Item 1. BUSINESS.
(a) Mid-Plains, Inc., (Mid-Plains), which was incorporated in 1901, is a public utility providing telecommunications services primarily in Middleton, Cross Plains and the west side of Madison, Wisconsin.
Mid-Plains has a wholly-owned subsidiary, Mid-Plains Communications Systems, Inc., (MPCS), which, in southern Wisconsin and northern Illinois, markets and installs deregulated communications systems and provides maintenance services related to their continued use. In October 1994 MPCS began providing long distance service. In October 1995 MPCS began providing Internet service.
Mid-Plains also has a 75% interest in PCS Wisconsin, LLC (PCS- WI). This limited liability company was established in 1996 to build and operate a personal communication system (PCS) in south central and southwestern Wisconsin. PCS-WI was the successful bidder for a PCS license at an auction held by the FCC, and the Company is currently in the planning and development stage of operations.
As further discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Mid-Plains and Pioneer Communications, Inc, (Pioneer) have entered into an Agreement and Plan of Merger dated December 31, 1996, which, if approved by the requisite number of shareholders of Mid-Plains and Pioneer, respectively, at special meetings scheduled for May 1996, will result in the combination of Mid-Plains and Pioneer into Chorus Communications Group, Ltd., a holding company. This combination is expected to better position the companies to compete effectively in the rapid changing communications industry.
There were no other material changes in the nature of the business conducted by the Company during 1996.
Information regarding the recent development of the Company's business in the number of access lines is shown below:
(b) Mid-Plains operates in two industry segments: a telecommunications utility providing telephone and data services (telephone operations) and system sales and service operations. The financial information regarding Mid-Plains' industry segments is provided in Item 8 - Mid-Plains, Inc. Consolidated Financial Statements (Note 12) for the year ended December 31, 1996.
(c) Mid-Plains' principal line of business is providing telecommunications services. Operating revenues fall into four major classes: local network revenues, network access and long distance services, system sales and services, and other (billing and collection, directory, other nonregulated and miscellaneous).
Revenues from each of these classes over the last three years are as follows:
The business of Mid-Plains is not seasonal to any significant extent.
Mid-Plains' telephone utility operations are subject to regulation by the Public Service Commission of Wisconsin (PSCW). Mid-Plains provides local exchange network service to customers within its 116 square mile service area located in Dane County, Wisconsin. The customers have local extended area services (EAS) and access to the nationwide direct dial toll service network. Although the Company's customers have access to the nationwide direct toll network, the Company does not have toll operators. The operator service is provided primarily through Ameritech.
The communications industry is undergoing significant changes. Regulatory, legislative and judicial decisions, new technologies, heightened customer interest in advanced communications, and the convergence of other industries with the telecommunications industry are causes of increasing competition in the telecommunications industry. The range of communications services, the equipment available to provide and access such services and the number of competitors offering such services continue to increase. Federal and state regulators are encouraging changes that promote competition in the industry in the belief that increased competition will drive technological innovation, lower prices and improve service levels.
In 1994, the Wisconsin Legislature enacted the Telecommunications Act of 1993. This legislation resulted in open competition for Ameritech and GTE and further relaxes regulation for other telecommunications utilities in Wisconsin.
On February 8, 1996, the Telecommunications Act of 1996 was signed into law. The bill breaks down regulatory barriers at both the state and federal levels and is certain to accelerate the convergence of local, long distance, wireless, video and data. The Federal Communications Commission (FCC) and state regulators must decide precisely how Congress' instructions will be carried out. Due to Mid-Plains' size, it has limited exemption from several provisions of the bill.
On August 27, 1996, Mid-Plains became the first independent local exchange company in Wisconsin to receive approval on its application for an Alternative Regulation Plan (Plan). Under this five-year Plan, Mid-Plains is required to maintain certain basic residential and business rates under a rate ceiling as well as reduce access charges received from intrastate long distance providers. In return, the Plan eliminated the tie between local rates and rate-of-return regulation. As part of the Plan, effective September 1, 1996, local rates on residential and standard business lines were increased, while access rates paid by long distance carriers to the Company for intrastate access were lowered. While the changes noted above were designed to be revenue neutral to Mid-Plains, they assisted in positioning Mid-Plains to better meet the competition of the future.
In looking ahead, Mid-Plains' telephone operations face increased competition with prices and technology under continual pressure. The Company also expects to encounter substantial competition from other companies in the sale and servicing of communication systems and in the sale and provision of long distance and Internet services. Specifically, TDS Datacom, Inc. and KMC Telecom, Inc., have submitted applications with the PSCW seeking authority to construct facilities in Mid-Plains' service area. Both companies have expressed the desire to deploy a switch to provide local service as an alternative telecommunications utility to business and residential customers. Mid-Plains has begun preliminary discussions regarding interconnection agreements with both of these companies. Along with these challenges, Mid-Plains also anticipates growing opportunities to expand beyond its traditional markets and continues to monitor and consider the most favorable options.
Information regarding the Company's major customers is provided in Item 8 - Mid-Plains, Inc. Consolidated Financial Statements (note 1) for the year ended December 31, 1996.
Order backlog is not a significant consideration in the Company's business, and the Company has no contracts or subcontracts which may be subject to renegotiation of profits or termination at the election of the Federal government.
Information regarding the Company's working capital practice is provided in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
The number of employees on the Company's payroll as of December 31, 1996, was 180.
Item 2.
Item 2. PROPERTIES.
Information regarding the Company's properties is provided in Item 8 - Mid-Plains, Inc. Consolidated Financial Statements (note 7) for the year ended December 31, 1996. Substantially all of the Company's properties are necessary to provide telecommunication services in the Company's serving area. Between January 1, 1994 and December 31, 1996, the Company made property additions in the amount of $17.3 million and retirements of $3.9 million. Virtually all of this property is subject to liens securing long-term debt. In the opinion of management, the Company's telecommunications plant is substantially in good repair and suitably equipped.
Item 3.
Item 3. LEGAL PROCEEDINGS.
There are no material pending legal actions, either for or against the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were none in the fourth quarter.
PART II.
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There are no principal market makers for Mid-Plains' common stock. The following table sets forth, for the periods indicated, prices based only on unrelated party transactions for which the seller and/or buyer have responded to a Company inquiry. Transactions include both those handled privately (non-broker) and those handled by stock brokers. Non-broker prices do not include retail markup, markdown or commissions which are included in broker prices. Average prices are the weighted average of the transactions described above.
There were 2,427 shareholders of record as of February 28, 1997 and 1,989,965 shares outstanding.
Mid-Plains has regularly paid dividends to its shareholders and expects it will continue to do so in the future. In connection with a long-term financing agreement, Mid-Plains is subject to restrictions on the amount of retained earnings available for cash dividends. Under the agreement, at December 31, 1996, $3,542,000 of its retained earnings were not restricted and thus available for the payment of dividends.
Mid-Plains' Bylaws limit the common stock any one shareholder may hold to no more than five percent (5%) of the authorized and issued capital stock of the Company provided however, the limitation automatically terminates without any further action of the Board of Directors upon the effective date of a Plan of Merger or share exchange approved by the requisite number of shareholders which in effect causes the issued capital stock of the Company to be exchanged for the capital stock of a holding/parent company of the Company.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for each of the five years in the period ended December 31, 1996 have been derived from the audited consolidated Financial Statements of the Company included herein. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated Financial Statements and notes thereto included elsewhere in this report.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
As a result of actions taken in 1996, Mid-Plains has successfully implemented several key initiatives that better position the Company for competition and future growth in the communications business. These initiatives, which are discussed below, include: an alternative regulation plan, discontinuation of applying certain accounting principles for regulated enterprises, entering into a merger agreement, successfully bidding on a personal communication license (PCS), and refinancing first mortgage notes.
Record revenues were once again reported in 1996. Consolidated operating revenues increased $2.5 million, to $27.1 million, in 1996, and $3.1 million, to $24.6 million, in 1995. Consolidated income before extraordinary item for 1996 remained constant at 1995's level of $3.4 million which was an increase of $0.5 million over 1994. Due to an extraordinary charge against income relating to the discontinuance of regulatory accounting principles (as discussed below) net income decreased $1.8 million in 1996 as compared to 1995.
Mid-Plains operates in two business segments: a telecommunications utility providing telephone and data services (telephone operations) and system sales and service operations.
TELEPHONE SERVICE OPERATING RESULTS
The Telephone segment contributed operating income of $6.0 million, $6.1 million, and $5.0 million to the consolidated operating income in 1996, 1995 and 1994, respectively.
OPERATING REVENUES
Telephone service revenues increased $1.8 million, to $19.9 million, in 1996, and $2.5 million, to $18.1 million, in 1995.
Local network services revenues increased $.9 million in 1996 as compared to 1995. These revenues increased principally as a result of higher demand for services, as evidenced by an 8.7% growth in access lines in 1996. Additionally, effective September 1, 1996, Mid-Plains implemented its Alternative Regulation Plan which had the effect of increasing local network services revenues $.4 million for the year.
Local network service revenues for 1995 increased $.7 million as compared to 1994. The growth was primarily due to an increase in local network service rates in 1995 which increased revenues by $1.1 million, and an 8.6% growth in the number of access lines served which resulted in $.3 million increase in revenues. These increases were offset in part by a credit of $.6 million in 1994 to eliminate regulatory liabilities no longer considered payable.
Interstate network access and long distance network services revenues increased $.5 million in 1996 as compared to 1995. These revenues increased largely due to higher demand for access services as evidenced by an increase in minutes of use of 10.3% in 1996. This increase was offset, in part, by a net decrease in access rates of approximately 2.3%.
Interstate network access and long distance network services revenues increased $1 million in 1995 as compared to 1994. This increase was due to 7.0% higher demand for services and the provision of long distance service of $.5 million.
Intrastate network access and long distance network services revenues increased $.2 million in 1996 as compared to 1995. The increase in these revenues was primarily due to higher demand for access services as evidenced by an increase in minutes of use of 8.3% in 1996. This increase was offset by $.3 million due to the effects of rate reductions resulting from Mid-Plains' implementation of their Alternative Regulation Plan on September 1, 1996.
Intrastate network access and long distance network services revenues increased $.6 million in 1995 as compared to 1994. This increase was due to higher demand of 3.1% for services and the provision of long distance service of $.2 million.
OPERATING EXPENSES
Telephone operating expenses, which include plant, depreciation, customer, corporate, and general taxes, increased by $1.9 million to $13.8 million and $1.4 million to $12.0 million in 1996 and 1995, respectively.
The increases in plant, customer and corporate operations in 1996 as compared to 1995 were due primarily to growth in internal operations. Additionally, plant operations increased $.3 million in 1996 due to costs associated with providing Internet access. The increases in plant, customer and corporate operations in 1995 as compared to 1994 were again due primarily to growth in internal operations. Additionally, an increase of $.3 million was due to the cost of providing long distance services.
Depreciation increased $.2 million in 1996 as compared to 1995 and $.3 million in 1995 as compared to 1994 as a result of increased depreciable property. Additionally, increases of $0.2 million in 1996 and $0.5 million in 1995 in depreciation expense were recorded in connection with the change-out of central office equipment.
On December 17, 1996 the Company's Board of Directors voted to terminate the pension plan effective April 15, 1997. It is anticipated that the plan settlement will not have a material effect on the Company. It is also anticipated that during 1997, after giving effect to enhanced 401(k) benefits, the Company's pension costs will decrease approximately $430,000 due to these changes.
SYSTEM SALES AND SERVICES OPERATING RESULTS
The system sales and services segment contributed operating income of $.7 million, $.3 million and $.5 million to the consolidated operating income in 1996, 1995 and 1994, respectively.
OPERATING REVENUES
System sales and services revenues increased $.8 million in 1996, to $7.2 million, as compared to 1995. The increase was due primarily from the growth in new system sales. System sales and services revenues for 1995 increased $.6 million, to $6.5 million, over 1994, due primarily from new system sales as well as an increase in maintenance sales.
OPERATING EXPENSES
As a percentage of system sales and services revenues, cost of sales and services was 59% in 1996, 64% in 1995, and 58% in 1994. The lower cost of sales and services percentage in 1996 was primarily the result of the Company's higher equipment pricing. The higher cost of sales and services percentage in 1995 in relationship to 1994 was primarily due to reclassifying to cost of sales, payroll overheads, which in 1994 were included in operating expenses. If the reclassifications had been made in 1994, the cost of sales percentage in 1994 would have increased 3% with a corresponding reduction in operating expenses.
System sales and services operating expenses increased $.3 million in 1996 primarily due to growth in internal operations and increase in incentives.
OTHER ITEMS
Interest expense increased $.2 million in 1996 as compared to 1995 and $0.1 million in 1995 as compared to 1994, primarily due to the increase in the amounts of short-term bank notes owed during the year. Additionally, in July 1995 interest on debentures increased as a result of an additional $2.5 million financing. This was offset in part by a reduction in the debenture interest rates from 11% to 8%.
EXTRAORDINARY ITEM - DISCONTINUANCE OF REGULATORY ACCOUNTING PRINCIPALS
Mid-Plains discontinued applying Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" in the second quarter of 1996. Mid-Plains determined that it no longer met the criteria for following SFAS 71 due to changes in legislative, regulatory and competitive environments. Future business transactions will be recorded following their economic substances, and regulatory assets and liabilities pursuant to SFAS 71 will no longer be recognized.
Although Mid-Plains' recorded assets and net equities were reduced as a result of this discontinuance of application of SFAS 71, no material impact on current and future cash flows is anticipated.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Mid-Plains requires funds primarily for its construction program, the maturity and retirement of long-term debt, dividend payments and investments. The capital resources available to meet these requirements are provided through internally generated funds and external financing. Net cash provided from operations of the Company and its subsidiary for the years 1994 - 1996 was $22.0 million. External financing for the same period totaled $8.2 million.
CAPITAL REQUIREMENTS AND RESOURCES
The primary capital requirement of the Company has historically consisted of expenditures under its construction program. Total construction expenditures for the years 1994 - 1996 were $17.3 million. Total capital expenditures for 1997 are estimated to be $9 million.
In 1995, Mid-Plains contributed $2 million in a capital call to the cellular partnership in which Mid-Plains has a limited interest. Additionally, as discussed below, Mid-Plains anticipates a significant investment in PCS Wisconsin, LLC, which will be required in the next few years. This investment is discussed further in "PCS WISCONSIN, LLC" below.
In 1995, Mid-Plains sold $5.0 million of five-year debentures, $2.5 million of which were used to retire debentures that were due on that date. In addition, in January 1997 Mid-Plains entered into a financing agreement that permits Mid-Plains to borrow up to $22 million of long-term debt and $7 million on revolving lines-of-credit.
It is expected that capital requirements for its construction program, maturity and retirement of long-term debt, dividend payments and investment in PCS Wisconsin, LLC will be provided for with cash flow from operations, the issuance of debt and, if necessary, equity financing.
After giving effect to the February 1997 refinancing, Mid-Plains had available unused lines-of-credit of $7 million. The Company has experienced no difficulty in obtaining funds for its construction program or other purposes and anticipates none in the future.
PCS WISCONSIN, LLC
PCS Wisconsin, LLC (PCS-WI), a 75% owned subsidiary of Mid-Plains, was established in 1996 to build and operate a personal communications system in south-central and southwestern Wisconsin. On January 14, 1997, PCS-WI was the successful bidder for a broadband Personal Communications Services (PCS) license at an auction held by the FCC. This license will, when granted, authorize PCS-WI to provide two-way voice and data services on a new wireless, digital network. The license covers Dane County and nine adjacent counties with a total population of 600,000. PCS-WI's bid for the license was $3,248,000.
Under the terms of the license, PCS-WI will be required to construct an operating system that will be capable of providing service to at least 25% of the population in the license area within five years of the grant of the license. PCS-WI anticipates that construction, development and introduction of the PCS networks and services will require substantial capital and operating expenditures over the next several years.
In addition to the risks associated with startup operations of PCS-WI, it is anticipated the Company will encounter stiff competition from the two existing cellular providers as well as from five other new PCS license holders.
EXTERNAL FINANCING
External financing for the years 1994 - 1996 was $8.2 million consisting of $5.0 million raised through the sale of debentures, $0.8 million from the sale of common stock under the employee stock purchase plan, and a net increase in short-term bank notes of $2.4 million.
On January 31, 1997, Mid-Plains entered into a financing agreement with the Rural Telephone Finance Cooperative (RTFC) that permits Mid-Plains to borrow up to $22 million. The RTFC financing agreements provide that $12 million of the loan is available for refinancing existing debt, capital expenditures and to provide working capital for telephone operations; $9 million is available to invest in PCS-WI (see above) and $1 million is available to purchase RTFC's Subordinate Capital Certificates, a condition of obtaining RTFC financing. RTFC permits the interest on the loans to be either fixed or variable, with the rates to be determined by RTFC. The variable rate at February 7, 1997 was 6.3%.
In connection with its long-term debt, the Company is subject to certain restrictions on its debt and the amount of retained earnings available for cash dividends. Under the agreement, at December 31, 1996, $3,542,000 of Mid-Plains' retained earnings were available for the payment of dividends.
OTHER MATTERS
MERGER PROPOSAL
Mid-Plains and Pioneer Communications, Inc. (Pioneer) have entered into an Agreement and Plan of Merger (Merger Agreement) dated December 31, 1996, which upon approval by the requisite number of shareholders of Mid-Plains and Pioneer will result in the mergers of Mid-Plains and Pioneer into wholly-owned subsidiaries of a holding company.
The new holding company will be named Chorus Communications Group, Ltd. (Chorus). The proposed merger, which will be counted for as a pooling of interests, has been approved by the respective Board of Directors of each company. Approval by the shareholders of each company is required to complete the merger. The companies expect to receive shareholder approvals and complete the proposed combination during the third quarter of 1997.
Under the terms of the proposed Merger Agreement, Mid-Plains' issued and outstanding common stock will be exchanged for Chorus common stock on a one-to-one basis and Pioneer common stock will be exchanged for Chorus common stock on a four-to-one basis. It is anticipated that Chorus will retain Mid-Plains' common share dividend payment level as of the effective time of the mergers. On January 9, 1997, the Board of Directors of Mid-Plains declared a quarterly dividend of 27 cents per share. This represents an annual rate of $1.08 per share.
The business of Chorus will consist of telecommunications operations and it is expected that it will service more than 38,000 access lines in southern Wisconsin. The operating revenues, net income from continuing operations and total assets of Mid-Plains and Pioneer and the Pro Forma Combined of Chorus were as follows:
ALTERNATIVE REGULATION PLAN
On August 27, 1996, Mid-Plains became the first independent local exchange company in Wisconsin to receive approval on its application for an Alternative Regulation Plan (Plan). Under this five-year Plan, Mid-Plains is required to maintain certain basic residential and business rates under a rate ceiling as well as reduce access charges received from intrastate long distance providers. In return, the Plan eliminated the tie between local rates and rate-of-return regulation. As part of the Plan, effective September 1, 1996, local rates on residential and standard business lines were increased, while access rates paid by long distance carriers to the Company for intrastate access were lowered. While the changes noted above were designed to be revenue neutral to Mid-Plains, they assisted positioning Mid-Plains to better meet the competition of the future.
COMPETITION
The communications industry is undergoing significant changes. The industry is converging, forming alliances and positioning to provide a variety of services. Market convergence has intensified. Legislation and regulation changes, technological advances and customer demand have expanded the types of services, products and number of companies offering communication services and products.
On February 8, 1996, the President signed the Telecommunications Act of 1996 into law. The bill broke down regulatory barriers at both the state and federal level and is certain to accelerate the convergence of local, long distance, wireless, video and data. The FCC and state regulators must decide precisely how Congress's instructions will be carried out. Due to Mid-Plains' size, it currently has limited exception from several provisions of the bill.
The breakdown of barriers at both the state and federal levels allows new competitors to enter telecommunication service markets. At the same time, telecommunications providers can enter new markets in areas of increased competition. Specifically, TDS Datacom, Inc. And KMC Telecom, Inc., have submitted applications with the PSCW seeking authority to construct facilities in Mid-Plains' service area. Both companies have expressed the desire to deploy a switch to provide local service as an alternative telecommunications utility to business and residential customers. Mid-Plains has begun preliminary discussions regarding interconnection agreements with both of these companies.
In looking ahead, Mid-Plains faces stiff competition with prices and technology under continued pressure. Along with this, Mid-Plains also anticipates growing opportunities in a market-driven information highway.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page Report of Independent Public Accountants 16
Consolidated Balance Sheets - December 31, 1996 and 1995 17-18
Consolidated Financial Statements for the three years ended December 31, 1996:
Statements of Income 19
Statements of Shareholder's Equity 20
Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22-35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors, Mid-Plains, Inc.:
We have audited the accompanying consolidated balance sheets of Mid-Plains, Inc. (a Wisconsin Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Financial Statements referred to above present fairly, in all material respects, the financial position of Mid-Plains, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated Financial Statements, the company discontinued applying the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," in 1996.
KIESLING ASSOCIATES LLP Madison, Wisconsin February 10, 1997
MID-PLAINS, INC. CONSOLIDATED BALANCE SHEETS
MID-PLAINS, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated Financial Statements. MID-PLAINS, INC. CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated Financial Statements.
MID-PLAINS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated Financial Statements.
MID-PLAINS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated Financial Statements.
MID-PLAINS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Name Change - On April 29, 1996, the shareholders approved amendments to the company's Articles of Incorporation which included changing the name from Mid-Plains Telephone, Inc. to Mid-Plains, Inc.
Business and Consolidation - Mid-Plain's consolidated financial statements include the accounts of Mid-Plains, its wholly-owned subsidiary, Mid-Plains Communications Systems, Inc. and its 75% interest in PCS Wisconsin, LLC. All significant inter-company items have been eliminated in consolidation. The preparation of consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Mid-Plains, Inc.'s main business is a telecommunications provider which provides telephone and data services to customers within its 116 square mile service area located in Dane County, Wisconsin. Mid-Plains Communications Systems, Inc.'s operations provide business systems, installation and service to a base of customers throughout southern Wisconsin and northern Illinois. PCS Wisconsin, LLC was established in 1996 to build and operate a personal communication system in south central and southwestern Wisconsin.
Regulation - The accounting policies of Mid-Plains, Inc. and its subsidiaries (Mid-Plains) conform to generally accepted accounting principles, and where applicable, the accounting principles prescribed by the Public Service Commission of Wisconsin (PSCW).
Prior to the second quarter of 1996, Mid-Plains had followed the accounting for regulated enterprises as prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). This accounting requires the deferral of certain costs and obligations based upon recovery of such amounts in future years. SFAS 71 also requires companies to depreciate plant and equipment over lives acceptable to the regulator. In the second quarter of 1996, Mid-Plains concluded that generally accepted accounting principles prescribed by SFAS 71 were no longer appropriate. As a result, Mid-Plains recorded a second quarter extraordinary non-cash after-tax charge of $1,782,000 (See note 3). Additionally, Mid-Plains has adjusted its estimated depreciated lives of its plant and equipment to give effect to shorter, more economical realistic lives.
In 1994, the Wisconsin Legislature enacted the Telecommunications Act of 1993. As a result of this and other regulatory and legislative activities, management concluded that the recovery of certain regulatory assets and payment of certain regulatory liabilities related to employee and retiree benefits would not be realized. The elimination of these regulatory assets of $360,000 and regulatory liabilities of $574,000 were reflected as increases in the 1994 operating expenses and revenues, respectively. These changes in estimates increased 1994 net income by $130,000.
Property, Plant and Equipment - Telephone property is stated at original cost of construction. Beginning in September 1995, regulators modified accounting principles for the allowance for funds used during construction (AFUDC) to conform with Statement of Financial Accounting Standards No. 34 "Capitalization of Interest Cost". During 1996, interest capitalized relating to plant construction was $38,000. No AFUDC was taken in 1995 or in 1994.
Normal retirements of telephone property are charged against accumulated depreciation along with the costs of removal less salvage, with no gain or loss recognition. Renewals and betterments of plant and equipment are capitalized while repairs, as well as renewals of minor items, are charged to operating expenses.
As a result of the discontinuation of applying SFAS 71, beginning July 1, 1996, depreciation of telephone plant is provided for primarily on the straight-line method over estimated service lives. Prior to that date, depreciation of telephone plant was provided for primarily on the straight-line method using class rates acceptable to the PSCW. The composite rates are 7.3%, 7.3%, and 6.1%, for the years 1996, 1995, and 1994, respectively.
When non-telephone property is sold or retired, a gain or loss is recognized. Depreciation is provided on the straight-line method over estimated service lives.
Inventories - Inventories are stated at the lower of cost or market.
The cost of materials and supplies inventory, which is used primarily for the construction of telephone plant, is determined principally by the average cost method.
The cost of communications systems and parts inventory, held primarily for sale and servicing of telephone systems, is determined principally by the First-In, First-Out (FIFO) method.
Income Taxes - Mid-Plains files a consolidated federal income tax return.
Income tax expense is based on reported earnings before income taxes. Refundable income taxes reflect the difference between the amount of estimated income taxes prepaid and the amount currently owed. Deferred income taxes have been established to reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In addition, deferred tax balances are adjusted to reflect tax rates, based on currently enacted tax laws, that are anticipated to be in effect in the years in which the temporary differences are expected to reverse.
Investment tax credits which were deferred prior to 1986 are being amortized over the service life of the related property.
Revenue Recognition - Mid-Plains recognizes revenues when earned, regardless of the period in which they are billed.
Telephone Revenues - Mid-Plains is required to provide service (and grant credit) to subscribers within its defined service territory.
Revenues from long-distance services are derived from charges for access to Mid-Plains' local exchange network, subscriber line charges and contractual arrangements for billing and collection and other services. Interstate access revenues are based on an average schedule company settlement formula administered by the National Exchange Carrier Association (NECA) as regulated by the FCC. Intrastate access revenues are based on an individual company tariff access charge structure regulated by the PSCW.
The percentage of revenues for long-distance services provided to carriers which exceeded 10% of telephone revenues were: AT&T Communications, Inc. 21% in 1996, 23% in 1995, and 30% in 1994; Ameritech 12% in 1996, 15% in 1995, and 16% in 1994; and MCI 11% in 1996, 10% in 1995, and 11% in 1994. No other customer accounted for more than 10% of total revenues.
System Sales and Services Revenues - Revenues from system sales and services are derived from the sale, installation and servicing of deregulated communications systems. Mid-Plains grants credit to customers, substantially all of whom are located in southern Wisconsin.
Customer contracts for sales and installations are accounted for using the completed-contract method which recognizes income only if the contract is completed, or substantially so. This resulted in net deferred revenues of $273,000 and $185,000 at December 31, 1996 and 1995, respectively, which are included in other current liabilities.
Cash and Cash Equivalents - Cash and cash equivalents include cash and certificates of deposit with original maturities of three months or less. Cash and cash equivalents are stated at cost which approximates market value. At December 31, 1996 and 1995, Mid-Plains had bank deposits in excess of federally insured limits of approximately $682,000 and $510,000, respectively.
Supplemental Cash Flow Disclosures - Mid-Plains, during 1996, 1995, and 1994, paid interest in the amount of approximately $1,068,000, $960,000, and $888,000, respectively, and income taxes in the amount of approximately $1,658,000, $1,902,000, and $1,137,000, respectively.
Earnings Per Share - Earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding. The number of shares used in this calculation were: 1996 - 1,985,795; 1995 - 1,978,725; and 1994 - 1,969,628.
2. PROPOSED MERGER
Mid-Plains, Inc. (Mid-Plains) and Pioneer Communications, Inc.(Pioneer) have entered into an Agreement and Plan of Merger (Merger Agreement) dated December 31, 1996, which will result in the combination of Mid-Plains and Pioneer into a holding company. The proposed merger, which will be accounted for as a pooling of interests, has been approved by the respective Board of Directors. It is still subject to approval by the shareholders of each company. The companies expect to receive shareholder approvals and complete the proposed combination during the second quarter of 1997. Under the terms of the proposed Merger Agreement, Mid-Plains' shareholders will become shareholders of the holding company's common stock on a share-for-share basis and Pioneers' shareholders will become shareholders of the holding company's common stock on a four-for-one basis.
3. EXTRAORDINARY ITEM - SFAS 71
On a regular basis, management has evaluated the continued applicability of accounting for its telecommunications operations under SFAS 71. In the second quarter of 1996, Mid-Plains concluded that generally accepted accounting principles (GAAP) prescribed by SFAS 71 were no longer appropriate due to a number of factors including: The Federal Telecommunications Act of 1996; Mid-Plains' application pending before the Public Service Commission of Wisconsin (PSCW) for authority to implement an alternative plan to traditional rate-of-return regulation; and recognition of potential increased competition.
As a result of the discontinuation of applying SFAS 71, Mid-Plains recorded a second-quarter extraordinary noncash after-tax charge of $1,782,000. The following table is a summary of the extraordinary charge:
The adjustment of $3,036,000 to net telecommunications plant was necessary as the estimated useful lives historically acceptable to the PSCW did not keep up with the rapid pace of technological changes in the industry and differed significantly from those used by unregulated enterprises. Plant balances were adjusted by increasing the accumulated depreciation balance. The increase was supported by a depreciation analysis that identified inadequate accumulated depreciation levels which Mid-Plains believes developed over the years primarily as a result of the systematic under-depreciation of assets resulting from the regulatory process. An impairment analysis was performed that did not identify any additional amounts not recoverable from future operations.
When adjusting its net telecommunications plant, Mid-Plains gave effect to shorter, more economic realistic lives. The following is a summary of average lives of the affected telephone plant before and after the discontinuance of SFAS 71.
Asset Category Before After Digital Switching Equipment 13 10 Underground Metallic Cable 28 20 Buried Metallic Cable 23 19
4. COMMON STOCK
On April 29, 1996, the shareholders of Mid-Plains approved amendments to the Company's Articles of Incorporation changing the Company's common stock from $3.33 1/3 par value to no par value and increasing the number of authorized shares of common stock from 3,000,000 to 25,000,000. The number of shares issued and outstanding as of December 31, 1996 and 1995 were 1,989,041 and 1,982,960, respectively.
5. LONG-TERM DEBT
The following table sets forth interest rates and other information on long-term debt outstanding at December 31, after giving effect to February 1997 refinancing of $2,601,000 Wisconsin Investment Board (WIB) First Mortgage Notes and $4,800,000 notes payable to banks.
On January 31, 1997, Mid-Plains entered into a financing agreement with the Rural Telephone Finance Cooperative (RTFC) that permits the Company to borrow up to $22,105,000 within four years at the RTFC's variable or fixed rates of interest as determined by RTFC. Mid-Plains is required to purchase Subordinated Capital Certificates (SCC's) equal to 5% of the advanced amount. SCC's are noninterest-bearing and are returned as the loan is repaid. The RTFC financing agreements provide that: $12,000,000 of the loan is available for refinancing existing debt, for capital expenditures and to provide working capital for telephone operations; $9,000,000 is available to invest in PCS Wisconsin (See note 10) and $1,105,000 is available to purchase SCC's.
Substantially all of the assets of Mid-Plains are pledged under the RTFC mortgage note.
In connection with the RTFC financing agreement, Mid-Plains is subject to restrictions on debt and the amount of retained earnings available for cash dividends. Under the agreement, at December 31, 1996, $3,542,000 of its retained earnings were not restricted and thus available for the payment of dividends.
Long-term debt maturing within each of the next five years is as follows: 1997 - $216,000; 1998 - $305,000; 1999 - $ 327,000; 2000 - $5,351,000 and 2001 - $ 376,000.
6. SHORT-TERM FINANCING
The table below contains information related to short-term financing:
7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows:
The 1996 increase in accumulated deprecation includes $3,036,000 due to the discontinuation of applying SFAS 71.
8. INCOME TAXES
The components of income tax expense were as follows:
The following is a reconciliation of the statutory federal income tax rate of 34% to Mid-Plains' effective income tax rate.
9. BENEFIT PLANS
Pension Plan - Mid-Plains has a pension plan covering most of the employees of its telephone operations. The plan is non-contributory and provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with Mid-Plains and compensation rates near retirement. Mid-Plains' funding policy has been to contribute annually an amount up to the maximum amount that can be deducted for federal income tax purposes. Plan assets consist of fixed income securities.
Mid-Plains applies the Financial Accounting Standards Board's SFAS 87, "Employers' Accounting for Pensions", using a measurement date of September 30 for financial reporting purposes.
The funded status of the plan at October 1 for the year ended December 31 was as follows:
On December 17, 1996, the Company's Board of Directors voted to terminate the pension plan effective April 15, 1997. It is anticipated that plan settlement will not have a material effect on the Company.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and short-term debt are based on face amounts which approximate fair value.
After giving effect to refinancing (see Note 5), the fair value of long-term debt, estimated using discounted cash flow analysis based on Mid-Plains' estimated current incremental borrowing rates for debt with similar terms, was as follows:
1996 1995 In Thousands
Carrying amount $12,401 $8,570 Fair market value $12,901 $9,058
It was not practicable to estimate the fair value of Mid-Plains' investment in the cellular limited partnership interest because of lack of quoted market prices. The carrying amount at December 31, 1996 is based upon the cost method of accounting. Management believes this amount is not impaired.
14. QUARTERLY FINANCIAL INFORMATION (Unaudited):
The second quarter of 1996 includes a $1,782,000 ($.89 per share) after tax charge related to the discontinuance of applying SFAS 71, as discussed in Note 3 above. Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Part III.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of Mid-Plains are as follows:
Dean W. Voeks, an officer of Mid-Plains since 1987, joined the Board in 1991. Mr. Voeks is also President and a director of Mid-Plains Communications Systems, Inc. (MPCS), a subsidiary of Mid-Plains, since 1991. Currently, Mr. Voeks is a director of First Business Bank of Madison and the Wisconsin State Telephone Association.
Howard G. Hopeman has served as Vice-President and Chief Financial Officer since 1989. He is Secretary & Treasurer and a director of MPCS.
Daniel J. Stein has served as Executive Vice President and General Manager of MPCS for the past 10 years. He became a director of MPCS in 1987.
Fredrick E. Urben has been an officer of Mid-Plains since 1972 and joined the board in 1977.
Floyd A. Brynelson joined the Board in 1970. Mr. Brynelson is a retired partner and Of Council to Axley Brynelson, Attorneys and Counselors. Mr. Brynelson was General Counsel of the Company from 1981 to 1993. He served as President of the Company from 1981 to 1990. He was also President of MPCS from 1985 to 1991, and a director from 1980 to 1991.
S.C. Ehlers joined the Board in 1969. Mr. Ehlers, a retired printer and publisher, also serves on the Board of MPCS since 1980.
Charles Maulbetsch joined the Board in 1981. Mr. Maulbetsch was a Vice-President of Middleton Community Bank from January 1, 1995 until his retirement on December 31, 1995. Prior to that he was a Bank Consultant. He is a director of Middleton Community Bank.
Eugene A. Johnson joined the Board in 1974. Mr. Johnson is a semi-retired Certified Public Accountant, Independent Realtor, and President of Johnson Hardware Stores.
Harold L.(Lee) Swanson joined the Board in 1981. Mr. Swanson is President and a director of State Bank of Cross Plains. Mr. Swanson has served on the board of MPCS since 1981 and is also a director of Madison Gas & Electric Company.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
Compensation of Directors
In 1996, each non-employee director received an annual fee of $14,000 for serving on the Company's Board of Directors. No additional fees were paid for attending meetings. Employee directors received no directors' fees.
Compensation of Executive Officers
The following table summarizes the compensation for the fiscal years, 1994, 1995 and 1996 of the President (the chief executive officer) and one other executive officer whose compensation exceeded $100,000 for fiscal year 1996.
Report of the Compensation Committee
The Company's principal executive compensation objective is to compensate executive officers in a manner that will attract and retain the services of an outstanding management team and provide incentives to motivate superior performance by key employees. To accomplish this, the non-employee directors have developed a three component compensation policy: (1) annual base salary adjustments designed to recognize Company performance, professional growth and to adjust for inflationary pressures: (2) annual incentive bonus based on Company performance and individual achievement for the year; and (3) promotional increases related to significant increases in responsibility and/or disparities with comparable positions. Specific targets for professional growth and Company performance are not set for an executive, but are evaluated on a subjective basis.
The compensation for Mr. Voeks, President (the chief executive officer), reports for 1996 reflect the applications of the policies described above. In 1996, Mr. Voeks' compensation was adjusted to reflect a base salary adjustment for inflation. Mr. Voeks' 1996 bonus reflects his ability to anticipate and respond successfully to changes in the business environment in which the Company operates, and Company performance factors such as earnings.
Mid-Plains' 1996 earnings per share before extraordinary item was $1.73, the same as 1995 record earnings per share. Mid-Plains' total shareholder return for the five years ended December 31, 1996 was slightly less than the S&P 500 Index but exceeded the S&P Telephone Index.
Based on the policies described above, Mr. Voeks informs the Committee of his proposed compensation for the Company's other executive officers.
COMPENSATION COMMITTEE Floyd A. Brynelson S.C. Ehlers Eugene A. Johnson Charles Maulbetsch Harold L. (Lee) Swanson
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
SEC rules require that the Company show a graphical comparison of the total return on its common stock for the last five fiscal years with the total returns of a broad market index and a more narrowly focused industry or group index. (Total return is defined as the return on common stock including dividends and stock price appreciation, assuming reinvestment of dividends.) The Company has selected the Standards & Poors (S&P) 500 Index for the broad market index, and a S&P Telephone Index as the industry index. These indices were selected because of their broad availability and recognition. The following chart compares the total return of an investment of $100 in Company common stock on December 31, 1991, with like returns for the S&P 500 and S&P Telephone Indices.
(HERE IS A CHART COMPARING THE TOTAL RETURN OF AN INVESTMENT OF $100 IN COMPANY COMMON STOCK ON DECEMBER 31, 1991, WITH LIKE RETURNS FOR THE S&P 500 AND S&P TELEPHONE INDICES)
Pension Plan and Supplemental Retirement Plan
Mid-Plains, Inc. has a defined benefit pension plan covering the employees of its telephone operations. Retirement benefits are based upon years of service with the Company and final five-year average annual salary. The retirement benefits are not subject to any reduction for Social Security benefits paid to the employees or any other offset amounts. For purposes of the plan, compensation means payment for services rendered, including vacation and sick pay, and is virtually equivalent to the annual compensation amounts reported in the foregoing Summary Compensation Table. Messrs. Voeks and Hopeman currently have 10 and 8 credited years of service, respectively. Annual retirement benefits under the retirement plan at the normal retirement age of 60 for specified levels of compensation and specified years of service are illustrated in the following table:
On December 17, 1996, Mid-Plains' Board of Directors voted to terminate the pension plan effective April 15, 1997.
Mid-Plains provides Mr. Voeks and Mr. Hopeman with a nonqualified supplemental retirement plan, which provides supplemental retirement benefits based on fixed annual contribution to the plan from 1995 until they reach age 60. The cost of the plan was $79,000 in 1996 and $76,000 in 1995.
Management Continuity Plan
The Company has severance pay agreements (Agreements) with Mr. Voeks, Mr. Hopeman and two other executive officers. The purpose of the Agreements is to encourage the executive officers to continue to carry out their duties in the event of the possibility of a change in control of the Company.
Benefits are payable under the Agreement only if a change in control has occurred and within three years after such change the executive's employment is terminated:(a) by the Company or its successor for reasons other than "cause"; or (b) voluntarily by the executive for "good reason", in each case as defined in the Agreements. The principal benefit under the Agreement is a lump-sum payment equal to 2.99 times the executive's annual compensation. Each agreement is automatically extended on an annual basis, unless either the Company or the employee gives a written notice of cancellation of such automatic extension.
Directors Compensation Committee Interlocks and Insider Participation
Mr. Brynelson, a member of the Compensation Committee, was formerly president of the Company. He is a retired partner and Of Counsel to Axley Brynelson, the primary law firm retained by the Company. Mr. Johnson, a member of the Compensation Committee, was formerly president of a Company subsidiary.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security ownership of certain beneficial owners.
Pursuant to restrictions in Mid-Plains' By-Laws, as further described in Item 5, no person, including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, may be, nor is any person in fact the beneficial owner of more than five percent of any class of the Company's voting securities.
(b) Security ownership of management.
At February 28, 1997, each director and each executive officer named in the Summary Compensation Table and all directors and executive officers of the Company as a group beneficially owned common stock of the Company as listed in the following table. To our knowledge, no shareholder owned 5 percent or more of the Company's outstanding common stock as of February 28, 1997.
(c) Changes in control.
As further described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Mid-Plains and Pioneer Communications, Inc. (Pioneer) have entered into an Agreement and Plan of Merger dated December 31, 1996, which will result in the combination of Mid-Plains and Pioneer into a holding Company to be named Chorus Communications Group, Ltd.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1996, Floyd A. Brynelson, a director, was Of Counsel with Axley Brynelson, the primary law firm retained by the Company. The Company has also retained their law firm in 1997.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors to file reports of ownership and changes in ownership with the Securities and Exchange Commission.
Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 ("Annual Statement of Changes in Beneficial Ownership") were required, the Company believes that during 1996 all required filings were made in a timely fashion except for the following: one Form 4 ("Statement of Changes in Beneficial Ownership") covering one transaction for Mr. Swanson, was not filed but the transaction was subsequently reported on a year-end Form 5 Report.
Part IV.
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements Schedules. See Index to Consolidated Financial Statements under Item 8 of this Form 10k.
2. Financial Statements Schedule.
All schedules are omitted because of the absence of conditions under which they are required.
3. Exhibits. Exhibits filed (or to be filed) as a part of this Form 10-K Annual Report are as follows:
Exhibit Number Description
3(ii) Restated Bylaws 12 Computation of Ratio of Earnings to Fixed Charges 21 Subsidiaries of the Registrant 27 Financial Data Schedule
Exhibits Incorporated By Reference
2. Agreement and Plan of Merger dated as of December 31, 1996 by Mid-Plains, Inc. and Pioneer Communications, Inc. (See Form 8-K dated January 7, 1997).
3(ii) Restated Articles of Incorporation (See Exhibit 3.01, Form 10-Q for the quarter ending June 30, 1996).
4. Mid-Plains, Inc., Series 1995 Registered Subordinated Debenture to M&I First National Bank, West Bend, Wisconsin, Trustee, (See Exhibit 4, Form 8-K dated July 6, 1995).
99. Mid-Plains, Inc. Employee Stock Purchase Plan (See Exhibit 99, Form 10-Q for the quarter ended September 30, 1995).
(b) Reports on Form 8-K. There were no reports on Form 8-K filed with the Securities and Exchange Commission during the fourth quarter of the year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MID-PLAINS, INC. (Registrant)
Date: March 28, 1997 By /s/Dean W. Voeks Dean W. Voeks, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
/s/Dean W. Voeks President and Director March 28, 1997 Dean W. Voeks (Principal Executive Officer)
/s/Howard G. Hopeman Vice-President and March 28, 1997 Howard G. Hopeman Chief Financial Officer (Principal Financial and Accounting Officer)
/s/Fredrick E. Urben Vice-President, March 28, 1997 Fredrick E. Urben Administration & Human Relations, Secretary & Treasurer and Director
/s/Charles Maulbetsch Director March 28, 1997 Charles Maulbetsch
/s/Harold L. (Lee) Swanson Director March 28, 1997 Harold L. (Lee) Swanson
The above signatures include a majority of the signatures of the Board of Directors.