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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 SEPTEMBER 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 November 3, 2003: 5,115,585 shares of common stock
outstanding.
NEW ULM TELECOM, INC. AND SUBSIDIARIES
SEPTEMBER 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..........8-17
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................18-32
Item 3 Quantitative and Qualitative Disclosures About Market Risk......32
Item 4 Controls and Procedures.........................................32
PART II OTHER INFORMATION.................................................32-33
Item 6 Exhibits and Report on Form 8-K..............................32-33
SIGNATURES...................................................................33
INDEX TO EXHIBITS............................................................34
NEW ULM TELECOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,169,552 $ 1,914,113
Receivables, net of allowance for
doubtful accounts of $155,187 and $100,950 1,350,933 2,626,492
Inventories 314,216 502,315
Prepaid expenses 90,385 183,751
----------- -----------
3,925,086 5,226,671
----------- -----------
INVESTMENTS AND OTHER ASSETS
Goodwill and intangibles, net of amortization 3,244,903 3,246,442
Note receivable from officer -- 674,037
Cellular investments 15,110,782 13,392,129
Other 1,231,346 1,042,896
----------- -----------
19,587,031 18,355,504
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telecommunications plant 53,576,915 51,864,392
Other property and equipment 2,508,172 2,438,378
Cable television plant 2,149,300 1,850,221
----------- -----------
58,234,387 56,152,991
Less accumulated depreciation 29,448,912 26,423,783
----------- -----------
28,785,475 29,729,208
----------- -----------
TOTAL ASSETS $52,297,592 $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
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,514,130 $ 2,514,130
Accounts payable 1,127,068 2,223,687
Accrued income taxes 5,594 --
Other accrued taxes 53,179 67,842
Other accrued liabilities 556,411 564,188
----------- -----------
4,256,382 5,369,847
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 18,263,831 20,152,961
----------- -----------
DEFERRED CREDITS
Income taxes 3,956,917 3,651,647
Investment tax credits 4,051 6,708
----------- -----------
3,960,968 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 17,290,436 15,604,245
----------- -----------
25,816,411 24,130,220
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $52,297,592 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
OPERATING REVENUES
Local network $ 963,959 $ 868,817 $ 2,741,324 $ 2,557,062
Network access 1,651,214 1,422,136 4,988,547 4,729,066
Billing and collecting 25,425 32,179 79,047 109,153
Miscellaneous 100,565 97,858 312,539 312,597
Nonregulated 1,198,598 1,046,947 3,409,631 2,961,102
------------ ------------ ------------ ------------
3,939,761 3,467,937 11,531,088 10,668,980
------------ ------------ ------------ ------------
OPERATING EXPENSES
Plant operations 532,776 428,361 1,524,496 1,283,892
Depreciation and amortization 1,028,993 837,025 3,078,645 2,509,447
Customer operations 225,608 229,590 694,124 674,856
General and administrative 521,209 831,258 1,536,220 1,824,150
Other operating expenses 699,333 561,886 1,922,694 1,656,181
------------ ------------ ------------ ------------
3,007,919 2,888,120 8,756,179 7,948,526
------------ ------------ ------------ ------------
OPERATING INCOME 931,842 579,817 2,774,909 2,720,454
------------ ------------ ------------ ------------
OTHER (EXPENSES) INCOME
Interest expense (139,757) (157,142) (446,116) (460,734)
Interest expense - debt retirement -- -- -- (271,200)
Interest income 8,355 3,790 37,848 31,233
Cellular investment income 745,906 814,911 2,359,658 2,264,965
Gain from dissolution -- -- -- 1,153,889
Other investment income 27,115 (164,395) 259,182 (18,258)
------------ ------------ ------------ ------------
641,619 497,164 2,210,572 2,699,895
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,573,461 1,076,981 4,985,481 5,420,349
INCOME TAXES 641,366 435,248 2,020,903 2,193,471
------------ ------------ ------------ ------------
NET INCOME $ 932,095 $ 641,733 $ 2,964,578 $ 3,226,878
============ ============ ============ ============
BASIC AND DILUTED
NET INCOME PER SHARE - NOTE 2 $ 0.18 $ 0.13 $ 0.58 $ 0.63
============ ============ ============ ============
DIVIDENDS PER SHARE $ 0.0833 $ 0.0833 $ 0.2499 $ 0.2499
============ ============ ============ ============
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
NINE MONTHS ENDED SEPTEMBER 30, 2003
Common Stock Retained
Shares Amount Earnings
----------- ----------- -----------
BALANCE on December 31, 2002 5,115,585 $ 8,525,975 $15,604,245
Net income 2,964,578
Dividends (1,278,387)
----------- ----------- -----------
BALANCE on September 30, 2003 5,115,585 $ 8,525,975 $17,290,436
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
6
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,964,578 $ 3,226,878
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,078,645 2,509,447
Cellular investment income (2,359,658) (2,264,965)
Distributions from cellular investments 641,005 568,986
Gain from cellular dissolution -- (1,153,889)
Deferred income taxes 305,270 --
Deferred investment tax credits (2,657) (2,657)
Decrease in:
Receivables 1,275,559 418,923
Inventories 188,099 101,631
Prepaid expenses 93,366 25,717
Increase (Decrease) in:
Accounts payable 266,532 (77,936)
Accrued income taxes 5,594 273,271
Other accrued taxes (14,663) 6,856
Other accrued liabilities (7,777) 23,873
----------- -----------
Net cash provided by operating activities 6,433,893 3,656,135
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (3,496,524) (6,009,937)
Proceeds from notes receivable 674,037 3,644
Purchase of cellular investments -- (3,220,682)
Other, net (188,450) (87,997)
----------- -----------
Net cash used in investing activities (3,010,937) (9,314,972)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt (1,889,130) (3,691,666)
Issuance of long-term debt -- 6,964,000
Dividends paid (1,278,387) (1,278,387)
----------- -----------
Net cash provided (used) by financing activities (3,167,517) 1,993,947
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 255,439 (3,664,890)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,914,113 4,245,683
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,169,552 $ 580,793
=========== ===========
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 September 30,
2003 and statements of income and the statements of cash flows for the periods
ended September 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
8
financial position, results of operations, and changes in cash flows at
September 30, 2003 have been made.
The accompanying unaudited interim 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 interim 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 September 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 September 30, 2003
and at September 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 $86,800
for the three months ended September 30, 2002 and $251,450 for the nine months
ended September 30, 2002.
NOTE 4 - STATEMENTS OF CASH FLOW
Supplemental Disclosures of Cash Flow Information:
Cash paid during the nine months ended September 30:
2003 2002
---- ----
Interest $456,025 $ 745,731
Income taxes $888,000 $1,578,650
Noncash investing activities included $418,296 and $126,654 during the periods
ended September 30, 2003 and 2002, respectively, relating to plant and equipment
additions placed in service, which are reflected in accounts payable at
September 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. At September 30, 2003, there was
$12,375,000 of direct borrowings outstanding under this facility at an interest
rate of 2.61%. The Company also
9
entered into a $10 million secured ten-year reducing revolving credit facility
during fiscal 2001, maturing in 2011. At September 30, 2003, there was
$8,250,000 of direct borrowings outstanding under this facility at an interest
rate of 2.61%. The borrowings under each credit facility bear interest, at the
Company's option, at either fixed or variable rates linked to the Company's
overall leverage ratio.
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 September 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 September 30,
2003. 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:
September 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
=========== ===========
10
Intangible assets subject to amortization pursuant to SFAS No. 142 are
summarized below:
September 30, December 31,
2003 2002
------------- ------------
Gross Carrying Amount $ 30,785 $ 30,785
Accumulated amortization (4,788) (3,249)
-------- --------
$ 25,997 $ 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 SEPTEMBER 30, 2003
Operating Revenues $ 2,482,214 $ 583,875 $ 302,886 $ 611,154 $ 4,587,029
Operating Expenses 2,237,582 312,400 156,264 378,613 3,541,372
------------- ------------- ------------- ------------- -------------
Operating income 244,632 271,475 146,622 232,541 1,045,657
Interest expense (86,011) (11,108) (20,632) (1,375) (299,751)
Cellular Investment Income -- -- -- -- --
Other Income (Expense) 822 1,784 32,859 5 --
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 159,443 $ 262,151 $ 158,849 $ 231,171 $ 745,906
============= ============= ============= ============= =============
Depreciation and amortization $ 860,027 $ 103,146 $ 35,315 $ 30,505 $ 550,325
============= ============= ============= ============= =============
Total Assets $ 64,013,553 $ 10,617,471 $ 5,538,500 $ 4,599,726 $ 32,385,223
============= ============= ============= ============= =============
Capital Expenditures $ 565,242 $ 294,010 $ 5,723 $ 37,568 $ 751,886
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER, 2003
Operating Revenues $ 8,567,158 $ 205,117 $ (4,832,514) $ 3,939,761
Operating Expenses 6,626,231 168,545 (3,786,857) 3,007,919
------------- ------------- ------------- -------------
Operating income 1,940,927 36,572 (1,045,657) 931,842
Interest expense (418,877) (20,631) 299,751 (139,757)
Cellular Investment Income -- -- 745,906 745,906
Other Income (Expense) 35,470 -- -- 35,470
------------- ------------- ------------- -------------
Income before income taxes $ 1,557,520 $ 15,941 $ -- $ 1,573,461
============= ============= ============= =============
Depreciation and amortization $ 1,579,318 $ -- $ (550,325) $ 1,028,993
============= ============= ============= =============
Total Assets $ 117,154,473 $ 9,234,123 $ (74,091,004) $ 52,297,592
============= ============= ============= =============
Capital Expenditures $ 1,654,429 $ -- $ (751,886) $ 902,543
============= ============= ============= =============
12
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenues $ 1,990,960 $ 556,622 $ 273,360 $ 562,011 $ 3,987,720
Operating Expenses 1,997,895 381,136 186,851 264,564 2,880,085
------------- ------------- ------------- ------------- -------------
Operating income (6,935) 175,486 86,509 297,447 1,107,635
Interest expense (156,981) (161) -- -- (166,340)
Cellular Investment Income -- -- -- -- --
Gain on Cellular Dissolution -- -- -- -- --
Other Income (Expense) (108,436) 442 (52,763) 152 (126,384)
------------- ------------- ------------- ------------- -------------
Income before income taxes $ (272,352) $ 175,767 $ 33,746 $ 297,599 $ 814,911
============= ============= ============= ============= =============
Depreciation and amortization $ 667,534 $ 94,490 $ 38,192 $ 36,809 $ 477,467
============= ============= ============= ============= =============
Total Assets $ 52,182,091 $ 9,946,738 $ 5,117,188 $ 4,057,349 $ 31,990,476
============= ============= ============= ============= =============
Capital Expenditures $ 2,911,786 $ 24,636 $ 34,909 $ 933 $ 281,165
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
THREE MONTHS ENDED SEPTEMBER, 2002
Operating Revenues $ 7,370,673 $ 171,784 $ (4,074,520) $ 3,467,937
Operating Expenses 5,710,531 144,474 (2,966,885) 2,888,120
------------- ------------- ------------- -------------
Operating income 1,660,142 27,310 (1,107,635) 579,817
Interest expense (323,482) -- 166,340 (157,142)
Cellular Investment Income -- -- 814,911 814,911
Gain on Cellular Dissolution -- -- -- --
Other Income (Expense) (286,989) -- 126,384 (160,605)
------------- ------------- ------------- -------------
Income before income taxes $ 1,049,671 $ 27,310 $ -- $ 1,076,981
============= ============= ============= =============
Depreciation and amortization $ 1,314,492 $ -- $ (477,467) $ 837,025
============= ============= ============= =============
Total Assets $ 103,293,842 $ 7,151,306 (62,171,885) $ 48,273,263
============= ============= ============= =============
Capital Expenditures $ 3,253,429 $ -- $ (281,165) $ 2,972,264
============= ============= ============= =============
13
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
Operating Revenues $ 7,321,192 $ 1,726,530 $ 833,815 $ 1,780,353 $ 12,471,093
Operating Expenses 6,596,387 863,956 450,012 1,097,466 9,497,581
------------- ------------- ------------- ------------- -------------
Operating income 724,805 862,574 383,803 682,887 2,973,512
Interest expense (274,455) (35,407) (65,939) (4,394) (613,681)
Cellular Investment Income -- -- (173) -- --
Gain on Cellular Dissolution -- -- -- -- --
Other Income (Expense) 178,583 3,806 114,588 53 --
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 628,933 $ 830,973 $ 432,279 $ 678,546 $ 2,359,831
============= ============= ============= ============= =============
Depreciation and amortization $ 2,580,099 $ 301,570 $ 105,944 $ 91,032 $ 1,603,396
============= ============= ============= ============= =============
Total Assets $ 64,013,553 $ 10,617,471 $ 5,538,500 $ 4,599,726 $ 32,385,223
============= ============= ============= ============= =============
Capital Expenditures $ 3,010,308 $ 398,548 $ 24,314 $ 63,354 $ 2,050,107
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
Operating Revenues $ 24,132,983 $ 533,371 $ (13,135,266) $ 11,531,088
Operating Expenses 18,505,402 412,531 (10,161,754) 8,756,179
------------- ------------- ------------- -------------
Operating income 5,627,581 120,840 (2,973,512) 2,774,909
Interest expense (993,876) (65,921) 613,681 (446,116)
Cellular Investment Income (173) -- 2,359,831 2,359,658
Gain on Cellular Dissolution -- -- -- --
Other Income (Expense) 297,030 -- -- 297,030
------------- ------------- ------------- -------------
Income before income taxes $ 4,930,562 $ 54,919 $ -- $ 4,985,481
============= ============= ============= =============
Depreciation and amortization $ 4,682,041 $ -- (1,603,396) $ 3,078,645
============= ============= ============= =============
Total Assets $ 117,154,473 $ 9,234,123 (74,091,004) $ 52,297,592
============= ============= ============= =============
Capital Expenditures $ 5,546,631 $ -- $ (2,050,107) $ 3,496,524
============= ============= ============= =============
14
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
New Ulm Western Peoples New Ulm Cellular
Telecom Telephone Telephone Phonery Investment
------------- ------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenues $ 6,317,688 $ 1,762,101 $ 782,816 $ 1,595,996 $ 11,236,529
Operating Expenses 5,568,391 892,243 475,015 888,037 8,294,251
------------- ------------- ------------- ------------- -------------
Operating income 749,297 869,858 307,801 707,959 2,942,278
Interest expense (644,686) (60,070) (27,178) -- (677,313)
Cellular Investment Income -- -- -- -- --
Gain on Cellular Dissolution -- -- 1,153,889 -- --
Other Income (Expense) (5,305) 1,549 16,056 675 --
------------- ------------- ------------- ------------- -------------
Income before income taxes $ 99,306 $ 811,337 $ 1,450,568 $ 708,634 $ 2,264,965
============= ============= ============= ============= =============
Depreciation and amortization $ 2,002,603 $ 283,470 $ 114,578 $ 108,796 $ 1,445,257
============= ============= ============= ============= =============
Total Assets $ 52,182,091 $ 9,946,738 $ 5,117,188 $ 4,057,349 $ 31,990,476
============= ============= ============= ============= =============
Capital Expenditures $ 5,792,239 $ 61,050 $ 53,469 $ 103,179 $ 1,876,591
============= ============= ============= ============= =============
Segment
Totals Others Eliminations Consolidated
------------- ------------- ------------- -------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating Revenues $ 21,695,130 $ 461,829 $ (11,487,979) $ 10,668,980
Operating Expenses 16,117,937 $ 376,290 (8,545,701) 7,948,526
------------- ------------- ------------- -------------
Operating income 5,577,193 85,539 (2,942,278) 2,720,454
Interest expense (1,409,247) -- 677,313 (731,934)
Cellular Investment Income -- -- 2,264,965 2,264,965
Gain on Cellular Dissolution 1,153,889 -- -- 1,153,889
Other Income (Expense) 12,975 -- -- 12,975
------------- ------------- ------------- -------------
Income before income taxes $ 5,334,810 $ 85,539 $ -- $ 5,420,349
============= ============= ============= =============
Depreciation and amortization $ 3,954,704 $ -- (1,445,257) $ 2,509,447
============= ============= ============= =============
Total Assets $ 103,293,842 $ 7,151,306 (62,171,885) $ 48,273,263
============= ============= ============= =============
Capital Expenditures $ 7,886,528 $ -- $ (1,876,591) $ 6,009,937
============= ============= ============= =============
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 June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS No. 146 did not impact the
Company's financial position and results of operations.
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.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, ELEMENTS OF FINANCIAL STATEMENTS. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. The Company
does not have financial instruments that have characteristics of both
liabilities and
16
equity, therefore, adoption of SFAS No. 150 did not have a material effect on
its financial position and results of operations.
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.
17
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 sufficiency of cash generated from current operations to fund
future liquidity needs;
o the ability to secure financing for future expansion;
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, such as the continuing
decreases in switched access minutes of use and decreases in
access rates charged to inter-exchange carriers;
o the economy in general;
o the future of the communications industry and communications
services;
o the effect of legal and regulatory changes; and
o other risks and uncertainties which may affect the operating
results.
Additional information concerning these and other factors that could cause
actual outcomes or results 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. Caution should be exercised 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
18
equity method of accounting. The equity method is used due to the influence the
Company has over the operations and management of MWH.
RESULTS OF OPERATIONS
---------------------
CONSOLIDATED OPERATING RESULTS
- ------------------------------
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 $3,939,761 for the
three months ended September 30, 2003, for an increase of 13.6% or
$471,824 compared to the same period in 2002. Total operating revenues
were $11,531,088 for the nine months ended September 30, 2003, for an
increase of 8.1% or $862,108 compared to the same period in 2002. The
New Ulm Telecom segment realized an increase in operating revenue due
to new and expanded service offerings: digital video and digital
subscriber line (DSL). The New Ulm Telecom segment has invested
heavily in its infrastructure, which allows it to enhance its local
network and offer these 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 includes voice services,
digital video services, data services, and Internet services. This
geographic expansion of the Company's service offerings has provided
and is expected to continue to provide this segment with growth. The
Peoples Telephone Company sector saw an increase in its nonregulated
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 little change.
OPERATING EXPENSES - Operating expenses for the three months ended
September 30, 2003 increased $119,799 or 4.1% compared to the same
period in 2002. Operating expenses for the nine months ended September
30, 2003 increased $807,653 or 10.2% compared to the same period in
2002, with the New Ulm Telecom segment responsible for a $1,027,996
increase in operating expenses. A $399,528 writeoff of bankrupt
carrier receivables in September 2002, lessened the amount of the
increase in operating expenses for 2003. Depreciation expense for the
New Ulm Telecom segment increased $577,496 for the first nine months
of 2003 compared to 2002, of which $415,431 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, Minnesota (MN).
OPERATING INCOME - Operating income for the three months ended
September 30, 2003 increased $352,025 or 60.7% over the three months
ended September 30, 2002. Operating income for the nine-month period
ended September 30, 2003 increased $54,455 or 2.0% compared to the
nine-month period ended September 30, 2002. The
19
increase in income was primarily due to the increase in operating
revenues and the writeoffs of bankrupt carrier receivables in
September 2002. The primary source of the increase in operating
revenues was the increased number of customers subscribing to the New
Ulm Telecom segment's digital video services in New Ulm and Redwood
Falls, MN.
OTHER INCOME - Other income for the three months ended September 30,
2003 increased $144,455 compared to the three months ended September
30, 2002. Other income decreased $489,323 for the nine-month period
ended September 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 $277,440 for the nine months ended
September 30, 2003 over the same period in 2002 due to an increase in
investment income of Fibercomm, L.L.C., a competitive local exchange
carrier (CLEC) in Sioux City, Iowa, and CoBank, a lender that
specializes in agribusiness, communications, energy and water systems,
and agricultural export financing.
There was a $285,818 decrease in interest expense for the nine-month
period ended September 30, 2003 compared to the same period in 2002.
Early extinguishments of debt were the main cause of this decrease. On
March 1, 2002, the Company repaid the entire outstanding principal
balance of $2,566,666 on its senior unsecured debt with Phoenix Life
Mutual Insurance Company.
NET INCOME - Net income was $932,095 for the three months ended
September 30, 2003 compared with $641,733 for the same period in 2002.
Net income was $2,964,578 for the nine-month period ending September
30, 2003 compared with $3,226,878 for the same nine-month period in
2002. The $262,300 or 8.1% decrease in net income for the nine-months
ending September 30, 2003 was primarily attributed to gains from the
dissolution of the cellular corporations in the first quarter of 2002,
debt extinguishment, and an increase in operating expenses.
20
Summary of Operations before intercompany eliminations
For the Three Months Ended For the Nine Months Ended
-------------------------------------- --------------------------------------
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
-------------------------------------- --------------------------------------
Operating Income:
New Ulm Telecom $ 244,632 $ (6,935) $ 724,805 $ 749,297
Western Telephone 271,475 175,486 862,574 869,858
Peoples Telephone 146,622 86,509 383,803 307,801
New Ulm Phonery 232,541 297,447 682,887 707,959
Other 36,572 27,310 120,840 85,539
----------- ----------- ----------- -----------
Total 931,842 579,817 2,774,909 2,720,454
Other Income 781,376 654,306 2,656,688 3,431,829
Interest Expense (139,757) (157,142) (446,116) (731,934)
Income Taxes (641,366) (435,248) (2,020,903) (2,193,471)
----------- ----------- ----------- -----------
Net Income $ 932,095 $ 641,733 $ 2,964,578 $ 3,226,878
=========== =========== =========== ===========
Basic and Diluted
Earnings per Share $ 0.18 $ 0.13 $ 0.58 $ 0.63
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 63.0% of the Company's consolidated
operating revenues for the three-month period ended September 30, 2003 and 63.5%
of the Company's consolidated operating revenues for the nine-month period ended
September 30, 2003. The New Ulm Telecom segment provides voice, video, and data
services in New Ulm, Courtland, Klossner, Essig, 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
21
are primarily earned by providing approximately 13,900 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 September 30, 2003 grew $491,254 or 24.7% over the same period
last year. Total New Ulm Telecom segment revenues for the nine-month period
ending September 30, 2003 increased $1,003,504 or 15.9% over the same period in
2002. All information contained in the following table is before intercompany
eliminations.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating Revenues:
Local Network $ 842,616 $ 754,666 $ 2,409,661 $ 2,202,743
Network Access 1,109,405 908,400 3,411,012 3,128,102
Other 530,193 327,894 1,500,519 986,843
----------- ----------- ----------- -----------
Total Operating Revenues 2,482,214 1,990,960 7,321,192 6,317,688
----------- ----------- ----------- -----------
Cash Operating Expenses 1,377,555 1,330,361 4,016,288 3,565,788
Noncash Operating Expenses 860,027 667,534 2,580,099 2,002,603
----------- ----------- ----------- -----------
Total Operating Expenses 2,237,582 1,997,895 6,596,387 5,568,391
----------- ----------- ----------- -----------
Operating Income 244,632 (6,935) 724,805 749,297
----------- ----------- ----------- -----------
Net Income $ 97,609 $ (161,361) $ 378,660 $ 61,449
=========== =========== =========== ===========
Local network revenue increased in the New Ulm Telecom segment by $87,950 or
11.7% for the three months ended September 30, 2003 compared to the same period
in 2002. Local network revenue increased in the New Ulm Telecom segment by
$206,918 or 9.4% for the nine months ended September 30, 2003 over the same
period ended September 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 $189,435 in local network revenue for the
nine-months ended September 30, 2003. The local network revenue for New Ulm, MN
saw an increase of $17,483 for the nine-months ended September 30, 2003. Despite
a 2.2% decrease in the number of access lines from September 30, 2002 to
September 30, 2003 for New Ulm, MN, targeted marketing, promotions and packaging
of vertical services, most notably digital subscriber line (DSL) to supplement
basic line charges, and a rate increase which took effect June 1, 2003, resulted
in the 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.
22
Network access revenue increased $201,005 or 22.1% for the three months ended
September 30, 2003 compared with the same period in 2002. Network access revenue
increased $282,910 or 9.0% for the nine months ended September 30, 2003. The New
Ulm Telecom segment experienced a 1.1% decrease in access minutes for the three
months ended September 30, 2003 and 1.1% decrease for the nine months ended
September 30, 2003. While a decrease in access minutes has been a common
industry trend, the New Ulm Telecom segment has minimized the decrease 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 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 $202,299 or 61.7% for the three months ended
September 30, 2003 compared with the same period in 2002. Other operating
revenues increased $513,676 or 52.1% for the nine months ended September 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 $299,629 of the increase in these revenues for the
nine-months ending September 30, 2003, with Redwood Falls accounting for
$211,545 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 $47,194 or 3.5% for the three-month period
ended September 30, 2003 and $450,500 or 12.6% for the nine-month period ended
September 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 improvements to enhance operating margins for the
New Ulm Telecom segment.
Noncash operating expenses increased $192,493 or 28.8% for the three months
ended September 30, 2003 compared with the same period in 2002. Noncash
operating expenses increased $577,496 or 28.8% for the nine months ended
September 30, 2003 compared with the same period ended September 30, 2002.
Depreciation expense was the cause of these increases. The
23
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 $251,567 for the three months ended September 30,
2003 compared to the three-month period ended September 30, 2002. The
three-month increase in operating income was the result of $245,630 in writeoffs
of bankrupt carrier receivables in September 2002. Operating income decreased
$24,492 or 3.3% for nine-month period ended September 30, 2003 compared to the
same period in 2002. The decrease in operating income was due to the increase in
depreciation due to the growing investment in the New Ulm Telecom segment
infrastructure, including a $415,431 increase in depreciation for the CLEC in
Redwood Falls, MN. This decrease in operating income was lessened by an increase
in operating revenues for the nine-month period as revenues from CLEC operations
began to offset the startup costs and operating costs associated with the
introduction of CLEC services in Redwood Falls, MN. A $1,003,504 increase in
revenues combined with a $1,027,996 increase in operating expenses resulted in
the $24,492 decrease in operating income for the nine-month period.
WESTERN TELEPHONE COMPANY OPERATIONS
Western Telephone Company (Western) revenues represented 14.8% of the Company's
consolidated operating revenues for the three months ended September 30, 2003
and 15.0% of the Company's consolidated operating revenues for the nine months
ended September 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues:
Local Network $ 116,588 $ 115,435 $ 322,716 $ 352,775
Network Access 354,204 347,056 1,079,658 1,124,620
Other 113,083 94,131 324,156 284,706
---------- ---------- ---------- ----------
Total Operating Revenues 583,875 556,622 1,726,530 1,762,101
---------- ---------- ---------- ----------
Cash Operating Expenses 209,254 286,646 562,386 608,773
Noncash Operating Expenses 103,146 94,490 301,570 283,470
---------- ---------- ---------- ----------
Total Operating Expenses 312,400 381,136 863,956 892,243
---------- ---------- ---------- ----------
Operating Income 271,475 175,486 862,574 869,858
---------- ---------- ---------- ----------
Net Income $ 161,355 $ 104,637 $ 499,815 $ 483,005
========== ========== ========== ==========
24
Local network revenues increased in the Western segment by $1,153 or 1.0% for
the three months ended September 30, 2003 compared to the same period in 2002.
Local network revenues decreased $30,059 or 8.5% for the nine months ended
September 30, 2003 compared to the same period in 2002. The decrease in local
network revenues was due to the 2002 billing of wireless reciprocal
compensation. Wireless reciprocal compensation has not yet been billed for the
first nine months of 2003. Reciprocal compensation is the revenue from
interconnect agreements with wireless carriers terminating traffic to Western's
local network.
Network access revenue increased $7,148 or 2.1% for the three-month period ended
September 30, 2003 compared to the same period in 2002. Network access revenue
decreased $44,962 or 4.0% for the nine-month period ended September 30, 2003
compared with the same period in 2002. The Western segment had a 9.5% decrease
in its access minutes of use for the nine-months ended September 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
for this segment. The expected future growth in the utilization of the Internet
(e-mail, voice-over-Internet) is also expected to reduce the future volume of
switched minutes of use. The Western segment has seen these decreases minimized
by increased settlements from NECA and through increased high-cost loop funding.
Other operating revenue increased $18,952 or 20.1% for the three months ended
September 30, 2003 and increased $39,450 or 13.9% for the nine months ended
September 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. The Western segment also saw an increase in other
operating revenue due to the introduction of digital video service in
Springfield, MN in June 2003.
Cash operating expenses decreased $77,392 or 27.0% for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002. Cash
operating expenses decreased $46,387 or 7.6% for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002. The cause of the
decrease in cash operating expenses for the three-month periods was the $115,289
write-off of bankrupt carrier receivables in 2002. Both decreases in cash
operating expenses were lessened by increases in Internet expenses for the DSL
service offering and digital video services that became available to customers
in Springfield, MN. Western identified the need to compete in all aspects of the
communications marketplace. Therefore, digital video services were introduced to
Western's subscribers in Springfield, MN during June 2003. 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 $8,656 or 9.2% for the quarter ended
September 30, 2003 and $18,100 or 6.4% for the nine months ended September 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.
25
Operating income increased $95,989 or 54.7% for the three months ended September
30, 2003 compared with the same period in 2002, primarily due to the $115,289
writeoff of bankrupt carrier receivables in September 2002. Operating income
decreased $7,284 or 0.8% for the nine months ended September 30, 2003 compared
with the nine months ended September 30, 2002. Operating income for the
nine-month period also decreased due to a $18,100 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
$36,000 resulting from the introduction of DSL into this segment's service area.
The decrease in operating income was also the result of decreases in local
network revenue and network access revenue as previously discussed. The
decreases in operating income were lessened by an increase in revenues
associated with Western's new service offerings of DSL and digital video, and
increased settlements from NECA, which includes high-cost loop funding.
PEOPLES TELEPHONE COMPANY OPERATIONS
Peoples Telephone Company (Peoples) revenues represented 7.7% of the Company's
consolidated operating revenues for the three months ended September 30, 2003
and 7.2% of the Company's consolidated operating revenues for the nine months
ended September 30, 2003. Revenues are primarily earned by providing
approximately 880 customers access to Peoples 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues:
Local Network $ 42,276 $ 36,237 $ 121,510 $ 114,107
Network Access 199,209 177,324 531,699 508,276
Other 61,401 59,799 180,606 160,433
---------- ---------- ---------- ----------
Total Operating Revenues 302,886 273,360 833,815 782,816
---------- ---------- ---------- ----------
Cash Operating Expenses 120,949 148,659 344,068 360,437
Noncash Operating Expenses 35,315 38,192 105,944 114,578
---------- ---------- ---------- ----------
Total Operating Expenses 156,264 186,851 450,012 475,015
---------- ---------- ---------- ----------
Operating Income 146,622 86,509 383,803 307,801
---------- ---------- ---------- ----------
Net Income $ 88,560 $ 134,336 $ 251,194 $1,179,323
========== ========== ========== ==========
Note: Net income for the nine-months ended September 30, 2002 included a
one-time gain of $686,795 from the dissolution of Three Lakes Cellular, Inc. and
Cherokee Cellular, Inc.
26
Local network revenue increased in Peoples by $6,039 or 16.7% for the
three-month period ended September 30, 2003 compared to the same period in 2002.
Local network revenue increased $7,403 or 6.5% for the nine-month period ended
September 30, 2003 compared to the same period in 2002. These increases occurred
despite a 5.0% decrease in the number of access lines in 2003 over 2002. The
revenue increases were accomplished with promotion and packaging of vertical
services, most notably, the introduction of DSL to supplement basic line
charges.
Network access revenue increased $21,885 or 12.3% and access minutes decreased
2.9% for the three months ended September 30, 2003 compared to the same period
in 2002. Network access revenue increased $23,423 or 4.6% and access minutes
decreased 2.9% for the nine months ended September 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-Internet) will
continue to decrease 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 for the nine-month period was due to an
increase in transport facilities that carry toll traffic for which Peoples
receives compensation from the National Exchange Carrier Association (NECA)
pool, 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 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 $1,602 or 2.7% for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002. Other
operating revenue increased $20,173 or 12.6% for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002. A rate increase
for CATV service, which went into effect in July 2002, accounted for
approximately $11,000 of the increase for the nine-month period. An increase of
12.0% in Internet customers increased other revenues by approximately $11,500
for the nine-month period. Offsetting these increases was a decrease in billing
and collection revenues of approximately $3,500 as inter-exchange carriers
(IXC's) continued to take back the billing and collection function.
Cash operating expenses decreased $27,710 or 18.6% for the three-month period
ended September 30, 2003 compared to the same period in 2002. Cash operating
expenses decreased $16,369 or 4.5% for the nine-month period ended September 30,
2003 compared to the same period in 2002. Cash operating expenses decreased
$38,609 for the nine-month period due to the write-off of bankrupt carrier
receivables in 2002. This decrease was offset by increased costs associated with
the number of services offered, such as DSL, as the Peoples segment continued to
address the need to compete in all aspects of communication services and provide
solutions to customers' communications needs.
27
Noncash operating expenses decreased $2,877 or 7.5% for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002.
Noncash operating expenses decreased $8,634 or 7.5% for the nine months ended
September 30, 2003 compared to the nine months ended September 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 $60,113 or 69.5% for the three months ended September
30, 2003 compared with the same period in 2002. Operating income increased
$76,002 or 24.7% for the nine months ended September 30, 2003 compared with the
same period in 2002. Operating income increased due to the CATV rate increase
that became effective July 2002, an increase in Internet revenues due to an
increasing customer base, and a decrease in expense due to the write-off of
carrier receivables in 2002. These operating income increases were partially
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 15.5% of the Company's consolidated
operating revenues for the three-month period ended September 30, 2003 and 15.4%
of the Company's consolidated operating revenues for the nine-month period ended
September 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 (the
carrying of toll traffic) solutions in telecommunications to end-user customers.
All information contained in the following table is before intercompany
eliminations.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating Revenues: $ 611,154 $ 562,011 $1,780,353 $1,595,996
---------- ---------- ---------- ----------
Cash Operating Expenses 348,108 227,755 1,006,434 779,241
Noncash Operating Expenses 30,505 36,809 91,032 108,796
---------- ---------- ---------- ----------
Total Operating Expenses 378,613 264,564 1,097,466 888,037
---------- ---------- ---------- ----------
Operating Income 232,541 297,447 682,887 707,959
---------- ---------- ---------- ----------
Net Income $ 138,945 $ 177,166 $ 405,276 $ 421,864
========== ========== ========== ==========
Operating revenue increased $49,143 or 8.7% for the three months ended September
30, 2003 compared to the same period in 2002. Operating revenue increased
$184,357 or 11.6% for the
28
nine months ended September 30, 2003 compared to the same period in 2002. This
increase was the result of an $282,572 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 $120,353 or 52.8% for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002. Cash
operating expenses increased $227,193 or 29.2% for the nine months ended
September 30, 2003 compared to the same period in 2002. These increases 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 $6,304 or 17.1% for the quarter ended
September 30, 2003 compared with the same period in 2002. Noncash operating
expenses decreased $17,764 or 16.3% for the nine-month period ended September
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.
Operating income decreased by $64,906 or 21.8% for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002.
Operating income decreased by $25,072 or 3.5% for the nine months ended
September 30, 2003 compared to the same period in 2002. These decreases in
income were the result of increases in cash operating expenses that exceeded
increases in operating 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
decreased $69,005 or 8.5% for the three months ended September 30, 2003 compared
to the same period ended in 2002. The cause of the decrease can be attributed to
the costs associated with replacing TDMA (Time Division Multiple Access)
technology with CDMA (Code Division Multiple Access) technology as the standard
wireless operating platform. MWH recognizes that in the future, TDMA will
eventually be replaced with CDMA technology. Cellular investment income
increased $94,693 or 4.2% for the nine months ended September 30, 2003 compared
to the same period in 2002. This increase was the result of revenue and income
growth as MWH continues to gain market share.
29
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Cellular Investment Income $ 745,906 $ 814,911 $ 2,359,658 $ 2,264,965
=========== =========== =========== ===========
Proportionate Method:
Operating Revenues 4,587,029 3,987,720 12,471,093 11,236,529
Cash Operating Expenses 2,991,046 2,402,618 7,894,185 6,848,994
Noncash Operating Expenses 550,326 477,467 1,603,396 1,445,257
----------- ----------- ----------- -----------
Total Operating Expenses 3,541,372 2,880,085 9,497,581 8,294,251
----------- ----------- ----------- -----------
Operating Income 1,045,657 1,107,635 2,973,512 2,942,278
----------- ----------- ----------- -----------
Net Income $ 745,906 $ 814,911 $ 2,359,658 $ 2,264,965
=========== =========== =========== ===========
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CAPITAL STRUCTURE
The total long-term capital structure (long-term debt plus shareholders' equity)
for the Company was $44,080,242 at September 30, 2003, reflecting 58.6% equity
and 41.4% 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 $6,433,893 for the nine-month period ended
September 30, 2003 compared to $3,656,135 for the nine-month period ended
September 30, 2002. Cash flows from operations for the nine months ended
September 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 $3,010,937 for the nine months
ended September 30, 2003 compared to $9,314,972 for the same period in 2002.
There was no capital outlay for the purchase of cellular investments for the
nine-month period ending September 30, 2003 compared to the purchase of cellular
investments of $3,220,682 for the nine months ended September 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
Cherokee Cellular, Inc. The decrease in notes receivable was $674,037 for the
first nine months of 2003 compared to a decrease of $3,644 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 Bill Otis, the Company's President.
Capital expenditures relating to on-going businesses were
30
$3,496,524 during the first nine months of 2003 as compared to $6,009,937 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 $3,167,517 for the nine-month period
ended September 30, 2003 compared to cash flows provided by financing activities
of $1,993,947 for the nine-month period ended September 30, 2002. Included in
cash flows used in financing activities were debt repayments, debt borrowings,
and dividend payments. During the first nine 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 nine months of 2002, the Company borrowed
$6,964,000 under its revolving credit facility to cover cash requirements,
primarily to repay $2,566,666 of senior unsecured debt with Phoenix Life Mutual
Insurance Company and to cover its capital expenditures. In the first nine
months of both 2003 and 2002, there was no stock retired.
DIVIDENDS
The Company paid dividends of $1,278,387 during both the first nine 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 $331,296 as of September 30, 2003,
compared to a working capital deficit of $143,176 as of December 31, 2002. The
decrease in working capital reflects the Company's decrease in receivables. The
ratio of current assets to current liabilities was 0.9:1.0 as of September 30,
2003 and 1.0:1.0 as of December 31, 2002.
LONG-TERM DEBT
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. This ten-year loan requires equal
monthly payments of $125,000. At September 30, 2003, there was $12,375,000 of
direct borrowings outstanding under this facility at an interest rate of 2.61%.
In addition, the Company entered into a $10 million secured ten-year reducing
revolving credit facility maturing in 2011. Principal payments of $250,000 per
quarter began once borrowing commenced. At September 30, 2003, there was
$8,250,000 of direct borrowings outstanding under this facility at an interest
rate of 2.61%.
The borrowings under each credit facility bear interest, at the Company's
option, at either fixed or variable rates linked to the Company's overall
leverage ratio.
31
Through March 1, 2002, 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 nine
months of 2003, the Company's interest expense would have increased
approximately $45,000. 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. At the end
of the period covered by this 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.
During the Company's most recent fiscal quarter, there has been no change in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" on page 34 of this Form 10-Q.
32
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ULM TELECOM, INC.
Dated: November 3, 2003 By /s/ James P. Jensen
-------------------------
James P. Jensen, Chairman
Dated: November 3, 2003 By /s/ Bill Otis
--------------------------
Bill Otis, President
33
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
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
34