UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3024
NEW ULM TELECOM, INC.
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-0440990
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
27 NORTH MINNESOTA STREET
NEW ULM, MINNESOTA 56073
(Address of Principal Executive Offices, Including Zip Code)
(507) 354-4111
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ___ No _X_.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of May 9, 2003: 5,115,585 shares of common stock outstanding.
NEW ULM TELECOM, INC. AND SUBSIDIARIES
MARCH 31, 2003
PART I FINANCIAL INFORMATION
Item 1 Financial Statements...............................................3-7
Unaudited Consolidated Balance Sheets..............................3-4
Unaudited Consolidated Statements of Income..........................5
Unaudited Consolidated Statements of Stockholders' Equity............6
Unaudited Consolidated Statements of Cash Flows......................7
Notes to Unaudited Consolidated Financial Statements..............8-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................15-27
Item 3 Quantitative and Qualitative Disclosures About Market Risk..........27
Item 4 Controls and Procedures..........................................27-28
PART II OTHER INFORMATION.....................................................28
Item 6 Exhibits and Report on Form 8-K.....................................28
SIGNATURES....................................................................28
CERTIFICATIONS.............................................................29-31
INDEX TO EXHIBITS.............................................................32
NEW ULM TELECOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 1,535,725 $ 1,914,113
Receivables, net of allowance for
doubtful accounts of $116,795 and $100,950 1,961,496 2,626,492
Inventories 378,104 502,315
Prepaid expenses 150,940 183,751
----------- -----------
4,026,265 5,226,671
----------- -----------
INVESTMENTS AND OTHER ASSETS
Goodwill and intangibles, net of amortization 3,245,929 3,246,442
Notes receivable from officer 657,000 674,037
Cellular investments 13,939,257 13,392,129
Other 1,215,382 1,042,896
----------- -----------
19,057,568 18,355,504
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telecommunications plant 52,243,958 51,864,392
Other property and equipment 2,448,337 2,438,378
Cable television plant 1,932,461 1,850,221
----------- -----------
56,624,756 56,152,991
Less Accumulated Depreciation 27,420,193 26,423,783
----------- -----------
29,204,563 29,729,208
----------- -----------
TOTAL ASSETS $52,288,396 $53,311,383
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,514,130 $ 2,514,130
Accounts payable 1,026,918 2,223,687
Other accrued taxes 81,183 67,842
Other accrued liabilities 591,045 564,188
----------- -----------
4,213,276 5,369,847
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 19,770,983 20,152,961
----------- -----------
DEFERRED CREDITS
Income taxes 3,651,647 3,651,647
Investment tax credits 5,822 6,708
----------- -----------
3,657,469 3,658,355
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $1.67 par value,
19,200,000 shares authorized,
5,115,585 shares issued and
outstanding 8,525,975 8,525,975
Retained earnings 16,120,693 15,604,245
----------- -----------
24,646,668 24,130,220
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $52,288,396 $53,311,383
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
----------- -----------
OPERATING REVENUES
Local network $ 860,060 $ 819,700
Network access 1,543,268 1,728,184
Billing and collecting 28,718 40,378
Miscellaneous 110,290 108,126
Nonregulated 1,049,066 890,852
----------- -----------
3,591,402 3,587,240
----------- -----------
OPERATING EXPENSES
Plant operations 473,897 440,013
Depreciation and amortization 1,024,786 836,348
Customer 213,691 219,109
General and administrative 505,798 475,883
Other operating expenses 616,514 528,707
----------- -----------
2,834,686 2,500,060
----------- -----------
OPERATING INCOME 756,716 1,087,180
----------- -----------
OTHER (EXPENSES) INCOME
Interest expense (152,306) (149,634)
Interest expense - debt retirement -- (271,200)
Interest income 8,322 25,447
Cellular investment income 769,147 753,319
Gain from dissolution -- 1,153,889
Other investment income (expense) 210,587 121,138
----------- -----------
835,750 1,632,959
----------- -----------
INCOME BEFORE INCOME TAXES 1,592,466 2,720,139
INCOME TAXES 649,889 1,101,864
----------- -----------
NET INCOME $ 942,577 $ 1,618,275
=========== ===========
BASIC AND DILUTED
NET INCOME PER SHARE - NOTE 2 $ 0.18 $ 0.32
=========== ===========
DIVIDENDS PER SHARE $ 0.0833 $ 0.0833
=========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 5,115,585 5,115,585
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2002 AND
THREE MONTHS ENDED MARCH 31, 2003
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS
----------- ----------- -----------
BALANCE on December 31, 2002 5,115,585 $ 8,525,975 $15,604,245
Net income 942,577
Dividends (426,129)
----------- ----------- -----------
BALANCE on March 31, 2003 5,115,585 $ 8,525,975 $16,120,693
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
6
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED
-----------------------------------
MARCH 31, 2003 MARCH 31, 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 942,577 $ 1,618,275
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,024,786 836,348
Cellular investment income (769,147) (753,319)
Distributions from cellular investements 222,019 125,982
Gain from cellular dissolution -- (1,153,889)
(Increase) Decrease in:
Receivables 664,996 329,140
Inventories 124,211 33,759
Prepaid expenses 32,811 32,464
Increase (Decrease) in:
Accounts payable 69,109 (177,516)
Accrued income taxes -- 686,342
Other accrued taxes 13,341 (2,413)
Other accrued liabilities 26,857 47,469
Deferred investment tax credits (886) (886)
----------- -----------
Net cash provided by operating activities 2,350,674 1,621,756
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (1,765,506) (1,241,419)
Change in notes receivable 17,037 1,234
Purchase of cellular investments -- (1,610,341)
Other, net (172,486) (105,719)
----------- -----------
Net cash used in investing activities (1,920,955) (2,956,245)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments of Long-Term Debt (381,978) (2,941,666)
Issuance of Long-Term Debt -- 1,420,000
Dividends Paid (426,129) (426,129)
----------- -----------
Net Cash Used by Financing Activities (808,107) (1,947,795)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (378,388) (3,282,284)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,914,113 4,245,683
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,535,725 $ 963,399
=========== ===========
The accompanying notes are an integral part of the financial statements.
7
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of New Ulm Telecom,
Inc. and its wholly owned subsidiaries (the "Company"). All material
intercompany transactions and accounts have been eliminated. Accounting
practices prescribed by regulatory authorities have been considered in the
preparation of the financial statements and formulation of accounting policies
for the Company. These policies conform with generally accepted accounting
principles as applied to regulated public utilities in accordance with Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. Network access revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies and nationwide average
schedules. Revenues include estimates pending finalization of cost studies.
Network access revenues are based upon interstate tariffs filed with the Federal
Communications Commission by the National Exchange Carrier Association and state
tariffs filed with state regulatory agencies. Management believes recorded
revenues are reasonable based on estimates of cost separation studies, which are
typically settled within two years.
Income taxes have been calculated in proportion to the earnings and tax credits
generated by operations. Investment tax credits have been deferred and are
included in income over the estimated useful lives of the related assets. The
Company's effective income tax rate is higher than the U.S. rate due to the
effect of state income taxes.
The balance sheets and statement of stockholders' equity as of March 31, 2003
and statements of income and the statements of cash flows for the periods ended
March 31, 2003 and 2002 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and changes in cash flows at March 31, 2003 have been made.
8
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002. The results of
operations for the period ended March 31, 2003 are not necessarily indicative of
the operating results to be expected for the entire year.
NOTE 2 - BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic and diluted net income per common share is based on the weighted average
number of shares of common stock outstanding of 5,115,585 at March 31, 2003 and
at March 31, 2002. All per share data has been restated to reflect the
three-for-one stock split effective January 10, 2002.
NOTE 3 - RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 consolidated financial
statements to conform with the 2003 presentation. These reclassifications had no
impact on previously reported net income or shareholders' equity. These
reclassifications decreased operating revenues and operating expenses by
$186,555 for the quarter ended March 31, 2002.
NOTE 4 - STATEMENTS OF CASH FLOW
Supplemental Disclosures of Cash Flow Information:
Cash paid during the three months ended March 31:
2003 2002
---- ----
Interest $155,922 $401,285
Income taxes $ 83,000 $ 72,200
Noncash investing activities included $545,569 and $485,714 during the periods
ended March 31, 2003 and 2002, respectively, relating to plant and equipment
additions placed in service, which are reflected in accounts payable at March
31, 2003 and 2002.
NOTE 5 - SECURED REDUCING REVOLVING CREDIT FACILITY
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. At March 31, 2003, there
was $13,125,000 of direct borrowings outstanding under this facility at an
interest rate of 2.76%. The Company also entered into a $10 million secured
ten-year reducing revolving credit facility during fiscal 2001, maturing in
2011. The borrowings
9
under the credit facility bear interest, at the Company's option, at either
fixed or variable rates linked to the Company's overall leverage ratio. At March
31, 2003, there was $9,000,000 of direct borrowings outstanding under this
facility at an interest rate of 2.76%.
NOTE 6 - MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories are recorded at the lower of average cost or
market.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the provisions of this accounting standard, goodwill
and intangible assets with indefinite useful lives are no longer amortized but
are instead tested for impairment or useful lives on at least an annual basis.
At March 31, 2003, the Company had goodwill for wireline acquisitions of
$3,218,906, which was net of accumulated amortization of $1,360,442 and goodwill
associated with equity investments, included in cellular investments, of
$4,890,389, which was net of accumulated amortization of $156,391. The Company
determined that these assets have indefinite useful lives and ceased
amortization effective January 1, 2002. The Company does not presently believe
that these assets are impaired.
The Company owned 9.92% of Midwest Wireless Holdings, LLC (MWH) at March 31,
2003 (9.92% at December 31, 2002). The Company accounts for its investment in
MWH using the equity method, and earnings from the investment are material to
the Company's net income. At December 31, 2002 MWH had investments in cellular,
Local Multipoint Distribution Service (LMDS) and Personal Communications Service
(PCS) licenses totaling $194,612,000, net of amortization of $9,922,000. MWH has
determined that these licenses have indefinite useful lives and ceased
amortization on January 1, 2002.
Changes in goodwill are summarized below:
March 31, December 31,
2003 2002
----------- -----------
Goodwill on wireline acquisitions $ 4,579,348 $ 4,579,348
Goodwill on cellular investments 5,046,780 5,046,780
Accumulated amortization (prior to adopting
SFAS No. 142) (1,516,833) (1,516,833)
----------- -----------
$ 8,109,295 $ 8,109,295
----------- -----------
10
Intangible assets subject to amortization pursuant to SFAS No. 142 are
summarized below:
March 31, December 31,
2003 2002
----------- -----------
Gross Carrying Amount $ 30,785 $ 30,785
Accumulated amortization (3,762) (3,249)
----------- -----------
$ 27,023 $ 27,536
----------- -----------
Under SFAS No. 142 intangible assets with definite lives will continue to be
amortized over their useful lives. The estimated amortization expense for
intangible assets will be $2,053 per year for the next five years.
NOTE 8 - SEGMENT INFORMATION
The Company is organized into five business segments: New Ulm Telecom, Inc. and
its wholly owned subsidiaries, Western Telephone Company, Peoples Telephone
Company, New Ulm Phonery, Inc., and a cellular investment recorded on the equity
method. No single customer accounted for a material portion of the Company's
revenues in any of the last three years. The cellular investment is the
Company's investment in MWH and is shown using the proportionate consolidation
method.
Segment information is as follows:
11
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
----------- ----------- ----------- ----------- -----------
THREE MONTHS ENDED MARCH 31, 2003
Operating Revenues $ 2,217,067 $ 589,651 $ 272,230 $ 553,498 $ 3,712,956
Operating Expenses 2,113,547 291,954 151,282 364,763 2,792,145
----------- ----------- ----------- ----------- -----------
Operating income 103,520 297,697 120,948 188,735 920,811
Interest expense (44,520) (22,175) (41,425) (2,761) (248,909)
Cellular Investment Income
Other Investment Income 156,197 766 61,910 36 55,820
----------- ----------- ----------- ----------- -----------
Income before income taxes $ 215,197 $ 276,288 $ 141,433 $ 186,010 $ 727,722
=========== =========== =========== =========== ===========
Depreciation and amortization $ 860,044 $ 99,212 $ 35,314 $ 30,216 $ 511,849
=========== =========== =========== =========== ===========
Total Assets $65,426,416 $10,277,158 $ 5,399,858 $ 4,304,816 $31,777,822
=========== =========== =========== =========== ===========
Capital Expenditures $ 1,718,275 $ 29,158 $ 11,798 $ 6,275 $ 677,247
=========== =========== =========== =========== ===========
Segment
Totals Others Eliminations Consolidated
----------- ----------- ----------- -----------
THREE MONTHS ENDED MARCH 31, 2003
Operating Revenues $ 7,345,402 $ 152,728 $ (3,906,728) $ 3,591,402
Operating Expenses 5,713,691 106,912 (2,985,917) 2,834,686
------------ ------------ ------------ ------------
Operating income 1,631,711 45,816 (920,811) 756,716
Interest expense (359,790) 207,484 (152,306)
Cellular Investment Income -- 769,147 769,147
Other Investment Income 274,729 (55,820) 218,909
------------ ------------ ------------ ------------
Income before income taxes $ 1,546,650 $ 45,816 $ 0 $ 1,592,466
=========== ============ ============ ============
Depreciation and amortization $ 1,536,635 $ -- $ (511,849) $ 1,024,786
============ ============ ============ ============
Total Assets $117,186,070 $ 7,914,360 $(72,812,034) $ 52,288,396
============ ============ ============ ============
Capital Expenditures $ 2,442,753 $ -- $ (677,247) $ 1,765,506
------------ ------------ ------------ ------------
12
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2002
Operating Revenues $ 2,218,347 $ 588,382 $ 249,460 $ 501,786 $ 3,415,820
Operating Expenses 1,782,710 253,666 140,880 295,718 2,569,781
------------ ------------ ------------ ------------ ------------
Operating income 435,637 334,716 108,580 206,068 846,039
Interest expense (333,851) (59,811) (27,172) (263,948)
Cellular Investment Income
Gain on Cellular Dissolution 1,153,889
Other Investment Income 102,645 566 43,076 298 171,228
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 204,431 $ 275,471 $ 1,278,373 $ 206,366 $ 753,319
============ ============ ============ ============ ============
Depreciation and amortization $ 667,534 $ 94,490 $ 38,193 $ 36,131 $ 490,023
============= ============ ============ ============ ============
Total Assets $ 49,648,639 $ 9,627,010 $ 4,912,000 $ 3,757,135 $ 31,101,074
============= ============ ============ ============ ============
Capital Expenditures $ 1,171,442 $ 4,386 $ 7,892 $ 57,699 $ 684,275
============= ============ ============ ============ ============
Segment
Totals Others Eliminations Consolidated
------------ ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2002
Operating Revenues $ 6,973,795 $ 108,177 $ (3,494,732) $ 3,587,240
Operating Expenses 5,042,755 105,998 (2,648,693) 2,500,060
------------ ------------ ------------ ------------
Operating income 1,931,040 2,179 (846,039) 1,087,180
Interest expense (684,782) 263,948 (420,834)
Cellular Investment Income -- 753,319 753,319
Gain on Cellular Dissolution 1,153,889 1,153,889
Other Investment Income 317,813 (171,228) 146,585
------------ ------------ ------------ ------------
Income before income taxes $ 2,717,960 $ 2,179 $ -- $ 2,720,139
============ ============ ============ ============
Depreciation and amortization $ 1,326,371 $ -- $ (490,023) $ 836,348
============ ============ ============ ============
Total Assets $ 99,045,858 $ 6,326,124 $(61,960,415) $ 43,411,567
============ ============ ============ ============
Capital Expenditures $ 1,925,694 $ -- $ (684,275) $ 1,241,419
------------ ------------ ------------ ------------
13
NOTE 9 - RECENT ACCOUNTING DEVELOPMENTS
The Company adopted the provisions of SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets," as of January 1, 2002. SFAS No. 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell and also sets forth
requirements for recognizing and measuring impairment losses on certain
long-lived assets to be held or used. The adoption of SFAS No. 144 had no impact
on the Company's financial position or its results of operations.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development or normal use of the asset. SFAS No. 143 is effective January 1,
2003. The Company is currently evaluating the provisions of SFAS No. 143 and
does not expect that adoption will have a material impact on its financial
position or its results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statements No.
64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers," and amends FASB Statement No. 13, "Accounting for Leases." In
March 2002, the Company recorded an extraordinary loss of $161,419, net of
income tax benefit of $109,781, as a result of an extinguishment of debt. Under
SFAS No. 145, this extraordinary loss on debt extinguishment was reclassified to
Other (Expenses) Income.
NOTE 10 - CONTINGENCIES
The Company is involved in certain contractual disputes in the ordinary course
of business. The Company does not believe the ultimate resolution of any of
these existing matters will have a material adverse effect on its financial
position, results of operations, or cash flows.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q contains forward-looking statements that are based on
management's current expectations, estimates and projections about the industry
in which 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 affect the pricing of services and 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 required investment in technological innovations which may
deplete capital resources;
o the continuation of historical trends;
o the economy in general;
o the future of the communications industry and communications
services;
o the effect of legal and regulatory changes;
o the sufficiency of cash generated 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 and in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2002. 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.
OVERVIEW
- --------
The Company operates five business segments. The majority of its operations
consist of four segments that provide telephone and related ancillary services,
and cable television services to numerous communities in Minnesota and Iowa. A
fifth segment has a 9.92% interest in Midwest Wireless Holdings L.L.C. (MWH) and
records this investment on the equity method of accounting. The equity method is
used due to the influence the Company has over the operations and management of
MWH.
15
RESULTS OF OPERATIONS
---------------------
CONSOLIDATED OPERATING RESULTS
- ------------------------------
The following is a summarized discussion of consolidated results of operations.
More detailed discussion of operating results by segment follows this
discussion.
* OPERATING REVENUES:
-------------------
Total operating revenues were $3,591,402 for the three months ended
March 31, 2003, for an increase of 0.1% or $4,162 compared to the same
period in 2002. While the operating revenues for the New Ulm Telecom
segment were relatively unchanged, this sector did see an increase in
revenue due to new and expanded service offerings: digital video and
digital subscriber line (DSL). New Ulm Telecom segment has invested
heavily in its infrastructure, which allows it to enhance its local
network and offer these new services to its subscribers. The New Ulm
Telecom segment also began operations of a Competitive Local Exchange
Carrier (CLEC) in the City of Redwood Falls, MN during the third
quarter of 2002. It is expected that this geographic expansion of the
Company's service offerings will provide this segment with continued
future growth. The negative effects of network access pricing and a
10.7% decrease in access minutes of use offset the aforementioned
increases. The Peoples Telephone Company sector saw an increase in its
network access revenue due to a 5.8% increase in minutes of use and an
increase in other operating revenues due to a rate increase for its
Cable Television (CATV) service offering, which took effect July 1,
2002. The New Ulm Phonery segment contributed to increased operating
revenues through increased sales of customer premise equipment (CPE),
Internet service provision, and revenues from leased network capacity.
All other segments had relatively no change.
* OPERATING EXPENSES:
-------------------
Operating expenses for the three months ended March 31, 2003 increased
$334,626 or 13.4% compared to the same period in 2002, with the New
Ulm Telecom segment responsible for $330,837 of the increase.
Depreciation expense for the New Ulm Telecom segment saw an increase
of $192,510 in 2003 compared to 2002. This increase was reflective of
the new investments in the New Ulm Telecom segment's infrastructure.
The remainder of the increase in the New Ulm Telecom segment reflected
the additional general and administrative expenses associated with the
commitment of the Company to compete in all aspects of communication
services and to provide exceptional customer service for the Company's
complete assortment of products and services and the increased costs
associated with the introduction of CLEC services in Redwood Falls,
MN.
* OPERATING INCOME:
-----------------
Operating income for the three months ended March 31, 2003 decreased
$330,464 or 30.4% over the three months ended March 31, 2002. The
decrease in income was
16
primarily due to the increase in operating expenses.
* OTHER INCOME:
-------------
Other income for the three months ended March 31, 2003 decreased
$797,209 compared to the three months ended March 31, 2002. During the
three-month period ended March 31, 2002, the Peoples Telephone segment
recognized a one-time gain of $1,153,880 when its partially-owned
subsidiaries, Cherokee Cellular, Inc. and Three Lakes Cellular, Inc.,
were dissolved by unanimous shareholder vote. Membership interests of
MWH were distributed to shareholders of the dissolved companies, based
on their pro rata ownership of the companies. In addition to obtaining
its pro rata share of MWH membership units, Peoples Telephone Company
acquired a 2.34% membership interest in MWH from other former
shareholders who sold MWH membership units to pay capital gain taxes
resulting from the transaction.
Other investment income increased $89,449 for the three months ended
March 31, 2003 over the same period in 2002 due to an increase of
investment income for Fibercom, L.L.C., and an increase in the
investment income for CoBank.
There was a $268,528 decrease in interest expense for the three-month
period ended March 31, 2003 compared to the same period in 2002. A
decrease in interest expense from the early extinguishments of debt is
the main cause of this decrease. On March 1, 2002, the Company repaid
the entire outstanding principal balance of $2,566,666 on this senior
unsecured debt with Phoenix Life Mutual Insurance Company.
* NET INCOME:
-----------
Net income was $957,772 for the three months ended March 31, 2003
compared with $1,618,275 for the same period in 2002. This $675,698 or
41.8% decrease was primarily attributed to our gains from the
dissolution of the cellular corporations in 2002, the extinguishments,
and an increase in operating expenses.
17
Summary of Operations
Quarter Ended March 31,
---------------------------
2003 2002
---------------------------
Operating Income:
New Ulm Telecom $ 103,520 $ 435,637
Western Telephone 297,697 334,716
Peoples Telephone 120,948 108,580
New Ulm Phonery 188,735 206,068
Other 45,816 2,179
----------- -----------
Total 756,716 1,087,180
Other Income 988,056 2,053,793
Interest Expense (152,306) (420,834)
Income Taxes (649,889) (1,101,864)
----------- -----------
Net Income $ 942,577 $ 1,618,275
=========== ===========
Basic and Diluted
Earnings Per Share $ .18 $ .32
Weighted Average
Shares Outstanding 5,115,585 5,115,585
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
- -----------------------------------------
NEW ULM TELECOM OPERATIONS
New Ulm Telecom segment revenues represent 58.6% of the Company's consolidated
operating revenues for the three-month period ended March 31, 2003. The New Ulm
Telecom segment also began offering CLEC services in the City of Redwood Falls,
MN in September 2002. Revenues are primarily earned by providing approximately
13,700 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. Total New Ulm Telecom segment
revenues for the three-month period ending March 31, 2003 were essentially
unchanged compared to the same period last year. All information contained in
the following table is before intercompany eliminations.
18
Quarter Ending March 31,
------------------------
2003 2002
---------- ----------
Operating Revenues:
Local Network $ 758,783 $ 717,040
Network Access 993,682 1,184,731
Other 464,602 316,576
---------- ----------
Total Operating Revenues 2,217,067 2,218,347
---------- ----------
Cash Operating Expenses 1,253,503 1,115,176
Noncash Operating Expenses 860,044 667,534
---------- ----------
Total Operating Expenses 2,113,547 1,782,710
---------- ----------
Operating Income 103,520 435,637
---------- ----------
Net Income $ 128,888 $ 122,479
---------- ----------
Local network revenue increased in the New Ulm Telecom segment by $41,743 or
5.8% for the three months ended March 31, 2003 compared to the same period in
2002. Local network revenue increased during this period as a result of service
offerings for the CLEC in Redwood Falls, MN. The CLEC accounted for an increase
of $46,578 in local network revenue. The local network revenue for New Ulm, MN
saw a decrease of $4,835. This decrease was the result of a decrease in the
number of access lines, which decreased 1.8% from March 31, 2002 to March 31,
2003 for New Ulm, MN. Targeted marketing and promotions and packaging of
vertical services, most notably the introduction of DSL to supplement basic line
charges, have minimized the decrease in this revenue.
Network access revenue decreased $191,049 or 16.1% for the three months ended
March 31, 2003 compared with the same period in 2002. The New Ulm Telecom
segment experienced a 10.7% decrease in access minutes for the three months
ended March 31, 2003, a common industry trend. The New Ulm Telecom segment has
invested over $22 million in capital expenditures since 2000. These capital
expenditures have enhanced this segment's infrastructure and have allowed New
Ulm Telecom to receive additional settlements from the National Exchange Carrier
Association (NECA). The additional investment in the New Ulm Telecom local loop
(access line cost) has made the Company eligible for high-cost loop funding
through the Universal Service Fund.
Other operating revenues increased $148,026 or 46.8% for the three months ended
March 31, 2003 compared with the same period in 2002. 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 offered in New Ulm, Essig, Searles, Courtland, and Redwood Falls,
MN was responsible for $81,327 of the increase in these revenues. The majority
of the remaining revenue increase was attributed to New Ulm Telecom
19
segment's CLEC operation in Redwood Falls, MN, through the sales of Internet
services and CPE.
Cash operating expenses increased $138,327 or 12.4% for the three-month period
ended March 31, 2003 compared with the same period in 2002. Cash operating
expenses have increased due to the introduction of a CLEC operation in Redwood
Falls, MN 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'
communications needs. The New Ulm Telecom segment also realizes growth potential
by competitively offering its array of services in an increasing number of
communities. The New Ulm Telecom segment began offering competitive services
competitively in the City of Redwood Falls, MN in September 2002. The Company is
always striving for cost efficiencies and technological improvement to enhance
its operating margins for the New Ulm Telecom segment.
Noncash operating expenses increased $192,510 or 28.8% for the three months
ended March 31, 2003 compared with the same period in 2002. Depreciation expense
was the cause of this increase. The increase in depreciation expense was
reflective of the new investments of over $22 million in the segment's
infrastructure as previously discussed.
Operating income decreased $332,117 or 76.2% for the three months ended March
31, 2003 compared with the same period in 2002. The decrease in operating income
was primarily due to the $192,510 increase in depreciation due to the growing
investment in the New Ulm Telecom segment infrastructure. The remainder of the
decrease reflected the additional general and administrative expenses associated
with the commitment of the New Ulm Telecom segment to effectively compete in all
aspects of communication services and to provide superior customer-focused
service for New Ulm Telecom segment's complete array of products and services
and the increased costs associated with the introduction of CLEC services in
Redwood Falls, MN. The $1,280 decreased revenues combined with a $330,837
increase in operating expenses resulted in the $332,117 decrease in operating
income.
WESTERN TELEPHONE COMPANY OPERATIONS
Western Telephone Company (Western) revenues represent 15.6% of the consolidated
operating revenues for the three months ended March 31, 2003. Revenues are
primarily earned by providing approximately 2,500 customers access to Western's
local network, and providing interexchange access for long distance carriers.
Western earns revenue through billing and collecting for various long distance
companies, directory advertising, cable television service, and Internet access
to its subscribers. All information contained in the following table is before
eliminations.
20
Quarter Ending March 31,
------------------------
2003 2002
-------- --------
Operating Revenues:
Local Network $ 99,499 $102,312
Network Access 386,458 391,613
Other 103,694 94,457
-------- --------
Total Operating Revenues 589,651 588,382
-------- --------
Cash Operating Expenses 192,742 159,176
Noncash Operating Expenses 99,212 94,490
-------- --------
Total Operating Expenses 291,954 253,666
-------- --------
Operating Income 297,697 334,716
-------- --------
Net Income $158,331 $163,993
-------- --------
Local network revenues decreased in the Western segment by $2,813 or 2.7% for
the three months ended March 31, 2003 compared to the same period in 2002. This
decrease in local network revenues correlated to the decrease of 2.7% in local
access lines for the three months ended March 31, 2003 compared to the three
months ended March 31, 2002.
Network access revenue decreased $5,155 or 0.1% for the three-month period ended
March 31, 2003 compared to the same period in 2002. Access minutes decreased
10.6% for the three months ended March 31, 2003. The negative effects of network
access pricing and decreasing minutes of use, a common industry trend, are
expected to continue, potentially resulting in future decreases in network
access revenue. The expected future growth in the utilization of the Internet
(e-mail, voice-over-IP) is expected to cause a decrease to the future volume of
switched minutes of use. The Western Telephone segment has seen these decreases
minimized by increased settlements from NECA and through increased high-cost
loop funding.
Other operating income increased $9,237 or 8.9% for the three months ended March
31, 2003 as compared to the same period in 2002. This increase was predominantly
the result of increased Internet DSL service revenue over the same three-month
period in 2002.
Cash operating expenses increased $33,566 or 21.1% for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002. The causes of
the increase in cash operating expenses were the switch hosting services billed
to this segment by the New Ulm Telecom segment and an increase in Internet
expenses for our DSL service offering as Western identified the need to compete
in this aspect of communications services. Additional services, such as DSL,
attention to customer satisfaction, aggressive marketing and finding solutions
to customers' communication needs are all dimensions for providing superior
products and services to customers. At the same time, Western is continually
striving to realize cost efficiencies and technological improvements to enhance
is operating margins in the Western segment.
21
Noncash operating expenses increased $4,722 or 5.0% for the quarter ended March
31, 2003 compared to the same period ended in 2002. Depreciation was the cause
of this increase. The increase was reflective of an increased amount of capital
investments.
Operating income decreased $21,824 or 6.5% for the three months ended March 31,
2003 compared with the same period in 2002. The cost of switch hosting services
billed to Western by the New Ulm Telecom segment accounted for approximately
$14,000 of the decrease in operating income. Operating income also decreased due
to a $4,722 increase in depreciation expense resulting from an increase in plant
investment, in particular, a fiber route from Sanborn to Redwood Falls, MN.
There was also an increase in Internet expense of $10,000 resulting from the
introduction of DSL into this segment's service area. The decrease in operating
income due to increases in operating expenses were partially offset by an
increase in revenues associated with Western's new service offering of DSL and
increased settlements from NECA, which includes high-cost loop funding.
PEOPLES TELEPHONE COMPANY OPERATIONS
Peoples Telephone Company (Peoples) revenues represent 7.2% of the consolidated
operating revenues for the three months ended March 31, 2003. Revenues are
primarily earned by providing approximately 880 customers access to Peoples'
local network, and in providing interexchange access for long distance carriers.
Peoples also earns revenue through billing and collecting for various long
distance companies, directory advertising, cable television service, and
Internet access to its subscribers. All information contained in the following
table is before eliminations.
Quarter Ending March 31,
------------------------
2003 2002
-------- --------
Operating Revenues:
Local Network $ 39,299 $ 37,869
Network Access 173,784 162,484
Other 59,147 49,107
-------- --------
Total Operating Revenues 272,230 249,460
-------- --------
Cash Operating Expenses 115,968 102,687
Noncash Operating Expenses 35,314 38,193
-------- --------
Total Operating Expenses 151,282 140,880
-------- --------
Operating Income 120,948 108,580
-------- --------
Net Income $ 84,120 $864,973
-------- --------
22
Local network revenue increased in Peoples by $1,430 or 3.8% for the three-month
period ended March 31, 2003 compared to the same period in 2002. This increase
occurred despite a 3.8% decrease in the number of access lines in 2003 over
2002. The revenue increase was accomplished with promotion and packaging of
vertical services, most notably, the introduction of DSL to supplement basic
line charges. DSL was responsible for this 2003 increase.
Network access revenue increased $11,300 or 7.0% and access minutes increased
5.8% for the three months ended March 31, 2003 compared to the same period in
2002. The negative effects of network access pricing, a common industry trend,
are expected to continue, potentially resulting in future decreases in network
access revenue. The continued utilization of the Internet (e-mail,
voice-over-IP) will continue to cause a decrease in the volume of switched
minutes of use, also resulting in future erosion of network access revenue. The
construction of a fiber route in 1998 and 1999 allowed Peoples to gain access to
a larger fiber optic network. The increased network access revenue was due to an
increase in transport facilities, which minimized the negative effects of
network access pricing, and also provided Peoples a way to minimize the industry
trend of decreasing access minutes of use caused by the utilization of the
Internet (e-mail and voice-over-IP) and wireless services. Network access
revenues have also been impacted by an increase in high-cost loop funding and an
increase in the amount charged to customers for service line connection charges
(SLC).
Other operating revenue increased $10,040 or 20.5% for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002. A rate
increase for CATV service, which went into effect in July 2002, accounted for
approximately $6,000 of this increase. An increase of 15.3% in Internet
customers increased other revenues by approximately $4,000.
Cash operating expenses increased $13,281 or 12.9% for the three-month period
ended March 31, 2003 compared to the same period ended 2002. Cash operating
expenses have increased due to the increased costs associated with the number of
services offered, such as DSL, and the general and administrative expenses
associated with the steps Peoples continues to take to offer its customers
state-of-the-art advances in telecommunication services.
Noncash operating expenses decreased $2,879 or 7.5% for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002. Depreciation
expense was the main cause for this decrease. Depreciation expense decreased
because some of the capital investment in this segment has become fully
depreciated.
Operating income increased $12,368 or 11.4% for the three months ended March 31,
2003 compared with the same period in 2002. A $22,770 increase in revenues was
due to increased network access revenues resulting from increased volume of
switched minutes of use, and an increase in other revenue. This operating
revenue increase was offset by an increase in operating expenses that occurred
due to the costs associated with new service offerings, such as DSL.
23
NEW ULM PHONERY OPERATIONS
New Ulm Phonery (Phonery) represents 14.6% of the consolidated operating
revenues for the three-month period ended March 31, 2003. 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 the Company (New Ulm, Redwood Falls, Springfield, and Sanborn,
MN). In addition, the Phonery leases network capacity to provide additional
network access revenues. This segment's expertise is the quality installation
and maintenance of wide area networking, local networking and transport
solutions in communication to end user customers. All information contained in
the following table is before eliminations.
Quarter Ending March 31,
------------------------
2003 2002
-------- --------
Operating Revenues: $553,498 $501,786
-------- --------
Cash Operating Expenses 334,547 259,587
Noncash Operating Expenses 30,216 36,131
-------- --------
Total Operating Expenses 364,763 295,718
-------- --------
Operating Income 188,735 206,068
-------- --------
Net Income $110,735 $122,854
-------- --------
Operating revenue increased $51,712 or 10.3% for the three months ended March
31, 2003 compared to the same period ended 2002. This increase was the result of
an $84,426 increase in Internet revenues, offset by revenue decreases of $10,199
for inside wire maintenance fees and $22,845 in network access revenues.
Cash operating expenses increased $74,034 or 28.9% for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002. This
three-month increase can be attributed to the need to compete in all aspects of
the communication services. This realization has motivated the segment to
enhance its awareness of customer satisfaction, aggressive marketing (brand
recognition) and solutions for Phonery customers' communications needs.
Increased emphasis of Internet access by Phonery's customers has led to
increased customer service hours (24 hours a day, 7 days a week access to
support), maintenance of facilities, marketing and advertising, and the
additional need for larger (more bandwidth) access points. The Phonery is
striving for cost efficiencies and technological improvements to enhance its
operating margins.
Noncash operating expenses decreased $5,915 or 16.4% for the quarter ended March
31, 2003 compared with the same period in 2002. The decrease was attributable to
a drop in depreciation expense, as some of the Phonery's capital investment has
become fully depreciated. The Phonery has an aggressive depreciation schedule
that makes it possible for the Phonery to depreciate its capital investment
quickly. This has allowed the Phonery to continually offer new
24
products and services to its customers, giving customers the ability to stay on
the cutting edge of technology.
Operating income decreased by $17,333 or 8.4% for the three months ended March
31, 2003 compared to the three months ended March 31, 2002. This decrease in
income is the result of the $22,845 decrease in network access revenues due to
the negative effects of network access pricing, offset by the decrease of $5,915
in depreciation expenses.
CELLULAR INVESTMENT
The Company has a 9.92% ownership in MWH. The segment information was shown
using the proportionate consolidation method. Cellular investment income
increased $15,828 or 2.1% for the three months ended March 31, 2003 compared to
the same period ended in 2002. This increase was the result of revenue and
income growth as MWH continues to gain market share. Acquisitions by MWH in Iowa
and Wisconsin in 2000 have had a significant impact on revenues and net income
in 2002 and 2003. 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.
Quarter Ending March 31,
------------------------
2003 2002
---------- ----------
Cellular Investment Income $ 769,147 $ 753,319
========== ==========
Proportionate Method:
Operating Revenues 3,712,956 3,415,821
Cash Operating Expenses 2,280,296 2,079,758
Noncash Operating Expenses 511,849 490,023
---------- ----------
Total Operating Expenses 2,792,145 2,569,781
---------- ----------
Operating Income 920,811 846,039
---------- ----------
Net Income $ 769,147 $ 753,319
---------- ----------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CAPITAL STRUCTURE
The total long-term capital structure (long-term debt plus shareholders' equity)
for the Company was $44,417,651 at March 31, 2003, reflecting 55.5% equity and
44.5% debt. This compares to a capital structure of $44,283,181 at December 31,
2002, reflecting 54.5% equity and 45.5% debt. Management believes adequate
internal and external resources are available to finance ongoing operating
requirements, including capital expenditures, business development, debt service
and the payment of dividends for at least the next 12 months.
25
CASH FLOWS
Cash provided by operations was $2,350,674 for the three-month period ended
March 31, 2003 compared to $1,621,756 for the three-month period ended March 31,
2002. Cash flows from operations for the three months ended March 31, 2003 and
2002 were primarily attributable to net income plus non-cash expenses for
depreciation and amortization.
Cash flows used in investing activities were $1,920,955 for the three months
ended March 31, 2003 compared to $2,956,245 for the same period in 2002. There
was no capital outlay for the purchase of cellular investments for the
three-month period ending March 31, 2003 compared to the purchase of cellular
investments of $1,610,341 for the three months ended March 31, 2002. The 2002
capital outlay was due to the purchase of shares by Peoples Telephone Company in
MWH in connection with the dissolution of Three Lakes Cellular, Inc. and the
Cherokee Cellular, Inc. Capital expenditures relating to on-going businesses
were $1,765,506 during the first three months of 2003 as compared to $1,241,419
for the same period in 2002. Capital expenditures were incurred primarily to
enhance the Company's infrastructure and to construct additional network
facilities to provide CLEC services in Redwood Falls, MN.
Cash flows used by financing activities was $808,107 for the three-month period
ended March 31, 2003 compared to cash flows used by financing activities of
$1,947,795 for the three-month period ended March 31, 2002. Included in cash
flows used in financing activities were debt repayments, debt borrowings,
repurchased and retired stock, and dividend payments. During the first three
months of 2003, the Company used cash provided by operating activities to make
principal payment on its long-term debt with CoBank. During the first three
months of 2002, the Company borrowed $1,420,000 under its revolving credit
facility to cover cash requirements, primarily to repay $2,566,666 of senior
unsecured debt with Phoenix Life Mutual Insurance Company and to cover cash
requirements for capital expenditures. In the first quarter of both 2003 and
2002, there was no stock retired.
DIVIDENDS
The Company paid dividends of $426,129 during both the first quarter of 2003 and
the first quarter of 2002. These were dividends of $.0833 per share. The Company
has made no announcements or plans to change the dividends above or below
historic levels for the remainder of 2003. Paying dividends at the existing
level is not expected to negatively impact the liquidity of the Company.
WORKING CAPITAL
Working capital was a negative $187,011 as of March 31, 2003, compared to
working capital of a negative $143,176 as of December 31, 2002. This decrease of
$43,835 in working capital was reflective of the Company's intensive capital
investment and an aggressive payback of CoBank notes. The ratio of current
assets to current liabilities was 1.0:1.0 as of March 31, 2003 and 1.0:1.0 as of
December 31, 2002.
26
LONG-TERM DEBT
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. This ten-year loan
requires equal monthly payments of $125,000. At March 31, 2003, there was
$13,125,000 of direct borrowings outstanding under this facility at an interest
rate of 2.76%.
In addition, the Company entered into a $10 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. Principal payments of
$250,000 per quarter begin once the funds are fully drawn or any lesser amount
borrowed. At March 31, 2003, there were $9,000,000 of direct borrowings
outstanding under this facility at an interest rate of 2.76%.
The Company had three unsecured notes payable to Phoenix Home Life Mutual
Insurance Company. By mutual agreement these notes were paid in full on March 1,
2002 using debt financing from CoBank.
OTHER
The Company has not conducted a public equity offering. It operates with
original equity capital, retained earnings and indebtedness in the form of
senior debt and bank lines of credit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does the Company use derivative financial instruments in its
operations or investment portfolio. The Company's earnings are affected by
changes in interest rates as its long-term debt is based on 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 (approximately 3%) for the first three
months of 2003, the Company's interest expense would have increased around
$15,000. Should interest rates rise significantly, management expects that it
would act to mitigate its exposure to the change by converting a portion of its
variable-rate debt to fixed-rate debt.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed, is accumulated and communicated to management timely. Within the
90-day period prior to the filing date of this periodic report, the Company
carried out an evaluation under the supervision and with the participation of
its management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief
27
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 Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of the Company's most recent evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" on page 32 of this Form 10-Q.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ULM TELECOM, INC.
Dated: May 9, 2003 By /s/ James P. Jensen
---------------------------
James P. Jensen, Chairman
Dated: May 9, 2003 By /s/ Bill Otis
---------------------------
Bill Otis, President
28
CERTIFICATIONS
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO RULE 13a-14
I, Bill Otis, President and Chief Executive Officer of New Ulm Telecom, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Ulm Telecom,
Inc. for the quarter ended March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
29
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 9, 2003 By /s/ Bill Otis
------------------------------------
Bill Otis
President and Chief Executive Officer
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO RULE 13a-14
I, Chris Hopp, Chief Financial Officer of New Ulm Telecom, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Ulm Telecom,
Inc. for the quarter ended March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and
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procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 9, 2003 By /s/ Chris Hopp
-----------------------
Chris Hopp
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32