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