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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3024
NEW ULM TELECOM, INC.
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-0440990
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
27 N. MINNESOTA STREET
NEW ULM, MN 56073-0697
(Address of Principal Executive Offices, including Zip Code)
(507) 354-4111
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___.
As of November 11, 2002, the issuer had outstanding 5,115,585 shares of
common stock.
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NEW ULM TELECOM, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2002
PART I FINANCIAL INFORMATION...............................................3-27
Item 1 Financial Statements.......................................3-7
Unaudited Consolidated Balance Sheets......................3-4
Unaudited Consolidated Statements of Income..................5
Unaudited Consolidated Statements of Stockholders'
Equity.......................................................6
Unaudited Consolidated Statements of Cash Flows..............7
Notes to Unaudited Consolidated Financial Statements......8-15
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................15-27
Item 3 Quantitative and Qualitative Disclosures About
Market Risk.................................................27
Item 4 Controls and Procedures..................................27-28
PART II OTHER INFORMATION.....................................................28
Item 6 Exhibits and Report on Form 8-K.............................28
SIGNATURES....................................................................28
CERTIFICATIONS.............................................................28-31
INDEX TO EXHIBITS.............................................................32
NEW ULM TELECOM, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
CURRENT ASSETS:
Cash $ 580,793 $ 4,245,683
Receivables, Net of Allowance for
Doubtful Accounts of $39,849 and $24,500 1,455,941 1,878,444
Inventories 864,934 966,565
Prepaid Expenses 86,493 112,210
----------- -----------
Total Current Assets 2,988,161 7,202,902
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired 3,246,955 3,248,495
Notes Receivable from Officer 687,402 687,402
Notes Receivable 252,790 252,854
Cellular Investments 12,381,380 6,310,830
Other 1,242,733 1,154,736
----------- -----------
Total Investments and Other Assets 17,811,260 11,654,317
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Telecommunications Plant 48,784,968 43,032,672
Other Property & Equipment 2,433,349 2,396,063
Cable Television Plant 1,617,968 1,539,443
----------- -----------
Total 52,836,285 46,968,178
Less Accumulated Depreciation 25,362,443 22,973,617
----------- -----------
Net Property, Plant & Equipment 27,473,842 23,994,561
----------- -----------
TOTAL ASSETS $48,273,263 $42,851,780
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
NEW ULM TELECOM, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2002
UNAUDITED CONSOLIDATED BALANCE SHEETS(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 1,500,000 $ 1,866,666
Accounts Payable 492,886 593,571
Accrued Income Taxes 273,271 --
Other Accrued Taxes 73,091 66,235
Other Accrued Liabilities 508,331 484,458
----------- -----------
Total Current Liabilities 2,847,579 3,010,930
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 19,339,000 15,700,000
----------- -----------
DEFERRED CREDITS:
Income Taxes 2,285,843 2,285,843
Investment Tax Credits 7,594 10,251
----------- -----------
Total Deferred Credits 2,293,437 2,296,094
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock - $5 Par Value, 19,200,000 Shares
Authorized, 5,115,585 Shares Issued and Outstanding 8,525,975 8,525,975
Retained Earnings 15,267,272 13,318,781
----------- -----------
Total Stockholders' Equity 23,793,247 21,844,756
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $48,273,263 $42,851,780
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
OPERATING REVENUES:
Local Network $ 906,338 $ 775,210 $ 2,669,625 $ 2,330,103
Network Access 1,432,780 1,437,309 4,760,998 4,453,720
Billing and Collection 70,814 90,655 216,108 306,433
Miscellaneous 97,858 111,981 312,597 337,854
Nonregulated 1,046,947 819,586 2,961,102 2,362,316
------------ ------------ ------------ ------------
Total Operating Revenues 3,554,737 3,234,741 10,920,430 9,790,426
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Plant Operations 428,361 437,212 1,283,892 1,345,241
Depreciation 836,335 682,919 2,507,707 2,045,719
Amortization 690 29,139 1,740 86,051
Customer Operations 242,062 182,357 714,014 579,475
General and Administrative 831,258 449,900 1,824,150 1,363,191
Other Operating Expenses 636,214 485,156 1,868,473 1,636,148
------------ ------------ ------------ ------------
Total Operating Expenses 2,974,920 2,266,683 8,199,976 7,055,825
------------ ------------ ------------ ------------
OPERATING INCOME 579,817 968,058 2,720,454 2,734,601
------------ ------------ ------------ ------------
OTHER (EXPENSES) INCOME:
Interest Expense (157,142) (172,742) (460,734) (515,647)
Interest Expense - Debt Retirement -- -- (271,200) --
Interest Income 3,790 8,539 31,233 32,566
Cellular Partnership Income 814,911 200,047 2,264,965 1,123,168
Gain from Cellular Dissolution -- -- 1,153,889 --
Other Investment Income (Expense) (164,395) 62,982 (18,258) 112,319
------------ ------------ ------------ ------------
Total Other (Expenses) Income, Net 497,164 98,826 2,699,895 752,406
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,076,981 1,066,884 5,420,349 3,487,007
INCOME TAXES 435,248 447,627 2,193,471 1,458,480
------------ ------------ ------------ ------------
NET INCOME $ 641,733 $ 619,257 $ 3,226,878 $ 2,028,527
============ ============ ============ ============
BASIC AND DILUTED
EARNINGS PER SHARE - NOTE 2 $ 0.13 $ 0.12 $ 0.63 $ 0.40
============ ============ ============ ============
DIVIDENDS PER SHARE $ 0.0833 $ 0.0833 $ 0.2499 $ 0.2499
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 5,115,585 5,155,725 5,115,585 5,155,725
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
5
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND
NINE MONTHS ENDED SEPTEMBER 30, 2002
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS
------------ ------------ ------------
BALANCE on December 31, 2000 1,731,955 $ 8,659,775 $ 13,106,729
Retired Stock (26,760) (133,800) (846,777)
Net Income 2,768,238
Dividends (1,709,409)
Three-for-One Stock Split 3,410,390
------------ ------------ ------------
BALANCE on December 31, 2001 5,115,585 $ 8,525,975 $ 13,318,781
Net Income 3,226,878
Dividends (1,278,387)
------------ ------------ ------------
BALANCE on September 30, 2002 5,115,585 $ 8,525,975 $ 15,267,272
============ ============ ============
The accompanying notes are an integral part of the financial statements.
6
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,226,878 $ 2,028,527
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 2,509,447 2,131,770
Cellular Investment Income (2,264,965) (1,123,168)
Distributions from Cellular Investments 568,986 441,953
Gain from Cellular Dissolution (1,153,889)
Decrease in:
Receivables 418,923 147,537
Inventories 101,631 345,692
Prepaid Expenses 25,717 77,967
Increase (Decrease) in:
Accounts Payable (100,685) (428,444)
Accrued Income Taxes 273,271 46,630
Other Accrued Taxes 6,856 (12,564)
Other Accrued Liabilities 23,873 (27,953)
Deferred Investment Tax Credits (2,657) (2,657)
----------- -----------
Net Cash Provided by Operating Activities 3,633,386 3,625,290
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment, Net (5,987,188) (4,351,505)
Change in Notes Receivable 3,644 26,714
Purchase of Cellular Investments (3,220,682) --
Other, Net (87,997) (133,885)
----------- -----------
Net Cash Used in Investing Activities (9,292,223) (4,458,676)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments of Long-Term Debt (3,691,666) (525,001)
Issuance of Long-Term Debt 6,964,000 3,460,000
Retired Stock -- (980,577)
Dividends Paid (1,278,387) (1,283,110)
----------- -----------
Net Cash Provided by Financing Activities 1,993,947 671,312
----------- -----------
NET DECREASE IN CASH (3,664,890) (162,074)
CASH
AT BEGINNING OF PERIOD 4,245,683 700,744
----------- -----------
CASH
AT END OF PERIOD $ 580,793 $ 538,670
=========== ===========
The accompanying notes are an integral part of the financial statements.
7
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of New Ulm Telecom,
Inc. and its wholly owned subsidiaries. All material intercompany transactions
and accounts have been eliminated. Accounting practices prescribed by regulatory
authorities have been considered in the preparation of the financial statements
and formulation of accounting policies for telephone subsidiaries. These
policies conform with generally accepted accounting principles as applied to
regulated public utilities in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
(SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. Network access revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies and nationwide average
schedules. Revenues include estimates pending finalization of cost studies.
Network access revenues are based upon interstate tariffs filed with the Federal
Communications Commission by the National Exchange Carrier Association and state
tariffs filed with state regulatory agencies. Management believes recorded
revenues are reasonable based on estimates of cost separation studies, which are
typically settled within two years.
Income taxes have been calculated in proportion to the earnings and tax credits
generated by operations. Investment tax credits have been deferred and are
included in income over the estimated useful lives of the related assets. The
Company's effective income tax rate is higher than the U.S. rate due to the
effect of state income taxes.
The balance sheets and statement of stockholders' equity as of September 30,
2002 and statements of income and the statements of cash flows for the periods
ended September 30, 2002 and 2001 have been prepared by the Company without
audit. In the opinion management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the
8
financial position, results of operations, and changes in cash flows at
September 30, 2002 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 2001 Annual Report on form 10-K.
The results of operations for the periods ended September 30, 2002 are not
necessarily indicative of the operating results for the entire year.
NOTE 2 - BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic and diluted net income per common share is based on the weighted average
number of shares of common stock outstanding of 5,115,585 at September 30, 2002,
5,155,725 at September 30, 2001. All per share data has been restated to reflect
the three-for-one stock split effective January 10, 2002.
NOTE 3 - STATEMENTS OF CASH FLOW
Supplemental Disclosures of Cash Flow Information:
Cash paid during the nine months ended September 30:
2002 2001
---- ----
Interest $745,731 $525,171
Income taxes $1,578,650 $1,414,507
NOTE 4 - SECURED REDUCING REVOLVING CREDIT FACILITY
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. At September 30, 2002,
there was $13,875,000 of direct borrowings outstanding under this facility at an
interest rate of 3.19%. The Company also entered into a $10 million secured
ten-year reducing revolving credit facility, during fiscal 2001, maturing in
2011. The borrowings under the credit facility bear interest, at the Company's
option, at either fixed or variable rates linked to the Company's overall
leverage ratio. At September 30, 2002, there was $6,964,000 of direct borrowings
outstanding under this facility at an interest rate of 3.19%.
NOTE 5 - MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories are recorded at the lower of average cost or
market.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under the provisions of this accounting standard, goodwill
and intangible assets with
9
indefinite useful lives are no longer amortized but are instead tested for
impairment or useful lives on at least an annual basis.
At December 31, 2001 the Company had goodwill of $5,042,587, which was net of
accumulated amortization of $1,489,771. The Company determined that these assets
have indefinite useful lives and ceased amortization effective January 1, 2002.
The Company does not presently believe that these assets have been materially
impaired.
The Company owned 9.92% of Midwest Wireless Holdings, LLC (MWH) at September 30,
2002 (7.58% at December 31, 2001). The Company accounts for its investment in
MWH using the equity method, and earnings from the investment are material to
the Company's net income. At December 31, 2001 MWH had investments in cellular,
LMDS and PCS licenses totaling $187,212,000, net of amortization of $9,922,000.
MWH has determined that these licenses have indefinite useful lives and ceased
amortization on January 1, 2002.
The following table provides, on a pro forma basis, financial information for
the periods ended September 30, 2002 as if the provisions of SFAS 142 had been
effective January 1, 2001.
Three Months Ended September 30, Nine Months Ended September 30
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Operating Revenues $ 3,554,737 $ 3,234,741 $ 10,920,430 $ 9,790,426
Operating Expenses (2,974,920) (2,266,683) (8,199,976) (7,055,825)
Add back Amortization Expense 29,139 86,051
------------ ------------ ------------ ------------
Operating Income 579,817 997,197 2,720,454 2,820,652
Other Income, net 497,164 98,826 2,699,895 752,406
Add back pro rata share of Midwest
Wireless Holdings LLC amortization 131,128 393,384
------------ ------------ ------------ ------------
Income Before Income Taxes 1,076,981 1,227,151 5,420,349 3,966,442
Income Tax Expense (435,248) (447,627) (2,193,471) (1,458,480)
Tax Effect of Change in Amortization (52,451) (157,354)
------------ ------------ ------------ ------------
Net Income $ 641,733 $ 727,073 $ 3,226,878 $ 2,350,608
============ ============ ============ ============
Adjusted Basic and Diluted Net Income
Per Share $ 0.13 $ 0.14 $ 0.63 $ 0.46
============ ============ ============ ============
10
NOTE 7 - SEGMENT INFORMATION
The Company is organized into five business segments: New Ulm Telecom, Inc. and
its wholly owned subsidiaries, Western Telephone Company, Peoples Telephone
Company, New Ulm Phonery, Inc., and a cellular investment recorded on the equity
method. No single customer accounted for a material portion of the Company's
revenues in any of the last three years. The cellular investment is the
Company's investment in MWH and is shown using the proportionate consolidation
method.
Segment information is as follows:
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenues $ 1,990,960 $ 556,622 $ 273,360 $ 562,011 $ 3,987,720
Operating Expenses 1,997,895 381,136 186,851 264,564 2,880,085
------------- ------------- ------------- ------------- -------------
Operating income (6,935) 175,486 86,509 297,447 1,107,635
Interest expense (156,981) (161) (166,340)
Cellular Investment Income 192,227
Other Income (Expense) (108,436) 442 (52,763) 152 (126,384)
------------- ------------- ------------- ------------- -------------
Income before income taxes $ (272,352) $ 175,767 $ 225,973 $ 297,599 $ 814,911
============= ============= ============= ============= =============
Depreciation and amortization $ 667,534 $ 94,490 $ 38,192 $ 36,809 $ 477,467
============= ============= ============= ============= =============
Total Assets $ 52,182,091 $ 9,946,738 $ 5,117,188 $ 4,057,349 $ 31,990,476
============= ============= ============= ============= =============
Capital Expenditures $ 2,895,164 $ 27,057 $ 38,971 $ 933 $ 281,165
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER, 2002
Operating Revenues $ 7,370,673 $ 171,784 $ (3,987,720) $ 3,554,737
Operating Expenses 5,710,531 144,474 (2,880,085) 2,974,920
------------- ------------- ------------- -------------
Operating income 1,660,142 27,310 (1,107,635) 579,817
Interest expense (323,482) 166,340 (157,142)
Cellular Investment Income 192,227 622,684 814,911
Other Income (Expense) (286,989) -- 126,384 (160,605)
------------- ------------- ------------- -------------
Income before income taxes $ 1,241,898 $ 27,310 $ (192,227) $ 1,076,981
============= ============= ============= =============
Depreciation and amortization $ 1,314,492 $ -- $ (477,467) $ 837,025
============= ============= ============= =============
Total Assets $ 103,293,842 $ 7,151,306 $ (62,171,885) $ 48,273,263
============= ============= ============= =============
Capital Expenditures $ 3,243,290 $ -- $ (281,165) $ 2,962,125
------------- ------------- ------------- -------------
11
NOTE 7 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER 30, 2001
Operating Revenues $ 1,840,391 $ 533,472 $ 258,995 $ 453,144 $ 2,394,746
Operating Expenses 1,458,310 255,995 141,019 297,086 2,009,837
------------- ------------- ------------- ------------- -------------
Operating income 382,081 277,477 117,976 156,058 384,909
Interest expense (159,840) (8,909) (3,993) (139,372)
Cellular Investment Income
Other Income (Expense) 1,375 1,088 68,625 433 (45,490)
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 223,616 $ 269,656 $ 182,608 $ 156,491 $ 200,047
============= ============= ============= ============= =============
Depreciation and amortization $ 541,098 $ 90,490 $ 32,491 $ 47,979 $ 459,035
============= ============= ============= ============= =============
Total Assets $ 44,797,395 $ 9,741,504 $ 3,976,999 $ 3,432,265 $ 23,196,369
============= ============= ============= ============= =============
Capital Expenditures $ 1,486,306 $ (91,640) $ 58,800 $ 31,093 $ 754,980
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER, 2001
Operating Revenues $ 5,480,748 $ 148,739 $ (2,394,746) $ 3,234,741
Operating Expenses 4,162,247 114,273 (2,009,837) 2,266,683
------------- ------------- ------------- -------------
Operating income 1,318,501 34,466 (384,909) 968,058
Interest expense (312,114) 139,372 (172,742)
Cellular Investment Income 200,047 200,047
Other Income (Expense) 26,031 45,490 71,521
------------- ------------- ------------- -------------
Income before income taxes $ 1,032,418 $ 34,466 $ -- $ 1,066,884
============= ============= ============= =============
Depreciation and amortization $ 1,171,093 $ -- $ (459,035) $ 712,058
============= ============= ============= =============
Total Assets $ 85,144,532 $ 5,962,755 $ (53,874,149) $ 37,233,138
============= ============= ============= =============
Capital Expenditures $ 2,239,539 $ -- $ (754,980) $ 1,484,559
------------- ------------- ------------- -------------
12
NOTE 7 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenues $ 6,317,688 $ 1,762,101 $ 782,816 $ 1,595,996 $ 11,236,529
Operating Expenses 5,568,391 892,243 475,015 888,037 8,294,251
------------- ------------- ------------- ------------- -------------
Operating income 749,297 869,858 307,801 707,959 2,942,278
Interest expense (452,381) (5,830) (2,523) (677,313)
Cellular Investment Income 534,276
Gain on Cellular Dissolution 1,153,889
Other Income (Expense) (197,610) (52,691) (8,599) 675
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 99,306 $ 811,337 $ 1,984,844 $ 708,634 $ 2,264,965
============= ============= ============= ============= =============
Depreciation and amortization $ 2,002,603 $ 283,470 $ 114,578 $ 108,796 $ 1,445,257
============= ============= ============= ============= =============
Total Assets $ 52,182,091 $ 9,946,738 $ 5,117,188 $ 4,057,349 $ 31,990,476
============= ============= ============= ============= =============
Capital Expenditures $ 5,763,007 $ 63,471 $ 57,531 $ 103,179 $ 1,876,591
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenues $ 21,695,130 $ 461,829 $ (11,236,529) $ 10,920,430
Operating Expenses 16,117,937 376,290 (8,294,251) 8,199,976
------------- ------------- ------------- -------------
Operating income 5,577,193 85,539 (2,942,278) 2,720,454
Interest expense (1,138,047) 677,313 (460,734)
Cellular Investment Income 534,276 1,730,689 2,264,965
Gain on Cellular Dissolution 1,153,889 1,153,889
Other Income (Expense) (258,225) (258,225)
------------- ------------- ------------- -------------
Income before income taxes $ 5,869,086 $ 85,539 $ (534,276) $ 5,420,349
============= ============= ============= =============
Depreciation and amortization $ 3,954,704 $ -- (1,445,257) $ 2,509,447
============= ============= ============= =============
Total Assets $ 103,293,842 $ 7,151,306 (62,171,885) $ 48,273,263
============= ============= ============= =============
Capital Expenditures $ 7,863,779 $ -- $ (1,876,591) $ 5,987,188
============= ============= ============= =============
13
NOTE 7 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Operating Revenues $ 5,479,619 $ 1,671,824 $ 786,321 $ 1,391,734 $ 7,313,403
Operating Expenses 4,645,160 777,403 405,406 913,414 5,631,162
------------- ------------- ------------- ------------- -------------
Operating income 834,459 894,421 380,915 478,320 1,682,241
Interest expense (475,832) (27,430) (12,385) (559,073)
Cellular Investment Income
Other Income (Expense) 41,800 4,055 97,521 1,509
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 400,427 $ 871,046 $ 466,051 $ 479,829 $ 1,123,168
============= ============= ============= ============= =============
Depreciation and amortization $ 1,617,491 $ 277,610 $ 94,096 $ 142,573 $ 1,227,953
============= ============= ============= ============= =============
Total Assets $ 44,797,395 $ 9,741,504 $ 3,976,999 $ 3,432,265 $ 23,196,369
============= ============= ============= ============= =============
Capital Expenditures $ 4,154,053 $ 10,169 $ 87,926 $ 99,357 $ 2,157,173
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Operating Revenues $ 16,642,901 $ 460,928 $ (7,313,403) $ 9,790,426
Operating Expenses 12,372,545 $ 314,442 (5,631,162) 7,055,825
------------- ------------- ------------- -------------
Operating income 4,270,356 146,486 (1,682,241) 2,734,601
Interest expense (1,074,720) 559,073 (515,647)
Cellular Investment Income 1,123,168 1,123,168
Other Income (Expense) 144,885 144,885
------------- ------------- ------------- -------------
Income before income taxes $ 3,340,521 $ 146,486 $ -- $ 3,487,007
============= ============= ============= =============
Depreciation and amortization $ 3,359,723 $ -- (1,227,953) $ 2,131,770
============= ============= ============= =============
Total Assets $ 85,144,532 $ 5,962,755 (53,874,149) $ 37,233,138
============= ============= ============= =============
Capital Expenditures $ 6,508,678 $ -- $ (2,157,173) $ 4,351,505
============= ============= ============= =============
NOTE 8 - RECENT ACCOUNTING DEVELOPMENTS
New Ulm Telecom, Inc. and Subsidiaries adopted the provisions of SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets," as of January 1,
2002. SFAS No. 144 requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less cost to sell and
also sets forth requirements for recognizing and measuring impairment losses on
certain long-lived assets to be held or used. The adoption of SFAS No. 144 had
no impact on New Ulm Telecom, Inc. and Subsidiaries' financial position or its
results of operations.
14
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development or normal use of the asset. SFAS No. 143 is effective January 1,
2003. New Ulm Telecom, Inc. is currently evaluating the provisions of SFAS No.
143 and does not expect that adoption will have a material impact on its
financial position or its results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statements No.
64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers," and amends FASB Statement No. 13, "Accounting for Leases". In
March 2002, New Ulm Telecom, Inc. recorded an extraordinary loss of $161,419,
net of income tax benefit of $109,781, as a result of an extinguishment of debt.
Under SFAS No. 145, this extraordinary loss on debt extinguishment was
reclassified to Other (Expenses) Income.
NOTE 9 - CONTINGENCIES
New Ulm Telecom, Inc. is involved in certain contractual disputes in the
ordinary course of business. New Ulm Telecom, Inc. does not believe the ultimate
resolution of any of these existing matters will have a material adverse effect
on its financial position, results of operations, or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q contains forward-looking statements that are based on
management's current expectations, estimates and projections about the industry
in which New Ulm Telecom, Inc. operates and management's beliefs and
assumptions. Such forward-looking statements are subject to important risks and
uncertainties that could cause New Ulm Telecom Inc.'s future actual results to
differ materially from such statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and probabilities,
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements, whether as a result of new information, future events or otherwise.
You are cautioned not to place undue reliance on these forward looking
statements, which speak only as of the date on which they were made. Except as
otherwise
15
required by law, New Ulm Telecom, Inc. undertakes no obligation to update any of
its forward-looking statements for any reason.
OVERVIEW
- --------
The Company operates five business segments: the majority of its operations
consist of four segments that provide telephone and related ancillary services,
and cable television services to numerous communities in Minnesota and Iowa. A
fifth segment has a 9.92% interest in Midwest Wireless Holdings L.L.C. (MWH) and
records this investment on the equity method of accounting. The equity method is
used due to the influence the Company has over the operations and management of
MWH.
RESULTS OF OPERATIONS
---------------------
CONSOLIDATED OPERATING RESULTS
- ------------------------------
* Total operating revenues were $3,554,737 for the three months ended
September 30, 2002, for an increase of 9.9% or $319,996 compared to
the same period in 2001. Total operating revenues were $10,920,430 for
the nine months ended September 30, 2002, for an increase of
$1,130,004 or 11.5% compared to the same period in 2001. The increase
in operating revenues was primarily due to New Ulm Telecom sectors'
new and expanded service offerings: digital video and digital
subscriber line (DSL). New Ulm Telecom segment has invested heavily in
its infrastructure, which allows it to enhance its local network and
offer these new services to its subscribers. The New Ulm Telecom
segment also began operations of a Competitive Local Exchange Carrier
(CLEC) in the City of Redwood Falls, MN during the third quarter of
2002. It is expected that this geographic expansion of the Company's
service offerings will provide this segment with continued future
growth. The Western Telephone Company Segment has also contributed to
this increase in operating revenues with DSL and the billing during
the three-month period ending June 30, 2002 of wireless reciprocal
compensation for 2000 and 2001. The New Ulm Phonery segment
contributed to increased operating revenues through increased sales of
customer premise equipment (CPE), Internet billing, and revenues from
leased network capacity. All other segments had relatively no change.
* Operating expenses for the three months ended September 30, 2002
increased $708,237 or 31.2% compared to the same period in 2001.
Operating expenses for the nine months ended September 30, 2002
increased $1,144,151 or 16.2% compared to the same period in 2001. The
New Ulm Telecom segment provided $923,231 of the increase, with
$457,192 of the increase attributed to depreciation expense and
$245,630 of the increase reflecting Inter-exchange carrier (IXC)
write-off of receivables due to the bankruptcies of Worldcom and
Global Crossing, and $220,409 of the increase reflecting the
additional general and administrative expenses associated with the
Company's desire to compete in all aspects of communications services
and to provide superior customer service for our complete array of
products and services. This includes the costs associated with the
startup of the CLEC in Redwood Falls, MN. The Western Telephone
Company and Peoples Telephone Company segments also saw significant
increases in operating
16
expenses due to the write-off of bankrupt carrier receivables. The
bankruptcy write-offs totaled $153,898 for these two sectors. Total
Company write-offs of bankrupt carrier receivables equal $399,528.
* Other income for the three months ended September 30, 2002 increased
$398,338 over the three months ended September 30, 2001. Other income
for the nine months ended September 30, 2002 increased $1,947,489 over
the nine months ended September 30, 2001. The dissolution of Cherokee
Cellular, Inc. and Three Lakes Cellular, Inc., partnership interests
held in the Peoples Telephone segment, in Iowa during the three-month
period ended March 31, 2002 allowed the Company to recognize a gain on
dissolution of $1,153,880. This dissolution provided Peoples Telephone
Company with an opportunity to purchase additional units in MWH and
acquire a 2.34% interest in MWH, because some partners chose not to
assume their pro-rata share of MWH ownership units. The dissolution
was made possible due to the acquisition of these two organizations by
MWH. The corporations chose to take units in MWH as opposed to cash in
this exchange. The entities in the corporations, including Peoples
Telephone Company, voted unanimously to dissolve the corporations,
which allowed the MWH units to flow to each entity. 2002 revenue and
income growth of MWH realized a gain of $607,521 over the same period
in 2001. Due to the increased ownership in MWH through the dissolution
of the cellular corporations in Iowa and the purchase of additional
units in MWH, the Peoples Telephone segment realized additional
investment income of $534,276. Other investment income decreased
$130,577 for the six months ended September 30, 2002 over the same
period in 2001 due to the upgrading of Courtland CATV service to
digital video service and the subsequent write-off of un-utilized CATV
assets, the write-down of the investment in Onvoy, the reduction of
investment income for Fibercom, L.L.C., and the increase in the
investment income for CoBank. There was a $271,200 increase in
interest expense from the early extinguishments of debt. This interest
expense was the prepayment penalty on the debt with Phoenix Life
Mutual Insurance Company. On March 1, 2002 the Company repaid this
$2,566,666 of senior unsecured debt. The remaining $53,589 increase in
other income over 2001 was due to lower interest rates on the
Company's debt resulting in reduced interest expense in 2002 in
comparison to the prior year.
* Net income was $641,733 for the three months ended September 30, 2002
compared with $619,257 for the same period in 2001. Net income for the
nine months ended September 30, 2002 was $3,226,878 compared with
$2,028,527 for the same period in 2001. This $1,198,351 or 59.1%
increase was primarily attributed to our gains from the dissolution of
the cellular corporations.
In the Segment operations discussions which follow, specific discussion of
year-to-year comparisons are given. (See Note 7 - Segment Information) An
overall review of the year-to-year comparisons of Company operations is provided
in the following table:
17
Summary of Operations
For Three Months Ended For Nine Months Ended
- ----------------------------------------------------------------------------------------
9/30/02 9/30/01 9/30/02 9/30/01
- ----------------------------------------------------------------------------------------
Operating Income:
New Ulm Telecom $ (6,935) $ 382,081 $ 749,297 $ 834,459
Western Telephone 175,486 277,477 869,858 894,421
Peoples Telephone 86,509 117,976 307,801 380,915
New Ulm Phonery 297,447 156,058 707,959 478,320
Other 27,310 34,466 85,539 146,486
----------- ----------- ----------- -----------
Total 579,817 968,058 2,720,454 2,734,601
Other Income 654,306 271,568 3,431,829 1,268,053
Interest Expense (157,142) (172,742) (731,934) (515,647)
Income Taxes (435,248) (447,627) (2,193,471) (1,458,480)
----------- ----------- ----------- -----------
Net Income $ 641,733 $ 619,257 $ 3,226,878 $ 2,028,527
=========== =========== =========== ===========
Basic and Diluted
Earnings Per Share .13 .12 .63 .40
Weighted Average
Shares Outstanding 5,115,585 5,155,725 5,115,585 5,155,725
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
- -----------------------------------------
NEW ULM TELECOM OPERATIONS
New Ulm Telecom revenues represent 56.0% of the consolidated operating revenues
for the three-month period ended September 30, 2002 and 57.9% of the
consolidated operating revenues for the nine-month period ended September 30,
2002. Revenues are primarily earned by providing approximately 13,000 customers
access to New Ulm Telecom's local network, and by providing interexchange access
for long distance network carriers. The New Ulm Telecom segment also earns
revenue through billing and collecting for various long distance companies,
directory advertising, and providing video services (a new venture undertaken in
2001) to its subscribers. The New Ulm Telecom segment also began offering CLEC
services in the City of Redwood Falls, MN in July 2002. Total New Ulm Telecom
segment revenues for the three-month period ending September 30, 2002 grew
$150,572 or 8.2% over the same period last year. Total New Ulm Telecom segment
revenues for the nine-month period ending September 30, 2002 increased $838,072
or 15.3% over the same period in 2001.
Local network revenue increased in the New Ulm Telecom segment by $104,479 or
16.1% for the three months ended September 30, 2002 compared to the same period
in 2001. Local
18
network revenue increased in the New Ulm Telecom segment by $249,513 or 12.8%
for the nine months ended September 30, 2002. Local network revenue increased
during these periods despite the fact that the number of access lines decreased
0.9% from September 30, 2001 to September 30, 2002. Targeted marketing and
promotions and packaging of vertical services, most notably, the introduction of
DSL, to supplement basic line charges, achieved this revenue increase. DSL,
which is used to provide high-speed access to the Internet, was responsible for
approximately $222,000 of the increase. A local service rate increase beginning
in February 2001 provided approximately $18,000 additional local service
revenues for the nine month period ending September 30, 2002 over the same
period ending in 2001.
Network access revenue decreased $8,572 or 0.1% for the three months ended
September 30, 2002 compared with the same period in 2001. Network access revenue
increased $293,639 or 10.4% for the nine months ended September 30, 2002. The
company experienced a 2.8% decrease in access minutes for the three months ended
September 30, 2002 and a 6.0% decrease in access minutes for the nine month
period ending September 30, 2002, a common industry trend. The New Ulm Telecom
segment has invested over $15 million in capital expenditures during the past
two years. These capital expenditures have enhanced this segment's
infrastructure and have allowed New Ulm Telecom to receive additional
settlements from the National Exchange Carrier Association (NECA). The
additional investment in the New Ulm Telecom local loop (access line cost) has
made the Company eligible for high cost loop funding through the NECA pools.
Other operating revenues increased $54,662 or 20.0% for the three months ended
September 30, 2002 and $294,917 or 42.6% for the nine months ended September 30,
2002 compared with the same periods in 2001. Due to the infrastructure
enhancements that have taken place since 2000, the New Ulm Telecom segment has
been able to begin offering video services over the existing infrastructure. The
video product was responsible for the majority of the increase in these
revenues. Also contributing to the revenue increase was the offering of
telephone, digital video, and DSL services in the Redwood Falls, MN CLEC
beginning in July 2002. The CLEC had revenue of $9,754 for the quarter and
year-to-date ending September 30, 2002.
Operating income decreased $389,016 or 101.8% for the three months ended
September 30, 2002 and $85,162 or 10.2% for the nine months ended September 30,
2002 compared with the same periods in 2001. The decrease in operating income
was primarily due to the $245,630 write-off of bankrupt carrier receivables, and
the $457,192 increase in depreciation due to the growing investment in our
infrastructure. Operating revenues increased by $838,069 for the nine month
period ending September 30, 2002 over the same period in 2001 due to growth
associated with our new service offerings of video and DSL, and the additional
settlements from NECA, including high-cost loop funding. The $838,069 in
increased revenues combined with a $923,231 increase in operating expenses
resulted in the $85,162 decrease in operating income.
Cash operating expenses increased $413,149 or 45.0% for the three-month period
ended September 30, 2002 and $538,119 or 17.8% for the nine-month period ended
September 30, 2002 compared with the same periods ended in 2001. Cash operating
expenses have increased due to the write-off of bankrupt carrier receivables,
and the increasing array of services offered such as video and DSL. The New Ulm
Telecom segment realized the need to compete in all
19
aspects of communication services. This realization motivated the segment to
enhance its awareness of customer satisfaction, additional services (video and
DSL), aggressive marketing (brand recognition) and solutions for our customers'
communications needs. The Company also realizes growth potential by
competitively offering its array of services in an increasing number of
communities. The Company began offering competitive services competitively in
the City of Redwood Falls, MN in September 2002. The Company is always striving
for cost efficiencies and technological improvement to maintain its operating
margins for the New Ulm Telecom segment.
Noncash operating expenses increased $126,436 or 23.4% for the three months
ended September 30, 2002 and $385,112 or 23.8% for the nine months ended
September 30, 2002 compared with the same periods in 2001. Depreciation expense
was the main cause of this increase. The $436,008 increase in depreciation
expense was reflective of the new investments of over $15 million in the
segment's infrastructure. Also, a $21,184 increase in amortization of leasehold
improvements reflects the Company's continued growth and expansion, and the need
for additional office and retail space. These increases were offset by a $72,080
decrease in the amortization of goodwill expense for the nine months ended
September 30, 2002 (See note 6) due to new accounting standard SFAS No. 142,
"GOODWILL AND OTHER INTANGIBLE ASSETS", effective January 1, 2002.
Other income for the nine months ended September 30, 2002 decreased $216,025
over the same period in 2001. The primary source of this decrease was the
$192,305 interest charge resulting from the early extinguishment of debt with
Phoenix Life Mutual Insurance Company. On March 1, 2002, the New Ulm Telecom
segment repaid its senior unsecured debt with Phoenix Life Mutual Insurance
Company. The resulting interest charge was the prepayment penaltt on the debt.
Other items contributing to the decrease in other income for the nine months
ended September 30, 2002 included the upgrading of Courtland CATV service to
digital video service and the subsequent write-off of un-utilized CATV assets,
the write-down of the investment in Onvoy, and the increase in the investment
income for CoBank.
The EBITDA(1) for this segment was $660,599 for the quarter ended September 30,
2002 compared with $923,179 for the same quarter in 2001. For the nine months
ended September 30, 2002 the EBITDA was $2,751,900 compared to $2,451,950 for
the same period in 2001. This $299,950 or 12.2% increase was realized primarily
through increased revenues.
WESTERN TELEPHONE COMPANY OPERATIONS
Western Telephone Company (Western) revenues represent 15.7% of the consolidated
operating revenues for the three months ended September 30, 2002 and 16.1% of
the consolidated operating revenues for the nine months ended September 30,
2002. Revenues are primarily earned by providing approximately 2,600 customers
access to Western's local network, and providing interexchange access for long
distance carriers. Western earns revenue through billing and collecting for
various long distance companies, directory advertising, cable television
service, and Internet access to its subscribers.
20
Local network revenues increased in the Western segment by $24,587 or 27.1% for
the three months ended September 30, 2002 compared to the same period in 2001.
Local network revenues increased in the Western segment by $79,346 or 29.0% for
the nine months ended September 30, 2002 compared to the same period in 2001.
This revenue increase was accomplished with the promotion and packaging of
vertical services, most notably, the introduction of DSL, to supplement basic
line charges. DSL was responsible for approximately $36,000 of the 2002
increase. The nine months ended September 30, 2002 also realized an increase of
$33,706 in revenue due to the billing of certain wireless reciprocal
compensation.
Network access revenue increased $1,431 or 0.4% for the three-month period ended
September 30, 2002 compared to the same period ended in 2001. Network access
revenue increased $32,777 or 3.0% for the nine-month period ended September 30,
2002. Access minutes increased 0.3% for the three months ended September 30,
2002 and decreased 3.6% for the nine months ended September 30, 2002. The
negative effects of network access pricing, a common industry trend, are
expected to erode the increases in volume of switched minutes of use, minimizing
future increases in network access revenue. The continued utilization of the
Internet (e-mail, voice-over-IP) will continue to decrease the volume of
switched minutes of use. The Western Telephone segment has offset these
decreases with increased settlements from NECA and through increased high-cost
loop funding.
Operating income decreased $101,991 or 36.8% for the three months ended
September 30, 2002 and $24,563 or 2.8% for the nine months ended September 30,
2002 compared with the same periods in 2001. The decrease in operating income
was primarily due to the write-off of inter-exchange carrier receivables due to
bankruptcy. The decrease in operating income due to this $115,289 write-off was
partially offset by an increase in revenues associated with our new service
offering of DSL, the back billing for wireless reciprocal compensation, and
increased settlements from NECA, which includes high-cost loop funding.
Cash operating expenses increased $121,142 or 73.2% for the three months ended
September 30, 2002 compared to the three months ended September 30, 2001. Cash
operating expenses increased $108,981 or 21.8% for the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001. The
cause of the increase in cash operating expenses was the $115,289 write-off of
bankrupt carrier receivables. While cash operating expenses increased, it was
wholly attributable to the write-off of bankrupt carrier receivables. All other
cash operating expenses remained steady due to Western's success with striving
for cost efficiencies and controlling expenses.
Noncash operating expenses increased $4,000 or 4.4% for the quarter ended
September 30, 2002 compared to the same period ended in 2001. Noncash operating
expenses increased $5,860 or 2.1% for the nine months ended September 30, 2002
compared to the same period ended in 2001. Depreciation was the main cause of
this increase. The increase was reflective of the steady amount of capital
investments.
Other income for the nine months ended September 30, 2002 decreased $35,146 over
the same period in 2001. The primary source of this decrease was the $54,240
interest charge resulting from the early extinguishment of debt with Phoenix
Life Mutual Insurance Company. On March
21
1, 2002, Western repaid its senior unsecured debt with Phoenix Life Mutual
Insurance Company. The resulting interest charge is the prepayment penalties on
the debt. Due to the retirement of the above-mentioned debt, Western had a
decrease in its ordinary interest expense of 21,600 for the nine months ending
September 30, 2002 compared to the nine-month period ending September 30, 2001.
The EBITDA(1) for this segment was $269,976 for the quarter ended September 30,
2002 compared with $367,967 for the same quarter in 2001. For the nine months
ended September 30, 2002 the EBITDA was $1,153,328 compared to $1,172,031 for
the same period in 2001. This $18,703 or 1.6% decrease was realized primarily
through increased cash operating expenses.
PEOPLES TELEPHONE COMPANY OPERATIONS
Peoples Telephone Company (Peoples) revenues represent 7.7% of the consolidated
operating revenues for the three months ended September 30, 2002 and 7.2% of the
consolidated operating revenues for the nine months ended September 30, 2002.
Revenues are primarily earned by providing approximately 920 customers access to
Peoples' local network, and in providing interexchange access for long distance
carriers. Peoples also earns revenue through billing and collecting for various
long distance companies, directory advertising, cable television service, and
Internet access to it subscribers.
Local network revenue increased in Peoples by $2,062 or 6.0% for the three-month
period ended September 30, 2002 compared to the same period in 2001. Local
network revenues increased in the Peoples Telephone Company segment by $10,663
or 10.3% for the nine months ended September 30, 2002. The revenue increases
were accomplished with promotion and packaging of vertical services, most
notably, the introduction of DSL to supplement basic line charges. DSL was
responsible for approximately $9,500 of the 2002 increase.
Network access revenue increased $2,612 or 1.5% and access minutes decreased
2.4% for the three months ended September 30, 2002 compared to the same period
in 2001. Network access revenue decreased $19,138 or 3.6% and access minutes
decreased 4.9% for the nine months ended September 30, 2002 compared to the same
period in 2001. The negative effects of network access pricing, a common
industry trend, are expected to erode the increases in volume of switched
minutes of use, minimizing future increases in network access revenue. The
continued utilization of the Internet (e-mail, voice-over-IP) will continue to
decrease the volume of switched minutes of use. The construction of a fiber
route in 1998 and 1999 allowed Peoples to gain access to a larger fiber optic
network. This network increased access revenue due to an increase in transport
facilities, which minimized the network access revenue decrease caused by the
decrease in access minutes of use. Network access revenues have also been
impacted by an increase in the high-cost loop reimbursements and an increase in
the amount charged to customers for service line connection charges (SLC).
Operating income decreased $31,467 or 26.7% for the three months ended September
30, 2002 and $73,114 or 19.2% for the nine months ended September 30, 2002
compared with the same periods in 2001. Approximately $19,000 of the decrease in
operating income is the result of decreased network access revenues due to
decreased volume of switched minutes of use. The
22
remainder of the decrease in operating income was the result of increases in
operating expenses which occurred due to the costs associated with new service
offerings, such as DSL, increased depreciation due to capital investments for
this segment, and the write-off of $38,509 of bankrupt carrier receivables.
Cash operating expenses increased $40,131 or 37.0% for the three-month period
ended September 30, 2002 compared to the same period ended 2001. Cash operating
expenses increased $49,127 or 15.8% for the nine-month period ended September
30, 2002. Cash operating expenses have increased due to the number of services
offered, such as DSL, and the write-off of bankrupt carrier receivables.
Noncash operating expenses increased $5,701 or 17.5% for the three months ended
September 30, 2002 compared to the three months ended September 30, 2001.
Noncash operating expenses increased $20,482 or 21.8% for the nine months ended
September 30, 2002 compared to the same period in 2001. Depreciation expense was
the main cause for this increase. The increase in depreciation was reflective of
the capital investments in this segment.
Other income increased $74,832 for the three-month period ended September 30,
2002 compared to the same period ended 2001. Other income increased by
$1,591,907 for the nine months ended September 30, 2002 compared to the nine
months ended September 30, 2001. The main sources of the increase were the gain
recognized from the dissolution the cellular corporations in the first quarter
of 2002, which accounted for $1,153,889 of the increase, and income from the MWH
investment due to increased ownership through the dissolution and the purchase
of additional units accounted for $534,276 of the increase, which was Peoples'
portion of MWH income that was recorded using the equity method of accounting.
Peoples had a 2.34% interest in MWH and records this investment on the equity
method of accounting because of the influence Peoples has over the operations
and management of MWH.. Other income decreased $24,655 due to interest charges
resulting from the early extinguishment of debt with Phoenix Life Mutual
Insurance Company. On March 1, 2002, Peoples repaid its senior unsecured debt
with Phoenix Life Mutual Insurance Company. The resulting interest charge was
the prepayment penalties on the debt. Due to the retirement of the
above-mentioned debt, Peoples had a decrease in its ordinary interest expense of
$10,000 for the nine months ending September 30, 2002 compared to the nine-month
period ending September 30, 2001. Peoples also had a decrease in its other
investment income of $80,703 due to the decrease in investment income for
Fibercom, L.L.C. caused by its write-off of receivables due to the bankruptcies
of Global Crossing and Worldcom.
The EBITDA(1) for this segment was $124,701 for the three months ended September
30, 2002 compared with $150,467 for the same period in 2001. The EBITDA for the
nine months ended September 30, 2002 was $422,379 compared with $475,011 for the
same period ended September 30, 2001. This $52,632 or 11.1% decrease was
primarily due to decreased access network revenues and the write-off of bankrupt
carrier receivables.
23
NEW ULM PHONERY OPERATIONS
New Ulm Phonery (Phonery) represents 15.8% of the consolidated operating
revenues for the three-month period ended September 30, 2002 and 14.6% for the
nine-month period ended September 30, 2002. Revenues are earned primarily by
sales, installation and service of business telephone systems and data
communications equipment and access to Internet services in the service areas
served by New Ulm Telecom, Inc. (New Ulm and Redwood Falls, Minnesota). In
addition, the Phonery leases network capacity to provide additional network
access revenues. This segment's expertise is the quality installation and
maintenance of wide area networking, local networking and transport solutions in
communication to end user customers.
Operating revenue increased $108,867 or 24.0% for the three months ended
September 30, 2002 and $204,262 or 14.7% for the nine months ended September 30,
2002 compared to the same periods ended 2001. This increase was primarily due to
increased Internet revenues and revenues from the sale of customer premise
equipment.
Cash operating expenses decreased $21,352 or 8.6% for the three months ended
September 30, 2002 compared to the three months ended September 30, 2001. Cash
operating expenses increased $8,400 or 1.1% for the nine months ended September
30, 2002 compared with the nine months ended September 30, 2001. This nine-month
increase can be attributed to the need to compete in all aspects of the
communication services. This realization has motivated the segment to enhance
its awareness of customer satisfaction, aggressive marketing (brand recognition)
and solutions for our customers' communications needs. Increased emphasis of
Internet access by our customers has led to increased customer service hours
(24x7 access to support), maintenance of facilities, marketing and advertising,
and the additional need for larger (more bandwidth) access points. The Phonery
is striving for cost efficiencies and technological improvements to maintain its
operating margins.
Noncash operating expenses decreased $11,170 or 23.3% for the quarter ended
September 30, 2002 and 33,777 or 23.7% for the nine months ended September 30,
2002 compared with the same periods in 2001. The decrease was attributable to a
drop in depreciation expense, as some of the Phonery's capital investment has
become fully depreciated due to the Phonery's aggressive depreciation schedule
making it possible for the Phonery to continually offer products and services
providing its customers the ability to stay on the cutting edge of technology.
The EBITDA(1) for this segment was $334,256 for the quarter ended September 30,
2002 compared with $204,037 for the same period in 2001. The EBITDA(1) for this
segment was $816,755 for the nine-month period ended September 30, 2002 compared
with $620,893 for the same period in 2001. This $195,862 or 31.5% increase was
primarily due to increased Internet revenues and a reduction in the cost of
installation and repair of inside wiring.
- -------------------------
(1) - EBITDA represents operating income plus depreciation and amortization
expense. EBITDA, which is not a measure of financial performance or liquidity
under generally accepted accounting principles, is provided because the Company
understands that such information is used by certain investors when analyzing
the financial position and performance of the Company. Because of the variety of
methods used by companies and analysts to calculate EBITDA, and the fact that
EBITDA calculations may not accurately measure a company's ability to meet debt
service requirements, caution should be used in relying on any EBITDA
presentation. The Company sees value in disclosing its calculation of EBITDA for
the financial community and in displaying the change in EBITDA. The Company
believes an increasing EBITDA depicts increased ability to attract financing and
increased valuation of the Company's business.
24
CELLULAR INVESTMENT
The Company has a 9.92% ownership in MWH. The segment information is shown using
the proportionate consolidation method. Segment amounts represent 9.92% of MWH
financial statement totals at September 30, 2002. Segment amounts represent
7.58% of MWH totals at September 30, 2001. Cellular investment income increased
$614,864 or 307.4% for the three months ended September 30, 2002 compared to the
same period ended in 2001. Cellular investment income increased $1,141,797 or
101.7% for the nine months ended September 30, 2002 compared to the same period
in 2001. This increase was the result of revenue and income growth as MWH gains
market share and an additional 2.34% MWH interest acquired by Peoples through
the dissolution of two Cellular Corporations and the purchase of additional
units in 2002. The additional units purchased were the result of a number of
partners in Three Lakes Cellular, Inc not taking advantage of their right to
purchase additional units. This allowed Peoples to make an additional investment
in MWH Also, the adoption of SFAS No. 142 by MWH resulted in a decrease in
amortization expense of $131,128 for the cellular investment for the three-month
period ended September 30, 2002 and $393,384 for the nine-month period ended
September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CAPITAL STRUCTURE
The total long-term capital structure (long-term debt plus shareholders' equity)
for New Ulm Telecom, Inc. was $43,132,247 at September 30, 2002, reflecting
55.2% equity and 44.8% debt. This compares to a capital structure of $37,544,756
at December 31, 2001, reflecting 58.2% equity and 41.8% debt. Management
believes adequate internal and external resources are available to finance
ongoing operating requirements, including capital expenditures, business
development, debt service and the payment of dividends for at least the next
twelve months.
CASH FLOWS
Cash provided by operations was $3,633,386 for the nine-month period ended
September 30, 2002 compared to $3,625,290 for the nine-month period ended
September 30, 2001. Cash flows from operations for the nine months ended
September 30, 2002 and 2001 were primarily attributable to net income plus
non-cash expenses for depreciation and amortization.
Cash flows used in investing activities were $9,292,223 for the nine months
ended September 30, 2002 compared to $4,458,676 for the same period in 2001.
Purchase of cellular investments were $3,220,682 for the nine months ended
September 30, 2002 due to the purchase of shares by
25
Peoples Telephone Company in MWH due to the dissolution of Three Lakes Cellular,
Inc. and the Cherokee Cellular, Inc. compared to no capital outlay for the
purchase of cellular investments for the same period in 2001. Capital
expenditures relating to on-going businesses were $5,987,188 during the first
nine months of 2002 as compared to $4,351,505 for the same period in 2001.
Capital expenditures were incurred primarily to enhance the Company's
infrastructure and to construct additional network facilities to provide CLEC
services in Redwood Falls, MN.
Cash flows provided by financing activities was $1,993,947 for the nine-month
period ended September 30, 2002 compared to cash flows provided by financing
activities of $671,312 for the nine-month period ended September 30, 2001.
Included in cash flows used in financing activities are debt repayments, debt
borrowings, repurchased and retired stock, and dividend payments. During the
first nine months of 2002, New Ulm Telecom, Inc. borrowed $6,964,000 under its
revolving credit facility to cover cash requirements, primarily to repay
$2,566,666 of senior unsecured debt with Phoenix Life Mutual Insurance Company
and to cover cash requirements for capital expenditures. During the first nine
months of 2001, New Ulm Telecom, Inc. borrowed $3,460,000 to cover cash
requirements, primarily for capital expenditures.
DIVIDENDS
The Company paid dividends of $1,278,387 during the first three quarters of 2002
compared to $1,283,110 for the same time period in 2001. These were dividends of
$.0833 per share per quarter, which was equal to the $.0833 per share per
quarter dividends paid in 2001. The Company's reinvested growth in equity has
come about while maintaining dividends to shareholders. The Company has made no
announcements or plans to change the dividends above historic levels for the
remainder of 2002. Paying dividends at the existing level is not expected to
negatively impact the liquidity of the Company.
SHARE REPURCHASE PROGRAM
In 2001 the Company's Board of Directors authorized management to repurchase
shares of Company common stock. During 2001, the Company repurchased 26,760
shares for $981,000. During the first three months of 2001, the Company
repurchased 12,990 shares for $476,277. During the quarter ended June 30, 2001,
the Company repurchased 13,770 shares for $504,723. The Company has no plans to
repurchase any shares in 2002.
WORKING CAPITAL
Working capital was $140,582 as of September 30, 2002, compared to working
capital of $4,191,972 as of December 31, 2001. The 2001 net working capital
included over $3,000,000 of CoBank loan advances received in December 2001.
These funds were expended in the first quarter 2002. They were used to purchase
additional common stock investments in two cellular corporations and early
retirement of Phoenix Life Mutual Insurance Company long-term debt. The decrease
in working capital is primarily due to the increase in accrued income taxes and
the reduction of cash and cash equivalents. The ratio of current assets to
current liabilities was 1.0:1.0 as of September 30, 2002 and 2.4:1.0 as of
December 31, 2001.
26
LONG-TERM DEBT
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. This ten-year loan
requires equal monthly payments of $125,000. At September 30, 2002, there was
$13,875,000 of direct borrowings outstanding under this facility at an interest
rate of 3.19%.
In addition, the Company entered into a $10 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. Principal payments of
$250,000 per quarter begin once the funds are fully drawn or any lesser amount
borrowed. At September 30, 2002, there was $6,964,000 of direct borrowings
outstanding under this facility at an interest rate of 3.19%.
The Company had three unsecured notes payable to Phoenix Home Life Mutual
Insurance Company. By mutual agreement these notes were paid in full on March 1,
2002 using debt financing from CoBank.
OTHER
The Company has not conducted a public equity offering. It operates with
original equity capital, retained earnings and recent additions to indebtedness
in the form of senior debt and bank lines of credit. The Company is comfortable
with debt to total capital proportions of 40 to 55 percent.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does the Company use derivative financial instruments in its
operations or investment portfolio. The Company's earnings are affected by
changes in interest rates as its long-term debt is based on variable rates.
Should interest rates rise significantly, management would likely act to
mitigate its exposure to the change by converting a portion of its variable-rate
debt to fixed-rate debt.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed, is accumulated and communicated to management timely. Within the
90-day period prior to the filing date of this periodic report, the Company
carried out an evaluation under the supervision and with the participation of
its management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls
27
and procedures are effective in timely alerting them to material information
relating to the Company required to be disclosed in periodic filings with the
SEC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None
SIGNATURES
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 thereunto duly authorized.
NEW ULM TELECOM, INC.
Dated: November 11, 2002 By /s/ James P. Jensen
-------------------------
James P. Jensen, Chairman
Dated: November 11, 2002 By /s/ Bill Otis
-------------------------
Bill Otis, President
CERTIFICATIONS
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO RULE 13A-14
I, Bill Otis, President and Chief Executive Officer of New Ulm Telecom, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of
September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
28
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 11, 2002 By /s/ Bill Otis
-----------------------------------------
Bill Otis
President and Chief Executive Officer
29
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO RULE 13A-14
I, Chris Hopp, Chief Financial Officer of New Ulm Telecom, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly
30
report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: November 11, 2002 By /s/ Chris Hopp
---------------------------
Chris Hopp
Chief Financial Officer
31
INDEX TO EXHIBITS
Exhibit
Number Description
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32