BARRY COUNTY SERVICES COMPANY ANNUAL REPORT

Transcription

1 BARRY COUNTY SERVICES COMPANY 2008 ANNUAL REPORT Barry County Telephone Company Message Express Internet

2 CONTENTS LETTER TO SHAREHOLDERS 2 FINANCIAL STATEMENTS Statements of Income Balance Sheets Statements of Stockholders Equity Statements of Cash Flows Notes to Financial Statements INDEPENDENT AUDITOR S REPORT 15

3 Barry County Services Company 123 West Orchard, Box 127 Delton, MI Fax May 28, 2009 To the Shareholders of Barry County Services Company: Enclosed is Barry County Services Company's Annual Report for the year ended December 31, The 2008 results reflect a profit of $1,008,433 compared to a $4,814,028 profit in The 2007 results benefited from the rentals and sale of eleven cell towers. The 2007 results were about $440,000 higher than 2008 results absent the cell towers. The Company continues to experience reduced earnings due to billing disputes by interconnecting carriers. The telephone industry faces many disputes over inter-carrier compensation. Two of three major disputes have been settled while the third dispute remains unresolved. We continue to work with our attorneys and industry trade organizations in attempts to reduce the impact of these disputes. On a positive note, sales of broadband data services (DSL) and enhanced calling features continue to rise and over 50% of our customers have broadband data services as of today. We continue to actively pursue improved earnings while expanding our service offerings. Please direct any questions to me at , or Sincerely, Robert Fisher, VP & GM

4 CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31 OPERATING REVENUES Local Service Revenues $3,217,737 $4,351,615 Access Charge Revenues 3,144,220 2,628,356 Rental Revenues 7,900 59,203 Miscellaneous Revenues 356, ,847 Uncollectible Revenues (8,833) (10,773) Total Operating Revenues 6,717,114 7,396,248 OPERATING EXPENSES Plant Specific 881, ,277 Plant Non-Specific: Network and Other 1,451,375 1,340,446 Depreciation and Amortization 980, ,003 Customer Operations 1,006, ,846 Corporate Operations 791, ,199 Total Operating Expenses 5,112,330 4,977,771 NET OPERATING REVENUE 1,604,784 2,418,477 OPERATING TAXES Federal Income Taxes (Note 8) 441, ,799 Other Operating Taxes 270, ,068 Total Operating Taxes 711,953 1,079,867 NET OPERATING INCOME 892,831 1,338,610 OTHER INCOME AND EXPENSE Interest and Dividend Income 168, ,362 Net Gain (Loss) on Sale of Fixed Assets (Note 14) 11,907 5,124,527 Other Income and Expense (5,602) (7,010) Federal Income Taxes Non-Operating (Note 8) (58,731) (1,816,883) Total Other Income and Expense 115,781 3,479,996 INCOME AVAILABLE FOR FIXED CHARGES 1,008,612 4,818,606 FIXED CHARGES: Interest Expense 179 4,578 NET INCOME 1,008,433 4,814,028 EARNINGS PER SHARE $ $ The accompanying notes are an integral part of these financial statements 3

5 CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31 CURRENT ASSETS Cash and Cash Equivalents $ 2,801,527 $ 2,989,230 Due From Subscribers 177, ,235 Other Accounts Receivable 148, ,370 Inventory Materials & Supplies 112, ,990 Prepaid Expense 58,079 46,784 Prepaid Income Taxes 226, ,711 Current Deferred Income Taxes (Note 8) 39,672 25,524 Total Current Assets 3,564,343 4,148,844 INVESTMENTS (Note 2) 204, ,513 LAND DEVELOPMENT LOANS (Note 12) 1,330,837 1,534,629 DEFERRED INCOME TAXES (Note 8) 871, ,671 PLANT, PROPERTY AND EQUIPMENT (Note 3) Telephone and Plant in Service: Barry County Telephone Company 17,525,352 18,030,913 Other Property and Equipment 3,438,673 3,387,292 Plant Under Construction 54, ,815 Total Plant, Property and Equipment Less: Accumulated Depreciation 21,018,149 16,249,912 21,520,020 16,688,608 Net Plant, Property and Equipment 4,768,237 4,831,412 Total Assets $ 10,739,259 $ 11,651,069 The accompanying notes are an integral part of these financial statements 4

6 CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS EQUITY DECEMBER 31 CURRENT LIABILITIES Accounts Payable $ 471,050 $ 643,888 Advance Billings and Payments 59,817 54,444 Customer Deposits 2,690 2,715 Current Maturities of SBA Leases (Note 7) 170, ,066 Income Taxes Accrued Other Taxes Accrued Accrued Dividends 366 4, ,969 4, ,316 Other Current Liabilities 376, ,652 Total Current Liabilities 1,441,380 1,593,869 SBA LONG TERM LEASE PAYMENTS (Note 7) 951,669 1,136,332 OTHER LIABILITIES POSTRETIREMENT BENEFITS (Note 4) 370, ,431 DEFERRED TAXES (Note 8) 65, ,016 Total Liabilities 2,829,195 3,209,648 STOCKHOLDERS EQUITY Common Stock, no stated or par value, authorized 80,000 shares; issued and outstanding, 59,683 and 62,386 shares, respectively Long Term Receivable (Note 10) Retained Earnings 7,910,064 (291,026) 8,732,447 Total Equity 7,910,064 8,441,421 Total Liabilities & Stockholders Equity $ 10,739,259 $ 11,651,069 The accompanying notes are an integral part of these financial statements 5

7 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY COMMON STOCK RETAINED EARNINGS LONG TERM RECEIVABLE TOTAL EQUITY Balance December 31, 2006 $ $ 8,282,047 $ (398,926) $ 7,883,121 Net Income 4,814,028 4,814,028 Changes in Long Term Receivable 150 Shares Redeemed (42,900) 107,900 65,000 Special Dividend 10/07 Cash ($50.00 per Share) (3,108,600) (3,108,600) Common Stock Dividend 12/07 Cash ($6.00 per Share) (374,316) (374,316) Common Stock Redeemed 3,156 Shares (902,616) (902,616) Common Stock Issued 264 Shares 64,804 64,804 Balance December 31, 2007 $ $8,732,447 $ (291,026) $ 8,441,421 Net Income 1,008,433 1,008,433 Changes in Long Term Receivable 1300 Shares Redeemed (291,026) 291,026 Special Dividend 09/08 Cash ($15.00 per Share) (905,325) (905,325) Common Stock Dividend 12/08 Cash ($6.00 per Share) (358,824) (358,824) Common Stock Redeemed 1,496 Shares (297,589) (297,589) Common Stock Issued 93 Shares 21,948 21,948 Balance December 31, 2008 $ $ 7,910,064 $ $ 7,910,064 The accompanying notes are an integral part of these financial statements 6

8 CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31 OPERATING ACTIVITIES Net Income $ 1,008,433 $ 4,814,028 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net (Gain) Loss on sale of fixed assets Depreciation and Amortization Provision for Deferred Income Taxes (11,907) 980,846 (1,876) (5,124,527) 962,003 (482,417) Changes in Operating Assets and Liabilities: Due from Subscribers Other Accounts Receivable Inventory Prepaid Expenses Accounts Payable Advance Billing and Payments Customer Deposits Income Taxes Accrued Other Taxes Accrued Other Current Liabilities Postretirement Benefit Obligation (24,801) 86,782 28, ,949 (172,838) 5,373 (25) (1,959) 2,402 10,054 4,769 19,570 29,494 (55,677) (564,827) 104,789 3,842 (75) (2,190) 92 69,663 38,296 Net Cash Provided by Operating Activities 2,234,218 (187,936) INVESTING ACTIVITIES Purchase of Plant, Property and Equipment (922,609) (1,644,872) Proceeds from Sale of Property Less Removal Cost 16,845 7,399,545 Land Development Loans 203,792 (850,390) Sale (Purchase) of Investment 4,453 Net Cash Provided by (Used in) Investing Activities (701,972) 4,908,736 FINANCING ACTIVITIES Payment on Land Contract Debt Payments on Long-term Lease Dividend Paid (180,159) (1,264,149) (144,511) (3,621,008) Common Stock Redeemed (588,615) (902,616) Common Stock Issued Long Term Receivable 21, ,026 64,804 65,000 Net Cash Used in Financing Activities (1,719,949) (4,538,331) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (187,703) 182,469 CASH AND CASH EQUIVALENTS Beginning of Year 2,989,230 2,806,761 CASH AND CASH EQUIVALENTS End of Year $2,801,527 $2,989,230 The accompanying notes are an integral part of these financial statements 7

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Barry County Services Company owns 100% of the stock of Barry County Telephone Company, Barry County Realty Company, Lake Michigan Telephone Company and Southern Michigan Cellular Company. For financial presentation purposes, these subsidiary companies are presented on a consolidated basis with Barry County Services Company. All significant intercompany accounts and transactions have been eliminated. Barry County Services Company is located in. The Company s principal business activities are telecommunication services including: providing wireline telephone services, access to the public telephone network. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The Company grants credit to customers, substantially all of who are local residents. The Company also grants credit to other carriers for access to its network. The percentage of total revenues from retail customers and other carriers is: From Retail Customers: Local Revenue 47% 39% Access Revenue 13% 12% From Other Carriers: Local Revenue 1% 18% Access Revenue 34% 22% Rental and Miscellaneous 5% 9% The Company maintains cash balances at several institutions. The Federal Deposit Insurance Corporation insures accounts at these institutions up to $250,000. At various times during the year the Company s cash account balances exceed this amount in the normal course of business. At December 31, 2008, the Company had approximately $2,475,177 on deposit in excess of FDIC insurance coverage. Accounting policies used in the preparation of these financial statements conform to accounting principles generally accepted in the United States of America. The accounting records of Barry County Telephone Company are maintained in accordance with the Uniform System of Accounts for Class A and B Telephone Companies prescribed by the Michigan Public Service Commission. Barry County Telephone Company receives compensation for interstate access services through tariffed access charges filed by the National Exchange Carriers Association (NECA) with the Federal Communications Commission (FCC) on behalf of the member companies. These access charges are billed by the Company to the interstate interexchange carriers, and pooled with like revenues from all NECA member companies. Settlements are based on formulas derived from the national average of costs to provide access services. Intrastate Access Revenue is based on charges billed under the Company s Intrastate Access Tariff. Both access revenue and local service revenues are recognized when earned, regardless of the period in which they are billed. Inventory consists of materials and supplies for additions and maintenance of the telephone plant and telephone equipment. Inventory is priced at the lower of cost or market on a first-in first-out basis. Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform with the presentation in the current-year financial statements. 8

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The balance due from subscribers is presented net of the provision for doubtful accounts. The provision was $3,300 and $3,300 at December 31, 2008 and 2007, respectively. Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less. The Company periodically purchases and issues common stock in the Company. It is the policy of the Company to record these common stock transactions at cost directly in the common stock account. It is the policy of the Company to expense advertising costs as incurred. During the years ended December 31, 2008 and 2007, the Company incurred directly charged advertising costs of $5,268 and $1,300 in each year respectively. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No A current tax liability or asset is recognized for estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between book and tax accounting. NOTE 2 - INVESTMENTS Investments consist of the following: December 31 Optimal Software Company, L.L.C. 5,000 5,000 Associated Network Partners, Inc. 108, ,750 RTFC Patronage Capital 90,763 90,763 Long Term Investments $ 204,513 $ 204,513 NOTE 3 - PLANT, PROPERTY AND EQUIPMENT Cost of plant, property and equipment and applicable depreciation rates or depreciable lives can be summarized as follows: December Depreciation Telephone Company Rates (%) Plant in Service: Land $ 90,839 $ 90,839 N/A Motor Vehicles 81,553 81, Other Work Equipment 165, , Buildings 930, , Furniture and Office Equipment 209, , Central Office Equipment 4,423,079 5,684, Other Radio Facilities 33,042 33, Cable and Wire Facilities 11,591,501 10,841, Total Telephone Plant $17,525,352 $18,030,913 9

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - PLANT, PROPERTY AND EQUIPMENT (continued) December 31 Depreciable Other Subsidiaries Life Years Property and Equipment: Land $1,211,063 $1,211,063 N/A Land Improvements 49,567 49, Buildings 64,711 64, Other Work Equipment 1,429,916 1,411, Motor Vehicles Towers 443, , , , Total Other Property and Equipment $ 3,438,673 $ 3,387,292 Plant in service and under construction is stated at cost. Normal asset retirements by Barry County Telephone Company are charged against accumulated depreciation along with the costs of removal less salvage, with no gain or loss recognized. All other retirements are recorded as a gain or loss. The Company provides for depreciation for these assets on a straight-line basis at annual rates, which will amortize the depreciable property over its estimated useful life. Such provisions as a percentage of average cost of depreciable telephone plant in service were 4.4% for 2008 and 4.0% for Other property and equipment is stated at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. When these assets are retired or sold a gain or loss is recognized. Depreciation expense aggregated $980,846 in 2008 and $962,003 in NOTE 4 - POSTRETIREMENT BENEFIT OBLIGATION Barry County Services Company sponsors a defined benefit postretirement plan for its employees. The plan provides medical benefits for retired employees and their families from the date of retirement to age 65. Eligibility is based on a factor of age and years of service. Additionally, the Company provides free local telephone service for retired employees. The plan is noncontributory and is not funded. There were no employer or participant contributions in 2008 or 2007, nor does the plan possess any assets. The following table sets forth the funded status of the Company s defined benefit postretirement plan and amounts recognized in the balance sheet at December 31, 2008 and 2007: Benefit Obligation, End of Year $ 370,200 $ 365,431 Net Postretirement Costs Recognized $ 4,769 $ 38,296 Benefits Paid $ 800 $ 1,600 The liability was computed assuming a constant 11% inflation rate for both 2008 and 2007 in health care costs and a 7% inflation rate for local telephone service. The discount rate used in determining the accumulated postretirement benefit obligation was 7%. 10

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - PENSION PLAN The Company has a defined contribution retirement program in effect for employees who meet certain eligibility requirements. The program provides for contributions to each employee's individual retirement account. The expense under this program was $449,771 and $441,988 for 2008 and 2007, respectively. The Company has no unfunded liability. NOTE 6 - COLLECTIVE BARGAINING AGREEMENT Fifteen employees located in and employed by the Barry County Telephone Company were represented by the International Brotherhood of Electrical Workers of America, AFL-CIO Local 1106 under a 3 year and five month collective bargaining agreement expiring on May 17, The agreement was renegotiated on May 21, 2008, and replaced by a 4 year collective bargaining agreement expiring on May 12, The agreement will remain in effect after the above-mentioned date unless terminated by either party. NOTE 7 - LEASE COMMITTMENTS At December 31, 2007, the Company had entered into one lease for building space. The total monthly payment is $795. As a result of the sale of towers to SBA, the Company has 11 leases for 7.5 years. The lease rate is $1,281 per tower per month and the rate will increase by 2.5% annually on September 28th. The Company recorded the future costs of these leases as a reduction in the gain on the sale of the towers. The lease payments will require cash outlays but will not reduce earnings in 2008 and future years. The commitment is as follows: 2009 $170, , , , ,059 The Company recorded net rent expense of $9,540 and $131,261 in 2008 and 2007, respectively. NOTE 8 INCOME TAXES The provision for federal income taxes consists of the following: Operating: Current Expense $ 443,513 $ 715,261 Deferred Expense (1,876) (25,462) Total Operating Federal Income Tax Expense $ 441,637 $ 689,799 Non-Operating Federal Income Tax Current Non-Operating Federal Income Tax Deferred 58,731 2,273,838 (456,955) Total Federal Income Tax Expense $ 500,368 $ 2,506,682 11

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 INCOME TAXES (continued) A reconciliation of income tax expense at the statutory rate to income tax expense at the Company s effective rate is as follows: Taxes Computed at Statutory Rates $ 512,993 $ 2,489,041 Adjustment of Prior Year Estimates and Other (12,625) 17,641 Total Income Tax Expense $ 500,368 $ 2,506,682 The detail of the net deferred tax liability is as follows: Depreciation $ 74,582 $ 114,016 Asset Impairment (8,636) Net Deferred Tax Liability $ 65,946 $ 114,016 The detail of the net deferred tax asset is as follows: Depreciation $ 245,718 $ 235,585 Post Retirement Benefits 125, ,246 Deferred Lease Obligations 386, ,815 Asset Impairment 38,208 82,915 Other 114,854 71,634 Subtotal $ 911,001 $ 957,195 Current Asset Impairment Total $911,001 $957,195 Deferred income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable enacted tax rates. NOTE 9 CASH FLOWS Cash paid during 2008 and 2007 for interest and income taxes was as follows: Year Ended December 31 Interest $ 179 $ 4,578 Income Taxes $170,000 $3,550,000 12

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - LONG-TERM NOTE RECEIVABLE EMPLOYEE STOCK PURCHASE FINANCING PLAN During 2001, the Company established a plan to finance the purchase of shares of the Company s common stock by employees. Upon signing an agreement to purchase an agreed upon number of shares, a note receivable is recorded for the unpaid portion of the common stock issued to the employee. The employee has five years to repay the loan or within 10 days of termination of employment, whichever occurs earlier. Interest is accrued at a 10% annual rate. Any dividends declared are applied to the outstanding loan balance. The Company held the common stock certificates as collateral. If the employee fails to pay for the stock in the fiveyear period, the shares of stock will revert back to the Company. In this event, it will be recorded as common stock retired in the amount of the outstanding note balance without the accrued interest. During 2008, the Company s management decided that, because it was very unlikely that employees would exercise their right to purchase under this plan, they would eliminate the financial statement presentation of this plan. There are shares still available in 2009 at which time the plan will be completely discontinued. NOTE 11 LAND CONTRACT AGREEMENT On June 28, 2002, the Company executed a Land Contract Agreement and a Memorandum of Land Contract for the purchase of several parcels of land in the area. The Company purchased these parcels for $220,000 with $40,002 paid as a down payment. The remainder is to be paid with monthly payments of $1,680 over at least 60 months. The land contract carries a 7.5% interest rate and cannot be paid in full before five years. The Company paid the balance of the land contract in June NOTE 12 LAND DEVELOPMENT LOANS In October of 2006, the Company entered into a construction loan agreement to provide financing for a multi-phase condominium project in Hastings, Michigan. Under terms of the agreement, the Company may advance up to $3,360,000 of funding for the project secured by mortgage filings. Interest accrues on the outstanding balance of each loan advance at 6% per annum. A defined portion of the loans is to be repaid upon the sale of each unit. In addition to the interest income, and following the fulfillment of terms under the agreement, the Company will receive 50% of the defined net profit of the borrower s from the sale of subsequent units. Each loan advance under the agreement shall be due and payable on December 31, 2011 provided, however, that advances for each unit shall be repaid at the closing on those sales as provided by the agreement. A member of the Company s Board of Directors has a vested interest in this project. At December 31, 2008, advances under this agreement were $1,330,837. Interest income recognized under the agreement totaled $112,479 for At December 31, 2007, advances under this agreement were $1,534,629. Interest income recognized under the agreement totaled $31,562 for NOTE 13 - DISPUTE WITH AT&T AT&T/SBC (formerly known as SBC Communications, Ameritech and Michigan Bell) disputed three distinct types of invoicing the Company did to bill for traffic between the two parties. The Company has been billing AT&T/SBC for local and long distance access termination for many years. A dispute over billing for the termination of local calls delivered by AT&T to Barry County Telephone Company customers was settled in late The Company received approximately $960,000 from AT&T. None of the disputed billing appeared as revenue in the 2006 or earlier financial statements. The settlement monies were recorded in

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - DISPUTE WITH AT&T (continued) AT&T/SBC had also disputed the Company s bills for the termination of long distance access calls sent by AT&T to Barry County Telephone Company customers. This billing was done under the Residual Usage Method (RUM), which is a standard industry practice. This dispute was settled in March, 2008, and the Company received approximately $610,000 from AT&T. The Company also received several concessions by AT&T that will make billing third party carriers easier and more accurate. None of the disputed billing appeared as revenue in the 2007 or earlier financial statements. The settlement monies were recorded in In January 2005, AT&T/SBC began refusing to pay an average of $20,000 monthly of local call termination charges. It is AT&T/SBC s contention that this traffic is for Unbundled Network Element-Platform (UNE-P) traffic should be billed to third party carriers rather than to AT&T. The previously mentioned settlements should make it possible for the Company to bill the third party carriers. The Company is currently preparing documentation to bill the third party carriers for this traffic. None of this disputed billing appears as revenue in the 2008 or earlier financial statements. NOTE 14 SALE OF TOWERS In September, 2007, the Company completed the sale of eleven towers to SBA Communications. These towers were sold for approximately $7.3 million. As part of that sales transaction, the Company was required to lease back those tower sites for $1,250 per tower per month. The rate of the leaseback will increase by 2.5% annually (See Note 7). The Company recorded the future costs of these leases as a reduction in the gain on the sale of the towers. The lease payments will require cash outlays but will not reduce earnings in future years. NOTE 15 ASSET IMPAIRMENT Because of competition in the wireless telephone business, in 2002, the Company recorded a charge to reflect the impaired state of certain assets in accordance with FASB 144. The Company impaired the value of licenses and all fixed assets from its wireless operations. The total value of remaining impaired assets is $1,664,614 for wireless spectrum licenses and $1,277,226 for switching and other network equipment. These assets are carried on the Company s book at an impaired value of zero. The Company continues to use the switching and other network equipment. The Company is marketing the licenses to other wireless providers. 14

16 OFFICERS AND DIRECTORS Gary Buckland, President Mark Herbert, Vice President Mark Graf, Secretary Frederic Halbert, Treasurer Harry Doele Judith Henley Mark Hewitt Robert Fisher, Vice President and General Manager

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