UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
( ) 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 of (I.R.S. Employer Identification
incorporation or organization) No.)
27 North Minnesota Street
New Ulm, Minnesota 56073
-----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number including area code: 507-354-4111
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $1.66 par value
Title of Class
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ___ No _X_
As of June 30, 2002, the aggregate market value of the common stock held by
non-affiliates of the registrant was $58,317,669 based on the last sale price of
$11.40 on The OTC Bulletin Board.
The total number of shares of the registrant's common stock outstanding as of
February 7, 2003: 5,115,585.
Documents Incorporated by Reference: Information required by Part III, Items
10-13 of this document are incorporated by reference to specific portions of the
registrant's definitive proxy statement for the annual meeting of shareholders
to be held May 15, 2003.
PART I
ITEM 1. BUSINESS
GENERAL
New Ulm Telecom, Inc. (the Company) was incorporated in 1905 under the laws of
the State of Minnesota, with headquarters in New Ulm, Minnesota. The Company's
principal line of business is the operation of local exchange telephone
companies (LECs). In the telecommunications industry, local exchange companies
generate the largest share of total revenues. The Company's core business is the
operation of three LECs. This business consists of connecting customers to the
telephone network, providing switched service and dedicated private lines,
connecting customers to long distance service providers and providing many other
services associated with LECs. The Company also provides cable television
services, Internet access services, long distance service and installs and
maintains telephone systems to the areas surrounding its LEC service territory
in southern Minnesota and northern Iowa. In addition, the Company undertook
business startup initiatives in the competitive local exchange carrier business
in 2002.
The five wholly-owned subsidiaries of New Ulm Telecom, Inc. and the business
segments in which they operate are:
NEW ULM TELECOM SECTOR
o New Ulm Telecom, Inc. (NUT) - Parent Company, a Minnesota
Corporation
WESTERN TELEPHONE SECTOR
o Western Telephone Company (WTC), a Minnesota Corporation
PEOPLES TELEPHONE SECTOR
o Peoples Telephone Company (PTC), an Iowa Corporation
NEW ULM PHONERY SECTOR
o New Ulm Phonery, Inc. (Phonery), a Minnesota Corporation
CELLULAR SECTOR
o New Ulm Cellular #9, Inc. (Cell #9), a Minnesota
Corporation; containing only the investment income from
Midwest Wireless Holdings L.L.C. (MWH)
OTHER SECTOR
o New Ulm Long Distance, Inc. (NULD), a Minnesota Corporation
o Cell #9, a Minnesota Corporation; containing only the
operating activities of Cell #9
The Company and its subsidiaries are engaged in businesses that provide services
to their customers for a fee. These services are repetitive and recurring, and,
as a result, backlog orders and seasonality are not significant factors. Working
capital requirements primarily involve the funding of the construction and
maintenance of telephone fixed assets, the payroll costs of highly skilled labor
and the inventory to service its telephone equipment customers.
The materials and supplies which are necessary for the operation of the
businesses of New Ulm Telecom, Inc. and its subsidiaries are available from a
variety of sources, and no future supply problems are anticipated. All of the
Company's incumbent local exchange carrier (ILEC) and competitive local exchange
carrier (CLEC) central office switches are the Nortel Brand. Nortel is a leading
supplier of communications equipment, and the Company's dependence on this brand
is not viewed as a significant risk. In addition, the Company invested heavily
in digital loop carrier equipment in New Ulm, Minnesota and Redwood Falls,
Minnesota. This equipment is manufactured by Next Level Communications, which
allows the Company to offer the converged services of voice, video and high
speed internet access utilizing one platform. The Company's dependence on this
brand is not viewed as a significant risk.
2
Patents, trademarks, licenses, franchises and concessions are not significant in
the businesses of the Company or its subsidiaries.
The Company and its subsidiaries are not dependent upon any single customer or
small group of customers. There is no customer that accounts for ten percent or
more of the Company's consolidated revenues.
There is no material portion of the businesses of the Company or its
subsidiaries which may be subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the Government.
The Company and its subsidiaries do not foresee any material investment in any
new products or services.
The Company and its subsidiaries operate only in southern Minnesota and northern
Iowa and have no foreign operations, customers, or assets.
The Company and its subsidiaries do not engage in material research and
development activities.
The Company does not have any collective bargaining agreements with its
employees.
As of December 31, 2002, the Company had 63 full-time equivalent employees.
ACQUISITIONS
The dissolution, in January 2002, of Cherokee Cellular, Inc. (CCI) and Three
Lakes Cellular, Inc. (TLCI), which is explained in the Disposition section
below, allowed the Company to increase its direct ownership in MWH. PTC acquired
an additional 12,050 units in MWH through the dissolution of these two
C-Corporations.
The dissolution of TLCI allowed PTC to acquire additional units in MWH. PTC
acquired 12,295 units from other partners in Three Lakes Cellular, Inc. for
approximately $1,940,000 in cash. The gain on dissolution is in the Peoples
Telephone Company Sector and the investment income subsequent to this
transaction is recorded in the Cellular Investment Sector.
DISPOSTIONS
In January of 2002, Cherokee Cellular, Inc. (CCI) and Three Lakes Cellular, Inc.
(TLCI), which contained units of MWH, dissolved. These corporations contained
MWH units. PTC had a partnership interest in each corporation. The C
Corporations entered into a transaction that allowed CCI and TLCI to transfer
MWH shares directly to the partners. The partners of CCI and TLCI assumed an
increase in the value of MWH resulting in a taxable gain and felt this decision
will minimize future taxes upon the appreciation in value of MWH. The
transaction contained no cash. Recognition of the gain occurred due to the step
up value resulting in the appreciation of the value of MWH. The Company recorded
a pre-tax gain of $1,157,915 ($697,065 net of tax).
INDUSTRY SEGMENTS FINANCIAL DATA
Financial information about New Ulm Telecom, Inc.'s industry segments is
included on pages 15 to 21 and 43 to 44 of this Form 10-K.
3
INDUSTRY SEGMENTS
The Company's operations are conducted in the following five segments:
NEW ULM TELECOM SECTOR
NUT is an independent telephone company which is regulated by the Minnesota
Public Utilities Commission (MPUC). NUT has not experienced a major change in
the scope or direction of its operations during the past year. At December 31,
2002, the Company served 13,500 access lines. NUT provides telephone service in
Minnesota to the cities of New Ulm, Courtland, Klossner, Searles, Redwood Falls
(city only) and the adjacent rural areas in Brown, Nicollet and Blue Earth
counties in south central Minnesota approximately 90 miles southwest of
Minneapolis, Minnesota. NUT operates three cable television systems in Minnesota
(in the cities of New Ulm, Courtland and Redwood Falls), servicing approximately
2,300 customers.
NUT derives its principal revenues from local service charges to its subscribers
and access charges to interexchange carriers for providing access to the long
distance network. Revenues are also received from long distance carriers for
providing the billing and collection of long distance toll calls to subscribers.
Alternatives to NUT service include customers leasing private line switched
voice and data services in or adjacent to the territories served by NUT, which
permits the bypassing of local telephone facilities. In addition, microwave
transmission services, wireless communications, fiber optic and coaxial cable
deployment and other services permit bypass of the local exchange network. These
alternatives to local exchange service represent a potential threat to NUT's
long-term ability to provide local exchange services at economical rates.
In order to meet this competition, NUT has deployed new technology for its local
exchange network to increase operating efficiencies and to provide new services
to its customers. These new technologies include the latest release of digital
switching technology on all of NUT's switches and installation of SS7 (an
out-of-band system) for all of its access lines. NUT has also begun construction
(anticipated to be completed in 2003) of a fiber ring (redundant route designs
which allow traffic to re-route if trouble appears in the line) that will
protect its interexchange network, which NUT believes will enable it to provide
a very reliable level of service to its customers. The utility of the local
network is also enhanced by the ability to offer high speed internet (digital
subscriber line, or DSL) to 90% of its customers. In addition, NUT has enhanced
the network to offer video services over the same facilities that provides its
customers with voice and internet access. This technology is available to
approximately 65% of its access lines.
NUT currently has competition in the provision of plain old telephone service
(POTS) in Redwood Falls, Minnesota. The incumbent provider is Qwest (NUT entered
Redwood Falls as a CLEC in September 2002). Competition does not currently exist
in the other communities and areas served by NUT for POTS. NUT's competitor for
video services in New Ulm, Minnesota is the incumbent of Time Warner. In Redwood
Falls, Minnesota the incumbent is Mediacom. NUT constantly responds to
competitive pressure with active programs to market products and to enhance its
infrastructure for higher customer satisfaction.
Competition also exists for some of the services provided by interexchange
carriers, such as customer billing services, dedicated private lines, and
network switching. This competition comes primarily from the interexchange
carriers themselves. The provision of these services is of a contractual nature
and is primarily controlled by the interexchange carriers. Other services, such
as directory advertising, operator services and cellular communications, are
open to competition. Competition is based primarily on service and experience.
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WESTERN TELEPHONE SECTOR
WTC is an independent telephone company which is regulated by the Minnesota
Public Utilities Commission (MPUC). WTC has not experienced a major change in
the scope or direction of its operations during the past year. At December 31,
2002, WTC served 2,500 access lines. WTC provides telephone service in Minnesota
to the cities of Springfield, Sanborn and the adjacent rural areas in Brown and
Redwood counties in south central Minnesota approximately 120 miles southwest of
Minneapolis, Minnesota. WTC operates two cable television systems in Minnesota
(in the cities of Sanborn and Jeffers), servicing approximately 220 customers.
WTC derives its principal revenues from local service charges to its subscribers
and access charges to interexchange carriers for providing access to the long
distance network. Revenues are also received from long distance carriers for
providing the billing and collection of long distance toll calls to subscribers.
Alternatives to WTC service include customers leasing private line switched
voice and data services in or adjacent to the territories served by WTC, which
permits the bypassing of local telephone facilities. In addition, microwave
transmission services, wireless communications, fiber optic and coaxial cable
deployment and other services permit bypass of the local exchange network. These
alternatives to local exchange service represent a potential threat to WTC's
long-term ability to provide local exchange services at economical rates.
In order to meet this competition, WTC has deployed new technology for its local
exchange network to increase operating efficiencies and to provide new services
to its customers. These new technologies include the latest release of digital
switching technology on all of WTC's remote switches and installation of SS7 (an
out-of-band system) for all of its access lines. WTC has also begun construction
(anticipated to be completed in 2003) of a fiber ring (redundant route designs
which allow traffic to re-route if trouble appears in the line) that will
protect its interexchange network, which WTC believes will enable it to provide
a very reliable level of service to its customers. The utility of the local
network is also enhanced by the ability to offer high speed internet (digital
subscriber line, or DSL) to 90% of its customers. In addition, WTC is planning
to enhance its network to offer video services over the same facilities that
provides its customers with voice and internet access in 2003.
WTC does not currently have competition in the provision of POTS. Competition
does exist for some of the services provided by interexchange carriers, such as
customer billing services, dedicated private lines, and network switching. This
competition comes primarily from the interexchange carriers themselves. The
provision of these services is of a contractual nature and is primarily
controlled by the interexchange carriers. Other services, such as, directory
advertising, operator services and cellular communications, are open to
competition. Competition is based primarily on service and experience.
PEOPLES TELEPHONE SECTOR
PTC is an independent telephone company which is regulated by the Iowa Utilities
Board (IUB). PTC has not experienced a major change in the scope or direction of
its operations during the past year. At December 31, 2002, PTC served 900 access
lines. PTC provides telephone service in Iowa to the city of Aurelia and the
adjacent rural areas in Cherokee and Buena Vista counties in north western Iowa
approximately 60 miles east of Sioux City, IA. PTC operates one cable television
system in Iowa (in the city of Aurelia), servicing approximately 370 customers.
PTC derives its principal revenues from local service charges to its subscribers
and access charges to interexchange carriers for providing access to the long
distance network. Revenues are also received from long distance carriers for
providing the billing and collection of long distance toll calls to subscribers.
5
Alternatives to PTC service include customers leasing private line switched
voice and data services in or adjacent to the territories served by PTC, which
permits the bypassing of local telephone facilities. In addition, microwave
transmission services, wireless communications, fiber optic and coaxial cable
deployment and other services permit bypass of the local exchange network. These
alternatives to local exchange service represent a potential threat to PTC's
long-term ability to provide local exchange services at economical rates.
In order to meet this competition, PTC has deployed new technology for its local
exchange network to increase operating efficiencies and to provide new services
to its customers. These new technologies include the latest release of digital
switching technology in PTC's remote switch and installation of SS7 (an
out-of-band system) for all of its access lines. PTC has also constructed a
fiber ring (redundant route designs which allow traffic to re-route if trouble
appears in the line) that protects its interexchange network, which allows PTC
to provide a very reliable level of service to its customers. The utility of the
local network is also enhanced by the ability to offer high speed internet
(digital subscriber line, or DSL) to 70% of its customers.
PTC does not currently have competition in the provision of POTS. Competition
does exist for some of the services provided by interexchange carriers, such as
customer billing services, dedicated private lines, and network switching. This
competition comes primarily from the interexchange carriers themselves. The
provision of these services is of a contractual nature and is primarily
controlled by the interexchange carriers. Other services, such as, directory
advertising, operator services and cellular communications, are open to
competition. Competition is based primarily on service and experience.
PTC owns a 12.59% interest in Fibercomm, L.C., a limited liability company, that
provides competitive local exchange service in Sioux City, IA. In addition, PTC
owns a 2.34% interest in MWH.
NEW ULM PHONERY SECTOR
Phonery is a non-regulated telecommunications business which provides internet
services, sells and services telephone apparatus, toll transport services and
provides voice-mail services on a retail level primarily in the areas served by
the New Ulm Telephone Sector, Western Telephone Sector and Peoples Telephone
Sector. The Phonery specializes in the quality custom installation and
maintenance of local networking and transport solutions in telecommunications
for end user customers.
There are a number of companies engaged in the sale of telephone equipment at
the retail level competing with the Phonery. Several companies also compete with
the Phonery in providing internet services. Competition is based primarily on
price, service, and experience. No company is dominant in this field.
CELLULAR SECTOR
Cell #9 owns a 7.58% and PTC owns a 2.34% interest in a limited liability
company, MWH, that provides cellular phone service in southern Minnesota,
northwestern Iowa and southwestern Wisconsin. Cell #9 and PTC, in this sector,
derive their equity earnings from their percentage ownership in MWH. The MWH
investment is a separate segment that is recorded on the equity method of
accounting.
6
OTHER REGULATION
The Company and its subsidiaries anticipate no material affects on their capital
expenditures, earnings or competitive position because of laws relating to the
protection of the environment.
OTHER COMPETITION
As a result of the Telecommunications Act of 1996, telephone companies no longer
have an exclusive franchise service area. Under the law, competitors may offer
telephone service to the Company's customers and request access to the Company's
local network facilities. The law also permits existing telephone companies to
offer telephone service outside their existing franchise service area. The law
includes universal service provisions, interconnection requirements, and rules
mandating how competition will be implemented. The Federal Communications
Commission (FCC) and state regulatory agencies are responsible for establishing
rule making procedures to implement the law. The rule making procedures are not
complete and a number of court cases have already been filed challenging various
aspects of the rules and procedures. Until the rule making procedures are
complete and the court issues settled, the Company cannot predict how the new
law will affect its business.
Since the mid-1990's New Ulm Telecom, Inc.'s business strategy has been to
position itself as a "one-stop" telecommunications provider. The Company
believes that its customers value the fact that it is the "local company" whose
goal is to meet the customers' total communications needs. The Company believes
that it has several competitive advantages: its prices and costs are low; its
service quality and reputation are high; its commitment to the communities it
services is unparalleled; its investment in technology is strong and it has a
direct billing relationship with almost all of the customers in its service
territories.
The long-range effect of competition on the provision of telecommunications
services and equipment will depend on technological advances, regulatory actions
at the state and federal levels, court decisions, and possible additional future
state and federal legislation. The trend resulting from past legislation has
been to expand competition in the telecommunications industry.
FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements that are based on
management's current expectations, estimates and projections about the industry
in which the Company operates and management's beliefs and assumptions. Such
forward-looking statements are subject to important risks and uncertainties that
could cause the Company'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. Factors that might cause
differences include:
o increased competition in core business sectors which may decrease
market share and or effect the pricing of services or products;
o the ability to retain key employees;
o changing market conditions which may affect growth rates in the
industry;
o the ability to secure financing for future expansion and operations;
o the ability to improve operations with new technologies;
o the investment in technological innovations which may affect future
capital needs;
o the continuation of historical trends;
o the economy in general;
7
o the future of the communications industry and communications
services;
o the effect of legal and regulatory changes which may have an effect
on business;
o sufficient cash generation from current operations to fund future
liquidity needs;
o other risk and uncertainties which may affect the operating results.
Additional information concerning these and other factors that could cause
actual results or events to differ materially from current expectations are
contained herein. 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 required by law, the Company undertakes no obligation to
update any of its forward-looking statements for any reason.
ITEM 2. PROPERTIES
The three operating telephone companies own central office equipment. The
central office equipment is used to record, switch and transmit the telephone
calls. NUT's host central office equipment was purchased in 1991 and consists of
a Nortel Networks DMS-100/200 digital switch. NUT also has remote switching
sites in three locations: two in New Ulm and one in the city of Courtland. The
equipment at these remote switching sites is housed within specially designed
central office equipment buildings.
Western Telephone Company installed Nortel Networks remote central office
equipment in 1996. This remote switching equipment utilizes the host switch in
New Ulm. Western Telephone Company also has a remote switching site in the city
of Sanborn. The equipment at Sanborn is housed within a specially designed
central office equipment building.
Peoples Telephone Company's central office equipment was installed in 1999 and
consists of a Nortel Networks RSC digital remote switch. The Company leases most
switching facilities from Fibercomm, LLC.
The Company owns various buildings and related land as follows:
(1) New Ulm Telecom, Inc. owns a building which is located at 400
Second Street North, New Ulm, Minnesota. It was originally
constructed in 1918 with various additions and remodeling through
the years. This building contains business offices and central
office equipment. The building also has warehouse and garage
space. This building contains approximately 23,700 square feet of
floor space.
(2) New Ulm Telecom, Inc. constructed a warehouse in 1992 that is
located at 225 20th South Street, New Ulm, Minnesota. The
warehouse has 10,800 square feet of space and is used primarily
as a storage facility for trucks, generators, trailers, plows and
inventory used in outside plant construction.
(3) New Ulm Telecom, Inc. has three remote central office buildings
that are located on the north side of New Ulm, the south side of
New Ulm, and in Courtland. These buildings contain central office
equipment that remote off of New Ulm's main central office
equipment.
(4) New Ulm Telecom, Inc. owns a tower and land located
north/northwest of the city of New Ulm along Highway 14 in
Nicollet County.
8
(5) New Ulm Telecom, Inc. owns land located at the corner of 7th
Street South and Valley Street in New Ulm, Minnesota. This lot is
utilized as storage for poles and cable inventory and contains
approximately 5,000 square feet of fenced-in storage area.
(6) New Ulm Telecom, Inc. leases a building located at 27 North
Minnesota in New Ulm, Minnesota. The building contains
approximately 14,000 square feet of space and is used primarily
as a retail location housing customer support services and
business offices.
(7) New Ulm Telecom, Inc. owns a building located at 137 E. 2nd
Street, Redwood Falls, Minnesota. This building contains business
offices and central office equipment. This building contains
approximately 1,540 square feet of floor space.
(8) New Ulm Telecom, Inc. has three remote central office buildings
in Redwood Falls, Minnesota that are located at 1105 South Mill
Street, 220 Veda Drive and 620 Walnut Street. These buildings
contain central office equipment that remote off of New Ulm's
main central office equipment.
(9) Western Telephone Company owns a building at 22 South Marshall,
Springfield, Minnesota. This building contains the business
office and central office equipment. This building contains
approximately 2,100 square feet of floor space.
(10) Western Telephone Company has a building in Sanborn, Minnesota,
which contains central office equipment that remotes off of
Western's central office equipment.
(11) Western owns a warehouse located at 22 South Marshall,
Springfield, Minnesota. This building is used as a storage
facility for vehicles, other work equipment and inventory used in
outside plant construction. This building contains approximately
3,750 square feet of space.
(12) Peoples Telephone Company owns a building at 221 Main Street,
Aurelia, Iowa that houses the business office, central office
equipment and cable television headend equipment. The building
contains approximately 1,875 square feet of floor space.
(13) Peoples Telephone Company owns a building that is adjacent to its
main office building at 217 Main Street, Aurelia, Iowa. This
building is available to expand the present main office building.
The building contains approximately 1,875 square feet of floor
space.
(14) Peoples Telephone Company owns a warehouse, including office,
building at 133 1/2 Main Street, Aurelia, Iowa, that contains
approximately 1,100 square feet of warehouse space and 525 square
feet of office space.
(15) Peoples Telephone Company also owns a vacant lot at 121 Main
Street, Aurelia, Iowa, that is 25' x 100'.
In addition, New Ulm Telecom, Western Telephone Company and Peoples Telephone
Company own the lines, cables and associated outside physical plant utilized in
providing telephone service in their service areas. New Ulm Telecom, Western
Telephone Company and Peoples Telephone Company own the cables and equipment to
provide cable television services.
9
New Ulm Phonery, Inc. owns internet equipment and equipment leased to
subscribers such as telephone sets and other similarly used instruments.
The Registrant believes that its property is suitable and adequate to provide
the necessary services and believes all properties are adequately insured. Note
7 to the financial statements, found at Part II Item 8 herein, describes the
mortgages and collateral relating to the above properties, while Note 2
describes the composite depreciation rate.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending or threatened involving the Registrant
or any of its subsidiaries at this time in any court, nor are there any
proceedings known to be contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the executive officers of
the Company as of December 31, 2002.
NAME AND AGE POSITION
------------ --------
BILL OTIS President and Chief Executive Officer
(45) - New Ulm Telecom, Inc.
BARBARA BORNHOFT Vice-President and Secretary
(46) - New Ulm Telecom, Inc.
CHRISTOPHER HOPP Controller and Treasurer
(34) - New Ulm Telecom, Inc.
The officers of the Company are elected annually and serve at the discretion of
the Board of Directors. None of the Company's officers is employed pursuant to a
written employment contract.
10
Background of Executive Officers
Bill Otis has been President and Chief Executive Officer of the Company since
1985. Prior to being President and Chief Executive Officer of the Company he was
hired as the Officer Manager/Controller for New Ulm Telecom, Inc. in 1979. Mr.
Otis is also a director of Midwest Wireless L.L.C.
Barbara Bornhoft has been Vice President/Secretary of the Company since 1998.
Chris Hopp has been Controller/Treasurer of the Company since 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is not traded on an exchange or in the
over-the-counter market; as such, it has a limited market. As of December 31,
2002, there were approximately 1,309 holders of record of the Company's common
stock.
Our common stock is traded on the OTC Bulletin Board under the symbol "NULM."
The table below sets forth the approximate high and low closing prices for our
common stock for the periods indicated as reported by the OTC Bulletin Board.
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
Common Stock
------------
High Low
2002: ---- ---
-----
1st quarter $ 12.50 $ 11.37
2nd quarter $ 11.40 $ 11.35
3rd quarter $ 11.00 $ 11.00
4th quarter $ 10.45 $ 9.25
2001:
-----
1st quarter $ 11.67 $ 9.37
2nd quarter $ 9.50 $ 9.25
3rd quarter $ 9.83 $ 9.70
4th quarter $ 10.25 $ 9.68
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Dividends
Dividends were declared quarterly in 2002, 2001 and 2000.
Dividends were $.33 in 2002, $.33 in 2001 and $.33 per share in 2000. The
dividends per share data have been restated to reflect the three-for-one stock
split effective January 10, 2002. Any increase in dividends will be decided by
the Board of Directors based on anticipated earnings, capital requirements and
the operating and financial condition of the Company.
ITEM 6. SELECTED FINANCIAL DATA
Selected Income Statement Data for registrant and subsidiaries (consolidated):
Year Ended December 31
----------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- ---------------- --------------- ---------------- ----------------
Operating Revenues $ 14,334,243 $ 13,334,822 $ 12,485,337 $ 11,757,082 $ 10,478,643
Operating Expenses 10,753,858 9,406,647 8,145,769 7,106,612 6,333,981
Operating Income 3,580,385 3,928,175 4,339,568 4,650,470 4,144,662
Other Income (Expenses) 3,043,946 810,702 829,696 1,132,540 1,230,569
Income Taxes 2,634,350 1,970,639 2,206,137 2,136,011 2,136,011
Net Income 3,989,981 2,768,238 2,963,127 3,329,423 3,239,220
Basic and Diluted Net Income
Per Share .78 .54 .57 .64 .62
Dividends Per Share .33 .33 .33 .32 .36
Selected Balance Sheet Data:
Year Ended December 31
----------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- ---------------- --------------- ---------------- ----------------
Current Assets $ 5,226,671 $ 7,202,902 $ 4,182,561 $ 4,235,750 $ 5,223,431
Current Liabilities 5,369,847 3,010,930 2,708,359 2,013,263 2,332,221
Working Capital (143,176) 4,191,972 1,474,202 2,222,487 2,891,210
Total Assets 53,311,383 42,851,780 34,958,288 27,027,069 26,043,448
Long-Term Debt 22,667,091 17,566,666 9,857,333 3,300,000 3,666,666
Stockholders' Equity 24,130,220 21,844,756 21,766,504 20,552,582 18,868,991
Book Value Per Share 4.72 4.27 4.19 3.95 3.63
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR 2002, 2001 AND 2000
As described on pages 2 to 6, 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 several communities
in Minnesota and Iowa. A fifth segment has a 9.92% interest in 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 this
LLC.
CONSOLIDATED RESULTS OF OPERATIONS
o 2002 consolidated revenues were $14,334,000, compared with $13,334,000
in 2001, an increase of $1,000,000 or 7.5%. The New Ulm Telecom sector
provided $940,000 of the increase with the continued success of its
new service offerings: digital video and digital subscriber line
(DSL), which began in 2001, and the introduction of competitive local
exchange services in Redwood Falls, Minnesota. New Ulm Telecom, Inc.
invested $7,800,000 in its infrastructure, which allowed it to enhance
its local network, offer new services to its subscribers and expand
its service territory to Redwood Falls, Minnesota. All other segments
had no material change.
o 2002 consolidated operating expenses were $10,754,000, compared with
$9,407,000 in 2001, an increase of $1,347,000 or 14.3%. The New Ulm
Telecom, Inc. sector provided $1,061,000 of the increase, with
$619,000 of the increase attributed to depreciation expense and
$246,000 of the increase reflecting Inter-exchange carrier (IXC)
write-off of receivables due to the bankruptcies of WorldCom and
Global Crossing, and $196,000 of the increase reflecting the
additional general and administrative expenses associated with the
steps taken by the Company to compete in all aspects of communication
services and to provide exceptional customer service for our complete
array of products and services and the introduction of CLEC services
in Redwood Falls, Minnesota. The Western Telephone Company and Peoples
Telephone Company segments also saw significant increases in operating
expenses due to the write-off of bankrupt carrier receivables. The
bankruptcy write-offs total $154,000 for these two sectors. Total
company write-offs of bankrupt carrier receivables in fiscal year 2002
were $400,000.
o 2002 consolidated net income was $3,989,000 compared with $2,768,000
in 2001. The increase in consolidated net income was $1,231,000 or
44.4%. The increase was attributed to the pretax gain of $1,157,000
($697,000 after-tax) of the dissolution of the two corporations within
the Peoples Telephone sector and the pre-tax increase in partnership
income from MWH of $1,580,000 ($950,000 after-tax) due to MWH's
increase in profitability and the direct ownership increase in MWH
attributable to the dissolution of the two cellular corporations in
Iowa and the additional units purchased at the time of that
dissolution.
13
o 2001consolidated revenues were $13,334,000, compared with $12,485,000
in 2000, an increase of $849,000 or 6.8%. The NUT sector provided
$702,000 of the increase with the introduction of new service
offerings: digital video and digital subscriber line (DSL). NUT
invested $8,000,000 in its infrastructure, which allowed it to enhance
its local network and offer these new services to its subscribers. All
other segments had no material change.
o 2001 consolidated operating expenses were $9,406,000, compared with
$8,146,000 in 2000, an increase of $1,260,000 or 15.5%. The New Ulm
Telecom, Inc. sector provided $1,156,000 of the increase, with
$756,000 of the increase attributed to depreciation expense. The
remaining $400,000 is associated with additional expenses (programming
fees, transport costs, employee costs, advertising) incurred with the
introduction of video services offered in the City of New Ulm,
Minnesota.
o 2001 consolidated net income was $2,768,000 compared with $2,963,000
in 2000. The decrease in consolidated net income was $195,000 or 6.6%.
In the Segment operations discussions which follow, specific discussion of
year-to-year changes by segment are given. An overall review of the year-to-year
changes in Company operations is provided in the following table:
SUMMARY OF OPERATIONS - BEFORE INTERCOMPANY ELIMINATIONS
- --------------------------------------------------------
2002 2001 2000
--------------- --------------- --------------
Year Ended December 31:
Operating Income:
New Ulm Telecom $ 1,076,202 $ 1,193,964 $ 1,648,539
Western Telephone 1,108,959 1,278,040 1,289,103
Peoples Telephone 400,169 490,644 476,003
New Ulm Phonery 825,939 750,750 720,454
Other 169,116 214,777 205,469
---------------- ---------------- ---------------
Total 3,580,385 3,928,175 4,339,568
Other Income 3,943,563 1,483,044 1,247,739
Interest Expense (899,617) (672,342) (418,043)
Income Taxes (2,634,350) (1,970,639) (2,206,137)
---------------- ---------------- ---------------
Net Income $ 3,989,981 $ 2,768,238 $ 2,963,127
================ ================ ===============
Basic and Diluted Earnings Per Share $ .78 $ .54 $ .57
Weighted Average Shares Outstanding 5,115,585 5,135,655 5,196,615
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
14
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
NEW ULM TELECOM OPERATIONS
New Ulm Telecom revenues represent 58.6% of 2002 consolidated operating
revenues. Revenues are primarily earned by providing approximately 13,500
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, Minnesota in
September 2002. Total New Ulm Telecom segment revenues have grown 23.6% since
2000. All information contained in this table is before intercompany
eliminations.
2002 2001 2000
--------------- -------------- ---------------
Operating Revenues:
Local Network $ 3,067,035 $ 2,751,689 $ 2,398,257
Network Access 4,203,193 3,970,146 3,886,447
Other 1,361,520 965,956 701,398
---------------- --------------- ----------------
Total Operating Revenues 8,631,748 7,687,791 6,986,102
---------------- --------------- ----------------
Cash Operating Expenses 4,586,304 4,062,075 3,661,598
Noncash Operating Expenses 2,969,242 2,431,752 1,675,965
---------------- --------------- ----------------
Total Operating Expenses 7,555,546 6,493,827 5,337,563
---------------- --------------- ----------------
Operating Income 1,076,202 1,193,964 1,648,539
---------------- --------------- ----------------
Net Income 135,360 179,585 775,184
---------------- --------------- ----------------
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA(1)) 4,045,444 3,625,716 3,324,504
Capital Expenditures $ 6,828,746 $ 6,723,454 $ 8,507,375
- -------------------------------
(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.
NUT revenues increased $944,000 or 12.3% in 2002 over 2001 and $702,000 or 10.0%
in 2001 over 2000.
Local network revenue increased in the New Ulm Telecom segment by $315,000 or
11.5% in 2002 over 2001 and $354,000 or 14.7% in 2001 over 2000. The increases
are significant considering the number of access lines decreased 1.1% in 2002
over 2001, due to the adoption of Digital Subscriber Line (DSL) for internet
access, and increased only 2.1% in 2001 over 2000. The revenue increases were
accomplished with promotion and packaging of vertical services, most notably,
DSL, to supplement basic line charges. DSL, which is used to provide high-speed
access to the internet, was responsible for approximately $170,000 of the 2002
increase. The Company also entered into a number of interconnect agreements,
which allows competitive providers access to our customers at the local service
level, with wireless providers that enhanced local service revenues by $56,000
for 2002 over 2001. Providing enhanced 911 services to our subscribers enabled
the Company to increase revenues by $38,000 in 2002 over 2001. Competitive
service offerings in Redwood Falls contributed an additional $35,000 in 2002
over 2001. A local service rate increase beginning in February 2001 provided
$200,000 additional local service revenues in 2001 over 2000.
15
Network access revenue increased $233,000 or 5.9% in 2002 over 2001 and $84,000
or 2.2% in 2001 over 2000. Access minutes in 2002 decreased by 7.9% over 2001
and 2001 decreased by 4.4% over 2000. The increases in network access revenue in
2002 were significant considering the decrease in minutes of use and the
negative effects of network access pricing, a common industry trend. The New Ulm
Telecom segment has invested $22,000,000 in capital expenditures since 2000.
These capital expenditures, enhancing this segment's infrastructure, have
allowed New Ulm Telecom to receive additional settlements from the National
Exchange Carrier Association (NECA). New Ulm Telecom has now become eligible for
high-cost loop funding.
Other operating revenues increased $396,000 or 41.0% in 2002 over 2001 and
increased $265,000 or 37.8% in 2001 over 2000. 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 $426,000 of enhanced revenues in 2002 as
compared to 2001. The CLEC in Redwood Falls provided additional revenues of
$20,000 in 2002 over 2001. The take back of billing and collecting services by
IXC's resulted in a loss of revenues from 2002 to 2001 of $80,000, for billing
and collection revenues.
Cash operating expenses increased $524,000 or 12.9% in 2002 over 2001 and
$400,000 or 10.9% in 2001 over 2000. Cash operating expenses have increased due
to the write-off of bankrupt carrier receivables totaling $246,000, and the
increasing array of services offered, such as video and DSL. The New Ulm Telecom
segment realized the need to compete in all 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' communication needs. The Company
is striving for cost efficiencies and technological improvements to maintain its
operating margins in the New Ulm Telecom segment.
Noncash operating expenses increased $537,000 or 22.1% in 2002 over 2001 and
$756,000 or 45.1% in 2001 over 2000. Depreciation expense is the main cause of
these increases. The increase in depreciation expense is reflective of the new
investments of $22,000,000 in the segment's infrastructure as mentioned above.
These investments have allowed the Company to offer video and DSL services, as
well as expand its service territory to Redwood Falls, Minnesota. These
increases were offset by a $96,000 decrease in the amortization of goodwill
expense, due to new accounting standard SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS", effective January 1, 2002.
The New Ulm Telecom segment capital expenditures for 2002 were $6,829,000. The
single largest construction project consisted of building facilities in Redwood
Falls, Minnesota for CLEC activities. The segment had capital projects of
$6,723,000 in 2001 and $8,507,000 in 2000 due to the overbuild of the city of
New Ulm, allowing NUT to offer video and DSL to its customers utilizing the same
infrastructure. The segment's capital budget for 2003 is approximately
$1,900,000.
16
WESTERN TELEPHONE COMPANY OPERATIONS
Western Telephone Company revenues represent 15.8% of 2002 consolidated
operating revenues. Revenues are primarily earned by providing approximately
2,500 customers access to Western Telephone Company's local network, and in
providing interexchange access for long distance network carriers. The Western
Telephone Company segment also earns revenue through billing and collecting for
various long distance companies, directory advertising, cable television
service, and Internet access to its subscribers. Total Western Telephone Company
segment revenues have grown .7% since 2000. All information contained in this
table is before eliminations.
2002 2001 2000
--------------- -------------- ---------------
Operating Revenues:
Local Network $ 497,559 $ 383,139 $ 320,083
Network Access 1,461,871 1,565,633 1,582,366
Other 372,792 392,360 412,986
---------------- --------------- ----------------
Total Operating Revenues 2,332,222 2,341,132 2,315,435
---------------- --------------- ----------------
Cash Operating Expenses 832,794 677,895 652,117
Noncash Operating Expenses 390,469 385,197 374,215
---------------- --------------- ----------------
Total Operating Expenses 1,223,263 1,063,092 1,026,332
---------------- --------------- ----------------
Operating Income 1,108,959 1,278,040 1,289,103
---------------- --------------- ----------------
Net Income 689,545 798,815 796,541
---------------- --------------- ----------------
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA(1)) 1,499,428 1,663,237 1,663,318
Capital Expenditures $ 716,534 $ 181,906 $ 367,813
Western Telephone Company revenues decreased $9,000 or .4% in 2002 over 2001 and
$26,000 or 1.1% in 2001 over 2000.
Local network revenue increased in the Western Telephone Company segment by
$114,000 or 29.9% for 2002 over 2001 and $63,000 or 19.7% for 2001 over 2000.
The increases are significant considering the number of access lines decreased
2.1% in 2002 over 2001 and increased .6% in 2001 over 2000. The revenue
increases were accomplished with promotion and packaging of vertical services,
most notably, the introduction of DSL, to supplement basic line charges. DSL,
which is used to provide high-speed access to the internet, was responsible for
approximately $50,000 of the 2002 increase. The year ending 2002 also realized
an increase of $50,000 in revenue due to the billing of certain wireless
reciprocal compensation.
Network access revenue decreased $104,000 or 6.6% and $17,000 or 1.1% in 2002
over 2001 and 2001 over 2000, respectively. Access minutes decreased 5.2% in
2002 over 2001 and 2.3% in 2001 over 2000. The negative effects of network
access pricing, a common industry trend, will likely erode any potential
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) and wireless services will continue to decrease the volume of
switched minutes of use.
17
Cash operating expenses increased $154,000 or 22.8% in 2002 over 2001 and
$26,000 or 4.0% in 2001 over 2000. The single largest reason for the increase in
cash operating expenses was due to the write-off of carrier receivables,
$115,000, in 2002. In addition, cash operating expenses have increased due to
the number of services offered. The Western Telephone Company segment recognized
the need to compete in all aspects of communication services. This realization
has motivated the segment to enhance its awareness of customer satisfaction,
additional services (DSL), aggressive marketing (brand recognition) and
solutions for our customers' communication needs. The Company is striving for
cost efficiencies and technological improvements to maintain its operating
margins in the Western Telephone Company segment.
Noncash operating expenses increased $5,000 or 1.4% in 2002 over 2001 and
$11,000 or 2.9% in 2001 over 2000. Depreciation was the main cause of this
increase. This increase was reflective of the steady amount of capital
investments. These increases were offset by a $18,000 decrease in the
amortization of goodwill expense, due to new accounting standard SFAS No. 142,
"GOODWILL AND OTHER INTANGIBLE ASSETS", effective January 1, 2002.
The Western Telephone Company segment capital expenditures for 2002 were
$716,534, in part due to one time expenditures to construct a fiber route from
Sanborn to Redwood Falls. The capital expenditure in 2001 was likely more
reflective of a typical year. The segment had capital projects of $182,000 in
2001 and $368,000 in 2000 due to the construction of a fiber route, which is
used to provide transport routes to a point of interconnection in Windom,
Minnesota.
PEOPLES TELEPHONE COMPANY OPERATIONS
Peoples Telephone Company revenues represent 6.8% of 2002 consolidated operating
revenues. Revenues are primarily earned by providing approximately 900 customers
access to Peoples Telephone Company's local network, and in providing
interexchange access for long distance network carriers. The PTC segment also
earns revenue through billing and collecting for various long distance
companies, directory advertising, cable television service, and internet access
to its subscribers. All information contained in this table is before
eliminations.
2002 2001 2000
--------------- -------------- ---------------
Operating Revenues:
Local Network $ 150,852 $ 141,654 $ 109,306
Network Access 615,791 690,392 687,666
Other 230,984 210,698 195,179
---------------- --------------- ----------------
Total Operating Revenues 997,627 1,042,744 992,151
---------------- --------------- ----------------
Cash Operating Expenses 448,508 417,076 397,348
Noncash Operating Expenses 148,950 135,024 118,800
---------------- --------------- ----------------
Total Operating Expenses 597,458 552,100 516,148
---------------- --------------- ----------------
Operating Income 400,169 490,644 476,003
---------------- --------------- ----------------
Net Income 1,347,423 410,652 309,318
---------------- --------------- ----------------
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA(1)) 549,119 625,668 594,803
Capital Expenditures $ 118,340 $ 206,403 $ 78,410
Peoples Telephone Company revenues decreased $45,000 or 4.3% in 2002 over 2001
and increased $51,000 or 5.1% in 2001 over 2000.
18
Local network revenue increased in the Peoples Telephone Company segment by
$9,000 or 6.5% in 2002 over 2001 and $32,000 or 29.6% in 2001 over 2000. The
increases are significant considering the number of access lines served
decreased 2.3% in 2002 over 2001 and increased .3% during 2001 over 2000. The
revenue increases were accomplished with promotion and packaging of vertical
services, most notably, the introduction of digital subscriber line (DSL), to
supplement basic line charges. DSL, which is used to provide high-speed access
to the internet, was responsible for approximately $12,000 of the 2002 increase.
Network access revenue decreased $75,000 or 10.8% in 2002 over 2001 and
increased $3,000 or .4% in 2001 over 2000. Access minutes decreased 6.1% in 2002
over 2001 and increased 1.7% in 2001 over 2000. The negative effects of network
access pricing, a common industry trend, will erode any potential 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) and
wireless services will continue to decrease the volume of switched minutes of
use.
Cash operating expenses increased $31,000 or 7.5% in 2002 over 2001 and $20,000
or 5.0% in 2001 over 2000. The single largest reason for the increase in cash
operating expenses was due to the write-off of carrier receivables, $39,000, in
2002. Cash operating expenses have increased due to the number of services
offered. The Peoples Telephone Company segment recognized the need to compete in
all aspects of communication services. This realization has motivated the
segment to enhance its awareness of customer satisfaction, additional services
(DSL), aggressive marketing (brand recognition) and solutions for our customer's
communication needs. The Company is striving for cost efficiencies and
technological improvements to maintain its operating margins in the Peoples
Telephone Company segment.
Noncash operating expenses increased $14,000 or 10.3% in 2002 over 2001 and
$16,000 or 13.7% in 2001 over 2000. Depreciation was the main cause of this
increase. This increase was reflective of the steady amount of capital
investments totaling $480,388 since 2000.
The Peoples Telephone Company segment capital expenditures for 2002 were
$118,000. The single largest construction project consisted of building
facilities in the PTC serving area to offer advanced calling features and access
to DSL. The segment had capital projects of $206,000 in 2001 and $78,000 in
2000. Capital expenditures in 2002 were more reflective of a typical year.
19
NEW ULM PHONERY OPERATIONS
New Ulm Phonery represents 14.1% of 2002 consolidated operating revenues.
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, Redwood
Falls, Springfield and Sanborn, Minnesota). In addition, the Company 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.
All information contained in this table is before eliminations.
2002 2001 2000
--------------- -------------- ---------------
Operating Revenues $ 2,081,868 $ 1,895,268 $ 1,890,770
---------------- --------------- ----------------
Cash Operating Expenses 1,098,341 1,021,336 1,035,045
Noncash Operating Expenses 157,588 123,182 135,271
---------------- --------------- ----------------
Total Operating Expenses 1,255,929 1,144,518 1,170,316
---------------- --------------- ----------------
Operating Income 825,939 750,750 720,454
---------------- --------------- ----------------
Net Income 540,484 482,027 455,572
---------------- --------------- ----------------
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA(1)) 983,527 873,932 855,725
Capital Expenditures $ 103,179 $ 432,988 $ 100,549
Phonery revenues increased $187,000 or 9.8% in 2002 over 2001 and $4,000 or .2%
in 2001 over 2000. The segment saw a minor increase in internet subscribers in
2002, while the New Ulm Telecom segment benefited from the customer increased
demand for DSL. Pricing for internet actually saw a slight decrease in 2001 as
more customers opted for DSL access.
Cash operating expenses increased $77,000 or 7.5% in 2002 over 2001 and
decreased $14,000 or 1.3% in 2001 over 2000. The 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, additional services (DSL), aggressive marketing (brand
recognition) and solutions for our customers' communication 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 Company is striving for cost efficiencies and technological improvements to
maintain its operating margins in the New Ulm Phonery segment.
Noncash operating expenses increased $34,000 or 27.9% in 2002 over 2001 and
decreased $12,000 or 8.9% in 2001 over 2000. The increase was attributable to an
increase in depreciation expense, as the sum of the Phonery's capital
investments since 2000 have totaled $637,000.
The New Ulm Phonery segment capital expenditures for 2002 were $103,000. Capital
expenditures in this segment consisted of enhancements to the internet delivery
system focusing on quality of service. The segment had capital projects of
$433,000 in 2001, upgrading of voicemail system, and $100,000 in 2000. Capital
expenditures in 2002 were more reflective of a typical year.
20
CELLULAR INVESTMENT
The Cellular Investment sector has a 9.92%, 7.58% and 7.58% in 2002, 2001 and
2000, respectively, ownership in MWH. The Company uses the proportionate method,
which applies the Company's ownership percentage to MWH revenues and expenses.
Revenues and income continue to grow as MWH adds customers. Acquisitions by MWH
in Iowa and Wisconsin in 2000 have had a significant impact on revenues and net
income in 2002. In addition, MWH was able to cease amortizing wireless licenses
and goodwill from the acquisition in Iowa and Wisconsin, due to new accounting
standard SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS", effective January
1, 2002.
In 2002, Cellular Investment income increased $1,580,000 or 130.1% over 2001.
This is greater than the 60.1% increase in revenues using the proportionate
method. This difference is due to greater profitability in the partnership and
partly as a result of the adoption of SFAS No. 142 by the partnership. The
proportionate method applies the Company's ownership percentage to MWH revenues
and expenses. Revenues and income continue to grow as MWH adds customers.
Acquisitions by MWH in Iowa and Wisconsin in 2000 had a significant impact on
revenues and net income of MWH in 2001 and 2000.
2002 2001 2000
--------------- -------------- ---------------
Cellular Investment Income $ 2,788,861 $ 1,208,636 $ 981,668
=============== ============== ===============
Proportionate Method:
Operating Revenues 16,139,561 10,031,822 7,795,241
--------------- -------------- ---------------
Cash Operating Expenses 10,290,753 6,206,282 4,775,446
Noncash Operating Expenses 1,916,390 1,750,489 1,261,780
--------------- -------------- ---------------
Total Operating Expenses 12,207,143 7,956,771 6,037,226
--------------- -------------- ---------------
Operating Income 3,932,418 2,075,051 1,758,015
--------------- -------------- ---------------
Net Income 2,788,861 1,208,636 981,668
--------------- -------------- ---------------
OTHER INCOME AND INTEREST EXPENSE
Other income (primarily interest and equity in LLC income) was $653,000 higher
in 2002 over 2001. The Company recognized a one-time pretax gain of $1,157,000
in 2002 due to the dissolution of two cellular corporations held by the Peoples
Telephone segment.
Included in other income is the Company's 12.6% equity ownership in Fibercomm,
L.C. The company recorded $290,000 less investment income from Fibercomm, L.C.
in 2002 over 2001, due to the write-off of carrier receivables (most notably
Global Crossing and WorldCom) by Fibercomm. In 2001, the partnership income was
$175,000, an increase of $180,000 over 2000.
21
Interest expense increased $215,000 in 2002 over 2001 and $254,000 in 2001 over
2000. The increases can be attributed to the new $10 million revolving credit
facility obtained in July 2000. The Company refinanced the revolving credit
facility on December 28, 2001 with a $15 million term loan and a revolving
credit facility of $10 million (total debt outstanding under both facilities at
December 31, 2001 was $17,566,666). The term loan facility's weighted average
interest rate is variable and was 2.82% at December 31, 2002. The debt was used
for a majority of the $22 million in capital expenditures since January 1, 2000,
the purchase of additional MWH units of $4.1 million, the early extinguishment
of the Phoenix debt (resulting in an early retirement of debt amount of
$271,000, which is included in interest expense) and the repurchase of New Ulm
Telecom, Inc. stock of approximately $1 million.
REVIEW OF CASH FLOWS
The Company's net working capital of negative $143,000 at December 31, 2002, was
a decrease of $4,335,000 from 2001. The decrease in working capital is a result
of intensive capital investment, aggressive payback of CoBank notes, and
increased investment in non-current assets (most notably MWH). The 2001 net
working capital includes over $3,000,000 of CoBank loan advances received in
December 2001. Those funds were expended in the first quarter 2002. They were
used to purchase additional common stock investments in two Iowa RSA
corporations and early retirement of Phoenix Life Mutual Insurance Company
long-term debt. The Company operates in capital intensive businesses. Additions
to property, plant and equipment are the Company's largest investing activity,
using $22,000,000 of working capital in the three years ended December 31, 2002.
The company also invested $4,106,000 in 2002 for the purchase of additional MWH
units. For cash flows from financing activities, aside from the routine payment
of shareholder dividends and the new levels of indebtedness in 2002 and 2001
(see "Liquidity and Capital Resources" below), the Company used $981,000 to
purchase outstanding shares of its common stock in 2001 and retired debt of
$4,077,000 in 2002. The Company's largest source of working capital has been its
operations, primarily from New Ulm Telecom, Western Telephone Company and
Peoples Telephone Company.
DIVIDENDS
The Company paid dividends of $1,704,000 in 2002. This was a dividend of $.33
per share, which was the same amount per share as the $.33 per share 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
increase the dividend in 2003. Paying at the existing level of dividends is not
expected to negatively impact the liquidity of the Company.
INFLATION
It is the opinion of management that the effects of inflation on operating
revenues and expenses over the past three years have been immaterial. Management
anticipates that this trend will continue in the near term.
22
SHARE REPURCHASE PROGRAM
The Company's Board of Directors authorized management to repurchase shares of
Company common stock through private transactions. During 2000, pursuant to this
authorization, the Company repurchased 500 (equivalent of 1,500 shares post
split) shares for $17,000, and in 2001 the Company repurchased 26,760
(equivalent of 80,280 shares post split) shares for $981,000. The Company
repurchased no shares in 2002. The Company does not currently anticipate share
repurchases in 2003.
REGULATORY MATTERS
The Telecommunications Act passed by the federal government in February of 1996
is resulting in significant changes to the telecommunications industry. The FCC
is in the process of determining how competition will be implemented by setting
standards for wholesale pricing, unbundling local network rates, and
interconnection rates. State regulators will also be involved in implementing
the transition to a competitive environment, but the exact roles that the FCC
and state regulators will play are yet to be fully determined.
The Company's local exchange telephone companies are subject to the jurisdiction
of Minnesota and Iowa with respect to a variety of matters, including rates for
intrastate access services, the conditions and quality of service and accounting
methods. Rates for local telephone service are not established directly by
regulatory authorities, but their authority over other matters limits the
Company's ability to implement rate increases. In addition, the regulatory
process inherently restricts the Company's ability to immediately pass cost
increases along to customers unless the cost increases are anticipated and the
rate increases implemented prospectively.
State regulators are considering access charge reform. A docket has been opened
but no action took place in 2002, and the Company cannot estimate the effect on
intrastate access revenues of any future changes.
Interstate access rates are established by a nationwide pooling of companies
known as the National Exchange Carriers Association (NECA). The FCC established
NECA in 1983 to develop and administer interstate access service rates, terms
and conditions. Revenues are pooled and redistributed on the basis of each
Company's actual or average costs. There has been a decline in the level of
interstate access charges in recent years, and the Company believes this trend
will continue. In 2001, the FCC amended the interstate access charge structure
and the universal support fund mechanisms. The net effect of these changes are
not expected to have a material effect on the Company's interstate access
revenues in 2003.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "BUSINESS COMBINATIONS", which is
effective for business combinations initiated after June 30, 2001. SFAS 141
requires all business combinations to be accounted for under the purchase
method. The Company does not believe adoption of this standard will have an
effect on the Company's results of operation or financial position.
23
Effective January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS". Under this statement goodwill determined to have an
indefinite life is no longer amortized; however, these assets are reviewed for
impairment on a periodic basis.
The goodwill impairment test requires management to determine the fair value of
certain of the Company's reporting units (as defined by SFAS 142). The Company
determined the fair value of its reporting units using market multiples of
earnings or customers noted in sales of similar operations. The Company does not
believe that Goodwill was impaired at January 1, 2002 (the adoption date of SFAS
142) or any impairment occurred during 2002.
In June 2001, the Financial Accounting Standards Board 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 and the associated asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
does not believe adoption of this standard will have an effect on the Company's
financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS", which
addresses the accounting and reporting for the disposal of long-lived assets.
This statement supercedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF
A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS". SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The adoption had no impact on the Company's financial
position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations and access to new debt continues to be the
Company's sources of funds. Cash provided from operating activities decreased
$465,000 in 2002 and increased $3,120,000 in 2001. In 2002 and 2001, the Company
received proceeds of $9,178,000 and $8,576,000 from the draw down of debt,
respectively. As of December 31, 2002, after payments (totaling $4,077,821 and
$866,667 in 2002 and 2001, respectively) total debt owed by the Company was
$22,667,091. The Company is in substantial compliance with the debt service
covenants placed upon them by CoBank.
The Company uses variable rate short-term financial instruments as of December
31, 2002. The Company continually monitors the interest rates on its short-term
bank loans and long-term senior indebtedness.
The Company's capital budget for 2003 is approximately $2.4 million, which will
be financed through internally generated funds. As of December 31, 2002 the
Company has no purchase commitments.
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 believes its
debt to total capital proportions of 45 to 60 percent will be adequate for the
foreseeable future.
24
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's future results of operation and other forward-looking statements
are subject to risks and uncertainties, including, but not limited to, the
effects of deregulation in the telecommunications industry as a result of the
Telecommunications Act of 1996. Such forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially from such statements and the Company disclaims any obligation to
update or revise any forward-looking statements based on the occurrence of
future events or the receipt of new information.
ITEM 7a. 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 a national variable
rate. If interest rates for the portion of the Company's long-term debt based on
variable rates had averaged 10% more for the entire year ended December 31,
2002, the Company's interest expense would have increased around $60,000 in
2002. 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.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota
We have audited the accompanying consolidated balance sheets of New Ulm Telecom,
Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We did
not audit the financial statements of Midwest Wireless Holdings L.L.C., a
limited partnership, the investment in which, as discussed in Note 4 to the
financial statements, is accounted for by the equity method of accounting. The
investment in Midwest Wireless Holdings L.L.C. was $13,392,129 and $6,310,830 as
of December 31, 2002 and 2001, respectively, and the equity in its net income
was $2,788,861, $1,208,636, and $981,668 for the years ended December 31, 2002,
2001, and 2000. The financial statements of Midwest Wireless Holdings L.L.C.
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Midwest Wireless
Holdings L.L.C., is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as, evaluating the overall financial statement presentation. We believe that our
audit and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of New Ulm Telecom, Inc. and
Subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
KIESLING ASSOCIATES LLP
West Des Moines, Iowa
February 7, 2003
26
To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota
We have audited the accompanying consolidated balance sheet of New Ulm Telecom,
Inc. and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Ulm Telecom,
Inc. and subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
OLSEN THIELEN & CO., LTD.
St. Paul, Minnesota
February 21, 2002
27
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2002 2001
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,914,113 $ 4,245,683
Receivables, net of allowance for doubtful
accounts of $100,950 and $24,500 2,626,492 1,878,444
Materials, supplies, and inventories 502,315 966,565
Prepaid expenses 183,751 112,210
----------- -----------
5,226,671 7,202,902
----------- -----------
INVESTMENTS AND OTHER ASSETS
Cellular investments (see note 4) 13,392,129 6,310,830
Goodwill and intangibles, net of amortization (see note 8) 3,246,442 3,248,495
Notes receivable from officer (see note 11) 674,037 687,402
Notes receivable -- 252,854
Other investments 1,042,896 1,154,736
----------- -----------
18,355,504 11,654,317
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telecommunications plant 51,864,392 43,032,672
Other property and equipment 2,438,378 2,396,063
Cable television plant 1,850,221 1,539,443
----------- -----------
56,152,991 46,968,178
Less accumulated depreciation 26,423,783 22,973,617
----------- -----------
29,729,208 23,994,561
----------- -----------
TOTAL ASSETS $53,311,383 $42,851,780
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
28
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2002 2001
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,514,130 $ 1,866,666
Accounts payable 2,223,687 593,571
Other accrued taxes 67,842 66,235
Other accrued liabilities 564,188 484,458
----------- -----------
5,369,847 3,010,930
----------- -----------
LONG-TERM DEBT, less current portion (see note 7) 20,152,961 15,700,000
----------- -----------
DEFERRED CREDITS
Income taxes (see note 9) 3,651,647 2,285,843
Investment tax credits 6,708 10,251
----------- -----------
3,658,355 2,296,094
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $1.66 par value, 19,200,000 shares
authorized, 5,115,585 shares issued and outstanding 8,525,975 8,525,975
Retained earnings 15,604,245 13,318,781
----------- -----------
24,130,220 21,844,756
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $53,311,383 $42,851,780
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
29
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
OPERATING REVENUES
Local network $ 3,565,358 $ 3,126,394 $ 2,677,558
Network access 6,201,044 6,198,446 6,128,831
Billing and collecting 139,053 231,016 283,485
Miscellaneous 408,446 424,237 422,283
Nonregulated 4,020,342 3,354,729 2,973,180
------------ ------------ ------------
14,334,243 13,334,822 12,485,337
------------ ------------ ------------
OPERATING EXPENSES
Plant operations 1,691,595 1,728,872 1,743,268
Depreciation 3,635,243 2,946,012 2,190,427
Amortization 31,006 129,143 113,824
Customer operations 876,001 687,306 778,836
Corporate operations 2,253,628 2,004,173 1,746,414
Other operating 2,266,385 1,911,141 1,573,000
------------ ------------ ------------
10,753,858 9,406,647 8,145,769
------------ ------------ ------------
OPERATING INCOME 3,580,385 3,928,175 4,339,568
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (628,417) (672,342) (418,043)
Interest expense - debt retirement (271,200) -- --
Interest and dividend income 83,547 83,432 117,096
Interest during construction 42,645 30,442 160,771
Gain on dissolution 1,157,915 -- --
Equity earnings in cellular partnership 2,788,861 1,208,636 981,668
Other investment income (expense) (129,405) 160,534 (11,796)
------------ ------------ ------------
3,043,946 810,702 829,696
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 6,624,331 4,738,877 5,169,264
INCOME TAXES 2,634,350 1,970,639 2,206,137
------------ ------------ ------------
NET INCOME $ 3,989,981 $ 2,768,238 $ 2,963,127
============ ============ ============
BASIC AND DILUTED
NET INCOME PER SHARE $ 0.78 $ 0.54 $ 0.57
============ ============ ============
DIVIDENDS PER SHARE $ 0.33 $ 0.33 $ 0.33
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
30
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
----------------------------- Retained
Shares Amount Earnings
------------ ------------ ------------
Balance at December 31, 1999 1,732,455 $ 8,662,275 $ 11,890,307
Retired stock (500) (2,500) (14,250)
Net income -- -- 2,963,127
Dividends -- -- (1,732,455)
------------ ------------ ------------
Balance at 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 at December 31, 2001 5,115,585 8,525,975 13,318,781
Net income -- -- 3,989,981
Dividends -- -- (1,704,517)
------------ ------------ ------------
Balance at December 31, 2002 5,115,585 $ 8,525,975 $ 15,604,245
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
31
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,989,981 $ 2,768,238 $ 2,963,127
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,666,249 3,075,155 2,304,251
Undistributed earnings of cellular investment (1,817,374) (589,112) (439,485)
Deferred income taxes 1,365,804 806,879 (31,590)
Deferred investment tax credits (3,543) (3,543) (3,542)
Gain from dissolution (1,157,915) -- --
Changes in assets and liabilities:
(Increase) Decrease in:
Receivables (748,048) (385,156) (36,014)
Inventories 464,250 894,404 (1,303,654)
Prepaid expenses (71,541) 15,350 (39,443)
Increase (Decrease) in:
Accounts payable (1,928) (344,446) (467,435)
Other accrued taxes 1,607 (37,778) 46,007
Other accrued liabilities 79,730 31,785 120,131
------------ ------------ ------------
Net cash provided by operating activities 5,767,272 6,231,776 3,112,353
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (7,766,799) (7,544,751) (9,054,147)
Change in certificates of deposit -- -- 600,000
Redemption of notes receivable, net of investment 266,219 41,227 (4,317)
Purchase of cellular investments (4,106,010) -- --
Other, net 111,840 (202,660) (294,317)
------------ ------------ ------------
Net cash used in investing activities (11,494,750) (7,706,184) (8,752,781)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt (4,077,821) (866,667) (366,667)
Issuance of long-term debt 9,178,246 8,576,000 6,924,000
Retired stock -- (980,577) (16,750)
Dividends paid (1,704,517) (1,709,409) (1,732,455)
------------ ------------ ------------
Net cash provided by financing activities 3,395,908 5,019,347 4,808,128
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,331,570) 3,544,939 (832,300)
Cash and Cash Equivalents at Beginning of Year 4,245,683 700,744 1,533,044
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 1,914,113 $ 4,245,683 $ 700,744
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
32
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
New Ulm Telecom, Inc.'s (Company) principal line of business is
providing local telephone service, internet, digital video, and access
to long distance telephone service through local exchange networks. The
Company owns and operates three independent telephone companies serving
seven communities in southern Minnesota, one community in Iowa and the
adjacent rural areas. The Company also has investments in cellular
entities and a competitive local exchange carrier (CLEC), and operates
six cable television systems.
The accounting policies of the Company and its subsidiaries conform to
accounting principles generally accepted in the United States of
America. Management uses estimates and assumptions in preparing its
consolidated financial statements. Those estimates and assumptions
affect the reported amounts of assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its five wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Accounting Estimates
The presentation 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 the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the
reported amount of revenues and expenses during the operating period.
Actual results could differ from those estimates.
Materials, Supplies and Inventories
Materials, supplies and inventories are recorded at the lower of
average cost or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at original cost. Additions,
improvements or major renewals are capitalized. When telecommunications
assets are sold, retired or otherwise disposed of in the ordinary
course of business, the cost plus removal costs less salvage is charged
to accumulated depreciation. Any gains or losses on
non-telecommunications property and equipment retirements are reflected
in the current year operations.
33
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments and Other Assets
Investments in a cellular telephone and CLEC limited liability company
are recorded using the equity method of accounting, which reflects
original cost and equity in undistributed earnings and losses, because
management of the Company believes they have the ability to
significantly influence the operating and financial policies of these
companies.
Long-term investments in other companies that are not intended for
resale or are not readily marketable are valued at the lower of cost or
net realizable value.
Goodwill and Intangibles
In January 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under
SFAS 142, the Company no longer amortizes goodwill and intangible
assets deemed to have indefinite lives. These assets are subject to
periodic impairment tests. Intangible assets with definite lives
continue to be amortized.
Revenue Recognition
Revenues are recognized when earned. Local network, cable television
and internet revenues are recognized over the period a subscriber is
connected to the network. Interstate access revenues are based on
settlements with the National Exchange Carrier Association. Interstate
access settlements are based on cost studies for New Ulm Telecom, Inc.
and by nationwide average cost schedules for two of its subsidiaries,
Western Telephone Company and Peoples Telephone Company. Access
revenues for New Ulm Telecom, Inc. include estimates which management
believes are reasonable, pending finalization of cost studies. Local
network and intrastate access revenues are based on tariffs filed with
the state regulatory commissions.
Interest During Construction
The Company includes in its telecommunications plant account an average
cost of debt used for the construction of the plant.
Cash Equivalents
All highly liquid investments with a maturity of three months or less
at the time of purchase are considered cash equivalents.
34
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes and Investment Tax Credits
The provision for income taxes consists of an amount for taxes
currently payable and a provision for tax consequences deferred to
future periods. Deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Significant components of the Company's deferred
taxes arise from the basis in property, plant, and equipment due to the
use of accelerated depreciation methods for tax and partnerships due to
the difference between book and tax income. For financial statement
purposes, deferred investment tax credits are being amortized as a
reduction of the provision for income taxes over the estimated useful
lives of the related property, plant and equipment.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
receivables. The Company places its cash investments with high credit
quality financial institutions in accounts which, at times, may exceed
the federally insured limits. The Company has not experienced any
losses in these accounts and does not believe it is exposed to any
significant credit risk. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's large number of
customers.
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 outstanding of 5,115,585 for 2002, 5,135,655
for 2001, and 5,196,615 for 2000. All per share data has been restated
to reflect the three-for-one stock split effective January 10, 2002.
Reclassifications
Certain reclassifications have been made to the 2001 and 2000
consolidated financial statements to conform with the 2002
presentation. These reclassifications had no impact on previously
reported net income or shareholders' equity. These reclassifications
decreased operating revenues and operating expenses by $329,196 and
$336,825 for 2001 and 2000, respectively.
35
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
December 31,
--------------------------
2002 2001
----------- -----------
Telecommunications plant $51,864,392 $43,032,672
Other property and equipment 2,438,378 2,396,063
Cable television plant 1,850,221 1,539,443
----------- -----------
56,152,991 46,968,178
Less accumulated depreciation 26,423,783 22,973,617
----------- -----------
Total property, plant and equipment $29,729,208 $23,994,561
=========== ===========
Depreciation is computed using the straight-line method based on
estimated service or remaining useful lives. The composite depreciation
rates on telecommunications plant and equipment for the three years
ended December 31, 2002, 2001 and 2000 were 7.4 %, 7.2% and 6.3%,
respectively. Other property is depreciated over estimated useful lives
of three to fifteen years.
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value.
LONG-TERM INVESTMENTS: It was not practicable to estimate a fair value
for common stock investments in companies carried on the cost basis due
to a lack of quoted market prices. The Company believes the original
cost is not impaired at December 31, 2002.
LONG-TERM DEBT: The fair value of the Company's long-term debt is
estimated based on the discounted value of the future cash flows
expected to be paid using current rates of borrowing for similar types
of debt. Fair value of the debt approximates carrying value.
NOTE 4. CELLULAR INVESTMENTS
Cellular investments include a 9.92% and 7.58% ownership interest in
units of Midwest Wireless Holdings L.L.C. (MWH) at December 31, 2002
and 2001, respectively. This entity provides cellular phone service to
southern Minnesota, northwestern Iowa and southwestern Wisconsin. The
difference between the carrying amount of the MWH investment and the
underlying equity in the net assets of MWH at the time of purchase of
ownership interests is $1,794,092 as of December 31, 2002, net of
accumulated amortization of $156,391. Amortization expense of $48,764
was included as a reduction of cellular investment income in 2001 and
2000.
36
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 4. CELLULAR INVESTMENTS (CONTINUED)
Cellular investments consist of the following:
December 31,
-----------------------------
2002 2001
------------ ------------
MWH:
Cost less accumulated amortization $ 7,596,308 $ 2,332,383
Cumulative income 10,139,945 7,351,084
Cumulative distributions (4,344,124) (3,372,637)
------------ ------------
Total $ 13,392,129 $ 6,310,830
============ ============
The following is summarized financial information from MWH as of and
for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
------------ ----------- ------------
Current assets $ 12,445,979 $ 17,372,431 $ 14,363,696
Noncurrent assets 305,838,514 285,452,749 250,179,199
Current liabilities 56,909,149 48,394,693 25,397,983
Noncurrent liabilities 124,875,462 137,442,305 130,370,191
Members' equity 136,499,882 117,188,182 108,774,721
Revenues 162,697,183 140,538,515 112,345,743
Operating income 39,641,304 28,018,634 24,545,298
Net income 28,113,520 16,588,360 14,297,071
NOTE 5. RETIREMENT PLAN
The Company's contribution to its 401(k) employee savings plan was
$178,994, $166,387 and $ 139,452 in 2002, 2001 and 2000, respectively.
NOTE 6. LINE OF CREDIT
The Company has a 60 month revolving line of credit of $1,640,000 at 1
1/2% over the bank reference rate with the Rural Telephone Finance
Cooperative. No amounts were outstanding at December 31, 2002 and 2001
under this line of credit, which matures in August 2003.
37
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 7. LONG-TERM DEBT
Long-term debt is as follows:
December 31,
--------------------------
2002 2001
----------- -----------
Unsecured note payable to Phoenix Home Life
Mutual Insurance Company in quarterly installments
of $65,000 plus 6.45% interest through
December 1, 2008 $ -- $ 1,820,000
Unsecured note payable to Phoenix Home Life
Mutual Insurance Company in quarterly installments
of $18,333 plus 6.45% interest through
December 1, 2008 -- 513,333
Unsecured note payable to Phoenix Home Life
Mutual Insurance Company in quarterly installments
of $8,333 plus 6.45% interest through
December 1, 2008 -- 233,333
Unsecured ten year note with the City of Redwood
Falls, payable semiannually (beginning in 2002), at
a fixed 5% interest rate maturing on January 1, 2013 167,091 --
Secured ten year reducing revolving credit facility to
CoBank, ACB in quarterly installments of $250,000
(beginning in 2003) plus a national variable rate of
interest through December 20, 2011 (2.82% at
December 31, 2002) 9,000,000 --
Secured ten year reducing revolving credit facility to
CoBank, ACB in monthly installments of $125,000
(beginning in 2002) plus a national variable rate of
interest through December 20, 2011 (2.82% and
and 3.41% at December 31, 2002 and 2001) 13,500,000 15,000,000
----------- -----------
22,667,091 17,566,666
Less amount due within one year 2,514,130 1,866,666
----------- -----------
Long-term debt $20,152,961 $15,700,000
=========== ===========
38
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 7. LONG-TERM DEBT (CONTINUED)
Substantially all assets of the Company are pledged as security for the
long-term debt under certain loan agreements with CoBank. These
mortgage notes are to repaid in equal quarterly and monthly
installments covering principal and interest beginning in the year
after issue and expiring by December 20, 2011.
The security and loan agreements underlying the CoBank notes contain
certain restrictions on distributions to stockholders, investment in,
or loans to others. In addition, the Company is required to maintain
certain financial ratios for current assets to current liabilities, net
worth to total assets, long-term debt to operating cash flow and debt
service coverage.
Principal payments required during the next five years are:
2003 $2,514,130
2004 2,514,845
2005 2,515,597
2006 2,516,387
2007 2,517,216
Cash payments for interest, net of amounts capitalized, were $549,704
and $683,189 in 2002 and 2001, respectively.
During 2002, the Company paid off the remaining balances on its loans
with Phoenix Mutual Life. Interest and fees of $271,200 were incurred
in connection with the extinguishment of this debt.
NOTE 8. GOODWILL AND INTANGIBLES
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Under the provisions of SFAS No. 142,
goodwill and intangible assets with indefinite useful lives are no
longer amortized, but are instead tested for impairment on at least an
annual basis.
At December 31, 2002, the Company had goodwill for wireline
acquisitions of $3,218,906, net of amortization of $1,360,442, and
goodwill associated with equity investments, included in cellular
investments, of $4,890,389, net of amortization of $156,391. The
Company determined that these assets have indefinite useful lives and
ceased amortization effective January 1, 2002.
During 2002, the Company tested the value of its goodwill as required
by SFAS No. 142. The Company determined that the carrying value of
these assets was not impaired.
39
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 8. GOODWILL AND INTANGIBLES (CONTINUED)
Goodwill and other non-amortizable intangibles consist of the
following:
2002 2001
----------- -----------
Balance Beginning of Year $ 5,012,929 $ 5,175,467
Goodwill acquired 3,096,366 --
Goodwill amortized -- (162,538)
----------- -----------
Balance End of Year $ 8,109,295 $ 5,012,929
=========== ===========
Included under the caption at year end:
Goodwill and intangibles $ 3,218,906 $ 3,218,906
Cellular investments 4,890,389 1,794,023
----------- -----------
$ 8,109,295 $ 5,012,929
=========== ===========
Amortizable intangibles consist of the following:
2002 2001
-------- --------
Balance Beginning of Year $ 29,589 $ --
Intangibles acquired -- 30,785
Intangible amortization (2,053) (1,196)
-------- --------
Balance End of Year $ 27,536 $ 29,589
======== ========
The following table adjusts previously reported net income to exclude
amortization expense recognized from goodwill as if SFAS No. 142 had
been in effect in 2001 and 2000:
2002 2001 2000
------------- ------------- -------------
Reported net income $ 3,989,981 $ 2,768,238 $ 2,963,127
Goodwill amortization (net of income
taxes of $67,614 and $69,401 for
2001 and 2000) -- 94,924 93,137
------------- ------------- -------------
Adjusted net income $ 3,989,981 $ 2,863,162 $ 3,056,264
============= ============= =============
Basic and diluted earnings per share:
Reported net income 0.78 0.54 0.57
Goodwill amortization -- 0.02 0.02
------------- ------------- -------------
Adjusted net income 0.78 0.56 0.59
============= ============= =============
40
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 9. INCOME TAXES AND INVESTMENT TAX CREDITS
Income taxes reflected in the Consolidated Statements of Income consist
of the following:
Years Ended December 31,
-------------------------------------------
2002 2001 2000
----------- ----------- -----------
Taxes currently payable:
Federal $ 827,468 $ 873,398 $ 1,669,697
State 444,621 293,905 571,572
Deferred income taxes 1,365,804 806,879 (31,590)
Amortization of investment tax credits (3,543) (3,543) (3,542)
----------- ----------- -----------
Total income tax expense $ 2,634,350 $ 1,970,639 $ 2,206,137
=========== =========== ===========
The differences between the statutory federal tax rate and the
effective tax rate were as follows:
2002 2001 2000
------ ------ ------
Statutory tax rate 35.0% 35.0% 35.0%
Effect of:
Surtax exemption -1.0% -1.0% -1.0%
State income taxes, net of federal tax benefit 6.7% 6.5% 6.5%
Amortization of investment tax credits -0.1% -0.1% -0.1%
Non-deductible expenses 0.4% 1.4% 1.5%
Other, net -1.2% -0.2% 0.8%
-------- ------- ------
Effective tax rate 39.8% 41.6% 42.7%
======== ======= ======
Deferred income taxes reflected in the Consolidated Balance Sheets are
summarized as follows:
December 31,
---------------------------
2002 2001
----------- -----------
Deferred Tax (Assets)/Liabilities
Depreciation $ 3,207,677 $ 2,160,628
Partnership basis 592,523 228,744
Other (148,553) (103,529)
----------- -----------
Total $ 3,651,647 $ 2,285,843
=========== ===========
Cash payments for income taxes were $2,068,031 and $1,530,207 in 2002
and 2001, respectively.
41
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 10. GAIN ON DISSOLUTION
In January of 2002, Cherokee Cellular, Inc. and Three Lakes Cellular,
Inc. were dissolved. These corporations contained units in Midwest
Wireless Holdings L.L.C. Peoples Telephone Company owned stock in each
corporation. The units of Midwest Wireless Holdings L.L.C. were
transferred directly to the shareholders of Cherokee Cellular, Inc. and
Three Lakes Cellular, Inc. The Company recognized a nonmonetary gain of
$1,157,915 on the transfer of units in Midwest Wireless Holdings L.L.C.
NOTE 11. RELATED PARTY TRANSACTIONS
The officer note receivable is secured by 153,690 shares of New Ulm
Telecom, Inc. common stock and has a 6.09% interest rate. A prior,
variable interest rate note became due on January 1, 2001 and was
renewed. This note requires an annual payment of $55,228, including
interest, with payments commencing on January 1, 2002 and a final
balloon payment due on January 1, 2006.
NOTE 12. COMMITMENTS
The Company's capital budget for 2003 is approximately $2,400,000,
which will be financed through internally generated funds. As of
December 31, 2002, the Company has no purchase commitments.
NOTE 13. NONCASH INVESTING ACTIVITIES
Noncash investing activities included $1,781,447, $149,403 and $496,393
during the years ended December 31, 2002, 2001 and 2000, respectively,
relating to plant and equipment additions placed in service during
2002, 2001 and 2000, respectively, which are reflected in accounts
payable at year end.
NOTE 14. SEGMENT INFORMATION
The Company is organized into five business segments: New Ulm Telecom,
Inc., three of its wholly-owned subsidiaries (Western Telephone
Company, Peoples Telephone Company, and New Ulm Phonery, Inc.), and a
cellular investment recorded using the equity method of accounting. 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 Midwest Wireless Holdings L.L.C. and is shown
using the proportionate method.
42
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 14. SEGMENT INFORMATION (CONTINUED)
Segment information is as follows:
Western Peoples
New Ulm Telephone Telephone New Ulm Cellular
Telecom, Inc. Company Company Phonery, Inc. Investment
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2002:
Operating Revenues $ 8,631,748 $ 2,332,222 $ 997,627 $ 2,081,868 $ 16,139,561
Operating Expenses 7,555,546 1,223,263 597,458 1,255,929 12,207,143
------------ ------------ ------------ ------------ ------------
Operating Income 1,076,202 1,108,959 400,169 825,939 3,932,418
Interest Expense (580,080) (107,760) (116,500) (5,955) (801,375)
Cellular Investment Income -- -- -- -- --
Gain on Dissolution -- -- 1,157,915 -- --
Other Investment Income 21,394 2,084 (27,450) 759 (342,182)
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes $ 517,516 $ 1,003,283 $ 1,414,134 $ 820,743 $ 2,788,861
============ ============ ============ ============ ============
Depreciation and Amortization $ 2,969,242 $ 390,469 $ 148,950 $ 157,588 $ 1,916,390
============ ============ ============ ============ ============
Total Assets $ 67,261,902 $ 10,151,203 $ 5,341,543 $ 4,195,423 $ 31,573,822
============ ============ ============ ============ ============
Capital Expenditures $ 6,828,746 $ 716,534 $ 118,340 $ 103,179 $ 3,164,667
============ ============ ============ ============ ============
Year Ended December 31, 2001
Operating Revenues $ 7,687,791 $ 2,341,132 $ 1,042,744 $ 1,895,268 $ 10,601,290
Operating Expenses 6,493,827 1,063,092 552,100 1,144,518 8,526,239
------------ ------------ ------------ ------------ ------------
Operating Income 1,193,964 1,278,040 490,644 750,750 2,075,051
Interest Expense (620,072) (36,029) (16,241) -- (713,755)
Cellular Investment Income -- -- -- -- --
Other Investment Income 65,049 4,744 202,739 1,876 (152,660)
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes $ 638,941 $ 1,246,755 $ 677,142 $ 752,626 $ 1,208,636
============ ============ ============ ============ ============
Depreciation and Amortization $ 2,431,752 $ 385,197 $ 135,024 $ 123,182 $ 1,692,507
============ ============ ============ ============ ============
Total Assets $ 52,070,721 $ 9,996,520 $ 4,149,850 $ 3,634,562 $ 22,969,308
============ ============ ============ ============ ============
Capital Expenditures $ 6,723,454 $ 181,906 $ 206,403 $ 432,988 $ 2,562,355
============ ============ ============ ============ ============
Year Ended December 31, 2000:
Operating Revenues $ 6,986,102 $ 2,315,435 $ 992,151 $ 1,890,770 $ 8,405,266
Operating Expenses 5,337,563 1,026,332 516,148 1,170,316 6,647,251
------------ ------------ ------------ ------------ ------------
Operating Income 1,648,539 1,289,103 476,003 720,454 1,758,015
Interest Expense (358,985) (40,639) (18,419) -- (655,807)
Cellular Investment Income -- -- -- -- --
Other Investment Income 204,660 12,049 46,504 2,858 (120,540)
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes $ 1,494,214 $ 1,260,513 $ 504,088 $ 723,312 $ 981,668
============ ============ ============ ============ ============
Depreciation and Amortization $ 1,675,965 $ 374,215 $ 118,800 $ 135,271 $ 1,217,258
============ ============ ============ ============ ============
Total Assets $ 42,770,269 $ 9,286,654 $ 3,766,987 $ 3,147,447 $ 20,052,351
============ ============ ============ ============ ============
Capital Expenditures $ 8,507,375 $ 367,813 $ 78,410 $ 100,549 $ 9,417,650
============ ============ ============ ============ ============
43
NEW ULM TELECOM, INC.
NEW ULM, MINNESOTA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 14. SEGMENT INFORMATION (CONTINUED)
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
Year Ended December 31, 2002:
Operating Revenues $ 30,183,026 $ 675,046 $ (16,523,829) $ 14,334,243
Operating Expenses 22,839,339 505,930 (12,591,411) 10,753,858
------------- ------------- ------------- -------------
Operating Income 7,343,687 169,116 (3,932,418) 3,580,385
Interest Expense (1,611,670) (89,322) 801,375 (899,617)
Cellular Investment Income -- -- 2,788,861 2,788,861
Gain on Dissolution 1,157,915 -- -- 1,157,915
Other Investment Income (345,395) -- 342,182 (3,213)
------------- ------------- ------------- -------------
Income Before Income Taxes $ 6,544,537 $ 79,794 $ -- $ 6,624,331
============= ============= ============= =============
Depreciation and Amortization $ 5,582,639 $ -- $ (1,916,390) $ 3,666,249
============= ============= ============= =============
Total Assets $ 118,523,893 $ 7,332,933 $ (72,545,443) $ 53,311,383
============= ============= ============= =============
Capital Expenditures $ 10,931,466 $ -- $ (3,164,667) $ 7,766,799
============= ============= ============= =============
Year Ended December 31, 2001
Operating Revenues $ 23,568,225 $ 697,083 $ (10,930,486) $ 13,334,822
Operating Expenses 17,779,776 482,306 (8,855,435) 9,406,647
------------- ------------- ------------- -------------
Operating Income 5,788,449 214,777 (2,075,051) 3,928,175
Interest Expense (1,386,097) -- 713,755 (672,342)
Cellular Investment Income -- -- 1,208,636 1,208,636
Other Investment Income 121,748 -- 152,660 274,408
------------- ------------- ------------- -------------
Income Before Income Taxes $ 4,524,100 $ 214,777 $ -- $ 4,738,877
============= ============= ============= =============
Depreciation and Amortization $ 4,767,662 $ -- $ (1,692,507) $ 3,075,155
============= ============= ============= =============
Total Assets $ 92,820,961 $ 5,933,600 $ (55,902,781) $ 42,851,780
============= ============= ============= =============
Capital Expenditures $ 10,107,106 $ -- $ (2,562,355) $ 7,544,751
============= ============= ============= =============
Year Ended December 31, 2000:
Operating Revenues $ 20,589,724 $ 637,704 $ (8,742,091) $ 12,485,337
Operating Expenses 14,697,610 432,235 (6,984,076) 8,145,769
------------- ------------- ------------- -------------
Operating Income 5,892,114 205,469 (1,758,015) 4,339,568
Interest Expense (1,073,850) -- 655,807 (418,043)
Cellular Investment Income -- -- 981,668 981,668
Other Investment Income 145,531 -- 120,540 266,071
------------- ------------- ------------- -------------
Income Before Income Taxes $ 4,963,795 $ 205,469 $ -- $ 5,169,264
============= ============= ============= =============
Depreciation and Amortization $ 3,521,509 $ -- $ (1,217,258) $ 2,304,251
============= ============= ============= =============
Total Assets $ 79,023,708 $ 5,301,942 $ (49,367,362) $ 34,958,288
============= ============= ============= =============
Capital Expenditures $ 18,471,797 $ -- $ (9,417,650) $ 9,054,147
============= ============= ============= =============
44
ITEM 8. SUPPLEMENTARY FINANCIAL INFORMATION
UNAUDITED QUARTERLY OPERATING RESULTS
Quarter Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ---------- ----------
2002
Revenues $3,666,152 $3,699,541 $3,554,737 $3,413,813
Operating Income 1,087,180 1,053,457 579,817 859,931
Net Income 1,618,275 966,870 641,733 763,103
Basic and Diluted Net Income
per Share 0.32 0.19 0.13 0.14
2001
Revenues $3,225,165 $3,330,520 $3,234,741 $3,544,396
Operating Income 894,781 871,762 968,058 1,193,574
Net Income 654,367 754,903 619,257 739,711
Basic and Diluted Net Income
per Share 0.13 0.15 0.12 0.14
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective November 18, 2002, Olsen Thielen & Co. Ltd. (O&T) was dismissed as the
Company's independent auditors. O&T's reports on the audited financial
statements for the year ended December 31, 2001, did not contain adverse,
qualified or modified opinions. The change in accountants was recommended by the
board of directors. There were no disagreements with O&T. On November 26, 2002
the Board of Directors appointed Kiesling Associates LLP as the Company's
independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to Directors of the Company and information as to compliance with
Section 16(a) of the Securities Exchange Act of 1934 are hereby incorporated by
reference to the Company's Proxy Statement, which will be filed with the
Commission within 120 days after close of the fiscal year ending December 31,
2002. Information as to Executive Officers of the Company are incorporated by
reference to Part I, Item 4 of this document.
45
ITEM 11. EXECUTIVE COMPENSATION
Information as to security ownership of certain beneficial owners and management
of the Company and information as to equity compensation plans are hereby
incorporated by reference to the Company's Proxy Statement, which will be filed
with the Commission within 120 days after close of the fiscal year ending
December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information as to beneficial ownership of more than five percent of New Ulm
Telecom, Inc.'s common stock and the information as to security ownership of
management is hereby incorporated by reference to the Company's Proxy Statement,
which will be filed with the Commission within 120 days after close of the
fiscal year ending December 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information as to certain relationships and related transactions is hereby
incorporated by reference to the Company's Proxy Statement, which will be filed
with the Commission within 120 days after close of the fiscal year ending
December 31, 2002.
ITEM 14. 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 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. There were no significant changes
in the registrant's internal controls or in other factors that could
subsequently affect those controls subsequent to the date of the evaluator.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Consolidated Financial Statements
Included in Part II, Item 8, of this report:
Pages
-----
Independent Auditors' Report 26 - 27
Consolidated Balance Sheet at December 31, 2002 and 2001 28 - 29
Consolidated Statement of Income for the Three Years Ended
December 31, 2002, 2001 and 2000 30
Consolidated Statement of Stockholders' Equity for the
Three Years Ended December 31, 2002, 2001 and 2000 31
Consolidated Statement of Cash Flows for the Three Years
Ended December 31, 2002, 2001 and 2000 32
Notes to Consolidated Financial Statements 33 - 44
(a)2. Consolidated Financial Statement schedules:
Report of Independent Auditors on Financial Statement Schedule 48
Schedule II - Valuation and Qualifying Accounts 48
Separate financial statements of Midwest Wireless Holdings
L.L.C., a 50 percent or less owned equity method investment,
are included as part of this report because this entity
constitutes a "significant subsidiary" pursuant to the
provisions of Regulation S-X, Article 3-09. 49 - 65
Other schedules are omitted because they are not required
or are not applicable, or the required information is shown
in the financial statements or notes thereto.
3. Exhibits Required
See "Index to Exhibits"
b) Reports on Form 8-K
New Ulm Telecom, Inc. filed a form 8K on November 18, 2002 announcing
the change in the Company's certifying accountant.
47
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of
New Ulm Telecom, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 7, 2003 also included an audit of the financial statement
schedules listed in Item 15(a)2 of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
KIESLING ASSOCIATES LLP
West Des Moines, Iowa
February 7, 2003
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectible Accounts
1/1/2002 12/31/2002
Beginning 2002 2002 2002 Ending
Balance Additions Recoveries Write-offs Balance
--------- --------- --------- --------- ---------
Customer
- --------
New Ulm $ 10,000 $ 45,895 $ 28,634 $ (69,529) $ 15,000
Western 8,500 11,922 4,305 (14,227) 10,500
Peoples 6,000 (1,538) 1,688 (150) 6,000
Phonery -- 22,000 -- 22,000
Redwood Falls -- 450 -- 450
--------- --------- --------- --------- ---------
$ 24,500 $ 78,729 $ 34,627 $ (83,906) $ 53,950
--------- --------- --------- --------- ---------
IXC
- ---
New Ulm $ -- $ 18,000 $ -- $ -- $ 18,000
Western -- 29,000 -- -- 29,000
--------- --------- --------- --------- ---------
$ -- $ 47,000 $ -- $ -- $ 47,000
--------- --------- --------- --------- ---------
Total $ 24,500 $ 125,729 $ 34,627 $ (83,906) $ 100,950
========= ========= ========= ========= =========
48
MIDWEST WIRELESS
HOLDINGS L.L.C.
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Members of
Midwest Wireless Holdings L.L.C.:
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, changes in members'
equity, and cash flows present fairly, in all material respects, the
consolidated financial position of Midwest Wireless Holdings L.L.C. and
Subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations, changes in members' equity, and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002.
PRICEWATERHOUSECOOPERS LLC
Minneapolis, Minnesota
February 6, 2003
50
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AT DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
ASSETS 2002 2001
Current assets:
Cash and cash equivalents $ 1,367,210 $ 3,032,464
Accounts receivable, less allowance for doubtful accounts of
$550,403 and $572,120 in 2002 and 2001, respectively 8,155,607 10,935,228
Inventories 1,411,573 2,207,887
Other assets 1,511,589 1,233,721
------------ ------------
Total current assets 12,445,979 17,409,300
Property, cellular plant and equipment, net 102,219,504 89,632,427
FCC licenses, net 194,612,163 187,211,924
Investments in cooperatives 9,006,847 8,771,529
------------ ------------
Total assets $318,284,493 $303,025,180
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of debt $ 14,655,912 $ 13,679,657
Revolving loan 25,000,000 20,000,000
Accounts payable 5,643,416 3,969,202
Accrued commissions 1,436,325 1,855,554
Other accrued expenses 10,173,496 8,890,280
------------ ------------
Total current liabilities 56,909,149 48,394,693
Other liabilities 988,120 1,413,672
Debt 114,458,723 129,114,637
------------ ------------
Total liabilities 172,355,992 178,923,002
Minority interest 9,428,619 6,913,996
Commitments
Members' equity 136,499,882 117,188,182
------------ ------------
Total liabilities and members' equity $318,284,493 $303,025,180
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
51
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
AT DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
Operating revenues:
Subscriber service $ 118,573,698 $ 93,477,223 $ 72,146,990
Roamer service 37,205,402 36,953,474 29,721,562
Equipment sales 6,352,249 10,058,368 9,015,304
Service fees 565,834 49,450 1,461,887
------------- ------------- -------------
162,697,183 140,538,515 112,345,743
------------- ------------- -------------
Operating expenses:
Operations and maintenance 30,506,792 24,776,324 19,785,719
Cost of equipment sold 10,448,214 13,654,007 10,458,625
Home roamer costs 27,668,831 20,468,432 16,976,940
Depreciation 19,318,449 17,822,738 12,278,169
Amortization of FCC licenses -- 4,505,851 3,780,643
Selling, general and administrative 35,113,593 31,292,529 24,520,349
------------- ------------- -------------
123,055,879 112,519,881 87,800,445
------------- ------------- -------------
Operating income 39,641,304 28,018,634 24,545,298
------------- ------------- -------------
Other income (expense):
Interest expense (8,078,374) (9,416,290) (8,651,813)
Interest and dividend income 92,915 136,870 312,229
Other 34,669 (41,784) (6,186)
------------- ------------- -------------
(7,950,790) (9,321,204) (8,345,770)
------------- ------------- -------------
Net income before minority interest 31,690,514 18,697,430 16,199,528
Minority interest (3,576,994) (2,109,070) (1,902,457)
------------- ------------- -------------
Net income $ 28,113,520 $ 16,588,360 $ 14,297,071
============= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
52
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
AT DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
Total
Capital Accumulated Members'
Contributions Income Equity
Balance, December 31, 1999 $ 13,317,553 $ 16,120,317 $ 29,437,870
Issuance of units related to the acquisition
of Iowa properties 51,418,250 -- 51,418,250
Issuance of units related to the acquisition
of Wisconsin properties 20,061,217 -- 20,061,217
Distributions to members -- (6,439,687) (6,439,687)
Net income -- 14,297,071 14,297,071
------------- ------------- -------------
Balance, December 31, 2000 84,797,020 23,977,701 108,774,721
Distributions to members -- (8,174,899) (8,174,899)
Net income -- 16,588,360 16,588,360
------------- ------------- -------------
Balance, December 31, 2001 84,797,020 32,391,162 117,188,182
Redemption (83,921) (374,030) (457,951)
Distributions to members -- (8,343,869) (8,343,869)
Net income -- 28,113,520 28,113,520
------------- ------------- -------------
Balance, December 31, 2002 $ 84,713,099 $ 51,786,783 $ 136,499,882
============= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
53
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
AT DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
Cash flows from operating activities:
Net income $ 28,113,520 $ 16,588,360 $ 14,297,071
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income allocated to minority interest 3,576,994 2,109,070 1,902,457
Provision for bad debts 928,358 1,115,719 623,261
Depreciation 19,318,449 17,822,738 12,278,169
Amortization of FCC licenses -- 4,505,851 3,780,643
(Gain) loss on disposal of fixed assets (3,645) (2,124) 27,278
Writeoff of Cellular 2000, Inc. investment 25,000 -- --
Patronage received in form of cooperative stock (310,848) (132,785) --
Changes in assets and liabilities:
Accounts receivable 1,851,263 (3,299,942) (2,665,409)
Inventories 796,314 510,885 (122,081)
Other assets (277,868) (546,637) (322,733)
Accounts payable 1,674,214 (2,156,106) 1,471,296
Accrued expenses 863,987 1,888,444 3,253,070
Other liabilities (425,552) (689,617) 946,340
------------- ------------- -------------
Net cash provided by operating activities 56,130,186 37,713,856 35,469,362
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of cellular properties -- -- (96,215,489)
Payments for property, cellular plant and equipment (31,901,881) (33,804,163) (28,636,271)
Proceeds from the disposal of fixed assets -- 37,571 --
Purchase of FCC licenses (7,400,239) (22,400,000) (354,900)
Purchases of cooperative stock (22,440) (1,176,440) (5,329,209)
Redemption of cooperative stock 72,970 68,313 --
Payments for deferred acquisition costs -- (192,511) --
Release of restricted cash -- -- 1,000,000
------------- ------------- -------------
Net cash used in investing activities (39,251,590) (57,467,230) (129,535,869)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds on revolving loan 5,000,000 17,500,000 500,000
Proceeds from debt borrowings -- 23,473,686 107,706,887
Payments on debt (13,679,659) (11,016,802) (6,130,602)
Distributions to members (8,343,869) (8,174,899) (6,439,687)
Distribution from subsidiary to minority interest (1,062,371) (1,039,851) (904,737)
Redemption of units (457,951) -- --
------------- ------------- -------------
Net cash (used in) provided by financing activities (18,543,850) 20,742,134 94,731,861
------------- ------------- -------------
Net change in cash and cash equivalents (1,665,254) 988,760 665,354
Cash and cash equivalents, beginning of year 3,032,464 2,043,704 1,378,350
------------- ------------- -------------
Cash and cash equivalents, end of year $ 1,367,210 $ 3,032,464 $ 2,043,704
============= ============= =============
Supplemental disclosure:
Cash paid during the year for interest $ 8,828,483 $ 10,540,203 $ 7,587,435
Equity units issued for acquisitions -- -- 71,479,467
The accompanying notes are an integral part of the
consolidated financial statements.
54
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION
Midwest Wireless Holdings L.L.C. (the Company) was formed in November
1999 as a Delaware limited liability company to acquire and operate
cellular communications properties in the Midwest portion of the United
States of America. Upon its formation, the Company exchanged its equity
units for approximately 86% of the equity units of Midwest Wireless
Communications, L.L.C. The transaction was accounted for on the
historical cost basis as a combination of entities under common
control, and the consolidated financial statements reflect the results
of operations as if the combination had occurred on January 1, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the Company's
wholly-owned subsidiaries, Midwest Wireless Iowa, L.L.C. and Midwest
Wireless Wisconsin, L.L.C., as well as its majority-owned subsidiary,
Midwest Wireless Communications, L.L.C. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
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 the reported
amounts of assets and liabilities at the date of the financial
statements and disclosure of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the periods reported. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company provides cellular service and cellular telephones to a
diversified group of consumers within a concentrated geographical area.
The Company performs credit evaluations of its customers and requires a
deposit when deemed necessary. Receivables are generally due within 30
days.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with original
maturities of three months or less to be cash equivalents.
CELLULAR TELEPHONE INVENTORIES
Inventories consist primarily of cellular phones and accessories held
for resale with cost determined using the specific identification
method. Losses on sales of cellular phones are recognized in the period
in which sales are made as a cost of acquiring subscribers.
55
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROPERTY, CELLULAR PLANT AND EQUIPMENT
Property, cellular plant and equipment is stated at its original cost.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the cellular plant and equipment. The estimated useful
lives of the cellular plant and equipment are as follows:
Building and improvements 3 - 30 years
Other equipment 2 - 20 years
Communication and network equipment 7 - 15 years
Vehicles 3 years
Computer equipment 3 years
Major renewals or betterments are capitalized, while repair and
maintenance expenditures are charged to operations as incurred.
Interest incurred on external borrowings during construction is
capitalized. The cost and accumulated depreciation of property,
cellular plant and equipment disposed of or sold are eliminated from
their respective accounts, and the resulting gain or loss is recorded
in operations.
FEDERAL COMMUNICATIONS COMMISSION (FCC) LICENSES
FCC licenses consist of the cost of acquiring cellular, personal
communication services (PCS), and local multi-point distribution (LMDS)
licenses. It also includes the value assigned to cellular licenses
acquired through the acquisitions of operating cellular systems. The
Company ceased amortization of its licenses effective January 1, 2002,
with the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142 (see Note 3).
LONG-LIVED ASSETS
The Company periodically reviews long-lived assets and fixed assets for
impairment whenever events or changes in circumstances indicate that
the carrying value of the assets may not be recoverable. Recoverability
is based on projected cash flows on an undiscounted basis.
REVENUE RECOGNITION
Service revenue consists of the base monthly service fee and airtime
revenue. Base monthly service fees are billed one month in advance and
are recognized in the month earned. Airtime and roamer revenue is
recognized when the service is provided. The Company recognizes revenue
for equipment installation when the installation is completed and the
Company recognizes equipment revenue when the equipment is delivered
and accepted by customers.
ROAMING REVENUE RECLASSIFICATION
The Company generates revenue from charges to its customers when they
use their cellular phones in other wireless providers' markets
(Incollect Revenue). Until 2002, the Company included Incollect Revenue
on a net basis as a component of Home Roamer Costs as an operating
expense in its statement of operations. Expense associated with
Incollect Revenue, charged by third-party wireless providers, is also
included in Home Roamer Costs. The Company used this method because,
historically, it has passed through to its customers most of the costs
related to Incollect Revenue. However, the wireless industry and the
Company have increasingly been using pricing plans that include flat
rate pricing and larger home service areas. Under these types of plans,
amounts charged to the Company by other wireless providers may not
necessarily be passed through to its customers.
56
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 2002, the Company adopted a policy to include Incollect Revenue as
Subscriber Service revenue rather than in Home Roamer Costs on a net
basis. Roamer Service Revenue includes only the revenue from other
wireless providers' customers who use the Company's network (Outcollect
Revenue). Subscriber Service Revenue and Home Roamer Costs in the 2001
and 2000 consolidated financial statements were reclassified to conform
to this presentation. This change in presentation has no impact on
operating income, net income or members' equity.
The Company reclassified Incollect Revenue of $8,434,482, $7,549,289
and $8,153,662 for the years ended December 31, 2002, 2001 and 2000,
respectively.
INCOME TAXES
No provision for income taxes has been recorded since all income,
losses and tax credits are allocated to the members for inclusion in
their respective income tax returns.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising expenses
were $3,317,280, $4,448,949 and $3,021,650 for the years ended December
31, 2002, 2001 and 2000, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method. Accordingly, compensation cost for stock options granted
to employees is measured as the excess, if any, of the fair value of
the stock at the date of the grant over the amount an employee must pay
to acquire the stock. Such compensation costs are amortized on a
straight-line basis over the underlying option's vesting term. No such
compensation expense was recognized for the years ended December 31,
2002, 2001 and 2000.
If the Company had elected to recognize compensation expense for
options granted using the fair value method, net income would have been
as follows:
2002 2001 2000
Net income, as reported $28,113,520 $16,588,360 $14,297,071
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards (337,615) (214,783) (45,873)
----------- ----------- -----------
Pro forma net income $27,775,905 $16,373,577 $14,251,198
=========== =========== ===========
57
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. FCC LICENSES
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." Effective with the adoption of this
standard, the Company is no longer amortizing FCC licenses (licenses),
which consist of licenses that provide the Company with the exclusive
right to utilize certain radio frequency spectrum to provide wireless
communication services. Although the licenses are issued for only a
fixed time, generally ten years, they are subject to renewal by the
FCC; but the renewals of licenses have occurred routinely and at
nominal cost. Moreover, there are currently no legal, regulatory,
contractual, competitive, economic, or other factors that limit the
useful lives of the licenses. As a result, licenses are treated as
indefinite-lived intangible assets and will not be amortized but rather
are tested annually for impairment.
In connection with the adoption of SFAS No. 142, the Company has
completed transitional and annual impairment tests for its licenses and
determined that there was no impairment. The Company utilized a fair
value approach, primarily using discounted cash flows, to complete the
impairment tests.
2002 2001
FCC licenses $ 204,534,427 $ 197,134,188
Less accumulated amortization (9,922,264) (9,922,264)
------------- -------------
$ 194,612,163 $ 187,211,924
============= =============
The changes in the carrying amount of FCC licenses for the year ended
December 31, 2002, are as follows:
Balance as of January 1, 2002 $ 187,211,924
Licenses acquired during the year 7,400,239
-------------
Balance as of December 31, 2002 $ 194,612,163
=============
The adjusted amounts shown below reflect the effect of retroactive
application of discontinuance of the amortization of licenses as if the
new method of accounting had been in effect during 2001 and 2000.
2002 2001 2000
Net income:
Reported net income $28,113,520 $16,588,360 $14,297,071
Amortization -- 4,505,851 3,780,643
----------- ----------- -----------
Adjusted net income $28,113,520 $21,094,211 $18,077,714
=========== =========== ===========
58
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. SELECT ACCOUNT INFORMATION
PROPERTY, CELLULAR PLANT AND EQUIPMENT
2002 2001
Land $ 3,643,696 $ 2,666,041
Plant in service 153,533,992 128,305,172
Plant under construction 6,815,296 5,777,756
------------ ------------
163,992,984 136,748,969
Less accumulated depreciation (61,773,480) (47,116,542)
------------ ------------
$102,219,504 $ 89,632,427
============ ============
The Company capitalized interest in the amount of $443,911, $581,879 and
$608,199 for the years ended December 31, 2002, 2001 and 2000,
respectively. At December 31, 2002 and 2001, accounts payable included
$2,100,831 and $1,269,501, respectively, related to the purchase of
property, cellular, plant and equipment.
5. ACQUISITIONS
On February 29, 2000, the Company, through its wholly-owned subsidiary,
Midwest Wireless Iowa, L.L.C., completed its acquisition of cellular
communications properties providing services to a 28-county area of Iowa
(the Iowa properties).
On March 17, 2000, the Company through its wholly-owned subsidiary,
Midwest Wireless Wisconsin, L.L.C., completed its acquisition of cellular
communications properties providing services to a 4-county area of
Wisconsin and Minnesota (the Wisconsin properties).
The Company allocated the excess purchase price over the fair value of
the net tangible assets acquired to FCC licenses and began amortizing it
over 39.5 years until January 1, 2002 (see Note 3). The acquisitions were
accounted for as purchases. As a result, the financial statements include
the operations related to the Iowa and Wisconsin properties beginning at
their respective acquisition dates.
59
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table presents the computation of the purchase price, the
estimated fair value of tangible assets acquired, and the amount
allocated to FCC licenses.
IOWA WISCONSIN
Cash $ 89,242,760 $ 5,078,783
Equity units issued 51,418,250 20,061,217
Acquisition expenses 2,760,681 180,089
Liabilities assumed:
Accounts payable and accrued liabilities - 28,956
Customer deposits 4,700 35,600
Advance revenue 792,218 90,616
------------ -----------
Total purchase price 144,218,609 25,475,261
Estimated fair value of tangible assets acquired:
Accounts receivable 1,699,586 282,309
Inventories 76,895 -
Property, cellular plant and equipment 9,101,600 2,497,400
------------ -----------
10,878,081 2,779,709
------------ -----------
FCC licenses $133,340,528 $22,695,552
============ ===========
On June 25, 2001, the Company acquired eight digital PCS licenses from
McLeod USA, Inc. for a total purchase price of $22,400,000. The purchase
is for spectrum licenses only and does not include any other assets. The
licenses cover a total population of approximately 1.4 million in 63
counties in northern Iowa, southern Minnesota, eastern South Dakota,
eastern Nebraska and western Illinois. The purchase price together with
costs incurred of approximately $100,000 to complete the transaction is
allocated to FCC licenses.
In July 2002, the Company acquired three digital PCS licenses for
$7,385,058. The agreement is for the purchase of spectrum licenses only
and does not include any other assets. The licenses cover 26 counties
primarily in southern Minnesota.
60
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. MEMBERS' CAPITAL
Members' capital includes capital contributions made by the members and
the accumulated income resulting from operations. Company income or
loss is allocated to the individual members based upon their ownership
percentage, as defined in the Limited Liability Company Agreement (the
Agreement). Pursuant to the Agreement, members are not obligated for
the debts and obligations of the Company, including accumulated losses
in excess of capital contributions.
Under the Agreement, no member may transfer or sell any units unless the
board of managers approves the terms of such transfer or sale. Upon
receipt of a bona fide offer in writing from a third party, the other
members and then the Company have the right to purchase all, but not less
than all, of the units at the bona fide offer price within a specified
time frame.
The Agreement also contains the right of co-sale under which no member
may transfer its units to an acquiring person, as defined in the
Agreement, who after such transfer would be an acquiring person without
assuring that each of the other members may participate in the transfer
of units under the same terms and conditions. The right of co-sale would
terminate in the event the Company completes a sale of securities
pursuant to a securities act or if the Company's market capitalization
would exceed $200,000,000.
Each member is entitled to one vote for each unit owned. Certain
restrictions on voting rights exist when units are sold to an acquiring
person.
7. DEBT
Debt consists of the following:
RATE AT BALANCE AT
DECEMBER 31 DECEMBER 31
----------------- ---------------------------------
MATURITY 2002 2001 2002 2001
RTFC note, variable rate 5/12/09 5.50% 5.25% $ 9,735,315 $ 10,928,336
RTFC, variable rate 4/30/09 5.50% 5.25% 20,375,286 22,872,168
RTFC note, fixed rate 7/29/08 5.75% 5.75% 5,882,114 6,696,207
RTFC note, variable rate 7/28/08 5.50% 5.25% 5,381,438 6,126,238
RTFC note, variable rate 3/2/10 5.50% 5.25% 80,191,775 88,254,536
RTFC note, variable rate 2/3/15 5.50% 5.25% 7,548,707 7,916,809
CoBank note, variable rate 10/20/03 5.00% 4.85% 25,000,000 20,000,000
------------- -------------
$ 154,114,635 $ 162,794,294
============= =============
61
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has entered into various agreements (the Agreements) with the
Rural Telephone Finance Cooperative (RTFC). In 2000, the Company entered
into an agreement to fund the acquisitions of the Iowa and Wisconsin
cellular markets and the construction of a new headquarters building. The
Agreements provide for borrowings of up to $159,725,739. The principal
and interest on the variable and fixed rate notes are payable in
quarterly installments. The Agreements provide the Company the option to
fix the interest rate on borrowings (or portions thereof) through the
maturity date. The variable rate is based on RTFC's cost of capital and
is adjusted monthly. The Agreements also provide for a revolving loan of
up to $10,000,000. Borrowings under the revolving loan bear interest at
the prime rate plus one and one-half percent. The outstanding principal
and interest are due upon maturity. At December 31, 2002 and 2001, the
Company had no borrowings outstanding under the RTFC revolving loan.
The Agreements require the Company to maintain an investment in RTFC in
the amount of at least 5% of the outstanding debt balance. The Agreements
also contain covenants that restrict distributions to members and require
the Company to maintain a current ratio of not less than 1.25. At
December 31, 2002, the Company was not in compliance with this covenant,
but a waiver was provided by RTFC. Substantially all assets of the
Company are pledged as collateral under the Agreement.
On October 22, 2001, the Company entered into an agreement with CoBank,
ACB (CoBank) to fund the acquisition of various PCS licenses, capital
expenditures and operating funds. The original agreement provided for
borrowings of up to $40,000,000 (the "revolving loan"). At December 31,
2001, the Company had drawn $20,000,000 on the revolving loan. At
December 31, 2001, borrowings under the agreement bore interest at LIBOR
plus 2.5% or 4.85%. On November 22, 2002, the Company amended the
agreement to provide for borrowings of up to $65,000,000, amended the
interest rate pricing, and extended the expiration date to October 20,
2003. At December 31, 2002, the Company had drawn $25,000,000 on the
revolving loan. At December 31, 2002, borrowings under the agreement bore
interest at LIBOR plus 3.5% or 5.0%. Management plans to pursue a
refinancing of this debt prior to its maturity.
The revolving loan is subject to various covenants including a limit on
the ratio of indebtedness to annualized operating cash flow, a minimum
ratio of operating cash flow to interest paid, and a minimum debt
coverage service ratio. Substantially all the assets of the Company are
pledged as collateral under the agreement with CoBank.
RTFC and CoBank have agreed to share a security interest in the Company's
assets on a pro rata basis.
Maturities of debt are as follows:
2003 $ 39,655,912
2004 15,702,490
2005 16,826,497
2006 18,027,422
2007 19,317,148
Thereafter 44,585,166
------------
$154,114,635
============
62
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. COMMITMENTS
Future minimum rental payments required under operating leases,
principally for real estate related to tower sites, and other contractual
commitments that have initial or remaining noncancellable terms in excess
of one year at December 31, 2002, are as follows:
2003 $1,130,983
2004 933,886
2005 520,744
2006 391,605
2007 247,086
Thereafter 328,571
----------
$3,552,875
==========
Rental expense was $1,645,524, $955,514 and $773,324 for the years ended
December 31, 2002, 2001 and 2000, respectively.
9. EMPLOYEE BENEFITS
The Company established the Midwest Wireless Holdings L.L.C. and
Subsidiary Companies 401(k) Profit Sharing Plan and Trust (formerly the
Midwest Wireless Communications L.L.C. Profit Sharing Plan and Trust)
(the 401(k) Plan) for all employees who meet certain service and age
requirements. The 401(k) Plan is comprised of an employer matching
contribution component and a profit sharing component. Employer matching
contributions to this component of the plan were $473,644, $376,783 and
$292,508 for the years ended December 31, 2002, 2001 and 2000,
respectively. Profit sharing contribution expenses were $544,981,
$455,778 and $309,312 for the years ended December 31, 2002, 2001 and
2000, respectively. Profit sharing contributions are 100% vested after
five years of employment.
Effective January 1, 1997, the Company established the Midwest Wireless
Holdings L.L.C. Appreciation Rights Plan, as amended (formerly the
Midwest Wireless Communications L.L.C. Appreciation Rights Plan) (the
Plan) for certain key employees. The Plan is designed to create two
classes of appreciation rights, Class A and Class B, which become fully
vested three years and five years, respectively, after the first day of
the year the rights are granted. Participants in the Plan are eligible to
receive awards based on defined increases in members' equity from the
date of grant through the end of the vesting period. The Board of
Managers granted both Class A and Class B appreciation rights in 1997.
Under the terms of the Plan, no additional Class B appreciation rights
will be granted, and additional Class A appreciation rights will be
granted at the discretion of the Board of Managers. However, effective
January 1, 2002, the Plan was amended to enable additional Class B
appreciation rights to be granted in 2002. In 2000 and 2001, the Board of
Managers issued additional Class A appreciation rights to certain key
employees and in 2000 authorized an additional 9,000 rights for new Plan
participants. The Company recognized $1,287,172, $1,053,863 and
$1,137,500 in compensation expense related to the Plan for the years
ended December 31, 2002, 2001 and 2000, respectively.
63
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. OPTION PLAN
During 2000, the Company's Board of Managers adopted and approved the
Midwest Wireless Holdings L.L.C. Unit Option Plan, as amended. Effective
July 2001, the Plan was amended to clarify certain language and
definitions in the Plan. Under the Plan, options to purchase 46,742 units
of the Company's membership units may be granted to employees with terms
and vesting periods determined by the Company's Board of Managers at the
date of grant. The exercise price is equal to the fair market value of
the units at the time the option is granted, as determined by the Board
of Managers. Options granted under the plan expire ten years from the
date of grant. The options granted vest 100% three years after they were
granted. At December 31, 2002, there were 33,131 units available for
issuance under this plan.
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER PRICE PER
GRANT OF UNITS UNIT
Balance, December 31, 2000 42,650 4,092 $299.06
Granted (4,710) 4,710 $318.32
-------- --------
Balance, December 31, 2001 37,940 8,802 $309.37
Granted (4,809) 4,809 $344.00
-------- --------
Balance, December 31, 2002 33,131 13,611 $321.60
======== ========
The weighted average fair value of options at the date of grant was
$66.12, $52.73 and $80.71 in 2002, 2001 and 2000, respectively.
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
$299.06 4,092 7.59 $299.06 4,092 $299.06
$318.32 4,285 7.01 $318.32 - -
$318.32 425 7.65 $318.32 - -
$344.00 4,809 9.01 $344.00 - -
64
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The fair value for each option grant was estimated at the date of grant
using the minimum value method with the following assumptions:
FISCAL YEAR
----------------------------------
2002 2001 2000
Dividend yield 2.33% 2.47% 2.07%
Risk-free interest rate 5.20% 4.73% 6.19%
Expected lives 10 years 10 years 10 years
65
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
Date: March 25, 2003 By /s/ Bill Otis
-------------- --------------------------------------------------
Bill Otis, President (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
KNOW ALL BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints __Bill Otis___ as his or her true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
SEC, granting unto said attorney-in-fact and agent, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Date: March 25, 2003 By /s/ Chris Hopp
-------------- --------------------------------------------------
Chris Hopp, Treasurer (Principal Financial and
Accounting Officer)
/s/ James Jensen
--------------------------------------------------
James Jensen, Chairman of the Board
/s/ Duane Lambrecht
--------------------------------------------------
Duane Lambrecht, Director
/s/ Gary Nelson
--------------------------------------------------
Gary Nelson, Director
/s/ Rosemary Dittrich
--------------------------------------------------
Rosemary Dittrich, Director
/s/ Mary Ellen Domeier
--------------------------------------------------
Mary Ellen Domeier, Director
/s/ Perry Meyer
--------------------------------------------------
Perry Meyer, Director
/s/ Robert Ranweiler
--------------------------------------------------
Robert Ranweiler, Director
66
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 annual report on Form 10-K of New Ulm Telecom,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
67
6. The registrant's other certifying officers and I have indicated in
this annual report whether 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.
Date: March 25, 2003 /s/ Bill Otis
-------------- -------------------------------------
Bill Otis
President and Chief Executive Officer
68
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 annual report on Form 10-K of New Ulm Telecom,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
69
6. The registrant's other certifying officers and I have indicated in
this annual report whether 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.
Date: March 25, 2003 /s/ Chris Hopp
-------------- -----------------------
Chris Hopp
Chief Financial Officer
70
INDEX TO EXHIBITS
Exhibits are required to be filed by Item 601 of Regulation S-K are included as
Exhibits to this report as follows:
3.1 Restated Articles of Incorporation (incorporated by reference
to the New Ulm Telecom, Inc. Form 10-K dated December 31,
1986).
3.2 Restated By-Laws (incorporated by reference to the New Ulm
Telecom, Inc. Form 10-K dated December 31, 1986).
4.1 The registrant, by signing this Report, agrees to furnish the
Securities and Exchange Commission, upon its request, a copy
of any instrument which defines the rights of holders of
long-term debt of the registrant and all of its subsidiaries
for which consolidated financial statements are required to be
filed, and which authorizes a total amount of securities not
in excess of 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis.
21* Subsidiaries of the Registrant
24* Power of Attorney
99.1* Written Statement of Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350)
99.2* Written Statement of Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350)
* Filed herewith