group, Ltd. Consolidated
Financial Statements (Note 15), the Company has not been provided with current
information on the partnership and does not have any knowledge of future capital
calls.
FINANCING ACTIVITIES
Financing for the years 1995 - 1997 was $15.3 million, consisting of $9.7
million of debt financing, $0.7 million from the sale of common stock under
stock plans and a net increase in short-term bank notes of $4.9 million.
On January 31, 1997, Mid-Plains entered into a financing agreement with the RTFC
that allows Mid-Plains to borrow up to $22 million. The agreement provides up to
$12 million for refinancing existing debt, capital expenditures and working
capital for LEC operations; $9 million for investment in PCS-WI (see above) and
$1 million for the purchase of RTFC's Subordinate Capital Certificates, a
condition of obtaining the financing. The interest rate on $4 million of the
debt is fixed at 7.4% with the remainder variable based upon the RTFC's cost of
funds, which at December 31, 1997 was 6.7%. At December 31, 1997, $4.3 million
remained unadvanced for local exchange carrier purposes and $9 million is
available to invest in PCS-WI.
In October of 1997, Chorus acquired an office building for $4.4 million. Funding
for this acquisition was provided by a $4 million loan from AnchorBank, S.S.B.
and $400,000 in short-term borrowings. The $4 million loan is payable over 20
years with the interest fixed for the first five years at 7.75%.
In January 1998, Chorus acquired Executive Systems & Software, Inc. d/b/a The
ComputerPLUS, and Intranet, Inc. The businesses were acquired for 20,000 shares
of common stock, $0.5 million cash and notes of $0.5 million to be paid over two
years.
In connection with its long-term debt, certain subsidiaries of Chorus may not
transfer funds to Chorus in the form of cash dividends, loans or advances until
certain financial requirements of their mortgages are met. Of the $13.7 million
underlying retained earnings of all Chorus subsidiaries at December 31, 1997,
$5.7 million was available for the payment of dividends on the subsidiaries'
common stock.
It is anticipated that the capital requirements for Chorus' construction
programs, maturity and retirement of long-term debt, and dividend payments will
be provided for with cash flow from operating activities and the issuance of
debt.
At February 26, 1998, Chorus has available unused lines-of-credit of $11
million. Chorus has experienced no difficulty in obtaining funds for its
construction programs or other purposes. However, competition could have some
adverse effect on Chorus' future operations and cash flows.
<PAGE>
OTHER MATTERS
REGULATION AND COMPETITION
The telecommunications industry is undergoing significant regulatory,
competitive and technological changes. The Federal Telecommunications Act of
1996 is transforming the telecommunications industry and changing
telecommunications policies in such areas as entry into local exchange and long
distance markets, pricing of telecommunications services, ownership of
facilities and use of spectrum. Wisconsin regulation of local exchange carriers
(LECs) has also changed. The Public Service Commission's encouragement of LEC
competition is causing the emergence of companies providing competitive access
and other services.
For regulatory purposes, Chorus has three LECs, two of which are currently
considered by the PSCW to be small telecommunications utilities subject to
reduced regulation. Mid- Plains is also considered a small telecommunications
utility but in August, 1996 received PSCW approval to implement an Alternative
Regulation Plan (the Plan). The Plan set rate ceilings, reduced intrastate
access charges and established certain goals.
As discussed in Item 8 - Chorus Communications Group, Ltd. Consolidated
Financial Statements (Note 15), in June 1997, the PSCW issued orders authorizing
two companies, KMC Telecom, Inc. (KMC) and TDS Datacom, Inc. (TDS) to provide
local exchange service in Mid- Plains service territory. The PSCW held that
Mid-Plains was no longer entitled to either an exclusive franchise under state
law or a rural telephone company exemption under federal law as a result of
entering into the Plan. Mid-Plains disagreed and filed a petition for judicial
review in the Wisconsin Circuit Court. While this was pending, the PSCW ordered
Mid-Plains to participate in an arbitration proceeding with TDS regarding an
interconnection agreement.
In December 1997, the Wisconsin Circuit Court ordered the PSCW to conduct a
hearing to determine whether Mid-Plains' adoption of the Plan constituted
consent to entry of competitors within its franchise territory and waiver of its
federal rural telephone company exemption. Notwithstanding the ruling, the PSCW
has ordered TDS and Mid-Plains to enter into an interconnection agreement issued
by the arbitration panel in January 1998. Mid-Plains has appealed that order.
The PSCW is in the process of commencing a proceeding to review Mid-Plains'
state franchise and federal rural exemption. Mid-Plains intends to continue to
defend its right to have its state franchise and federal rural telephone company
exemption determined under due process of the law. Mid-Plains expects that in
late 1998 or in 1999 it may have significant competition which will have some
adverse effect upon its revenues, including the loss of services to TDS
corporate offices with approximately 1,500 access lines currently served by
Mid-Plains. The full extent of the effect of competition is unknown at this
time.
The other LECs are expected to continue to have limited competition in the next
several years.
Along with these challenges, Chorus also sees growing opportunities to expand
beyond its traditional markets and continues to monitor and consider the most
favorable options.
CHORUS INITIATIVES
Chorus continues to position itself to respond aggressively to competitive
developments and benefit from new opportunities.
On June 1, 1997, Chorus was formed as the result of mergers of Mid-Plains and
Pioneer (See Item 8 - Chorus Communications Group, Ltd. Consolidated Financial
Statements Note 1).
<PAGE>
In October 1997, Chorus purchased a new headquarters building to consolidate
personnel to take advantage of the synergies of having more of its operations
under one roof and to provide for future growth.
In January 1998, Chorus acquired The ComputerPLUS and IntraNet, Inc. Management
believes that The ComputerPLUS, a network systems integrator and computer
reseller, will complement its systems sales and service segment. Intranet
significantly expanded Chorus' Internet operations.
Chorus expects to actively pursue growth as a coalition of independent
communication companies through additional mergers with other independent
telephone companies.
OTHER FINANCIAL INFORMATION
Management is currently not aware of any environmental matters which in the
aggregate would have a material adverse effect on the financial condition or
results of operations of the Company.
The Year 2000 compliance issue exists because many computerized information
systems use two-digit data fields to designate a year and cannot process
date-sensitive information beyond December 31, 1999. The Company has taken
actions to understand the nature and extent of the work required to make its
systems, products and infrastructure, in those situations in which Chorus is
required to do so, Year 2000 compliant. Chorus has established a Year 2000
Project Team to coordinate and monitor the Company's Year 2000 compliance
efforts and is in the process of preparing a company-wide Year 2000 compliance
plan. Chorus continues to evaluate the estimated costs associated with these
efforts. While these efforts involve additional costs, the Company believes,
based on available information, that these costs will not have a material
adverse effect on its results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, (FAS 131), "Disclosures about Segments
of an Enterprise and Related Information". The Company has elected early
adoption of FAS 131 and accordingly has followed the pronouncement disclosure
requirements for reporting segment information for all periods shown. (See Item
8 - Chorus Communications Group, Ltd. Consolidated Financial Statements Note
13).
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes, and future filings by the Company on Form 10-K, Form 10-Q
and Form 8-K and future oral and written statements by the Company and its
management may include, certain forward-looking statements, including (without
limitation) statements with respect to anticipated future operating and
financial performance, growth opportunities and growth rates, acquisition
opportunities, Year 2000 compliance and other similar forecasts and statements
of expectation. Words such as expects, anticipates, plans, believes, estimates,
and should, and variations of these words and similar expressions, are intended
to identify these forward-looking statements. Forward-looking statements by the
Company and its management are based on estimates, projections, beliefs and
assumptions of management and are not guarantees of future performance. The
Company disclaims any obligation to update or revise any forward-looking
statement based on the occurrence of future events, the receipt of new
information, or otherwise.
Actual future performance, outcomes and results may differ materially from those
expressed in forward-looking statements made by the Company and its management
as a result of a number of important factors. Representative examples of these
<PAGE>
factors include (without limitation) rapid technological developments and
changes in the telecommunications and information services industries; ongoing
deregulation (and the resulting likelihood of significantly increased price and
product/service competition) in the telecommunications industry as a result of
the Telecommunications Act of 1996 and other federal and state rules and
regulations enacted pursuant to that legislation and regulatory limitations on
the Company's ability to change its pricing for communications services. In
addition to these factors, actual future outcomes and results may differ
materially because factors including (without limitation) market conditions and
growth rates, economic conditions, policy changes and the continued availability
of financing in the amounts, at the terms, and on the conditions necessary to
support the Company's future business.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHORUS COMMUNICATIONS GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Financial Statements for the three years ended December 31, 1997:
Statements of Income
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
Chorus Communications Group, Ltd.
We have audited the accompanying consolidated balance sheets of Chorus
Communications Group, Ltd. (a Wisconsin Corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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 audits 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 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 Chorus Communications Group,
Ltd. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, a subsidiary
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
in 1996.
/S/Kiesling Associates LLP
KIESLING ASSOCIATES LLP
Madison, Wisconsin
February 6, 1998
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, December 31,
ASSETS 1997 1996
------ ------------ --------
In Thousands
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,736 $ 1,902
Temporary investments 2,500 3,200
Accounts receivable
Due from customers 3,045 2,700
Other, principally connecting
companies 2,446 1,977
Inventories
Plant materials and supplies 542 663
Communication systems and parts 911 900
Other 1,498 825
-------- --------
Total Current Assets 13,678 12,167
-------- --------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 68,325 62,564
Less accumulated depreciation (27,667) (28,162)
-------- ---------
Total Property, Plant and Equipment 40,658 34,402
-------- ---------
CELLULAR LIMITED PARTNERSHIP INTERESTS 3,715 4,168
PERSONAL COMMUNICATION SERVICES LICENSE 3,418 -
OTHER ASSETS 1,285 968
-------- --------
TOTAL ASSETS $ 62,754 $ 51,705
======== ========
</TABLE>
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ------------ --------
In Thousands
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 614 $ 383
Notes payable to banks 1,328 -
Accounts payable 3,345 3,721
Accrued pension cost 781 2
Other 1,005 1,152
------- -------
Total Current Liabilities 7,073 5,258
------- -------
LONG-TERM DEBT 22,012 15,477
DEFERRED INCOME TAXES 3,142 3,331
OTHER LIABILITIES 1,384 1,152
------- -------
Total Liabilities 33,611 25,218
------- -------
MINORITY INTEREST 370 2
------- -------
COMMITMENTS AND CONTINGENCIES (See Notes)
SHAREHOLDERS' EQUITY
Common stock, no par value; 13,868 13,765
authorized 25 million shares;
issued and outstanding 2,684,303
and 2,681,601 shares, respectively
Retained earnings 14,905 12,720
------- -------
Total Shareholders' Equity 28,773 26,485
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $62,754 $51,705
</TABLE> ======= =======
See Notes to Consolidated Financial Statements.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
Year Ended December 31,
1997 1996 1995
---- ---- ----
In Thousands Except For Per Share Data
<S> <C> <C> <C>
REVENUES AND SALES
Local exchange carrier services $24,006 $22,867 $21,480
System sales and services 7,123 7,538 6,768
Other services and sales 5,208 2,776 2,291
------- ------- -------
Total Revenues and Sales 36,337 33,181 30,539
------- ------- -------
OPERATING COSTS AND EXPENSES
Cost of goods sold 4,267 4,474 4,268
Cost of services 6,096 4,665 4,126
Selling, general & administrative 11,910 10,865 9,805
Depreciation 4,764 4,334 3,954
------- ------- -------
Total Operating Costs and Expenses 27,037 24,338 22,153
------- ------- -------
OPERATING INCOME 9,300 8,843 8,386
Other income 327 235 170
Interest expense (1,301) (1,408) (1,203)
Minority interest 28 3 -
------- ------ ------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY CHARGE 8,354 7,673 7,353
Income tax expense 3,218 2,932 2,781
------- ------- -------
INCOME BEFORE EXTRAORDINARY CHARGE 5,136 4,741 4,572
EXTRAORDINARY CHARGE, net of
income taxes of $1,133 (1,782)
------- ------- -------
NET INCOME $ 5,136 $ 2,959 $ 4,572
======= ======= =======
EARNINGS PER SHARE
Income before extraordinary charge $ 1.91 $ 1.77 $ 1.71
Extraordinary charge - (0.67) -
------ ------- ------
Net income $ 1.91 $ 1.10 $ 1.71
====== ======= ======
Average common shares outstanding 2,684 2,678 2,671
====== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Common Stock Total
Retained Shareholders'
Shares Amount Earnings Equity
In Thousands
<S> <C> <C> <C> <C>
Balances, December 31, 1994 2,631 $13,176 $10,735 $23,911
Net income 4,572 4,572
Cash dividend - $1.05 a
share (2,792) (2,792)
Stock plans 9 360 - 360
----- ------- ------- -------
Balances, December 31, 1995 2,640 13,536 12,515 26,051
Net income 2,959 2,959
Cash dividend - $1.03 a
share (2,754) (2,754)
Stock plans 6 229 - 229
Grants exercised 35
Balances, December 31, 1996 2,681 13,765 12,720 26,485
Net income 5,136 5,136
Cash dividend - $1.10 a
share (2,951) (2,951)
Stock plan 3 103 - 103
----- ------- ------- -------
Balances, December 31, 1997 2,684 $13,868 $14,905 $28,773
===== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
1997 1996 1995
In Thousands
<S> <C> <C> <C>
OPERATIONS
Income before extraordinary charge $5,136 $4,741 $4,572
Adjustments to reconcile income before
extraordinary charge to net cash
from operations:
Depreciation 4,764 4,335 3,968
Deferred income taxes (189) 549 545
Changes in current assets and
current liabilities:
Receivables - net (813) 232 (286)
Inventories - net 110 (94) (130)
Payables - net 403 10 17
Other - net (538) 1,281 165
------ ------- ------
Net cash from operations 8,873 11,054 8,851
------ ------- ------
INVESTING
Capital expenditures (11,258) (6,446) (7,665)
Cellular investment 453 273 (1,995)
Personal Communication Services license (820) - -
Purchases of short-term investments (1,000) (1,900) (2,000)
Proceeds from sale of short-term
investments 1,700 1,300 800
Other - net 238 (299) (289)
------ ------ -------
Net cash (used in) investing (10,687) (7,072) (11,149)
------- ------ -------
FINANCING
Stock plans 103 229 360
Dividends paid (2,951) (2,754) (2,792)
Long-term debt issued 4,745 - 5,000
Long-term debt repaid (577) (1,135) (3,567)
Short-term bank notes - borrowing 16,344 16,816 9,230
Short-term bank notes - repayment (15,016) (16,456) (6,090)
------- ------ ------
Net cash from (used in) financing 2,648 (3,300) 2,141
------- ------ ------
Increase (decrease) in cash and
cash equivalents 834 682 (157)
Cash and cash equivalents:
Beginning of period 1,902 1,220 1,377
------ ------ ------
End of period $2,736 $1,902 $1,220
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MERGERS
Effective June 1, 1997, Mid-Plains, Inc, (Mid-Plains) and Pioneer
Communications, Inc. (Pioneer) have merged into subsidiaries of a new
holding company, Chorus Communications Group, Ltd. (the "Mergers").
Pursuant to the Mergers, Mid-Plains shareholders received one (1) share
of holding company common stock (1,991,743 shares) for each share of
Mid-Plains common stock; Pioneer shareholders received four (4) shares
of holding company common stock (692,560 shares) for each share of
Pioneer common stock. The Mergers have been accounted for as a
pooling-of-interests and, accordingly, historical financial data has
been reported as if the companies have always been one (see Note 2).
DESCRIPTION OF BUSINESS
Chorus Communications Group, Ltd. and its subsidiaries (Chorus or the
Company) is a telecommunications company that provides phone, data and
other services through its local exchange carrier (LEC) subsidiaries in
Southern Wisconsin. The Company also sells, installs and services
business systems within Southern Wisconsin.
BASIS OF PRESENTATION
The consolidated financial statements of Chorus include the accounts of
its majority-owned subsidiaries. All significant inter-company items
have been eliminated in consolidation. Investments of less than 20% are
accounted for on the cost basis.
The accounting policies of Chorus conform to generally accepted
accounting principles. The accounting records of telephone subsidiaries
are maintained in accordance with the uniform system of accounts
prescribed by the Public Service Commission of Wisconsin (PSCW).
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Certain LECs of Chorus are subject to the provisions of Statement of
Financial Accounting Standards No. 71 (FAS 71), "Accounting for the
Effects of Certain Types of Regulation." The Company periodically
reviews the criteria for applying these provisions to determine whether
continuing application of FAS 71 is appropriate for these telephone
subsidiaries.
One LEC, Mid-Plains, discontinued applying FAS 71 in the second quarter
of 1996 (see Note 3). Two other telephone subsidiaries continue to
apply FAS 71 because the Company believes FAS 71 criteria are still
being met; and therefore, has no current plans to change its method of
accounting. In analyzing the effects of discontinuing the application
of FAS 71, management has determined that the useful lives of plant
assets used for regulatory purposes are consistent with generally
accepted accounting principles and therefore any adjustments to
accumulated depreciation would be immaterial, as would be the write-off
of regulatory assets and liabilities.
PROPERTY, PLANT AND EQUIPMENT
Plant in service and under construction is stated at the original cost
of construction including the capitalized costs of certain taxes and
payroll-related expenses. Normal retirements of telephone property are
charged against accumulated depreciation along with the costs of
removal less salvage, with no gain or loss recognition. Renewals and
betterments of telephone plant and equipment are capitalized while
repairs, as well as renewals of minor items, are charged to operating
expenses. When non-telephone property is sold or retired, a gain or
loss is recognized.
Depreciation is provided for primarily on the straight-line basis over
the estimated economic lives of the assets.
INVENTORIES
Inventories are stated at the lower of cost or market.
The cost of materials and supplies inventory, which is used primarily
for the construction of telephone plant, is determined principally by
the average cost method.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The cost of communications systems and parts inventory, held primarily
for sale and servicing of telephone systems, is determined principally
by the First-In, First-Out (FIFO) method.
INCOME TAXES
Chorus will file a consolidated federal income tax return.
Income taxes are accounted for using a liability method and provide for
the tax effects of transactions reported in the consolidated financial
statements including both taxes currently due and deferred. Deferred
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The deferred tax
assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
Investment tax credits (ITC), which were deferred prior to the Tax
Reform Act of 1986, are being amortized over the life of the plant
which produced the ITC.
REVENUE RECOGNITION
Chorus recognizes revenues when earned, regardless of the period in
which they are billed.
Local Exchange Carrier Services - Chorus' LECs are required to
provide service and grant credit to subscribers within their
defined service territory.
Local network service revenues are recognized over the period
a subscriber is connected to the telephone network.
Network access is derived from charges for access to the LECs'
networks. The interstate portion of access revenues are based
on an average schedule company settlement formula administered
by the National Exchange Carrier Association which is
regulated by the FCC. The intrastate portion of access
revenues are based on individual company tariff access charge
structures approved by the PSCW. The tariffs developed from
these methods are used to
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
charge the connecting carriers and recognize revenues in the
period the traffic is transported.
System Sales and Services Revenues - Revenues from system
sales and services are derived from the sale, installation and
servicing of deregulated communications systems. Chorus grants
credit to customers, substantially all of whom are located in
Southern Wisconsin.
Customer contracts for sales and installations are accounted
for using the completed-contract method which recognizes
income only if the contract is completed, or substantially so.
Other Services and Sales - Other revenues include long
distance, Internet services and directory publishing. These
revenues are recognized over the period the services are
provided.
TEMPORARY INVESTMENTS
Cash investments with original maturities of three months to 12 months
are classified as temporary investments. Temporary investments are
stated at cost which approximates market value. All highly liquid,
short-term investments with an original maturity of three months or
less are considered to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The company believes it is not
exposed to any significant credit risk on cash and cash equivalents.
EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding.
2. MERGER INFORMATION
Combined and separate results of Mid-Plains and Pioneer during the
periods preceding the Mergers (see Note 1) were as follows:
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGER INFORMATION (Continued)
<TABLE>
Total Revenues Net
(In thousands) And Sales Income
<S> <C> <C>
Three months ended March 31, 1997
(Unaudited)
Mid-Plains $ 6,796 $ 697
Pioneer 1,572 283
------- -------
Combined $ 8,368 $ 980
------- -------
Year ended December 31, 1996
Mid-Plains $27,087 $ 1,660
Pioneer 6,094 1,299
------- -------
Combined $33,181 $ 2,959
------- -------
Year ended December 31, 1995
Mid-Plains $24,578 $ 3,425
Pioneer 5,961 1,147
------- -------
Combined $30,539 $ 4,572
------- -------
</TABLE>
There were no transactions between Mid-Plains and Pioneer prior to the
combination.
3. EXTRAORDINARY CHARGE
In response to legislation, an alternative plan of regulation and in
recognition of potential increased competition, Mid-Plains discontinued
the use of FAS 71 in the second quarter of 1996. As a result of the
decision to discontinue applying FAS 71 to Mid-Plains, the company
recorded a noncash, after-tax extraordinary charge of $1.8 million (net
of tax benefits of $1.1 million), or $0.67 per share, in the second
quarter of 1996. The charge primarily represented a reduction in the
net book value of Mid-Plains' telephone plant and equipment through an
increase in accumulated depreciation. Mid-Plains shortened the
depreciable lives of its telephone plant and equipment in 1996, as
follows:
Depreciable Lives:
Asset Category Before After
Digital Switching Equipment 13 10
Underground Metallic Cable 28 20
Buried Metallic Cable 23 19
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 is as follows:
Interest December 31,
Rates Maturities 1997 1996
----- ---------- ---- ----
In Thousands
Registered Subordinate Debentures 8% 2000 $5,000 $5,000
Mortgage notes -
RUS 2% to 5% 1998-2017 564 602
FCC 6.25% 1998-2007 2,598 -
RTB 4% to 8% 1998-2017 2,495 2,857
RTFC 6.7% to 7.4%* 1998-2012 7,976 7,401**
Anchorbank 7.75%*** 1998-2017 3,993 -
------ ------
22,626 15,860
Less current portion (614) (383)
------ ------
Long-term debt $22,012 $15,477
======= =======
* Variable rate based on RTFC's cost except for $4 million fixed at 7.4%
on February 13, 1998.
** After giving effect to February 1997 refinancing of $2.6 million
mortgage notes and $4.8 million notes payable to banks.
*** Fixed through November 2002.
During 1997, Chorus, in a non-cash transaction, incurred $2.6 million
in long-term debt related to the acquisition of the F-block PCS license
(see Note 15).
Substantially all assets of Chorus are pledged as security for the
long-term debt under loan agreements with the Rural Utilities Service
(RUS), the Rural Telephone Bank (RTB), the Rural Telephone Finance
Cooperative (RTFC) or Anchorbank. The PCS license is pledged as
security for the long-term debt under a loan agreement with the Federal
Communications Commission (FCC).
Under the RTFC loan, Subordinated Capital Certificates (SCCs) are
required to be purchased equal to 5% of the advanced amount. SCCs are
noninterest- bearing and are returned as the loan is repaid.
Cash paid for interest for 1997, 1996 and 1995, totaled $1.3 million,
$1.3 million, and $1.2 million, respectively.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT (Continued)
Of the funds available under RTB and RTFC approved loans, $4.4 million
remained unadvanced for local exchange carrier purposes as of December
31, 1997. In addition, under the RTFC loans $9 million is available to
invest in PCS Wisconsin (see Note 15) and $0.2 million is available to
purchase SCCs as of December 31, 1997.
The annual requirements for principal repayments on long-term debt are
approximately $0.6 million, $0.7 million, $5.7 million, $0.7 million,
and $0.8 million for the years 1998 through 2002, respectively.
5. SHORT-TERM FINANCING
The table below contains information related to short-term financing:
<TABLE>
Year Ended December 31,
1997 1996 1995
In Thousands
<S> <C> <C> <C>
Balance of notes payable to
banks at end of year $1,328 $ * $4,440
Weighted average interest rate
at end of year 8.35% 8.10% 8.30%
Maximum amount outstanding
during year $4,812 $5,682 $4,440
Average amount outstanding
during year $ 786 $3,864 $1,619
Weighted average interest
rate during the year 8.32% 8.10% 8.80%
*The balance of notes payable to banks at December 31, 1996 was
included in long-term debt due to refinancing (See note 4).
</TABLE>
Chorus and its subsidiaries had available unused lines-of-credit of $10
million at December 31, 1997.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows:
<TABLE>
December 31,
1997 1996
In Thousands
<S> <C> <C>
Land $ 1,368 $ 444
Buildings 8,025 4,369
Digital switching equipment 18,912 20,370
Cable, wiring and conduit 32,541 29,920
Other 7,479 7,367
Under construction - 94
------- -------
68,325 62,564
Less accumulated depreciation (27,667) (28,162)
------- -------
Total property, plant and equipment $40,658 $34,402
======= =======
</TABLE>
Depreciation expense for LECs in 1997, 1996 and 1995 was equivalent to
a composite average percentage of 7.5%, 7.3% and 7.2%, respectively.
7. RESTRICTION ON COMMON STOCK DIVIDENDS
At December 31, 1997, all of the consolidated retained earnings were
available for the payment of cash dividends on shares of Chorus common
stock.
However, certain LECs may not transfer funds to the parent in the form
of cash dividends, loans or advances until certain financial
requirements of their mortgages have been met. Of the $13.7 million
underlying retained earnings of all Chorus subsidiaries at December 31,
1997, $5.7 million was available for the payment of dividends on the
subsidiaries' common stock.
8. CELLULAR LIMITED PARTNERSHIP INTERESTS
The following is a summary of the Company's limited partnership
interests through which cellular telephone service is provided in
Wisconsin Standard
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CELLULAR LIMITED PARTNERSHIP INTERESTS (Continued)
Metropolitan Statistical Area (SMSA) and Rural Statistical Areas (RSA)
(See Note 15).
December 31,
1997 1996
In Thousands
18.1% Interest in Madison SMSA $3,649 $4,102
2.0% Interest in Wisconsin RSA 8 66 66
------ ------
$3,715 $4,168
9. PERSONAL COMMUNICATION SERVICES LICENSE
PCS Wisconsin, LLC. (PCS-WI) holds an F-block license which allows it
to construct and operate a personal communications services system
(PCS) in ten counties in Southern Wisconsin. The license is carried at
cost including acquisition costs and interest charges which are being
capitalized prior to being operational. For 1997, interest of $130,000
was capitalized. (See Note 15).
Mid-Plains (see Note 1) owns 75% of PCS-WI with the remaining 25% held
by a minority interest.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, temporary
investments and short-term debt are based on face amounts which
approximate fair value.
After giving effect to refinancing (see Note 4), the fair value of
long-term debt, estimated using discounted cash flow analysis based on
Chorus' estimated current incremental borrowing rates for debt with
similar terms, was as follows:
1997 1996
---- ----
In Thousands
Carrying amount $22,626 $15,860
Fair market value $22,565 $16,081
It was not practicable to estimate the fair value of Chorus'
investments in the cellular limited partnership interests because of
lack of quoted market prices. The carrying amount at December 31, 1997
is based upon the cost method of accounting. Management believes this
amount is not impaired (see Notes 8 and 15).
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
Year Ended December 31,
1997 1996 1995
In Thousands
<S> <C> <C> <C>
Current:
Federal $2,751 $1,888 $1,881
State 703 521 486
Deferred:
Federal (153) 493 340
State (24) 107 171
Amortization of deferred
investment tax credits (59) (77) (97)
------ ------ ------
Total income tax expense $3,218 $2,932 $2,781
====== ====== ======
</TABLE>
Cash paid for income taxes for 1997, 1996 and 1995 totaled $3.5
million, $2.1 million and $2.5 million, respectively.
The following is a reconciliation of the statutory federal income tax
rate of 34% to Chorus' effective income tax rate.
<TABLE>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax
rate 34.0% 34.0% 34.0%
State income taxes, net of
federal benefit 5.2 5.4 5.5
Amortization of investment tax
credits (.7) (1.0) (1.3)
Amortization of excess deferred
federal taxes - (.3) (.5)
Other differences - .1 .1
----- ----- -----
Effective income tax rate 38.5% 38.2% 37.8%
===== ===== =====
</TABLE>
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (Continued)
The components of Chorus' deferred tax asset (liability) were as follows:
<TABLE>
December 31,
1997 1996
In Thousands
<S> <C> <C>
Deferred tax asset:
Pension $ 306 $ -
Merger costs 109 14
Compensated absences 292 242
Deferred compensation 131 115
Deferred income 105 102
Other 254 242
------- -------
Deferred tax asset 1,197 715
------- -------
Deferred tax liability:
Property, plant and equipment
depreciation (3,317) (2,608)
Cellular interest (639) (954)
Unamortized investment tax credit (114) (186)
Other (6) (61)
-------- -------
Deferred tax liabilities (4,076) (3,809)
-------- -------
Net deferred tax liability (2,879) (3,094)
Less: Current deferred tax asset (263) (237)
-------- --------
Long-term deferred tax liability $(3,142) $(3,331)
</TABLE>
12. BENEFIT PLANS
PENSION PLAN
Mid-Plains (See Note 1) has a pension plan covering most of the
employees of its telephone operations. The plan is non-contributory and
provides for benefits to be paid to eligible employees at retirement
based primarily upon years of service with Mid-Plains and compensation
rates near retirement. Mid- Plains' funding policy has been to
contribute annually an amount up to the maximum amount that can be
deducted for federal income tax purposes. Plan assets consist of fixed
income securities.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. BENEFIT PLANS (Continued)
The components of net pension costs are as follows:
<TABLE>
Year Ended December 31,
1997 1996 1995
In Thousands
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 624 $ 506 $ 494
Interest cost on projected benefit
obligation 590 488 454
Actual return on plan assets (680) (228) (719)
Net amortization and deferral 241 (201) 403
------ ------ -----
Net pension cost $ 775 $ 565 $ 632
====== ====== =====
</TABLE>
On December 17, 1996, the Company amended its pension plan to provide
for its termination. Pension plan benefits cease to accrue to employees
as of April 15, 1997, the effective date of pension plan termination.
Regulatory approval is pending. These events resulted in a curtailment
charge of $4,000 in 1997.
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Actuarial Assumptions -
Discount Rate - interest rate used to
adjust for the time value of money 4.50% 6.50% 6.50%
Assumed rate of increase in
compensation levels 5.29% 5.26% 5.30%
Expected long-term rate of return
on pension assets 7.75% 7.75% 7.75%
</TABLE>
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. BENEFIT PLANS (Continued)
The following table presents the funded status of the plan at October 1
for the year ended December 31.
<TABLE>
1997 1996
------ -----
In Thousands
<S> <C> <C>
Vested benefit obligation $ 7,836 $ 5,717
Non-vested benefit obligation - 119
------- -------
Total actuarial present value of
accumulated benefit obligation $7,836 $ 5,836
======= =======
Projected benefit obligation for
service rendered to date $(7,836) $(9,124)
Plan assets at fair value as of
October 1 7,055 6,748
------- -------
Plan assets less than
projected benefit obligation (781) (2,376)
Unrecognized loss on assets 73 2,135
Unrecognized net asset at transition (73) (94)
Unrecognized prior service cost - 333
------- -------
Accrued pension cost at December 31 $ (781) $ (2)
======= =======
</TABLE>
401(k) BENEFIT PLANS
Chorus sponsors defined contribution 401(k) benefit plans to substantially all
full-time employees. Under the plans, the Company provides matching
contributions based on qualified employee contributions. Matching contributions
were as follows: 1997 - $382,000, 1996 - $234,000, and 1995 - $219,000.
STOCK PLANS
Prior to the Mergers, Mid-Plains had a stock purchase plan which allowed
employees and directors to purchase limited quantities of stock. The plan had a
pricing policy under which employees, other than officers, could purchase shares
at a discounted market price and officers and directors could buy shares at full
market price. Purchases under the plan were as follows: 1997 - $103,000, 1996 -
$220,000 and 1995 - $282,000.
Pioneer (see Note 1) previously had a Director Stock Option Plan (the Plan)
which was terminated effective January 2, 1996. The Plan granted each director
the option to purchase up to 200 shares of stock annually in lieu of receiving
director fees or other compensation. In 1995, the directors purchased $78,000 in
options, increasing the granted options to 35,200 shares. When the Plan was
terminated in 1996, all shares subject to the granted options were exercised for
a total of $9,000.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. OPERATING SEGMENTS
Chorus organizes its business into two reportable segments: local
exchange carrier (LEC) services and system sales and services. The LEC
services segment provides telephone and data services to customers in
local exchanges located in southern Wisconsin. The system sales and
services segment sells business systems and provides installation and
service to a base of customers throughout Southern Wisconsin. Chorus
also has operations in long distance, Internet services, and directory
publishing that do not meet the quantitative thresholds for reportable
segments.
Chorus' reportable business segments are strategic business units that
offer different products and services. Each segment is managed
separately primarily because of different products, services and
regulatory environments. LEC segments have been aggregated because of
their similar characteristics.
The segments' accounting policies are the same as those described in
the summary of significant accounting policies. As required by the
PSCW, transfers to LECs are accounted for at lower of cost or market
however, costs to and between other segments are accounted for at
market value.
<TABLE>
1997
Local System
Exchange Sales and
Carriers Services Other Total
In Thousands
<S> <C> <C> <C> <C>
Revenues and sales -
External customers $24,006 $ 7,123 $5,208 $36,337
Intersegment revenues and sales 1,282 - 248 1,530
Interest revenue 222 42 135 399
Interest expense 1,260 - 115 1,375
Depreciation and amortization 4,521 122 121 4,764
Segment profit (loss) 4,857 382 (133) 5,106
Segment assets 47,220 3,630 12,552 63,402
Expenditures for segment assets 6,523 78 4,657 11,258
</TABLE>
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. OPERATING SEGMENTS (Continued)
<TABLE>
1996
Local System
Exchange Sales and
Carriers Services Other Total
In Thousands
<S> <C> <C> <C> <C>
Revenues and sales -
External customers $22,867 $ 7,538 $2,776 $33,181
Intersegment revenues and sales 635 - 50 685
Interest revenue 148 36 94 278
Interest expense 1,408 3 44 1,455
Depreciation and amortization 4,158 108 68 4,334
Extraordinary item 1,782 - - 1,782
Segment profit (loss) 4,631 484 (377) 4,738
Segment assets 46,377 3,732 4,143 54,252
Expenditures for segment assets 6,220 104 123 6,447
</TABLE>
<TABLE>
1995
Local System
Exchange Sales and
Carriers Services Other Total
<S> <C> <C> <C> <C>
In Thousands
Revenues and sales -
External customers $21,480 $ 6,768 $2,291 $30,539
Intersegment revenues and sales 577 - 50 627
Interest revenue 134 23 55 212
Interest expense 1,201 28 11 1,240
Depreciation and amortization 3,785 115 54 3,954
Segment profit (loss) 4,653 237 (318) 4,572
Segment assets 47,243 3,144 2,364 52,751
Expenditures for segment assets 7,509 129 27 7,665
</TABLE>
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. OPERATING SEGMENTS (Continued)
<TABLE>
Reconciliation of Segment Information 1997 1996 1995
---- ---- ----
In Thousands
<S> <C> <C> <C>
Revenues and Sales
Total revenues and sales for reportable
segments $32,411 $31,040 $28,825
Other revenues 5,456 2,826 2,341
Elimination of intersegment revenues
and sales (1,530) (685) (627)
------- ------- -------
Consolidated revenues $36,337 $33,181 $30,539
======= ======= =======
Profit
Total profit for reportable segments $ 5,239 $ 5,115 $ 4,890
Other profit (loss) (133) (377) (318)
Unallocated amounts:
Non-operating segment 2 - -
Extraordinary charge - (1,782) -
Minority interest 28 3 -
------- ------- -------
Net Income $ 5,136 $ 2,959 $ 4,572
======= ======= =======
Assets
Total assets for reportable segments* $50,850 $50,109 $50,837
Other assets 12,552 4,143 2,364
Elimination of intercompany receivables (1,774) (2,544) (705)
Non-operating segment 800 - -
Minority interest 326 (3) -
------- ------- -------
Consolidated assets $62,754 $51,705 $52,046
======= ======= =======
</TABLE>
*The depreciation of Chorus' headquarters building, acquired in October
1997, is allocated to segments using its facilities. The related net
cost of $4.4 million at December 31, 1997 is not allocated but included
in the other segment assets.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. OPERATING SEGMENTS (Continued)
Consolidated Interest Expense includes intercompany activity of
$74,000, $47,200, and $37,000 for 1997, 1996 and 1995, respectively.
Major Customer Information
The percentage of revenues for long-distance services provided to local
exchange carriers which exceeded 10% of LEC revenues were: AT&T
Communications, Inc. 19% in 1997, 28% in 1996, and 31% in 1995; MCI 11%
in 1997, 14% in 1996 and 12% in 1995; Ameritech 17% in 1996 and 21% in
1995. No other customer accounted for more than 10% of total revenues.
14. SUBSEQUENT EVENT
On January 28, 1998, Chorus acquired Executive Systems & Software,
Inc., d/b/a The ComputerPLUS, and Intranet, Inc., which were under
common ownership. The businesses were acquired for 20,000 shares of
common stock and cash and notes totaling $1.0 million. Additionally,
Chorus entered into covenants not to compete with the prior owner for
$0.4 million. The acquisitions will be accounted for under the purchase
method of accounting.
The ComputerPLUS is a network systems integrator and computer reseller.
IntraNet, Inc. is an Internet provider. The companies had combined
sales and revenues of $9.2 million, $8.8 million and $7.1 million for
their fiscal years 1997, 1996 and 1995, respectively. The acquisitions
are not expected to have a material impact on Chorus' results of
operations in 1998.
15. COMMITMENTS AND CONTINGENCIES
Capital expenditures for 1998 are estimated at $10.5 million, and
substantial commitments have been made in connection with such
expectations.
PCS LICENSE
PCS-WI (see Note 9) is required by the FCC to construct a PCS system
providing service to at least 25% of the population in the license area
within five years of the grant of the license. The license was granted
on April 28, 1997.
The Company is studying options as to development, construction and
introduction of PCS service. Buildout would require substantial capital
and operating expenditures over the next several years in a highly
competitive market.
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (Continued)
CELLULAR LIMITED PARTNERSHIP LITIGATION
After PCS-WI was a successful bidder for a PCS license, the cellular
partnership's general partner (See Note 8) discontinued providing
Mid-Plains with substantially all of the information to which limited
partners are entitled. Mid-Plains has, however, continued to receive
distributions from the partnership. The partnership's general partner
claims that Mid-Plains is in violation of the partnership agreement as
a result of holding a PCS license in an area that is partially served
by the cellular partnership. Mid-Plains believes that none of its
actions conflict with the partnership interests and that it continues
to be a limited partner in good standing in the partnership. Mid-Plains
has commenced an action for declaratory relief in the Dane County,
Wisconsin Circuit Court to resolve the dispute.
PSCW LITIGATION
In June 1997, the PSCW issued orders authorizing two companies, KMC
Telecom, Inc. ("KMC") and TDS Datacom, Inc. ("TDS") to provide local
exchange service in the Mid-Plains service territory. As part of these
orders, the PSCW held that Mid-Plains was no longer entitled to either
an exclusive franchise under state law or a rural telephone company
exemption under federal law. The PSCW concluded that as a result of
Mid-Plains entering into an alternative regulatory plan in 1996, it
impliedly waived its federal and state law rights. Mid-Plains disagreed
and filed a petition for judicial review in Dane County, Wisconsin
Circuit Court. While the outcome of the petition was pending, the PSCW
ordered Mid-Plains to participate in an arbitration proceeding with TDS
regarding the terms and conditions of an interconnection agreement.
In December 1997, the Dane County, Wisconsin Circuit Court held that
the PSCW record was not sufficient to support a finding of implied
consent or waiver by Mid-Plains and ordered the PSCW to conduct a
hearing to determine whether Mid- Plains' adoption of its alternative
regulatory plan constituted consent to entry of competitors within its
franchise territory and waiver of its federal rural telephone company
exemption. Notwithstanding the ruling, the PSCW has ordered TDS and
Mid-Plains to enter into an interconnection agreement issued by the
arbitration panel in January 1998. Mid-Plains has appealed that order.
The PSCW is in the process of commencing a proceeding to review
Mid-Plains' state franchise and federal rural exemption. Mid-Plains
also has another related petition for review pending before the Dane
County, Wisconsin Circuit Court. While Mid-Plains intends to continue
to defend its right to have its state franchise and federal rural
telephone company exemption determined under due
<PAGE>
CHORUS COMMUNICATIONS GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (Continued)
process of the law, it expects that competition will have some adverse
effect upon its revenues in the future. The extent of that effect is
unknown at this time.
16. QUARTERLY FINANCIAL INFORMATION (Unaudited):
<TABLE>
Quarter Ended
March 31 June 30 Sept. 30 Dec.31
In Thousands Except For Per Share Data
<S> <C> <C> <C> <C>
1997
Operating Revenues $8,368 $8,996 $9,590 $9,383
Operating Income $1,780 $2,555 $2,823 $2,142
Net Income $ 980 $1,445 $1,539 $1,172
Earnings per Share $ .36 $ .54 $ .57 $ .44
1996
Operating Revenues $8,084 $7,901 $8,810 $8,386
Operating Income $2,177 $2,142 $2,455 $2,069
Income before Extraordinary
Charge $1,156 $1,185 $1,282 $1,118
Net Income (loss) $1,156 $ (597) $1,282 $1,118
Earnings per Share $ .43 $ (.22) $ .48 $ .41
</TABLE>
The second quarter of 1996 includes a $1.8 million ($.67 per share)
after tax charge related to the discontinuance of applying FAS 71, as
discussed in Note 3 above.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of Chorus are as follows:
<TABLE>
Name Age Position
<S> <C> <C>
Dean W. Voeks 55 Chief Executive Officer and Director:
1998 <F3>
Howard G. Hopeman 54 Executive Vice President and
Chief Financial Officer
Darold J. Londo 33 Vice President, Human Resources
Daniel J. Stein 43 Executive Vice President of subsidiary,
MPCS
Fredrick E. Urben 56 Secretary & Treasurer
G. Burton Bloch<F1> 76 Director: 1999<F3>
Charles Maulbetsch<F1><F2> 63 Director: 1999<F3>
Harold L.(Lee) Swanson<F1><F2> 60 Director: 2000<F3>
Douglas J. Timmerman<F1> 57 Director: 1998<F3>
- ----------
<FN>
<F1>Member of Compensation Committee
<F2>Member of Audit Committee
<F3>Annual Meeting at which current director term expires
</FN>
</TABLE>
Dean W. Voeks is Chief Executive Officer of Chorus; President and director of:
Mid-Plains and MPCS since 1991, The ComputerPLUS and IntraNet since January of
1998; a director of Pioneer since 1997; also a director of First Business Bank
of Madison.
Howard G. Hopeman is executive vice president and chief financial officer of
Chorus. He has also served as Vice President and Chief Financial Officer of
Mid-Plains since 1989 and is Secretary and Treasurer of MPCS.
<PAGE>
Darold J. Londo is Vice President of Human Resources of Chorus and Mid-Plains
since joining the organization in December of 1997. Prior to this, Mr. Londo was
an attorney for Axley Brynelson, Attorneys and Counselors, since 1993.
Daniel J. Stein has served as Executive Vice President of MPCS for the past 11
years.
Fredrick E. Urben is Secretary & Treasurer of Chorus and Mid-Plains. Mr. Urben
has been an officer of Mid-Plains since 1972 and a Director of Mid-Plains since
1977.
G. Burton Bloch is a retired dentist; Secretary and a director of Pioneer since
1987 and Farmers since 1975.
Charles Maulbetsch was a Vice President of Middleton Community Bank from January
1, 1995 until his retirement December 31, 1995; prior to that he was a Bank
Consultant; also a director of Mid-Plains since 1981, and Middleton Community
Bank.
Harold L.(Lee) Swanson is Chief Executive Officer, President and a director of
State Bank of Cross Plains of which he has been associated with for over 32
years; a director of Mid-Plains since 1981; also a director of Madison Gas &
Electric. Mr.
Swanson is Chairman of the Compensation Committee.
Douglas J. Timmerman is Chief Executive Officer and a director of AnchorBank and
Anchor BanCorp Wisconsin, Inc. of which he has been associated with for over 20
years; President of Pioneer; Director of Mid-Plains, Pioneer, and Farmers as
well as Credit Bureau of Madison, Federal Home Loan Bank of Chicago and
Wisconsin Cheeseman, Inc.
Item 11. EXECUTIVE COMPENSATION
Compensation of Directors
Effective June 1, 1997, the date of the reorganization of Mid-Plains and Pioneer
as subsidiaries of Chorus (the "Mergers"), the total annual director fees that
Messrs. Bloch, Maulbetsch, Swanson and Timmerman receive for serving on Chorus'
Board, and any subsidiary boards, was set at $20,000. In addition, Mr. Bloch
receives officer salaries totaling $5,500 for serving as Secretary of Pioneer
and Farmers. Mr. Timmerman receives an officer salary of $3,400 for serving as
President of Pioneer. Mr. Voeks did not receive any director fees. The Chorus
Board of Directors met three times in 1997. All directors attended more than 75%
of the total number of meetings of the Board and the total number of meetings
held by all committees of the Board on which they served.
The following table summarizes the compensation for the fiscal years 1995, 1996
and 1997 of the Chief Executive Officer and two other executive officers whose
compensation exceeded $100,000 for fiscal year 1997.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
Name and Annual Compensation All Other
Principal Position Year Salary Bonus Compensation<F1>
<S> <C> <C> <C> <C>
Dean W. Voeks: 1997 $150,000 $45,000 $9,500
Chief Executive Officer 1996 $145,000 $35,000 $7,560
1995 $140,000 $25,000 $6,930
Howard G. Hopeman: 1997 $100,500 $20,000 $7,691
Executive Vice President 1996 $ 97,000 $15,000 $4,704
and Chief Financial 1995 $ 93,500 $11,000 $4,389
Officer
Daniel J. Stein: 1997 $ 86,000 $10,000 $6,079
Executive Vice President 1996 $ 83,000 $ 2,500 $3,218
of MPCS 1995 $ 80,000 $ 5,000 $3,570
<FN>
<F1>Company matching contribution to defined contribution 401(k) benefit plan.
</FN>
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
In February 1997, prior to the Mergers, the 1997 salary for Mr. Voeks,
Chief Executive Officer, was set by Mid-Plains' Compensation Committee. This
committee included Messrs. Maulbetsch and Swanson and the other Mid-Plains
outside directors. Mid-Plains' Compensation Committee considered performance
factors such as revenues, earnings and other available financial criteria in
determining his salary.
At the time the 1997 salary level was set for Mr. Voeks, Mid-Plains'
Compensation Committee reviewed Company performance for 1996. The information
showed a 10% increase in revenues for 1996 over 1995 and Income before
Extraordinary Item as being level between 1996 and 1995.
In March 1998, Chorus' Compensation Committee reviewed Mr.Voeks' 1997
salary and set a bonus for 1997 at $45,000. The bonus was determined based on a
comparison of Mr. Voeks' compensation level with those of chief executive
officers included in two compensation surveys prepared by independent telephone
company associations. Chorus' Compensation Committee determined that Mr. Voeks'
compensation level should be at the 90 percent level of these studies because
the studies included many smaller rural telephone companies and cooperatives. In
addition, Chorus' Compensation Committee reviewed salary information from a
survey of similar sized electronic and technology companies.
<PAGE>
Mr. Voeks sets the salaries for other executive officers and determines
their bonuses based on Company performance and pre-established goals.
COMPENSATION COMMITTEE
G. Burton Bloch Harold L. (Lee) Swanson
Charles Maulbetsch Douglas J. Timmerman
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Security and Exchange Commission rules require that the Company show a
graphical comparison of the total return on its common stock for the last five
fiscal years with the total returns of a broad market index and a more narrowly
focused industry or group index. (Total return is defined as the return on
common stock including dividends and stock price appreciation, assuming
reinvestment of dividends.) The Company has selected the Standard & Poors (S&P)
500 Index for the broad market index, and an S&P 500 Telephone Index as the
industry index. These indices were selected because of their broad availability
and recognition. The Company was formed on June 1, 1997 as a result of the
Mergers. The total return for the Company is based on the total return on
Chorus' common stock beginning June 1997 and Mid-Plains' common stock prior to
the June 1997 Mergers. The following chart compares the total return of an
investment of $100 in Company (Chorus/Mid-Plains) common stock on December 31,
1992, with like returns for the S&P 500 and S&P 500 Telephone indices.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
CHORUS/MID-PLAINS
S&P 500 and S&P Telephone Indices
[Line graph of data points]
<TABLE>
S&P 500 S&P 500 CHORUS/
INDEX TELEPHONE INDEX MID-PLAINS
<S> <C> <C> <C>
Base Period 100 100 100
1993 110 115 127
1994 112 111 147
1995 153 167 173
1996 189 168 186
1997 252 235 186
</TABLE>
<PAGE>
Pension Plan and Supplemental Retirement Plan
Mid-Plains has a defined benefit pension plan covering the employees of
its telephone operations. Retirement benefits are based upon years of service
with Mid- Plains and final five-year average annual salary. On December 17,
1996, Mid-Plains amended its pension plan to provide for its termination.
Pension benefits ceased to accrue to employees as of April 15, 1997, the
effective date of pension plan termination. Regulatory approval is pending.
Messrs. Hopeman, Stein and Voeks are covered under the plan.
Two officers of Mid-Plains are also covered under a nonqualified
supplemental retirement plan which provides a supplemental retirement benefit.
The plan requires an annual contribution of $44,190 and $31,970 for Mr. Voeks
and Mr. Hopeman, respectively, until age 60. The participants' benefits are
based on Mid-Plains' contribution plus income earned.
Management Continuity Plan
Chorus has severance pay agreements ("Agreements") with Messrs.
Hopeman, Stein and Voeks and one other executive officer. The purpose of the
Agreements is to encourage the executive officers to continue to carry out their
duties in the event of the possibility of a change in control of the Company.
Benefits are payable under the Agreements only if a change in control
has occurred and within three years after such change the executive's employment
is terminated: (a) by the Company or its successor for reasons other than
"cause"; or (b) voluntarily by the executive for "good reason," in each case as
defined in the Agreements. The principal benefit under the Agreement is a
lump-sum payment equal to 2.99 times the executive's annual compensation. Each
of the Agreements is automatically extended annually, unless either the Company
or the respective employee gives a written notice of cancellation of such
automatic extension.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Management
At January 31, 1998, each director and each executive officer named in
the Summary Compensation Table and all directors and executive officers of the
Company as a group beneficially owned common stock of the Company as listed in
the following table. To our knowledge, no shareholder owned 5 percent or more of
the Company's outstanding common stock as of January 31, 1998.
<PAGE>
<TABLE>
Shares Percent
Name of Beneficial Owner Beneficially Owned of Class
<S> <C> <C>
G. Burton Bloch 17,955<F1> 0.7%
Howard G. Hopeman 7,659<F2> 0.3%
Charles Maulbetsch 25,500<F2> 0.9%
Daniel J. Stein 2,015<F2> 0.1%
Harold L. (Lee) Swanson 8,000<F2> 0.3%
Douglas J. Timmerman 22,908<F3> 0.8%
Dean W. Voeks 2,304<F2><F4> 0.1%
All directors and executive
officers as a group (9 persons) 108,290 4.0%
<FN>
<F1>Includes 17,843 shares of Company common stock in a family trust in
which Mr. Bloch has pecuniary interest, voting and investment power, and 112
shares of Company common stock in a partnership in which Mr. Bloch has a
pecuniary interest, voting and investment power.
<F2>Includes 5,244, 500, 900, 5,515 and 1,037 shares of Company common
stock in self-directed Individual Retirement Accounts, to which Messrs. Hopeman,
Maulbetsch, Stein, Swanson and Voeks, respectively, have voting and investment
power.
<F3>Includes 22,712 shares of Company common stock in a family
partnership in which Mr. Timmerman has a pecuniary interest, voting and
investment power, 112 shares of Company common stock in a partnership in which
Mr. Timmerman has a pecuniary interest, voting and investment power, and 84
shares of Company common stock in custodial ownership form in which Mr.
Timmerman has voting and investment power.
<F4>Includes 150 shares of Company common stock in a Supplemental
Retirement Plan to which Mr. Voeks has voting and investment power.
</FN>
</TABLE>
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors to file reports of ownership and changes in
ownership with the Securities and Exchange Commission.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 ("Annual Statement of
Changes in Beneficial Ownership") were required, the Company believes that
during 1997 all required filings were made in a timely fashion except for the
following: one Form 3 ("Initial Statement of Beneficial Ownership of
Securities") for Mr. Stein was inadvertently filed late.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K.
(a) 1. Consolidated Financial Statements
See Index to Consolidated Financial Statements under Item 8 of
this Form 10-K.
2. Financial Statements Schedule.
All schedules are omitted because of the absence of conditions
under which they are required.
3. Exhibits.
Exhibits filed (or to be filed) as a part of this Form 10-K
Annual Report are as follows:
Exhibit Number Description
12 Computation of Ratio of Earnings to
Fixed Charges
21 Subsidiaries of the Registrant
27 Financial Data Schedule
Exhibits Incorporated by Reference
2 Agreement and Plan of Merger, dated December 31,
1996, by Mid- Plains, Inc. And Pioneer
Communications, Inc., incorporated by reference to
Form 8-A12G, reporting under Exchange Act Section
12(g), filed on December 12, 1997, File No 000-23443.
<PAGE>
3(i) Articles of Incorporation (incorporated by reference
to Form 8-A12G, reporting under Exchange Act Section
12(g), filed on December 2, 1997, file No.
000-23443).
3(ii)By-Laws (incorporated by reference to Form 8-A12G,
reporting under Exchange Act Section 12(g), filed on
December 2, 1997, file No. 000-23443).
(B) Reports on Form 8-K.
On January 15, 1998, Chorus filed a Form 8-K Current Report under Item
5 Other Events where the Company reported issuing a press release
announcing acquisition of Executive Systems, Inc. d/b/a The
ComputerPLUS and IntraNet, Inc. On January 23, 1998, Chorus filed a
Form 8-K Current Report under Item 5 Other Events where the Company
reported that one of its subsidiaries Mid-Plains, Inc. was engaged in
litigation regarding its cellular partnership investments.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHORUS COMMUNICATIONS GROUP, LTD.
(Registrant)
Date: March 31, 1998 By /s/Dean W. Voeks
Dean W. Voeks, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/Dean W. Voeks Chief Executive Officer and March 31, 1998
- ------------------------ Director
Dean W. Voeks (Principal Executive Officer)
/s/Howard G. Hopeman Executive Vice-President and March 31, 1998
- ------------------------ Chief Financial Officer
Howard G. Hopeman (Principal Financial
and Accounting Officer)
/s/Charles Maulbetsch Director March 31, 1998
- ------------------------
Charles Maulbetsch
/s/Harold L.(Lee) Swanson Director March 31, 1998
- ------------------------
Harold L. (Lee) Swanson
The above signatures include a majority of the signatures of the Board of
Directors.
<TABLE>
EXHIBIT 12
CHORUS COMMUNICATIONS GROUP, LTD.
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
In Thousands:
<S> <C> <C> <C> <C> <C>
Net Income<F1> $5,136 $4,741 $4,572 $3,888 $3,937
Income Tax
Expense 3,218 2,932 2,781 2,356 2,255
Interest Charges 1,301 1,408 1,203 1,132 1,185
------ ------ ------ ------ ------
Total Earnings 9,655 9,081 8,556 7,376 7,377
Interest Expense 1,301 1,408 1,203 1,132 1,185
------ ------ ------ ------ ------
Ratio 7.42 6.45 7.11 6.52 6.23
====== ====== ====== ====== ======
<FN>
<F1> For 1996, the amount is before extraordinary charge.
</FN>
</TABLE>
EXHIBIT 21
CHORUS COMMUNICATIONS GROUP, LTD.
SUBSIDIARIES OF THE CORPORATION
The subsidiaries of the Chorus Communications Group, Ltd.and their subsidiaries
are listed below.
Name State of Incorporation
Mid-Plains, Inc. Wisconsin
Mid-Plains Communications Systems, Inc. Wisconsin
MPC of Illinois Illinois
PCS Wisconsin, LLC. Wisconsin
Pioneer Communications, Inc. Wisconsin
The Farmers Telephone Company Wisconsin
Dickeyville Telephone Corporation Wisconsin
Chorus Properties, LLC. Wisconsin
*Executive Systems & Software, Inc.
d/b/a The ComputerPLUS Wisconsin
*IntraNet, Inc. Wisconsin
* Chorus Communications Group, Ltd., acquired on January 28, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. Dollars
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 2736
<SECURITIES> 0
<RECEIVABLES> 5491
<ALLOWANCES> 0
<INVENTORY> 1453
<CURRENT-ASSETS> 13678
<PP&E> 68325
<DEPRECIATION> 27667
<TOTAL-ASSETS> 62754
<CURRENT-LIABILITIES> 7073
<BONDS> 0
0
0
<COMMON> 13868
<OTHER-SE> 14905
<TOTAL-LIABILITY-AND-EQUITY> 62754
<SALES> 0
<TOTAL-REVENUES> 36337
<CGS> 4267
<TOTAL-COSTS> 10363
<OTHER-EXPENSES> 16674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1301
<INCOME-PRETAX> 8354
<INCOME-TAX> 3218
<INCOME-CONTINUING> 5136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5136
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
</TABLE>
