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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 JUNE 30, 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 Exchange Act).
Yes No X .
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 11, 2003: 5,115,585 shares of common stock
outstanding.
NEW ULM TELECOM, INC. AND SUBSIDIARIES
JUNE 30, 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.....8-16
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................17-30
Item 3 Quantitative and Qualitative Disclosures About Market
Risk.......................................................30
Item 4 Controls and Procedures.................................30-31
PART II OTHER INFORMATION................................................31-33
Item 4 Submission of Matters to a Vote of Security Holders.....31-33
Item 6 Exhibits and Report on Form 8-K............................33
SIGNATURES..................................................................34
INDEX TO EXHIBITS...........................................................35
NEW ULM TELECOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,090,107 $ 1,914,113
Receivables, net of allowance for
doubtful accounts of $122,694 and $100,950 1,428,942 2,626,492
Inventories 333,466 502,315
Prepaid expenses 126,809 183,751
----------- -----------
3,979,324 5,226,671
----------- -----------
INVESTMENTS AND OTHER ASSETS
Goodwill and intangibles, net of amortization 3,245,416 3,246,442
Note receivable from officer -- 674,037
Cellular investments 14,604,183 13,392,129
Other 1,224,927 1,042,896
----------- -----------
19,074,526 18,355,504
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telecommunications plant 52,829,282 51,864,392
Other property and equipment 2,470,604 2,438,378
Cable television plant 2,000,345 1,850,221
----------- -----------
57,300,231 56,152,991
Less accumulated depreciation 28,444,146 26,423,783
----------- -----------
28,856,085 29,729,208
----------- -----------
TOTAL ASSETS $51,909,935 $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
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,514,130 $ 2,514,130
Accounts payable 897,470 2,223,687
Accrued income taxes 41,612 --
Other accrued taxes 73,365 67,842
Other accrued liabilities 527,498 564,188
----------- -----------
4,054,075 5,369,847
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 18,888,831 20,152,961
----------- -----------
DEFERRED CREDITS
Income taxes 3,651,647 3,651,647
Investment tax credits 4,937 6,708
----------- -----------
3,656,584 3,658,355
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - $1.66 par value,
10,000,000 and 0 shares authorized, 0
shares issued and outstanding
Common stock - $1.66 par value, 90,000,000
and 19,200,000 shares authorized,
5,115,585 shares issued and outstanding 8,525,975 8,525,975
Retained earnings 16,784,470 15,604,245
----------- -----------
25,310,445 24,130,220
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $51,909,935 $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
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
OPERATING REVENUES
Local network $ 917,305 $ 868,545 $ 1,777,365 $ 1,688,245
Network access 1,794,065 1,578,746 3,337,333 3,306,930
Billing and collecting 24,904 36,596 53,622 76,974
Miscellaneous 101,684 106,613 211,974 214,739
Nonregulated 1,161,967 1,023,303 2,211,033 1,914,155
----------- ----------- ----------- -----------
3,999,925 3,613,803 7,591,327 7,201,043
----------- ----------- ----------- -----------
OPERATING EXPENSES
Plant operations 517,823 415,518 991,720 855,531
Depreciation and amortization 1,024,866 836,074 2,049,652 1,672,422
Customer 254,825 226,157 468,516 445,266
General and administrative 509,213 517,009 1,015,011 992,892
Other operating expenses 606,847 565,588 1,223,361 1,094,295
----------- ----------- ----------- -----------
2,913,574 2,560,346 5,748,260 5,060,406
----------- ----------- ----------- -----------
OPERATING INCOME 1,086,351 1,053,457 1,843,067 2,140,637
----------- ----------- ----------- -----------
OTHER (EXPENSES) INCOME
Interest expense (154,053) (153,958) (306,359) (303,592)
Interest expense - debt retirement -- -- -- (271,200)
Interest income 21,171 1,996 29,493 27,443
Cellular investment income 844,605 696,735 1,613,752 1,450,054
Gain from dissolution -- -- -- 1,153,889
Other investment income 21,480 24,999 232,067 146,137
----------- ----------- ----------- -----------
733,203 569,772 1,568,953 2,202,731
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,819,554 1,623,229 3,412,020 4,343,368
INCOME TAXES 729,648 656,359 1,379,537 1,758,223
----------- ----------- ----------- -----------
NET INCOME $ 1,089,906 $ 966,870 $ 2,032,483 $ 2,585,145
=========== =========== =========== ===========
BASIC AND DILUTED
NET INCOME PER SHARE - NOTE 2 $ 0.21 $ 0.19 $ 0.40 $ 0.51
=========== =========== =========== ===========
DIVIDENDS PER SHARE $ 0.0833 $ 0.0833 $ 0.1666 $ 0.1666
=========== =========== =========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 5,115,585 5,115,585 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
SIX MONTHS ENDED JUNE 30, 2003
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS
--------- --------- -----------
BALANCE on December 31, 2002 5,115,585 $8,525,975 $15,604,245
Net income 2,032,483
Dividends (852,258)
--------- --------- -----------
BALANCE on June 30, 2003 5,115,585 $8,525,975 $16,784,470
========= ========= ===========
The accompanying notes are an integral part of the financial statements.
6
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
-----------------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,032,483 $ 2,585,145
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,049,652 1,672,422
Cellular investment income (1,613,752) (1,450,054)
Distributions from cellular investements 401,698 358,327
Gain from cellular dissolution -- (1,153,889)
Deferred investment tax credits (1,771) (1,771)
(Increase) Decrease in:
Receivables 1,197,550 179,799
Inventories 168,849 (12,129)
Prepaid expenses 56,942 758
Increase (Decrease) in:
Accounts payable 92,261 (123,578)
Accrued income taxes 41,612 55,387
Other accrued taxes 5,523 7,855
Other accrued liabilities (36,690) (8,752)
----------- -----------
Net cash provided by operating activities 4,394,357 2,109,520
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (2,593,981) (3,037,673)
Change in notes receivable 674,037 2,402
Purchase of cellular investments -- (2,415,511)
Other, net (182,031) (168,218)
----------- -----------
Net cash used in investing activities (2,101,975) (5,619,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt (1,264,130) (3,316,666)
Issuance of long-term debt -- 3,970,000
Dividends paid (852,258) (852,258)
----------- -----------
Net cash used by financing activities (2,116,388) (198,924)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 175,994 (3,708,404)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,914,113 4,245,683
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,090,107 $ 537,279
=========== ===========
The accompanying notes are an integral part of the financial statements.
7
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED 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 June 30, 2003 and
statements of income and the statements of cash flows for the periods ended June
30, 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 June 30, 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 June 30, 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 June 30, 2003 and
at June 30, 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
$164,650 for the quarter ended June 30, 2002.
NOTE 4 - STATEMENTS OF CASH FLOW
Supplemental Disclosures of Cash Flow Information:
Cash paid during the six months ended June 30:
2003 2002
---- ----
Interest $313,563 $ 543,314
Income taxes $215,000 $1,360,400
Noncash investing activities included $362,969 and $136,793 during the periods
ended June 30, 2003 and 2002, respectively, relating to plant and equipment
additions placed in service, which are reflected in accounts payable at June 30,
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 June 30, 2003, there
was $12,750,000 of direct borrowings outstanding under this facility at an
interest rate of 2.53%. The Company also entered into a $10 million secured
ten-year reducing revolving credit facility during fiscal 2001, maturing in
2011. The borrowings under the credit facility bear interest, at the Company's
option, at either fixed or variable rates
9
linked to the Company's overall leverage ratio. At June 30, 2003, there was
$8,500,000 of direct borrowings outstanding under this facility at an interest
rate of 2.53%.
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 June 30, 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 June 30, 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 effective January 1, 2002.
Changes in goodwill are summarized below:
June 30, 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
=========== ===========
Intangible assets subject to amortization pursuant to SFAS No. 142 are
summarized below:
10
June 30, December 31,
2003 2002
----------- ------------
Gross Carrying Amount $ 30,785 $ 30,785
Accumulated amortization (4,275) (3,249)
----------- -----------
$ 26,510 $ 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 JUNE 30, 2003
Operating revenues $ 2,621,911 $ 553,004 $ 258,699 $ 615,701 $ 4,171,107
Operating expenses 2,245,258 259,602 142,466 354,090 3,164,064
------------- ------------- ------------- ------------- -------------
Operating income 376,653 293,402 116,233 261,611 1,007,044
Interest expense (143,924) (2,124) (3,882) (258) (106,446)
Cellular investment income -- -- (173) -- --
Gain on cellular dissolution -- -- -- -- --
Other investment income 21,564 1,256 19,819 12 (55,820)
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 254,293 $ 292,534 $ 131,997 $ 261,365 $ 844,778
============= ============= ============= ============= =============
Depreciation and amortization $ 860,028 $ 99,212 $ 35,315 $ 30,311 $ 541,222
============= ============= ============= ============= =============
Total assets $ 64,573,254 $ 10,454,520 $ 5,367,063 $ 4,460,288 $ 32,218,758
============= ============= ============= ============= =============
Capital expenditures $ 726,791 $ 75,380 $ 6,793 $ 19,511 $ 620,974
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
THREE MONTHS ENDED JUNE 30, 2003
Operating revenues $ 8,220,422 $ 175,526 $ (4,396,023) $ 3,999,925
Operating expenses 6,165,480 137,074 (3,388,980) 2,913,574
------------- ------------- ------------- -------------
Operating income 2,054,943 38,452 (1,007,044) 1,086,351
Interest expense (256,634) (3,865) 106,446 (154,053)
Cellular investment income (173) -- 844,778 844,605
Gain on cellular dissolution -- -- -- --
Other investment income (13,169) -- 55,820 42,651
------------- ------------- ------------- -------------
Income before income taxes $ 1,784,967 $ 34,587 $ -- $ 1,819,554
============= ============= ============= =============
Depreciation and amortization $ 1,566,088 $ -- $ (541,222) $ 1,024,866
============= ============= ============= =============
Total assets $ 117,073,883 $ 8,665,862 $ (73,829,810) $ 51,909,935
============= ============= ============= =============
Capital expenditures $ 1,449,449 $ -- $ (620,974) $ 828,475
============= ============= ============= =============
12
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
THREE MONTHS ENDED JUNE 30, 2002
Operating revenues $ 2,108,381 $ 617,097 $ 259,996 $ 532,199 $ 3,832,989
Operating expenses 1,787,786 257,441 147,284 327,755 2,844,385
------------- ------------- ------------- ------------- -------------
Operating income 320,595 359,656 112,712 204,444 988,604
Interest expense (153,854) (98) (6) -- (247,025)
Cellular investment income -- -- -- -- --
Gain on cellular dissolution -- -- -- -- --
Other investment income 486 541 25,743 225 (44,844)
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 167,227 $ 360,099 $ 138,449 $ 204,669 $ 696,735
============= ============= ============= ============= =============
Depreciation and amortization $ 667,535 $ 94,490 $ 38,193 $ 35,856 $ 477,767
============= ============= ============= ============= =============
Total assets $ 50,101,639 $ 9,835,983 $ 5,013,057 $ 3,878,825 $ 32,149,807
============= ============= ============= ============= =============
Capital expenditures $ 1,709,011 $ 32,028 $ 10,668 $ 44,547 $ 911,151
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
THREE MONTHS ENDED JUNE 30, 2002
Operating revenues $ 7,350,662 $ 181,868 $ (3,918,727) $ 3,613,803
Operating expenses 5,364,651 125,818 (2,930,123) 2,560,346
------------- ------------- ------------- -------------
Operating income 1,986,011 56,050 (988,604) 1,053,457
Interest expense (400,983) -- 247,025 (153,958)
Cellular investment income -- -- 696,735 696,735
Gain on cellular dissolution -- -- -- --
Other investment income (17,849) -- 44,844 26,995
------------- ------------- ------------- -------------
Income before income taxes $ 1,567,179 $ 56,050 $ -- $ 1,623,229
============= ============= ============= =============
Depreciation and amortization $ 1,313,841 $ -- $ (477,767) $ 836,074
============= ============= ============= =============
Total assets $ 100,979,311 $ 6,684,957 $ (62,509,736) $ 45,154,532
============= ============= ============= =============
Capital expenditures $ 2,707,405 $ -- $ (911,151) $ 1,796,254
============= ============= ============= =============
13
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
SIX MONTHS ENDED JUNE 30, 2003
Operating revenues $ 4,838,978 $ 1,142,655 $ 530,929 $ 1,169,199 $ 7,884,064
Operating expenses 4,358,805 551,556 293,748 718,853 5,956,209
------------- ------------- ------------- ------------- -------------
Operating income 480,173 591,099 237,181 450,346 1,927,855
Interest expense (188,444) (24,299) (45,307) (3,019) (313,930)
Cellular investment income -- -- (173) -- --
Gain on cellular dissolution -- -- -- -- --
Other investment income 177,761 2,022 81,729 48 --
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 469,490 $ 568,822 $ 273,430 $ 447,375 $ 1,613,925
============= ============= ============= ============= =============
Depreciation and amortization $ 1,720,072 $ 198,424 $ 70,629 $ 60,527 $ 1,053,071
============= ============= ============= ============= =============
Total assets $ 64,573,254 $ 10,454,520 $ 5,367,063 $ 4,460,288 $ 32,218,758
============= ============= ============= ============= =============
Capital expenditures $ 2,445,066 $ 104,538 $ 18,591 $ 25,786 $ 1,298,221
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
SIX MONTHS ENDED JUNE 30, 2003
Operating revenues $ 15,565,825 $ 328,254 $ (8,302,752) $ 7,591,327
Operating expenses 11,879,171 243,986 (6,374,897) 5,748,260
------------- ------------- ------------- -------------
Operating income 3,686,654 84,268 (1,927,855) 1,843,067
Interest expense (574,999) (45,290) 313,930 (306,359)
Cellular investment income (173) -- 1,613,925 1,613,752
Gain on cellular dissolution -- -- -- --
Other investment income 261,560 -- -- 261,560
------------- ------------- ------------- -------------
Income before income taxes $ 3,373,042 $ 38,978 $ -- $ 3,412,020
============= ============= ============= =============
Depreciation and amortization $ 3,102,723 $ -- (1,053,071) $ 2,049,652
============= ============= ============= =============
Total assets $ 117,073,883 $ 8,665,862 (73,829,810) $ 51,909,935
============= ============= ============= =============
Capital expenditures $ 3,892,202 $ -- $ (1,298,221) $ 2,593,981
============= ============= ============= =============
14
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
SIX MONTHS ENDED JUNE 30, 2002
Operating revenues $ 4,326,728 $ 1,205,479 $ 509,456 $ 1,033,985 $ 7,248,809
Operating expenses 3,570,496 511,107 288,164 623,473 5,414,166
------------- ------------- ------------- ------------- -------------
Operating income 756,232 694,372 221,292 410,512 1,834,643
Interest expense (487,705) (59,909) (27,178) -- (510,973)
Cellular investment income -- -- -- -- --
Gain on cellular dissolution -- -- 1,153,889 -- --
Other investment income 103,131 1,107 68,819 523 126,384
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 371,658 $ 635,570 $ 1,416,822 $ 411,035 $ 1,450,054
============= ============= ============= ============= =============
Depreciation and amortization $ 1,335,069 $ 188,980 $ 76,386 $ 71,987 $ 967,790
============= ============= ============= ============= =============
Total assets $ 50,101,639 $ 9,835,983 $ 5,013,057 $ 3,878,825 $ 32,149,807
============= ============= ============= ============= =============
Capital expenditures $ 2,880,453 $ 36,414 $ 18,560 $ 102,246 $ 1,595,426
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
SIX MONTHS ENDED JUNE 30, 2002
Operating revenues $ 14,324,457 $ 290,045 $ (7,413,459) $ 7,201,043
Operating expenses 10,407,406 231,816 (5,578,816) 5,060,406
------------- ------------- ------------- -------------
Operating income 3,917,051 58,229 (1,834,643) 2,140,637
Interest expense (1,085,765) -- 510,973 (574,792)
Cellular investment income -- -- 1,450,054 1,450,054
Gain on cellular dissolution 1,153,889 -- -- 1,153,889
Other investment income 299,964 -- (126,384) 173,580
------------- ------------- ------------- -------------
Income before income taxes $ 4,285,139 $ 58,229 $ -- $ 4,343,368
============= ============= ============= =============
Depreciation and amortization $ 2,640,212 $ -- (967,790) $ 1,672,422
============= ============= ============= =============
Total assets $ 100,979,311 $ 6,684,957 (62,509,736) $ 45,154,532
============= ============= ============= =============
Capital expenditures $ 4,633,099 $ -- $ (1,595,426) $ 3,037,673
============= ============= ============= =============
NOTE 9 - RECENT ACCOUNTING DEVELOPMENTS
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
15
effective January 1, 2003. The Company believes it does not have an obligation
to remove long-lived assets as described by SFAS No. 143 and accordingly, the
adoption of SFAS No. 143 did not have a material effect on its financial
position and 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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 are effective
for guarantees issued or modified after December 31, 2002, and are to be applied
prospectively. The disclosure requirements were effective for financial
statements for interim or annual periods ending after December 15, 2002. The
Company adopted the initial recognition provisions of Interpretation No. 45 in
January 2003. The initial adoption of Interpretation No. 45 did not have a
material impact on its results of operations or financial position.
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.
16
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; and
o other risks 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 attribute undue certainty
to 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
such as Internet, data, 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.
17
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.
[X] OPERATING REVENUES:
Total operating revenues were $3,999,925 for the three months ended
June 30, 2003, for an increase of 10.7% or $386,122 compared to the
same period in 2002. Total operating revenues were $7,591,327 for the
six months ended June 30, 2003, for an increase of 5.4% or $390,284
compared to the same period in 2002. The operating revenues for the New
Ulm Telecom segment realized 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. The CLEC in
Redwood Falls offers customers a full array of telecommunications'
services that include voice services, digital video services, data
services, and Internet services. It is expected that this geographic
expansion of the Company's service offerings will provide this segment
with continued future growth. The Peoples Telephone Company sector saw
an increase in its unregulated revenue primarily due to an increase in
Internet service subscription 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 the increased operating revenues primarily through
increased Internet service provision. The other segments had relatively
no change.
[X] OPERATING EXPENSES:
Operating expenses for the three months ended June 30, 2003 increased
$353,228 or 13.8% compared to the same period in 2002. Operating
expenses for the six months ended June 30, 2003 increased $687,854 or
13.6% compared to the same period in 2002, with the New Ulm Telecom
segment responsible for a $788,309 increase in operating expenses.
Depreciation expense for the New Ulm Telecom segment saw an increase of
$385,003 for the first six months of 2003 compared to 2002, of which
$276,955 was attributed to new investments in the New Ulm Telecom
segment's infrastructure. The remainder of the increase in the New Ulm
Telecom segment reflected the increased costs associated with the
introduction of CLEC services in Redwood Falls, MN.
[X] OPERATING INCOME:
Operating income for the three months ended June 30, 2003 increased
$32,894 or 3.1% over the three months ended June 30, 2002. Operating
income for the six-month period ended June 30, 2003 decreased $297,570
or 13.9% compared to the six-month period ended June 30, 2002. The
decrease in income was primarily due to the increase in operating
expenses. The primary source of the increase in
18
operating expenses was the expenses associated with the New Ulm Telecom
segment's CLEC services in Redwood Falls, MN.
[X] OTHER INCOME:
Other income for the three months ended June 30, 2003 increased
$163,431 compared to the three months ended June 30, 2002. Other income
decreased $633,778 for the six- month period ended June 30, 2003
compared with the same period in 2002. During the three-month period
ended March 31, 2002, the Peoples Telephone segment recognized a
one-time gain of $1,153,889 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
additional membership interest in MWH from other former shareholders
who sold MWH membership units to pay capital gain taxes resulting from
the transaction. The Peoples Telephone Company segment has a 2.34%
membership interest in MWH due to these transactions.
Other investment income increased $85,930 for the six months ended June
30, 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 $268,433 decrease in interest expense for the six-month
period ended June 30, 2003 compared to the same period in 2002. A
decrease in interest expense from the early extinguishments of debt was
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.
[X] NET INCOME:
Net income was $1,089,906 for the three months ended June 30, 2003
compared with $966,870 for the same period in 2002. Net income was
$2,032,483 for the six-month period ending June 30, 2003 compared with
$2,585,145 for the same six-month period in 2002. The $552,662 or 21.4%
decrease in net income for the six-months ending June 30, 2003 was
primarily attributed to our gains from the dissolution of the cellular
corporations in the first quarter of 2002, the debt extinguishment, and
an increase in operating expenses.
19
Summary of Operations before intercompany eliminations
For the Three Months Ended For the Six Months Ended
---------------------------- ----------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Operating Income:
New Ulm Telecom $ 376,653 $ 320,595 $ 480,173 $ 756,232
Western Telephone 293,402 359,656 591,099 694,372
Peoples Telephone 116,233 112,712 237,181 221,292
New Ulm Phonery 261,611 204,444 450,346 410,512
Other 38,452 56,050 84,268 58,229
----------- ----------- ----------- -----------
Total 1,086,351 1,053,457 1,843,067 2,140,637
Other Income 887,256 723,730 1,875,312 2,777,523
Interest Expense (154,053) (153,958) (306,359) (574,792)
Income Taxes (729,648) (656,359) (1,379,537) (1,758,223)
----------- ----------- ----------- -----------
Net Income $ 1,089,906 $ 966,870 $ 2,032,483 $ 2,585,145
=========== =========== =========== ===========
Basic and Diluted
Earnings per Share 0.21 0.19 0.40 0.51
Weighted Average
Shares Outstanding 5,115,585 5,115,585 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 represented 62.1% of the Company's consolidated
operating revenues for the three-month period ended June 30, 2003 and 60.4% of
the Company's consolidated operating revenues for the six-month period ended
June 30, 2003. The New Ulm Telecom segment provides voice, video, and data
services in New Ulm, Courtland, Klossner, Searles, and Redwood Falls, MN. The
New Ulm Telecom segment began offering CLEC services in the City of Redwood
Falls, MN in September 2002. Revenues are primarily earned by providing
approximately 13,800 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 June
20
30, 2003 grew $513,530 or 24.4% over the same period last year. Total New Ulm
Telecom segment revenues for the six-month period ending June 30, 2003 increased
$512,250 or 11.8% over the same period in 2002. All information contained in the
following table is before intercompany eliminations.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues:
Local Network $ 808,262 $ 731,037 $1,567,045 $1,448,077
Network Access 1,307,925 1,034,971 2,301,607 2,219,702
Other 505,724 342,373 970,326 658,949
---------- ---------- ---------- ----------
Total Operating Revenues 2,621,911 2,108,381 4,838,978 4,326,728
---------- ---------- ---------- ----------
Cash Operating Expenses 1,385,230 1,120,251 2,638,733 2,235,427
Noncash Operating Expenses 860,028 667,535 1,720,072 1,335,069
---------- ---------- ---------- ----------
Total Operating Expenses 2,245,258 1,787,786 4,358,805 3,570,496
---------- ---------- ---------- ----------
Operating Income 376,653 320,595 480,173 756,232
---------- ---------- ---------- ----------
Net Income $ 152,163 $ 100,331 $ 281,051 $ 222,810
========== ========== ========== ==========
Local network revenue increased in the New Ulm Telecom segment by $77,225 or
10.6% for the three months ended June 30, 2003 compared to the same period in
2002. Local network revenue increased in the New Ulm Telecom segment by $118,968
or 8.2% for the six months ended June 30, 2003 over the same period ended June
30, 2002. Local network revenue increased during these periods as a result of
service offerings for the CLEC in Redwood Falls, MN. The CLEC accounted for an
increase of $112,902 in local network revenue for the six-months ended June 30,
2003. The local network revenue for New Ulm, MN saw an increase of $6,066 for
the six-months ended June 30, 2003. Despite a 2.5% decrease in the number of
access lines from June 30, 2002 to June 30, 2003 for New Ulm, MN, targeted
marketing, promotions and packaging of vertical services, most notably the
introduction of digital subscriber line (DSL) to supplement basic line charges,
resulted in our increase in revenue. The decease in New Ulm, MN local access
lines was due to customers dropping their second phone line for Internet when
upgrading to DSL Internet service. DSL Internet service offers the convenience
of allowing Internet access and voice access over the same line at the same
time.
Network access revenue increased $272,954 or 26.4% for the three months ended
June 30, 2003 compared with the same period in 2002. Network access revenue
increased $81,905 or 3.7% for the six months ended June 30, 2003. The New Ulm
Telecom segment experienced a 1.1% increase in access minutes for the three
months ended June 30, 2003 and 4.3% increase for the six months ended June 30,
2003. While a decrease in access minutes has been a common industry trend, the
New Ulm Telecom segment saw growth in its access minutes due to the addition in
September 2002 of a CLEC in Redwood Falls, MN. 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 has allowed New Ulm
Telecom to receive
21
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 $163,351 or 47.7% for the three months ended
June 30, 2003 compared with the same period in 2002. Other operating revenues
increased $311,377 or 47.3% for the six months ended June 30, 2003. The increase
in other operating revenues was primarily the result of our CLEC service
offerings in Redwood Falls, MN. 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 $178,610 of the increase in these revenues for the six-months
ending June 30, 2003, with Redwood Falls accounting for $131,520 of the
increase. The majority of the remaining revenue increase was attributed to New
Ulm Telecom segment's successful launch of its CLEC operation in Redwood Falls,
MN, through the sales of Internet services and customer premise equipment (CPE).
Cash operating expenses increased $264,979 or 23.7% for the three-month period
ended June 30, 2003 and $403,306 or 18.0% for the six-month period ended June
30, 2003 compared with the same periods 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 services to an increasing number of communities. The New Ulm Telecom segment
began offering its services 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 $192,493 or 28.8% for the three months
ended June 30, 2003 compared with the same period in 2002. Noncash operating
expenses increased $385,003 or 28.8% for the six months ended June 30, 2003
compared with the same period ended June 30, 2002. Depreciation expense was the
cause of these increases. The increases in depreciation expense were reflective
of the new investments in excess of $22 million in the segment's infrastructure
since 2000.
Operating income increased $56,058 or 17.5% for the three months ended June 30,
2003 compared to the three-month period ended June 30, 2002. Operating income
decreased $276,059 or 36.5% for the six-month period ended June 30, 2003
compared to the same period in 2002. The decrease in operating income was
primarily due to the increase in depreciation due to the growing investment in
the New Ulm Telecom segment infrastructure, including a $276,955 increase in
depreciation for the CLEC in Redwood Falls, MN. Operating income also decreased
for the six-month period due to the startup cost and operating cost of the
introduction of CLEC services in Redwood Falls, MN. A $512,250 increase in
revenues combined with a $788,309
22
increase in operating expenses resulted in the $276,059 decrease in operating
income for the six-month period.
WESTERN TELEPHONE COMPANY OPERATIONS
Western Telephone Company (Western) revenues represented 13.1% of the
consolidated operating revenues for the three months ended June 30, 2003 and
14.3% of the consolidated operating revenues for the six months ended June 30,
2003. Revenues are primarily earned by providing approximately 2,500 customers
in Springfield and Sanborn, MN 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 intercompany
eliminations.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues:
Local Network $ 106,629 $ 135,028 $ 206,128 $ 237,340
Network Access 338,996 385,951 725,454 777,564
Other 107,379 96,118 211,073 190,575
---------- ---------- ---------- ----------
Total Operating Revenues 553,004 617,097 1,142,655 1,205,479
---------- ---------- ---------- ----------
Cash Operating Expenses 160,390 162,951 353,132 322,127
Noncash Operating Expenses 99,212 94,490 198,424 188,980
---------- ---------- ---------- ----------
Total Operating Expenses 259,602 257,441 551,556 511,107
---------- ---------- ---------- ----------
Operating Income 293,402 359,656 591,099 694,372
---------- ---------- ---------- ----------
Net Income $ 180,129 $ 214,375 $ 338,460 $ 378,368
========== ========== ========== ==========
Local network revenues decreased in the Western segment by $28,399 or 21.0% for
the three months ended June 30, 2003 compared to the same period in 2002. Local
network revenues decreased $31,212 or 13.2% for the six months ended June 30,
2003 compared to the same period in 2002. The decreases in local network
revenues were due to the 2002 billing of wireless reciprocal compensation. Due
to the insignificance of the amounts, wireless reciprocal compensation has not
yet been billed for the first six months of 2003. Reciprocal compensation is the
revenue from interconnect agreements with wireless carriers terminating traffic
to our local network.
Network access revenue decreased $46,955 or 12.2% for the three-month period
ended June 30, 2003 compared to the same period in 2002. Network access revenue
decreased $52,110 or 6.7% for the six-month period ended June 30, 2003 compared
with the same period in 2002. The Western Telephone segment had a 9.25% decrease
in its access minutes of use for the six-months ended June 30, 2003 compared to
the same period in 2002. The negative effects of network access pricing and
decreasing minutes of use, a common industry trend, are expected to continue,
23
potentially resulting in future decreases in network access revenue for this
segment. The expected future growth in the utilization of the Internet (e-mail,
voice-over-IP) is also expected to reduce 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 $11,261 or 11.7% for the three months ended
June 30, 2003 and increased $20,498 or 10.8% for the six months ended June 30,
2003 as compared to the same periods in 2002. These increases were predominantly
the result of increased Internet and DSL service revenue compared to the same
periods in 2002.
Cash operating expenses decreased $2,561 or 1.6% for the three months ended June
30, 2003 compared to the three months ended June 30, 2002. Cash operating
expenses increased $31,005 or 9.6% for the six months ended June 30, 2003
compared to the six months ended June 30, 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, an increase in Internet expenses for the DSL
service offering, and digital video services that became available to customers
in Springfield, MN in June 2003 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, the Company is continually
striving to realize cost efficiencies and technological improvements to enhance
its operating margins in the Western segment.
Noncash operating expenses increased $4,722 or 5.0% for the quarter ended June
30, 2003 and $9,444 or 5.0% for the six months ended June 30, 2003 compared to
the same periods ended in 2002. Depreciation was the cause of these increases.
The increases were reflective of an increased amount of capital investments.
Operating income decreased $66,254 or 18.4% for the three months ended June 30,
2003 compared with the same period in 2002. Operating income decreased $103,273
or 14.9% for the six months ended June 30, 2003 compared with the six months
ended June 30, 2002. The cost of switch hosting services billed to Western by
the New Ulm Telecom segment accounted for approximately $26,000 of the decrease
in operating income for the six-months ended June 30, 2003. Operating income for
the six-month period also decreased due to a $9,444 increase in depreciation
expense resulting from an increase in plant investment, in particular, a fiber
route from Sanborn to Redwood Falls, MN, and an increase in Internet expense of
$23,000 resulting from the introduction of DSL into this segment's service area.
The decreases in operating income were also the result of decreases in local
network revenue and network access revenue as previously discussed. The
decreases in operating income 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.
24
PEOPLES TELEPHONE COMPANY OPERATIONS
Peoples Telephone Company (Peoples) revenues represented 6.1% of the
consolidated operating revenues for the three months ended June 30, 2003 and
6.6% of the consolidated operating revenues for the six months ended June 30,
2003. Revenues are primarily earned by providing approximately 880 customers
access to People's local network, and by 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 intercompany eliminations.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues:
Local Network $ 39,935 $ 40,001 $ 79,234 $ 77,870
Network Access 158,706 168,468 332,490 330,952
Other 60,058 51,527 119,205 100,634
---------- ---------- ---------- ----------
Total Operating Revenues 258,699 259,996 530,929 509,456
---------- ---------- ---------- ----------
Cash Operating Expenses 107,151 109,091 223,119 211,778
Noncash Operating Expenses 35,315 38,193 70,629 76,386
---------- ---------- ---------- ----------
Total Operating Expenses 142,466 147,284 293,748 288,164
---------- ---------- ---------- ----------
Operating Income 116,233 112,712 237,181 221,292
---------- ---------- ---------- ----------
Net Income $ 78,514 $ 180,014 $ 162,634 $1,044,987
========== ========== ========== ==========
Note: Net income for the six-months ended June 30, 2002 included a one-time gain
of $686,795.
Local network revenue decreased in Peoples by $66 or 0.2% for the three-month
period ended June 30, 2003 compared to the same period in 2002. Local network
revenue increased $1,364 or 1.8% for the six-month period ended June 30, 2003
compared to the same period in 2002. This increase occurred despite a 5.0%
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.
Network access revenue decreased $9,762 or 5.8% and access minutes decreased
8.7% for the three months ended June 30, 2003 compared to the same period in
2002. Network access revenue increased $1,538 or 0.5% and access minutes
decreased 5.4% for the six months ended June 30, 2003 compared to the same
period in 2002. 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. Peoples expects that
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
25
larger fiber optic network. The increased network access revenue for the
six-month period 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 $8,531 or 16.6% for the three months ended
June 30, 2003 compared to the three months ended June 30, 2002. Other operating
revenue increased $18,571 or 18.5% for the six months ended June 30, 2003
compared to the six months ended June 30, 2002. A rate increase for CATV
service, which went into effect in July 2002, accounted for approximately
$11,000 of this increase for the six-month period. An increase of 12.0% in
Internet customers increased other revenues by approximately $7,500 for the
six-month period.
Cash operating expenses decreased $1,940 or 1.8% for the three-month period
ended June 30, 2003 compared to the same period in 2002. Cash operating expenses
increased $11,341 or 5.4% for the six-month period ended June 30, 2003 compared
to the same period in 2002. Cash operating expenses increased for the six-month
period due to the increased costs associated with the number of services
offered, such as DSL, and the increasing network costs of providing CATV
services.
Noncash operating expenses decreased $2,878 or 7.5% for the three months ended
June 30, 2003 compared to the three months ended June 30, 2002. Noncash
operating expenses decreased $5,757 or 7.5% for the six months ended June 30,
2003 compared to the six months ended June 30, 2002. Depreciation expense was
the cause of these decreases. Depreciation expense decreased because some of the
capital investments in this segment have become fully depreciated.
Operating income increased $3,521 or 3.1% for the three months ended June 30,
2003 compared with the same period in 2002. Operating income increased $15,889
or 7.2% for the six months ended June 30, 2003 compared with the same period in
2002. Operating income increased due to the CATV rate increase put into effect
July 2002 and an increase in Internet revenues due to an increasing customer
base. These operating revenue increases were offset by an increase in operating
expenses resulting from costs associated with new service offerings, such as
DSL.
NEW ULM PHONERY OPERATIONS
New Ulm Phonery (Phonery) represented 14.6% of the consolidated operating
revenues for the three-month period ended June 30, 2003 and 14.6% of the
consolidated operating revenues for the six-month period ended June 30, 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 this segment. In addition, the Phonery
leases network capacity to provide additional network access revenues. This
segment focuses on 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
26
table is before intercompany eliminations.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues: $ 615,701 $ 532,199 $1,169,199 $1,033,985
---------- ---------- ---------- ----------
Cash Operating Expenses 323,779 291,899 658,326 551,486
Noncash Operating Expenses 30,311 35,856 60,527 71,987
---------- ---------- ---------- ----------
Total Operating Expenses 354,090 327,755 718,853 623,473
---------- ---------- ---------- ----------
Operating Income 261,611 204,444 450,346 410,512
---------- ---------- ---------- ----------
Net Income $ 155,596 $ 121,844 $ 266,331 $ 244,698
========== ========== ========== ==========
Operating revenue increased $83,502 or 15.7% for the three months ended June 30,
2003 compared to the same period in 2002. Operating revenue increased $135,214
or 13.1% for the six months ended June 30, 2003 compared to the same period in
2002. This increase was the result of an $178,479 increase in Internet revenues,
offset by revenue decreases for inside wire maintenance fees, installation and
repair of inside wire, billed labor, sales of CPE and network access revenues.
Cash operating expenses increased $31,880 or 10.9% for the three months ended
June 30, 2003 compared to the three months ended June 30, 2002. Cash operating
expenses increased $106,840 or 19.4% for the six months ended June 30, 2003
compared to the same period in 2002. This six-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 on 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 $5,545 or 15.5% for the quarter ended June
30, 2003 compared with the same period in 2002. Noncash operating expenses
decreased $11,460 or 15.9% for the six-month period ended June 30, 2003 compared
to the same period in 2002. The decreases were attributable to a drop in
depreciation expense, as some of the Phonery's capital investment has become
fully depreciated. The Phonery has recognized the rapidly changing technology in
these markets and depreciates plant and equipment quickly. This has allowed the
Phonery to continually offer new products and services to its customers, giving
customers the ability to stay on the cutting edge of technology.
27
Operating income increased by $57,167 or 28.0% for the three months ended June
30, 2003 compared to the three months ended June 30, 2002. Operating income
increased by $39,834 or 9.7% for the six months ended June 30, 2003 compared to
the same period in 2002. These increases in income were the result of the
increase in Internet access revenues.
CELLULAR INVESTMENT
The Company has a 9.92% ownership in MWH. This segment information is shown
using the proportionate consolidation method. Cellular investment income
increased $147,870 or 21.2% for the three months ended June 30, 2003 compared to
the same period ended in 2002. Cellular investment income increased $163,698 or
11.3% for the six months ended June 30, 2003 compared to the same period in
2002. These increases were the result of revenue and income growth as MWH
continues to gain market share.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Cellular Investment Income $ 844,605 $ 696,735 $1,613,752 $1,450,054
========== ========== ========== ==========
Proportionate Method:
Operating Revenues 4,171,107 3,832,989 7,884,064 7,248,809
Cash Operating Expenses 2,622,843 2,366,618 4,903,139 4,446,376
Noncash Operating Expenses 541,221 477,767 1,053,070 967,790
---------- ---------- ---------- ----------
Total Operating Expenses 3,164,064 2,844,385 5,956,209 5,414,166
---------- ---------- ---------- ----------
Operating Income 1,007,043 988,604 1,927,855 1,834,643
---------- ---------- ---------- ----------
Net Income $ 844,605 $ 696,735 $1,613,752 $1,450,054
========== ========== ========== ==========
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CAPITAL STRUCTURE
The total long-term capital structure (long-term debt plus shareholders' equity)
for the Company was $44,199,276 at June 30, 2003, reflecting 57.3% equity and
42.7% 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.
CASH FLOWS
Cash provided by operations was $4,394,357 for the six-month period ended June
30, 2003 compared to $2,109,520 for the six-month period ended June 30, 2002.
Cash flows from
28
operations for the six months ended June 30, 2003 and 2002 were primarily
attributable to net income plus non-cash expenses for depreciation and
amortization.
Cash flows used in investing activities were $2,101,975 for the six months ended
June 30, 2003 compared to $5,619,000 for the same period in 2002. There was no
capital outlay for the purchase of cellular investments for the six-month period
ending June 30, 2003 compared to the purchase of cellular investments of
$2,415,511 for the six months ended June 30, 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. The decrease in notes receivable was $674,037 for the first six months of
2003 compared to a decrease of $2,402 for the same period in 2002. The decrease
of $674,037 in notes receivable for 2003 was due to payment in full of the note
receivable from officer, Mr. Bill Otis, President. Capital expenditures relating
to on-going businesses were $2,593,981 during the first six months of 2003 as
compared to $3,037,673 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 and
digital video services in Springfield, MN.
Cash flows used by financing activities was $2,116,388 for the six-month period
ended June 30, 2003 compared to cash flows used by financing activities of
$198,924 for the six-month period ended June 30, 2002. Included in cash flows
used in financing activities were debt repayments, debt borrowings, and dividend
payments. During the first six 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 six months of 2002, the Company borrowed $3,970,000
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
six months of both 2003 and 2002, there was no stock retired.
DIVIDENDS
The Company paid dividends of $852,258 during both the first six months of 2003
and 2002. The dividends amounted to $.0833 per share per quarter. 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
The Company had a working capital deficit of $74,751 as of June 30, 2003,
compared to a working capital deficit of $143,176 as of December 31, 2002. The
improvement reflected the Company's increased cash and cash equivalents. The
ratio of current assets to current liabilities was 1.0:1.0 as of June 30, 2003
and 1.0:1.0 as of December 31, 2002.
29
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 June 30, 2003, there was
$12,750,000 of direct borrowings outstanding under this facility at an interest
rate of 2.53%.
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 began once borrowing commenced. At March 31, 2003, there
was $8,500,000 of direct borrowings outstanding under this facility at an
interest rate of 2.53%.
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 six months
of 2003, the Company's interest expense would have increased approximately
$30,000. 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 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.
30
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the registrant was held May 15, 2003
in New Ulm, MN. The total number of shares outstanding and entitled to vote at
the meeting was 5,115,585 of which 3,061,235 were present either in person or by
proxy. Six matters were presented to the shareholders, five of which passed.
Three directors were elected to serve three-year terms. The names of the
directors elected at the annual meeting and the applicable votes were as
follows:
DIRECTOR FOR WITHHELD ABSTAIN
Rosemary Dittrich 3,033,210 20,302 7,723
Mary Ellen Domeier 3,048,077 5,435 7,723
Gary Nelson 3,019,960 33,552 7,723
The Board Members continuing and whose terms expire at subsequent annual
meetings are as follows:
2004 Annual Meeting 2005 Annual Meeting
James Jensen Robert Ranweiler
Perry Meyer Duane Lambrecht
Also, Article III, Section 1 of the Company's Articles of Incorporation was
amended as follows
(a) to increase the number of authorized shares of common stock
from 19,200,000 shares to 90,000,000 shares, each having a par
value of $1.66 per share; and
(b) to authorize the issuance of up to 10,000,000 shares of
preferred stock of the par value of $1.66 per share and allow
the Board of Directors to fix the rights and preferences of
preferred shares of any class or series and to generally allow
the Board of Directors to authorize the issuance thereof by
resolution in the manner prescribed by law and to take other
actions consistent therewith.
The votes to approve the amendment were as follows:
BROKER
FOR WITHHELD ABSTAIN NON-VOTES
Amendment to
Article III, Section 1 2,395,932 610,811 54,492 328,733
31
A proposal to amend Article III, Section 2 failed to receive the required 2/3
"For" votes (3,410,050) of the outstanding shares needed to approve the change.
The change would have amended Article III, Section 2 of the Articles, which
currently provides that no individual shareholder, partnership, corporation or
fiduciary shall own either in their, his or her own right or jointly with
another party more than seven percent (7%) of the outstanding capital stock of
the Company, by adding provisions providing that (i) to the extent capital stock
was acquired in excess of such permitted limit ("Excess Shares"), such Excess
Shares could not have been voted; and (ii) the Company would have had the right
to redeem Excess Shares.
The votes for this amendment were as follows:
BROKER
FOR WITHHELD ABSTAIN NON-VOTES
Amendment to
Article III, Section 2 2,525,114 497,511 38,610 328,733
Article IV of the Company's Articles of Incorporation, was amended to add the
following provision:
An action required or permitted to be taken at a meeting of the Board of
Directors, other than an action requiring shareholder approval, may be taken by
written action signed, or consented to by authenticated electronic
communication, by the number of directors that would be required to take the
same action at a meeting of the Board of Directors at which all directors were
present.
The votes for this amendment were as follows:
BROKER
FOR WITHHELD ABSTAIN NON-VOTES
Amendment to
Article IV 2,899,669 123,329 38,237 328,733
Article IV of the Company's Articles of Incorporation was amended to add the
following:
No shareholder shall be entitled to any preemptive right to purchase, subscribe
or otherwise acquire any new or additional securities of the Company, or any
options or warrants to purchase, subscribe for or otherwise acquire any such new
additional securities before the Company may offer them to other persons.
The votes for this amendment were as follows:
BROKER
FOR WITHHELD ABSTAIN NON-VOTES
Amendment to
Article IV 2,493,674 519,154 48,407 328,733
The shareholders also approved the appointment of Kiesling Associates LLP as the
auditors for 2003. The votes to approve the appointment of the auditors were as
follows:
32
FOR AGAINST ABSTAIN
Approval of
Appointment of Auditors 3,012,885 18,270 30,080
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" on page 35 of this Form 10-Q.
(b) Reports on Form 8-K
None
33
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: August 11, 2003 By /s/ James P. Jensen
---------------------------------
James P. Jensen, Chairman
Dated: August 11, 2003 By /s/ Bill Otis
---------------------------------
Bill Otis, President
34
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3 Articles of Incorporation, As Amended
31.1 Certification Pursuant to Exchange Act Rule 13a-14, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Exchange Act Rule 13a-14, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
35