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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-3024
NEW ULM TELECOM, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0440990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 NORTH MINNESOTA STREET
NEW ULM, MINNESOTA 56073
(Address of principal executive offices and zip code)
Registrant's telephone number including area code: 507-354-4111
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $1.66 PAR VALUE
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __X__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes _____ No __X__
As of June 30, 2003, the aggregate market value of the common stock held by
non-affiliates of the registrant was $43,869,409 based on the last sale price of
$9.20 on The OTC Bulletin Board.
The total number of shares of the registrant's common stock outstanding as of
March 20, 2004: 5,115,435.
Documents Incorporated by Reference: Information required by Part III, Items
10-14 of this document is incorporated by reference to specified portions of the
registrant's definitive proxy statement for the annual meeting of shareholders
to be held May 20, 2004.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
New Ulm Telecom, Inc. was incorporated in 1905 under the laws of the State of
Minnesota, with headquarters in New Ulm, Minnesota. The Company's principal line
of business is the operation of three incumbent local exchange telephone
companies (ILECs). This business consists of connecting customers to the
telephone network, providing switched service and dedicated private lines,
connecting customers to long distance service providers and providing many other
services associated with ILECs. The Company also provides cable television
services, Internet access services including both dial-up access and high-speed
digital subscriber line or DSL access, long distance service and installs and
maintains telephone systems to the areas surrounding its ILEC service territory
in southern Minnesota and northern Iowa. The Company began offering service as a
competitive local exchange carrier (CLEC) in the city of Redwood Falls,
Minnesota in 2002. The Company also has a 9.88% investment in Midwest Wireless
Holdings L.L.C. a wireless communications provider in southern Minnesota,
northern Iowa, and southwestern Wisconsin.
For purposes of this report, all references to the "Company" shall mean New Ulm
Telecom, Inc. and its subsidiaries.
The Company maintains a website at www.newulmtel.net. The Company's annual
reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on
Form 8-K are available free of charge at www.newulmtel.net, as soon as
reasonably practicable after such material is filed with or furnished to the
SEC.
The Company and its five wholly owned subsidiaries are organized into five
business segments as follows:
NEW ULM TELECOM SEGMENT
o This Segment contains the ILEC and CLEC activities of New Ulm Telecom, Inc.
(New Ulm) the parent company.
WESTERN TELEPHONE SEGMENT
o This Segment contains the ILEC activities of Western Telephone Company
(Western) a wholly owned subsidiary.
PEOPLES TELEPHONE SEGMENT
o This Segment contains the ILEC activities of Peoples Telephone Company
(Peoples) a wholly owned subsidiary.
NEW ULM PHONERY SEGMENT
o This Segment contains the activities of New Ulm Phonery, Inc. (Phonery) a
wholly owned subsidiary.
CELLULAR SEGMENT
o This Segment contains the investment activities from the Company's ownership
in Midwest Wireless Holdings L.L.C. (MWH) in which New Ulm Cellular #9, Inc.
(Cell #9) a wholly owned subsidiary owns 7.55% and Peoples owns 2.33%. The
Company's total ownership of MWH is 9.88% as of December 31, 2003.
Other activities including the activities of New Ulm Long Distance, Inc. (NULD),
a wholly owned subsidiary, and the operating activities of Cell #9 are not
included in a identified segment.
Financial information about the Company's industry segments is included on pages
41 to 42 of this Form 10-K.
2
DISPOSITIONS
- ------------
In January 2002, Cherokee Cellular, Inc. (CCI) and Three Lakes Cellular, Inc.
(TLCI), which owned units of MWH, dissolved. Peoples had an ownership interest
in each corporation. The C-Corporations entered into a transaction that allowed
CCI and TLCI to transfer MWH shares directly to the stockholders. Prior to this
transaction, Peoples contributed $2,166,000 of cash to these corporations. The
stockholders of CCI and TLCI assumed an increase in the value of MWH resulting
in a taxable gain. Recognition of the gain occurred due to the step up value
resulting in the appreciation of the value of MWH. The Company recorded a
pre-tax gain of $1,157,915 ($697,065 net of tax) which is reflected in the
Peoples Telephone Company Segment in 2002.
ACQUISITIONS
- ------------
The dissolution of CCI and TLCI, as explained above allowed the Company to
increase its direct ownership in MWH. Peoples acquired an additional 12,050
units in MWH through the dissolution of these two C-Corporations.
The dissolution of TLCI also allowed Peoples to purchase additional units in
MWH. Peoples purchased 12,295 units from other partners in TLCI for
approximately $1,940,000 in cash. The investment income subsequent to these
transactions is reflected in the Cellular Segment.
NARRATIVE DESCRIPTION OF BUSINESS
- ---------------------------------
Telephone Industry Segments
The Company's core business is the operation of three independent telephone
companies from which it generates the majority of its revenue. The Company
conducts this core business in the following three Segments.
o New Ulm Telecom Segment (New Ulm)
o Western Telephone Segment (Western)
o Peoples Telephone Segment (Peoples)
New Ulm is an independent telephone company which is regulated by the Minnesota
Public Utilities Commission (MPUC). New Ulm has not experienced a major change
in the scope or direction of its operations during the past year. At December
31, 2003, the Company served approximately 13,990 access lines. New Ulm provides
telephone service in Minnesota to the cities of New Ulm, Courtland, Klossner,
Searles, Redwood Falls (city only) and the adjacent rural areas in Brown,
Nicollet and Blue Earth counties in south central Minnesota approximately 90
miles southwest of Minneapolis, Minnesota. New Ulm also operates three cable
television systems in Minnesota (in the cities of New Ulm, Courtland and Redwood
Falls and the rural area surrounding New Ulm), servicing approximately 3,040
customers.
Western is an independent telephone company which is regulated by the Minnesota
Public Utilities Commission (MPUC). Western has not experienced a major change
in the scope or direction of its operations during the past year. At December
31, 2003, Western served approximately 2,430 access lines. Western provides
telephone service in Minnesota to the cities of Springfield, Sanborn and the
adjacent rural areas in Brown and Redwood counties in south central Minnesota
approximately 120 miles southwest of Minneapolis, Minnesota. Western operates
three cable television systems in Minnesota (in the cities of Springfield,
Sanborn and Jeffers), servicing approximately 430 customers.
3
Peoples is an independent telephone company which is regulated by the Iowa
Utilities Board (IUB). Peoples has not experienced a major change in the scope
or direction of its operations during the past year. At December 31, 2003,
Peoples served approximately 860 access lines. Peoples provides telephone
service in Iowa to the city of Aurelia and the adjacent rural areas in Cherokee
and Buena Vista counties in north western Iowa approximately 60 miles east of
Sioux City, IA. Peoples operates one cable television system in Iowa (in the
city of Aurelia), servicing approximately 360 customers.
The telephone segments derive their principal revenues from local service
charges to their residential and business subscribers and access charges to
inter-exchange carriers for providing the carriers access to the Company's local
phone networks. Revenues are also received from long distance carriers for
providing the billing and collection of long distance toll calls to the
Company's subscribers.
Alternatives to the Company's service include customers leasing private line
switched voice and data services in or adjacent to the territories served by the
Company, which permits the bypassing of local telephone facilities. In addition,
microwave transmission services, wireless communications, fiber optic and
coaxial cable deployment and other services permit bypass of the local exchange
network. These alternatives to local exchange service represent a potential
threat to the Company's long-term ability to provide local exchange services at
economical rates.
In order to meet the competition present in the industry, New Ulm, Western and
Peoples have deployed new technology for their local exchange networks to
increase operating efficiencies and to provide new services to their customers.
These new technologies include the latest release of digital switching
technology on all of the ILEC's switches and installation of SS7 (an out-of-band
system) for all of its access lines. New Ulm, Western, and Peoples have also
constructed fiber rings (redundant route designs which allow traffic to re-route
if trouble appears in the network) that will protect their local networks, and
will enable them to provide a very reliable level of service to their customers.
The value of the local network is also enhanced by the ability to offer access
to high-speed internet (DSL) to over 85% of their customers. DSL technology
offers customers access to high-speed internet and traditional voice
connectivity over the same connection. In addition, New Ulm and Western have
enhanced their networks to offer video services over the same facilities that
provide their customers with voice and internet access. This technology is
available to approximately 70% of their access lines.
New Ulm currently has competition in the City of Redwood Falls, Minnesota in the
provision of traditional telephone service. Qwest is the incumbent provider (New
Ulm entered Redwood Falls as a CLEC in September 2002). Competition does not
currently exist in the other communities and areas served by New Ulm or the
areas served by Western or Peoples for traditional telephone service. The
Company is also facing competition in the Minnesota communities of New Ulm,
Redwood Falls, and Springfield in the provision of video services. Time Warner
is the incumbent provider for video services in New Ulm and Mediacom is the
incumbent provider in Redwood Falls and Springfield. New Ulm, Western, and
Peoples constantly respond to competitive pressure with active programs to
market products and to enhance their infrastructure for higher customer
satisfaction.
Competition also exists for some of the services provided by inter-exchange
carriers, such as customer billing services, dedicated private lines, and
network switching. This competition comes primarily from the inter-exchange
carriers themselves. The provision of these services is of a contractual nature
and is primarily controlled by the inter-exchange carriers. Other services, such
as directory advertising, operator services and cellular communications, are
open to competition. Competition is based primarily on service and experience.
4
New Ulm Phonery Segment
- -----------------------
The Phonery is a non-regulated telecommunications business which provides
internet services, sells and services telephone apparatus, toll transport
services and provides voice-mail services on a retail level primarily in the
areas served by the New Ulm, Western and Peoples Segments. The Phonery
specializes in the quality custom installation and maintenance of local
networking and transport solutions in telecommunications for end user customers.
There are a number of companies engaged in the sale of telephone equipment at
the retail level competing with the Phonery. Several companies also compete with
the Phonery in providing internet services. Competition is based primarily on
price, service, and experience. No company is dominant in this field.
Cellular Segment
- ----------------
Cell #9 owns a 7.55% and Peoples owns a 2.33% interest in MWH. MWH provides
cellular phone service in southern Minnesota, northwestern Iowa and southwestern
Wisconsin. This segment derives its activities from the equity earnings in MWH
from Cell #9's and Peoples equity ownership in MWH. The MWH investment is a
separate segment that is recorded on the equity method of accounting.
REGULATORY MATTERS
- ------------------
The Telecommunications Act passed by the federal government in February of 1996
is resulting in significant changes to the telecommunications industry. The
Federal Communications Commission (FCC) is in the process of determining how
competition will be implemented by setting standards for wholesale pricing,
unbundling local network rates, and interconnection rates. State regulators are
also involved in implementing the transition to a competitive environment, but
the exact roles that the FCC and state regulators will play are yet to be fully
determined.
Interstate access rates are established by a nationwide pooling of companies
known as the National Exchange Carriers Association (NECA). The FCC established
NECA in 1983 to develop and administer interstate access service rates, terms
and conditions. Revenues are pooled and redistributed on the basis of each
company's actual or average costs. There has been a shift in the composition of
interstate access charges in recent years shifting more of the charges to the
end user and reducing the amount of access charges paid by inter-exchange
carriers. The Company believes this trend will continue.
The FCC has currently undertaken a comprehensive examination of inter-carrier
compensation (payments from one telecommunications company to another for use of
their interconnecting networks). This examination could lead to significant
changes in the way the Company is compensated for use of its local network in
the future.
The Company's local exchange telephone companies are subject to the jurisdiction
of Minnesota and Iowa with respect to a variety of matters, including rates for
intrastate access services, the conditions and quality of service and accounting
methods. Rates for local telephone service are not established directly by
regulatory authorities, but their authority over other matters limits the
Company's ability to implement rate increases. In addition, the regulatory
process inherently restricts the Company's ability to immediately pass cost
increases along to customers unless the cost increases are anticipated and the
rate increases are implemented prospectively.
5
State regulators are considering access charge reform. In Minnesota a docket has
been opened to reduce the access charges paid to the Company by inter-exchange
carriers, but no action took place in 2003. The Company cannot estimate the
effect on intrastate access revenues of any future changes.
These regulatory changes are not expected to have a material effect on the
Company's revenues in 2004.
The Company and its subsidiaries anticipate no material effects on their capital
expenditures, earnings or competitive position because of laws relating to the
protection of the environment.
COMPETITION
- -----------
As a result of the Telecommunications Act of 1996, telephone companies no longer
have an exclusive franchise service area. Under the law, competitors may offer
telephone service to the Company's customers and request access to the Company's
local network facilities. The law also permits existing telephone companies to
offer telephone service outside their existing franchise service area. The law
includes universal service provisions, interconnection requirements, and rules
mandating how competition will be implemented. The FCC and state regulatory
agencies are responsible for establishing rule making procedures to implement
the law. The rule making procedures are not complete and a number of court cases
have already been filed challenging various aspects of the rules and procedures.
Until the rule making procedures are complete and the court issues settled, the
Company cannot predict how the new law will affect its business.
Since the mid-1990's, the Company's business strategy has been to position
itself as a "one-stop" telecommunications provider. The Company believes that
its customers value the fact that it is the "local company" whose goal is to
meet the customers' total communications needs. The Company believes that it has
several competitive advantages: its prices and costs are low; its service
quality and reputation are high; its commitment to the communities it services
is unparalleled; its investment in technology is strong, and it has a direct
billing relationship with almost all of the customers in its service
territories.
The long-range effect of competition on the provision of telecommunications
services and equipment will depend on technological advances, regulatory actions
at the state and federal levels, court decisions, and possible additional future
state and federal legislation. The trend resulting from past legislation has
been to expand competition in the telecommunications industry.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-K contains forward-looking statements that are based on
management's current expectations, estimates and projections about the industry
in which the Company operates and management's beliefs and assumptions. Such
forward-looking statements are subject to important risks and uncertainties that
could cause the Company's future actual results to differ materially from such
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and probabilities, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that might cause
differences include:
o increased competition in core business segments which may decrease
market share and or affect the pricing of services or products;
6
o the ability to retain key employees;
o changing market conditions which may affect growth rates in the
industry;
o the ability to secure financing for future expansion and operations;
o the ability to improve operations with new technologies;
o the investment in technological innovations which may affect future
capital needs;
o the continuation of historical trends;
o the economy in general;
o the future of the communications industry and communications services;
o the effect of legal and regulatory changes which may have an effect on
business;
o sufficient cash generation from current operations to fund future
liquidity needs; and,
o other risks and uncertainties which may affect 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. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they were
made. Except as otherwise required by law, the Company undertakes no obligation
to update any of its forward-looking statements for any reason.
EMPLOYEES
- ---------
As of December 31, 2003, the Company had 70 full-time equivalent employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Set forth below are the names, ages and positions of the executive officers of
the Company as of March 1, 2004.
NAME AND AGE POSITION
---------------------------- ---------------------------------------------
BILL OTIS President and Chief Executive Officer
(46) - New Ulm Telecom, Inc.
BARBARA BORNHOFT Vice-President and Secretary
(47) - New Ulm Telecom, Inc.
NANCY BLANKENHAGEN Interim Chief Financial Officer and Treasurer
(43) - New Ulm Telecom, Inc.
The officers of the Company are elected annually and serve at the discretion of
the Board of Directors. None of the Company's officers is employed pursuant to a
written employment contract. There are no familial relationships between any
director or executive officer.
Background of Executive Officers
- --------------------------------
Bill Otis has been President and Chief Executive Officer of the Company since
1985. Prior to being President and Chief Executive Officer of the Company he was
the Officer Manager/Controller for New Ulm Telecom, Inc. from 1979 to 1985. Mr.
Otis is also a director of MWH.
Barbara Bornhoft has been Vice President/Secretary of the Company since 1998.
Nancy Blankenhagen has been Interim Chief Financial Officer/Treasurer of the
Company since February 2004. Prior to her appointment, she had been an
accountant for the Company since 1989.
7
ITEM 2. PROPERTIES
- ------------------
The three operating telephone companies own central office equipment. The
central office equipment is used to record, switch and transmit the telephone
calls.
New Ulm's host central office equipment was purchased in 1991 and consists of a
Nortel Networks DMS-100/200 digital switch. New Ulm also has remote switching
sites in three locations: two in New Ulm and one in the city of Courtland. The
equipment at these remote switching sites is housed within specially designed
central office equipment buildings.
Western installed Nortel Networks remote central office equipment in 1996. This
remote switching equipment utilizes the host switch in New Ulm. Western also has
a remote switching site in the city of Sanborn. The equipment at Sanborn is
housed within a specially designed central office equipment building.
Peoples' central office equipment was installed in 1999 and consists of a Nortel
Networks RSC digital remote switch. Peoples leases host switching facilities
from FiberComm, LC of which it owns a 12.6% equity interest.
The Company owns various buildings and related land as follows:
(1) New Ulm Telecom, Inc. owns a building which is located at 400 Second
Street North, New Ulm, Minnesota. It was originally constructed in 1918
with various additions and remodeling through the years. This building
contains business offices and central office equipment. The building
also has warehouse and garage space. This building contains
approximately 23,700 square feet of floor space.
(2) New Ulm Telecom, Inc. constructed a warehouse in 1992 that is located at
225 20th South Street, New Ulm, Minnesota. The warehouse has 10,800
square feet of space and is used primarily as a storage facility for
trucks, generators, trailers, plows and inventory used in outside plant
construction.
(3) New Ulm Telecom, Inc. has three remote central office buildings that are
located on the north side of New Ulm, the south side of New Ulm, and in
Courtland. These buildings contain central office equipment that remote
off of New Ulm's main central office equipment.
(4) New Ulm Telecom, Inc. owns two towers and the land on which they are
constructed. One is located north/northwest of the city of New Ulm along
Highway 14 in Nicollet County, and the other is located north of St.
George, Minnesota.
(5) New Ulm Telecom, Inc. owns land located at the corner of 7th Street
South and Valley Street in New Ulm, Minnesota. This lot is utilized as
storage for poles and cable inventory and contains approximately 5,000
square feet of fenced-in storage area.
(6) New Ulm Telecom, Inc. leases a building located at 27 North Minnesota,
New Ulm, Minnesota. The building contains approximately 14,000 square
feet of space and is used primarily as a retail location housing
customer support services and our corporate business office.
(7) New Ulm Telecom, Inc. owns a building located at 137 E. 2nd Street,
Redwood Falls, Minnesota. This building contains business offices and
central office equipment. This building contains approximately 1,540
square feet of floor space.
(8) New Ulm Telecom, Inc. has three remote central office buildings in
Redwood Falls, Minnesota that are located at 1105 South Mill Street, 220
Veda Drive and 620 Walnut Street. These buildings contain central office
equipment that remote off of New Ulm's main central office equipment.
8
(9) Western Telephone Company owns a building at 22 South Marshall,
Springfield, Minnesota. This building contains the business office and
central office equipment. This building contains approximately 2,100
square feet of floor space.
(10) Western Telephone Company has a building in Sanborn, Minnesota, which
contains central office equipment that remotes off of Western's central
office equipment.
(11) Western Telephone Company owns a warehouse located at 22 South Marshall,
Springfield, Minnesota. This building is used as a storage facility for
vehicles, other work equipment and inventory used in outside plant
construction. This building contains approximately 3,750 square feet of
space.
(12) Peoples Telephone Company owns a building at 221 Main Street, Aurelia,
Iowa that houses the business office, central office equipment and cable
television headend equipment. The building contains approximately 1,875
square feet of floor space.
(13) Peoples Telephone Company owns a building that is adjacent to its main
office building at 217 Main Street, Aurelia, Iowa. This building is
available to expand the present main office building. The building
contains approximately 1,875 square feet of floor space.
(14) Peoples Telephone Company owns a warehouse, including office, building
at 133 1/2 Main Street, Aurelia, Iowa, that contains approximately 1,100
square feet of warehouse space and 525 square feet of office space.
(15) Peoples Telephone Company also owns a vacant lot at 121 Main Street,
Aurelia, Iowa, that is 25' x 100'.
In addition, New Ulm, Western and Peoples own the lines, cables and associated
outside physical plant utilized in providing telephone and cable television
service in their service areas.
The Phonery owns internet equipment and equipment leased to subscribers such as
telephone sets and other similarly used instruments.
The Company believes that its property is suitable and adequate to provide the
necessary services and believes all properties are adequately insured. Note 6 to
the financial statements, found on page 38 of this document, describes the
mortgages and collateral relating to the above properties, while Note 2 to the
financial statements, found on page 35 of this document describes the Company's
depreciation policy.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There is no material litigation pending or threatened involving the Registrant
or any of its subsidiaries at this time in any court, nor are there any
proceedings known to be contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Form 10-K.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- --------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
Our common stock is traded on the OTC Bulletin Board under the symbol "NULM."
The table below sets forth the approximate high and low bid prices for our
common stock for the periods indicated as reported by the OTC Bulletin Board.
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
Common Stock
--------------------------
High Low
---------- ---------
2003:
1st quarter $ 10.25 $ 7.65
2nd quarter $ 10.10 $ 8.15
3rd quarter $ 10.10 $ 9.10
4th quarter $ 9.75 $ 8.80
2002:
1st quarter $ 12.50 $ 11.37
2nd quarter $ 11.40 $ 11.35
3rd quarter $ 11.00 $ 11.00
4th quarter $ 10.45 $ 9.25
Record Holders
- --------------
As of December 31, 2003, there were approximately 1,329 holders of record of the
Company's common stock.
Dividends
- ---------
Dividends were declared in 2003, 2002 and 2001.
Dividends were $.33 in 2003, $.33 in 2002 and $.33 per share in 2001. The
dividends per share data have been restated to reflect the three-for-one stock
split effective January 10, 2002. The Board of Directors reviews dividend
declarations based on anticipated earnings, capital requirements and the
operating and financial condition of the Company.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Selected Income Statement Data for the Company (consolidated):
Year Ended December 31
----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ---------------- --------------- ---------------- ----------------
Operating Revenues $ 15,841,037 $ 14,334,243 $ 13,334,822 $ 12,485,337 $ 11,757,082
Operating Expenses 11,867,260 10,753,858 9,406,647 8,145,769 7,106,612
Operating Income 3,973,777 3,580,385 3,928,175 4,339,568 4,650,470
Other Income 2,393,527 3,043,946 810,702 829,696 1,132,540
Income Taxes 2,554,550 2,634,350 1,970,639 2,206,137 2,453,587
Net Income 3,812,754 3,989,981 2,768,238 2,963,127 3,329,423
Basic and Diluted Net Income
Per Share .75 .78 .54 .57 .64
Dividends Per Share .33 .33 .33 .33 .32
10
Selected Balance Sheet Data:
Year Ended December 31
----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ---------------- --------------- ---------------- ----------------
Current Assets $ 5,459,456 $ 5,226,671 $ 7,202,902 $ 4,182,561 $ 4,235,750
Current Liabilities 4,214,536 5,369,847 3,010,930 2,708,359 2,013,263
Working Capital 1,244,920 (143,176) 4,191,972 1,474,202 2,222,487
Total Assets 53,330,534 53,311,383 42,851,780 34,958,288 27,027,069
Long-Term Debt 20,145,630 22,667,091 17,566,666 9,857,333 3,300,000
Stockholders' Equity 26,238,457 24,130,220 21,844,756 21,766,504 20,552,582
Book Value Per Share 5.13 4.72 4.27 4.19 3.95
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS FOR 2003, 2002 AND 2001
- ---------------------------------------------
As described in Item 1 of this Form 10-K, the Company operates five business
segments; the majority of its operations consist of four segments that provide
telephone and related ancillary services, and cable television services to
several communities in Minnesota and Iowa. A fifth segment has a 9.88% interest
in MWH and records this investment on the equity method of accounting. The
equity method is used due to the influence the Company has over the operations
and management of this investment.
NON-GAAP MEASUREMENTS
- ---------------------
In addition to the GAAP results provided in this Form 10-K, we have provided
non-GAAP measurements including discussion of operating income and net income
adjusted for unusual items and EBITDA. EBITDA represents operating income plus
depreciation and amortization expense (noncash expenses). EBITDA, which is not a
measure of financial performance or liquidity under United States GAAP, is
provided because the Company understands that such information is used by
certain investors when analyzing the financial position and performance of the
Company. These measures do not replace the presentation of our GAAP financial
results. Because of the variety of methods used by companies and analysts to
calculate EBITDA, and the fact that EBITDA calculations may not accurately
measure a company's ability to meet debt service requirements, caution should be
used in relying on any EBITDA presentation. These non-GAAP measures are used for
no-purpose other than to provide supplemental information to our investors in
analyzing our performance.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
2003 Compared to 2002
- ---------------------
o 2003 consolidated revenues were $15,841,000, compared with $14,334,000
in 2002, an increase of $1,507,000 or 10.5%. The New Ulm segment
provided $1,495,000 of the increase with the continued success of its
new service offerings: digital video and DSL, which began in 2001, and
the introduction of competitive local exchange services in Redwood
Falls, Minnesota. New Ulm invested $3,595,000 in its infrastructure in
2003, which allowed it to enhance its local network, offer new
services to its subscribers and expand its service territory to
Redwood Falls, Minnesota. All other segments had no significant
change.
o 2003 consolidated operating expenses were $11,867,000, compared with
$10,754,000 in 2002, an increase of $1,113,000 or 10.3%. The New Ulm
segment provided $1,274,000 of the total increase, of which $620,000
related to depreciation expense with the remaining increase due to the
introduction of CLEC services in Redwood Falls, Minnesota. Total
company write-offs of bankrupt carrier receivables in fiscal year 2002
were $400,000.
11
o 2003 consolidated net income was $3,813,000 compared with $3,990,000
in 2002. The decrease in consolidated net income was $177,000 or 4.4%.
Consolidated net income in 2002 included a pretax gain of $1,157,000
($697,000 after taxes) due to the dissolution of two corporations
within the Peoples Telephone segment. If this gain were excluded from
2002 operating results, consolidated net income from 2003 would have
increased $520,000 or 15.8% from 2002 consolidated net income. This
increase was attributed to increased profitability of the Company's
telephone operations including its non-regulated offerings such as DSL
and video services, a reduction in interest expense due to reduction
of principal amounts outstanding and an increase in other investment
income.
2002 Compared to 2001
- ---------------------
o 2002 consolidated revenues were $14,334,000, compared with $13,335,000
in 2001, an increase of $999,000 or 7.5%. The New Ulm segment provided
$940,000 of the increase with the continued success of its new service
offerings: digital video and DSL, which began in 2001, and the
introduction of competitive local exchange services in Redwood Falls,
Minnesota. The Company invested $7,800,000 in its infrastructure in
2002, which allowed it to enhance its local network, offer new
services to its subscribers and expand its service territory to
Redwood Falls, Minnesota. All other segments had no significant
change.
o 2002 consolidated operating expenses were $10,754,000, compared with
$9,407,000 in 2001, an increase of $1,347,000 or 14.3%. The New Ulm
segment provided $1,061,000 of the increase, with $619,000 of the
increase attributed to depreciation expense and $246,000 of the
increase due to the write-off of inter-exchange carrier receivables
due to the bankruptcies of WorldCom and Global Crossing, and $196,000
of the increase reflecting the additional general and administrative
expenses associated with the steps taken by the Company to compete in
all aspects of communications services and to provide exceptional
customer service for our complete array of products and services and
the introduction of CLEC services in Redwood Falls, Minnesota. The
Western and Peoples segments also saw significant increases in
operating expenses due to the write-offs of inter-exchange carrier
receivables totaling $154,000 for these two sectors. Total Company
write-offs of bankrupt carrier receivables in fiscal year 2002 were
approximately $400,000.
o 2002 consolidated net income was $3,990,000 compared with $2,768,000
in 2001. The increase in consolidated net income was $1,222,000 or
44.2%. The increase was attributed to the pretax gain of $1,157,000
($697,000 after-tax) of the dissolution of the two corporations within
the Peoples segment and the pre-tax increase in partnership income
from MWH of $1,580,000 ($950,000 after-tax) due to MWH's increase in
profitability and the direct ownership increase in MWH attributable to
the dissolution of the two cellular corporations in Iowa and the
additional units purchased at the time of that dissolution.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
- -----------------------------------------
NEW ULM TELECOM OPERATIONS
New Ulm revenues represented 60.4% of 2003 consolidated operating revenues.
Revenues are primarily earned by providing approximately 13,990 customers access
to New Ulm Telecom's local network, and by providing inter-exchange access for
long distance network carriers. The New Ulm segment also earns revenue through
billing and collecting for various long distance companies, directory
advertising and providing video services (a new venture undertaken in 2001) to
its subscribers. The New Ulm segment also began offering CLEC services in the
City of Redwood Falls, Minnesota in September 2002. Total New Ulm segment
revenues have grown 31.7% since 2001. All information contained in this table is
before intercompany eliminations.
12
2003 2002 2001
--------------- ---------------- ----------------
Operating Revenues:
Local Network $ 3,318,717 $ 3,067,035 $ 2,751,689
Network Access 4,754,992 4,203,193 3,970,146
Other 2,053,117 1,361,520 965,956
--------------- ---------------- ----------------
Total Operating Revenues 10,126,826 8,631,748 7,687,791
--------------- ---------------- ----------------
Cash Operating Expenses 5,240,619 4,586,304 4,062,075
Noncash Operating Expenses 3,589,200 2,969,242 2,431,752
--------------- ---------------- ----------------
Total Operating Expenses 8,829,819 7,555,546 6,493,827
--------------- ---------------- ----------------
Operating Income 1,297,007 1,076,202 1,193,964
--------------- ---------------- ----------------
Net Income 570,723 135,360 179,585
--------------- ---------------- ----------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) 4,886,207 4,045,444 3,625,716
Capital Expenditures $ 3,525,192 $ 6,828,746 $ 6,723,454
New Ulm's total revenues increased $1,495,000 or 17.3% in 2003 over 2002 and
$944,000 or 12.3% in 2002 over 2001.
Local network revenue increased in the New Ulm segment by $252,000 or 8.2% in
2003 over 2002 and $315,000 or 11.5% in 2002 over 2001. The number of access
lines served increased 3.7% in 2003 over 2002, as compared to a decrease of 1.1%
in 2002 over 2001. The increase in access lines in 2003 was primarily due to
growth in the segments CLEC activity in Redwood Falls which was started in late
2002. The decrease in access lines in 2002 over 2001 was primarily due to the
roll out of DSL service in 2002. DSL is used to provide both traditional voice
connectivity and access to high-speed internet service over the same facilities,
which eliminates the need for customers to have second lines dedicated solely to
providing internet service. Growth in the segments basic voice service revenue
for CLEC customers accounted for approximately $156,000 and $11,000 of the 2003
and 2002 increase in local network revenue. In addition, charges for the voice
portion of DSL service were responsible for $114,000 and $170,000 of the 2003
and 2002 increase in local network revenues respectively. Overall, the revenue
increases were accomplished with promotion and packaging of vertical services,
most notably, DSL, and focused marketing to potential customers in Redwood
Falls. In 2002, the New Ulm segment also entered into a number of
interconnection agreements with wireless providers, which allows these providers
access to its customers at the local service level, which increased local
network revenues by $56,000 for 2002 over 2001. In 2002, the segment also
provided enhanced 911 services to subscribers which enabled the segment to
increase revenues by $38,000 in 2002 over 2001. Both of these revenue streams
remained fairly constant from 2003 to 2002.
Network access revenue increased $552,000 or 13.1% in 2003 over 2002 and
$233,000 or 5.9% in 2002 over 2001. Access minutes in 2003 increased by 0.2%
over 2002 and 2002 decreased by 7.9% over 2001. The increases in network access
revenue were significant considering the overall decrease in minutes of use over
the last two years and the negative effects of network access pricing, a common
industry trend. Overall, the trend of decreasing minutes of use the ILEC
industry has been experiencing was mostly offset in the New Ulm segment by the
increase in minutes of use generated by the segments CLEC activities in Redwood
Falls. The New Ulm segment has invested over $17,000,000 in capital expenditures
since 2001. These capital expenditures, enhancing this segment's infrastructure,
have allowed New Ulm to receive additional settlements from the National
Exchange Carrier Association (NECA). New Ulm is eligible for high-cost loop
funding from NECA which contributed an additional $564,000 to access revenues in
2003 over 2002 and $226,000 in 2002 over 2001.
13
Other operating revenues increased $692,000 or 50.8% in 2003 over 2002 and
increased $396,000 or 41.0% in 2002 over 2001. Due to the infrastructure
enhancements that have taken place since 2000, the New Ulm segment has been able
to begin offering video services over the existing infrastructure. The video
product was responsible for $415,000 of increased revenues in 2003 as compared
to 2002 and $426,000 of the increase for 2002 over 2001. The CLEC activity in
Redwood Falls provided additional revenues of $222,000 in 2003 over 2002 and
$20,000 in 2002 over 2001 primarily from the high-speed internet portion of DSL
service. The take back of billing and collection services by inter-exchange
carriers resulted in a loss of revenues from 2003 to 2002 of $15,000, and
$80,000 for 2002 over 2001 for billing and collection revenues.
Cash operating expenses increased $654,000 or 14.3% in 2003 over 2002 and
$524,000 or 12.9% in 2002 over 2001. Increases in the cash operating expenses
for the CLEC activity in Redwood Falls accounted for $599,000 of the total
increases in 2003 over 2002 and $163,000 in 2002 over 2001. Cash operating
expenses in 2002 also included the write-off of bankrupt carrier receivables
totaling $246,000. The remaining increases were due to the increasing array of
services offered, such as video and DSL. The New Ulm segment realized the need
to compete in all aspects of communication services. This realization motivated
the segment to enhance its awareness of customer satisfaction, additional
services (video and DSL), aggressive marketing (brand recognition) and solutions
for our customers' communication needs. The Company is striving for cost
efficiencies and technological improvements to maintain its operating margins in
the New Ulm Telecom segment.
Noncash operating expenses increased $620,000 or 20.9% in 2003 over 2002 and
$537,000 or 22.1% in 2002 over 2001. Depreciation expense was the main cause of
these increases. The increase in depreciation expense was reflective of the new
investments of over $17,000,000 in the segment's infrastructure as mentioned
above. These investments have allowed the New Ulm segment to offer video and DSL
services, as well as expand its service territory to Redwood Falls, Minnesota.
These increases were offset by a $96,000 decrease in the amortization of
goodwill expense in 2002 as a result of adopting SFAS No. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS", effective January 1, 2002.
The New Ulm segment capital expenditures for 2003 were $3,525,000. The single
largest construction project consisted of building out facilities to provide
video and DSL in the rural areas surrounding New Ulm. The segment had capital
projects of $6,829,000 in 2002 due to building facilities in Redwood Falls for
CLEC activities and $6,723,000 in 2001 due to the overbuild of the city of New
Ulm, allowing the segment to offer video and DSL to its customers utilizing the
same infrastructure. The segment's capital budget for 2004 is approximately
$2,300,000.
WESTERN TELEPHONE COMPANY OPERATIONS
Western revenues represented 14.3% of 2003 consolidated operating revenues.
Revenues are primarily earned by providing approximately 2,430 customers access
to its local network, and in providing inter-exchange access for long distance
network carriers. The Western segment also earns revenue through billing and
collecting for various long distance companies, directory advertising, cable
television service, and internet access to its subscribers. Total Western
segment revenues have grown 2.4% since 2001. All information contained in this
table is before intercompany eliminations.
2003 2002 2001
--------------- ---------------- ----------------
Operating Revenues:
Local Network $ 490,468 $ 497,559 $ 383,139
Network Access 1,435,741 1,461,871 1,565,633
Other 470,933 372,792 392,360
--------------- ---------------- ----------------
Total Operating Revenues 2,397,142 2,332,222 2,341,132
--------------- ---------------- ----------------
Cash Operating Expenses 791,487 832,794 677,895
Noncash Operating Expenses 421,361 390,469 385,197
--------------- ---------------- ----------------
Total Operating Expenses 1,212,848 1,223,263 1,063,092
--------------- ---------------- ----------------
Operating Income 1,184,294 1,108,959 1,278,040
--------------- ---------------- ----------------
Net Income 761,024 689,545 798,815
--------------- ---------------- ----------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) 1,605,655 1,499,428 1,663,237
Capital Expenditures $ 427,415 $ 716,534 $ 181,906
14
Western revenues increased $65,000 or 2.8% in 2003 as compared to 2002, as
compared to a decrease of $9,000 or .4% in 2002 over 2001.
Local network revenue decreased in the Western segment by $7,000 or 1.4% for
2003 over 2002 as compared to an increase of $114,000 or 29.9% for 2002 over
2001. The overall increase over the three years are significant considering the
number of access lines decreased 2.2% in 2003 over 2002 and decreased 2.1% in
2002 over 2001. The overall revenue increases were accomplished with promotion
and packaging of vertical services, most notably, the introduction of DSL in
2002, to supplement basic line charges. DSL, which is used to provide both
traditional voice connectivity and access to high-speed internet, was
responsible for approximately $2,000 and $50,000 of the 2003 and 2002 increase.
In 2002, the Company also entered into a number of interconnection agreements
with wireless providers, which allows these providers access to our customers at
the local service level. The year ending 2002 realized an increase of $50,000 in
revenue due to the billing of wireless reciprocal compensation as compared to a
decrease in this revenue of approximately $7,000 in 2003.
Network access revenue decreased $26,000 or 1.8% in 2003 over 2002 and $104,000
or 6.6% in 2002 over 2001. Access minutes decreased 8.8% in 2003 over 2002 and
5.2% in 2002 over 2001. The negative effects of network access pricing, a common
industry trend, will likely erode any potential increases in volume of switched
minutes of use, minimizing future increases in network access revenue. The
continued utilization of the internet (e-mail, voice-over-IP) and wireless
services will continue to decrease the volume of switched minutes of use. The
decrease in revenue due to decreasing minutes of use was somewhat offset by an
increase in universal service funds Western received which increased $24,000 in
2003 over 2002 and $13,000 in 2002 over 2001.
Other revenue which consists primarily of regulated revenues such as billing and
collection for inter-exchange carrier and nonregulated revenues such as internet
access and cable television service increased $98,000 or 26.3% in 2003 over 2002
as compared to a decrease of $20,000 or 5.0% in 2002 as compared to 2001. The
increase in 2003 was primarily due to the first full year of offering DSL and
expanded cable television services in Western's service area. The 2002 decrease
from 2001 was primarily due to a continued decline in billing and collections
revenue the segment receives from inter-exchange carriers which represented a
decline of $12,000 in 2003 and $13,000 in 2002.
Cash operating expenses decreased $41,000 or 5.0% in 2003 over 2002 and
increased $154,000 or 22.8% in 2002 over 2001. The single largest reason for the
increase in cash operating expenses in 2002 and subsequent decrease in 2003 was
the write-off of inter-exchange carrier receivables of $115,000 in 2002 due to
the bankruptcy of two inter-exchange carriers. In addition, cash operating
expenses have increased due to the number of services offered including the
expansion of DSL service to Western's Springfield exchange in 2003. The Western
segment recognized the need to compete in all aspects of communication services.
This realization has motivated the segment to enhance its awareness of customer
satisfaction, additional services (DSL), aggressive marketing (brand
recognition) and solutions for our customers' communication needs. The Company
is striving for cost efficiencies and technological improvements to maintain its
operating margins in the Western segment.
Noncash operating expenses increased $31,000 or 7.9% in 2003 over 2002 and
$5,000 or 1.4% in 2002 over 2001. Depreciation was the main cause of these
increases. These increases were reflective of the steady amount of capital
investments Western has made over the past three years. The 2002 increase was
offset by an $18,000 decrease in the amortization of goodwill expense, as
Western stopped amortizing goodwill under the new accounting standard SFAS No.
142, "GOODWILL AND OTHER INTANGIBLE ASSETS", effective January 1, 2002.
15
The Western segment's capital expenditures for 2003 were $427,000, in part due
to the expansion of DSL and video services to Springfield, Minnesota. The
segment had capital expenditures of $717,000 in 2002, which in part were related
to construction of a fiber route from Western's Sanborn exchange to Redwood
Falls. The segment had capital projects of $182,000 in 2001. The segments
capital budget for 2004 is approximately $482,000.
PEOPLES TELEPHONE COMPANY OPERATIONS
Peoples' revenues represented 6.2% of 2003 consolidated operating revenues.
Revenues are primarily earned by providing approximately 860 customers access to
its local network, and in providing inter-exchange access for long distance
network carriers. The Peoples segment also earns revenue through billing and
collecting for various long distance companies, directory advertising, cable
television service, and internet access to its subscribers. All information
contained in this table is before eliminations.
2003 2002 2001
--------------- ---------------- ----------------
Operating Revenues:
Local Network $ 162,421 $ 150,852 $ 141,654
Network Access 637,497 615,791 690,392
Other 240,953 230,984 210,698
--------------- ---------------- ----------------
Total Operating Revenues 1,040,871 997,627 1,042,744
--------------- ---------------- ----------------
Cash Operating Expenses 504,446 448,508 417,076
Noncash Operating Expenses 144,909 148,950 135,024
--------------- ---------------- ----------------
Total Operating Expenses 649,355 597,458 552,100
--------------- ---------------- ----------------
Operating Income 391,516 400,169 490,644
--------------- ---------------- ----------------
Net Income 619,032 1,347,423 410,652
--------------- ---------------- ----------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) 536,425 549,119 625,668
Capital Expenditures $ 61,780 $ 118,340 $ 206,403
Peoples' revenues increased $43,000 or 4.3% in 2003 over 2002 as compared to
decrease of $45,000 or 4.3% in 2002 over 2001.
Local network revenue increased in the Peoples segment by $12,000 or 7.6% in
2003 over 2002 and $9,000 or 6.5% in 2002 over 2001. The increases are
significant considering the number of access lines served decreased 3.6% in 2003
over 2002 and decreased 2.3% in 2002 over 2001. The revenue increases were
accomplished with promotion and packaging of vertical services, most notably,
the introduction of DSL, to supplement basic line charges. DSL, which is used to
provide both traditional voice connectivity and access to high-speed internet,
was responsible for approximately $14,000 of the 2003 increase and $12,000 of
the 2002 increase, which was slightly offset by a reduction in basic local
service revenues for traditional voice service as customers subscribing to DSL
service no longer needed a second line devoted to internet access.
Network access revenue increased $22,000 or 3.5% in 2003 over 2002 and decreased
$75,000 or 10.8% in 2002 over 2001. Access minutes decreased 1.0% in 2003 over
2002 and decreased 6.1% in 2002 over 2001. The negative effects of network
access pricing, a common industry trend, will erode any potential increases in
volume of switched minutes of use, minimizing future increases in network access
revenue. The continued utilization of the internet (e-mail, voice-over-IP) and
wireless services will continue to decrease the volume of switched minutes of
use.
16
Other revenues which consist primarily of regulated revenues such as billing and
collections for inter-exchange carriers and nonregulated revenues such as
internet access and cable television services increased $10,000 or 4.3% in 2003
over 2002 and $20,000 or 9.6% in 2002 over 2001. The increases were due
primarily to increased penetration of customers for video and DSL services.
Cash operating expenses increased $56,000 or 12% in 2003 over 2002 and $31,000
or 7.5% in 2002 over 2001. Total cash operating expenses in 2002 included the
write-off of carrier receivables of $39,000 due to the bankruptcy of two
inter-exchange carriers. Cash operating expenses have increased due to the
number of services offered. The Peoples segment recognized the need to compete
in all aspects of communication services. This realization has motivated the
segment to enhance its awareness of customer satisfaction, additional services
(DSL), aggressive marketing (brand recognition) and solutions for our customer's
communication needs. The Company is striving for cost efficiencies and
technological improvements to maintain its operating margins in the Peoples
segment.
Noncash operating expenses decreased $4,000 or 2.7% in 2003 over 2002 as
compared to an increase of $14,000 or 10.3% in 2002 over 2001. Depreciation was
the main cause of these changes. The overall increase between 2001 and 2003 was
reflective of the steady amount of capital investments in the segments property
and equipment offset by some of the segments older cable television equipment
becoming fully depreciated in 2003.
The Peoples segment had a pretax gain of $1,157,000 ($697,000 net of taxes) in
2002 on the dissolutions of two corporations which had owned units of Midwest
Wireless Holdings L.L.C.
The Peoples segment capital expenditures for 2003 were $62,000. The single
largest construction project consisted of building facilities in the Peoples
service area to offer advanced calling features and access to DSL. The segment
had capital projects of $118,000 in 2002 and $206,000 in 2001.
NEW ULM PHONERY OPERATIONS
The Phonery represented 14.1% of 2003 consolidated operating revenues. Revenues
are earned primarily by sales, installation and service of business telephone
systems and data communications equipment and access to internet services in the
service areas served by the New Ulm segment and the Western segment (New Ulm,
Redwood Falls, Springfield and Sanborn, Minnesota). In addition, the segment
leases network capacity to provide additional network access revenues. This
segment's expertise is the quality installation and maintenance of wide area
networking, local networking and transport solutions in communication to end
user customers. All information contained in this table is before eliminations.
2003 2002 2001
--------------- ---------------- ----------------
Operating Revenues $ 2,367,533 $ 2,081,868 $ 1,895,268
--------------- ---------------- ----------------
Cash Operating Expenses 1,354,597 1,098,341 1,021,336
Noncash Operating Expenses 133,435 157,588 123,182
--------------- ---------------- ----------------
Total Operating Expenses 1,488,032 1,255,929 1,144,518
--------------- ---------------- ----------------
Operating Income 879,501 825,939 750,750
--------------- ---------------- ----------------
Net Income 558,793 540,484 482,027
--------------- ---------------- ----------------
Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) 1,012,936 983,527 873,932
Capital Expenditures $ 117,721 $ 103,179 $ 432,988
17
Phonery revenues increased $286,000 or 13.7% in 2003 over 2002 and $187,000 or
9.8% in 2002 over 2001. The segment saw an increase in the high-speed internet
portion of DSL service in 2003 of approximately $512,000 which was offset by a
decrease in dial-up internet services of approximately $121,000 as customers
switch from slower dial-up service to high-speed DSL service. The remaining
offsetting decrease in revenue in 2003 was due to a decrease in sales and
installation of communications systems and equipment of approximately $92,000.
In 2002, the increase in the high-speed internet portion of DSL service was
$122,000 which was offset by a decrease in dial-up internet service of $59,000.
Cash operating expenses increased $256,000 or 23.3% in 2003 over 2002 and
increased $77,000 or 7.5% in 2002 over 2001. The increases in cash operating
expenses related directly to the increase in DSL customers added over the past
two years. The increase can be attributed to the need to compete in all aspects
of the communication services. This realization has motivated the segment to
enhance its awareness of customer satisfaction, additional services (DSL),
aggressive marketing (brand recognition) and solutions for our customers'
communication needs. Increased emphasis of internet access by our customers has
led to increased customer service hours (24x7 access to support), maintenance of
facilities, marketing and advertising, and the additional need for larger (more
bandwidth) access points. The Company is striving for cost efficiencies and
technological improvements to maintain its operating margins in the Phonery
segment.
Noncash operating expenses decreased $24,000 or 15.3% in 2003 over 2002 and
increased $34,000 or 27.9% in 2002 over 2001. The overall increase for the three
years between 2001 and 2003 was attributable to an increase in depreciation
expense, as the sum of the Phonery's capital investments since 2001 have totaled
$654,000, coupled with some of the segments older equipment becoming fully
depreciated.
The Phonery segment capital expenditures for 2003 were $118,000. Capital
expenditures in this segment consisted of enhancements to the internet delivery
system focusing on quality of service. The segment had capital projects of
$103,000 in 2002, and $433,000 in 2001 due to upgrading of its voicemail system.
CELLULAR INVESTMENT
The Cellular segment has a 9.88%, 9.92% and 7.58% ownership interest in Midwest
Wireless Holdings L.L.C. (MWH) in 2003, 2002 and 2001, respectively. Revenues
and operating income continue to grow as MWH adds customers. Acquisitions by MWH
in Iowa and Wisconsin in 2000 have had a significant impact on revenues and
profitability of MWH. MWH acquired additional properties in Iowa in 2003 which
diluted the Company's ownership slightly. In addition, MWH ceased amortizing
wireless licenses and goodwill from the acquisitions in Iowa and Wisconsin, due
to new accounting standard SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS",
effective January 1, 2002.
In 2003, Cellular income decreased $78,000 or 2.8% over 2002 as compared to an
increase of $1,580,000 in 2002 over 2001. The 2003 decrease was due primarily to
increased depreciation as MWH continues to build-out its network infrastructure.
The 2003 income decreased despite a 10% increase in revenues and a 3.6% increase
in cash operating income in 2003 over 2002 for MWH. The substantial increase in
2002 income was partially due to increased ownership interests purchased in 2002
($373,000 effect) and the fact that MWH ceased amortization of its wireless
licenses and goodwill ($342,000 effect). The remaining increase was due to
overall growth in customers and profitability of MWH in 2002.
18
The Company uses the proportionate method, which applies the Company's ownership
percentage to MWH revenues and expenses for the segment information below.
2003 2002 2001
--------------- ---------------- ----------------
Cellular Investment Income $ 2,710,717 $ 2,788,861 $ 1,208,636
=============== ================ ================
Proportionate Method:
Operating Revenues 17,830,689 16,139,561 10,031,822
--------------- ---------------- ----------------
Cash Operating Expenses 11,766,583 10,290,753 6,206,282
Noncash Operating Expenses 2,270,044 1,916,390 1,750,489
--------------- ---------------- ----------------
Total Operating Expenses 14,036,627 12,207,143 7,956,771
--------------- ---------------- ----------------
Operating Income 3,794,062 3,932,418 2,075,051
--------------- ---------------- ----------------
Net Income $ 2,710,717 $ 2,788,861 $ 1,208,636
--------------- ---------------- ----------------
OTHER INCOME AND INTEREST EXPENSE
Interest expense decreased $44,000 in 2003 over 2002 and $44,000 in 2002 over
2001, excluding the early extinguishment of the Phoenix debt (resulting in a
payment for early retirement of debt for $271,000, which is included in interest
expense in 2002). The decrease can be attributed to continued reduction of
amounts outstanding and a decrease in the interest rate on the Company's debt.
The CoBank loan weighted average interest rate is variable and was 2.62% at
December 31, 2003 and 2.82% at December 31, 2002.
Interest income decreased approximately $36,000 in 2003 over 2002 as compared to
an increase of $100 in 2002 over 2001. The decrease in 2003 was primarily due to
the payoff of a note receivable from an officer in May 2003.
The Company recognized a one-time pretax gain of $1,157,915 in 2002 due to the
dissolution of two cellular corporations held by the Peoples segment.
Other investment income increased $348,000 in 2003 over 2002 as compared to a
decrease of $290,000 in 2002 over 2001. Included in other income is the
Company's 12.6% equity ownership in FiberComm, L.C. The Company recorded $64,000
of investment income from FiberComm, L.C. in 2003 as compared to a loss of
$55,000 in 2002. The loss in 2002 was due to the write-off of carrier
receivables (most notably Global Crossing and WorldCom) by FiberComm, L.C. In
2001, the income was $175,000. Also included in other investment income was the
patronage credit the Company earns from CoBank as part of our debt agreements
with them. The patronage earned in 2003 was $154,000 as compared to $82,000 in
2002. The remainder of the 2002 difference was due to the write-down of certain
CATV assets which were upgraded with new digital video equipment in 2002.
FACTORS AFFECTING FUTURE PERFORMANCE
The Company's future results of operation and other forward-looking statements
are subject to risks and uncertainties, including, but not limited to, the
effects of deregulation in the telecommunications industry as a result of the
Telecommunications Act of 1996. Such forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially from such statements and the Company disclaims any obligation to
update or revise any forward-looking statements based on the occurrence of
future events or the receipt of new information. See "Forward-Looking
Statements" in Item 1 of this Form 10-K.
19
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS FROM OPERATIONS
Cash generated by operations for the year ended December 31, 2003 was $8,110,000
as compared to $5,767,000 in 2002 and $6,232,000 in 2001.
The 2003 increase was driven primarily by an increase in operating income of
$393,000 in 2003 as compared to 2002 despite an increase in depreciation and
amortization expense (non-cash) of $623,000. This was primarily due to
efficiencies achieved in 2003 as it was the second year of CLEC activities in
Redwood Falls, Minnesota, and an increase in income taxes deferred to future
periods due to changes in federal income tax lives and methods for depreciation
of fixed assets which allow the Company to deduct these assets for tax purposes
quicker than depreciated for financial statement purposes.
The 2002 decrease in operating cash flows from 2001 was primarily due to the
$1,158,000 non-cash gain on Dissolution of Cherokee Cellular, Inc. and Three
Lakes Cellular, Inc. Amounts receivable from inter-exchange carriers also
increased due to delayed payments from some of the larger inter-exchange
carriers who were going through bankruptcy proceedings, such as MCI/WorldCom.
Cash generated by operations continues to be the Company's primary source of
funding for existing operations, capital expenditures, debt service, and
dividend payments to shareholders. At December 31, 2003, the Company had working
capital of $1,245,000 as compared to a deficit in working capital of $143,000 at
December 31, 2002. Cash and cash equivalents as December 31, 2003 were
$2,201,000 as compared to $1,914,000 at December 31, 2002.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company operates in a capital intensive business. The Company is continuing
to upgrade its local networks for changes in technology to provide the most
advanced services to its customers. Additions to property, plant and equipment
were $4,132,000 in 2003, $7,767,000 in 2002 and $7,545,000 in 2001. The 2003
additions were financed through cash flows from operations. The additions in
2002 and 2001 were financed partially through operations and partially through
advances on the Company's revolving credit facility with CoBank. The Company
expects plant additions to total $2,770,000 for 2004, which are expected to be
financed from operations. In 2002, the Company also expended $4,106,000 for
additional ownership units in Midwest Wireless Holdings L.L.C.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company advanced long term debt of $9,178,000 in 2002 and $8,576,000 in 2001
from its revolving credit facility with CoBank. These advances were used to help
finance its additions to property plant and equipment primarily for the
build-out of its CLEC network in Redwood Falls, Minnesota, and expanding its
CATV offerings in New Ulm, Minnesota. The Company also utilized these funds to
retire previously issued debt from Phoenix Home Life Insurance Company of
$2,567,000 in 2002 and purchase additional ownership units of Midwest Wireless
Holdings L.L.C.
20
DIVIDENDS
The Company paid dividends of $1,705,000 in 2003 and 2002 and $1,709,000 in
2001. This was a dividend of $.33 per share for the past three years. The
Company's reinvested growth in equity has come about while maintaining dividends
to shareholders. The Board of Directors reviews dividend declarations based on
anticipated earnings, capital requirements and the operating and financial
condition of the Company. Paying at the existing level of dividends is not
expected to negatively impact the liquidity of the Company.
SHARE REPURCHASE PROGRAM
The Company's Board of Directors authorized management to repurchase 26,760
(equivalent of 80,280 shares post split) shares of Company common stock through
private transactions in 2001 for $981,000. The Company repurchased no shares in
2002 or 2003. At this time, the Company does not anticipate any significant
share repurchases in 2004.
LONG TERM OBLIGATIONS
The Company's long-term obligations consist primarily of debt issued from
CoBank. In December 2001, the Company refinanced its revolving credit facilities
with CoBank with a $15 million term loan and a reducing revolving credit
facility of $10 million (total debt outstanding under both facilities at
December 31, 2001 was $17,566,666). Interest on both CoBank loans is variable
based on CoBank's reference rate. The interest rates on both CoBank loans were
2.62% at December 31, 2003 and 2.82% at December 31, 2002. The Company also has
an unsecured loan with the city of Redwood Falls, Minnesota that bears interest
at 5%.
The following table details the Company's contractual obligations, along with
the cash payments due each period (excluding interest expense).
Principal Payment Due by Period
------------------------------------------------------------------------------------------
Less Than After
Total 1 Year 2005-2007 2008-2010 2010
---------------- -------------- -------------- -------------- --------------
Contractual Obligations:
Long-Term Debt:
CoBank Reducing
Revolving Credit Facility $ 12,000,000 $ 1,500,000 $ 4,500,000 $ 3,000,000 $ 3,000,000
CoBank Reducing
Revolving Credit Facility 8,000,000 1,000,000 3,000,000 2,000,000 2,000,000
Unsecured Note Payable 145,630 14,845 49,200 37,088 44,497
---------------- -------------- -------------- -------------- --------------
Totals $ 20,145,630 $ 2,514,845 $ 7,549,200 $ 5,037,088 $ 5,044,497
================ ============== ============== ============== ==============
LIQUIDITY OUTLOOK
The Company has not conducted a public equity offering. It operates with
original equity capital, retained earnings and additions to indebtedness in the
form of senior debt and bank lines of credit. The Company believes its debt to
total capital proportions of 40 to 60 percent will be adequate for the
foreseeable future.
By utilizing cash flow from operations and current cash balances, the Company
feels it has adequate resources to meet its anticipated operating, capital
expenditures, and debt service requirements.
21
EFFECTS OF INFLATION
It is the opinion of management that the effects of inflation on operating
revenues and expenses over the past three years have not been significant.
Management anticipates that this trend will continue in the near term.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires us to make judgments, assumptions, and estimates that affect the
amounts reported in our financial statements and accompanying notes. Note 1 to
the consolidated financial statements describes the significant accounting
policies and methods used in preparing the financial statements. The Company
considers the accounting policies described below to be the most critical
accounting policies because these policies are impacted significantly by
estimates we make. The Company bases its estimates on historical experience or
various assumptions that are believed to be reasonable under the circumstances,
and the results from the basis for making judgments about the reported values of
assets, liabilities, revenues and expenses. Actual results may materially differ
from these estimates.
Valuation of Long-Lived Assets:
- -------------------------------
In fiscal 2002, the Company adopted SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS". Under this statement, the Company would
record impairment losses on long-lived assets used in operations when events and
circumstances indicate the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amounts of those assets. In assessing the recoverability of long-lived assets,
the Company compares the carrying value to the undiscounted future cash flows
the assets are expected to generate. If the total of the undiscounted future
cash flows is less than the carrying amount of the assets, the Company would
write down such assets based on the excess of the carrying amount over the fair
value of the assets. Fair value is generally determined by calculating the
discounted future cash flows expected from those assets. Changes in these
estimates could have a material adverse effect on the assessment of our
long-lived assets, thereby requiring us to write down the assets. Write-downs of
long-lived assets are recorded as impairment charges and are a component of
operating expenses. The Company has reviewed its long-lived assets and concluded
that no impairment charge on its long-lived assets is necessary.
Valuation of Goodwill:
- ----------------------
The Company has goodwill on its books related to prior acquisition of telephone
properties and acquisition of ownership interests in Midwest Wireless Holdings
L.L.C. The Company was required to test goodwill for impairment annually or at
other times if events have occurred or circumstances exist that indicate the
carrying value of goodwill may no longer be recoverable. The impairment test for
goodwill involves a two-step process: step one consists of a comparison of the
fair value of a reporting unit with its carrying amount, including the goodwill
allocated to each reporting unit. If the carrying amount is in excess of the
fair value, step two requires the comparison of the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill.
Any excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss, which is a component of operating expenses. The Company did not record an
impairment charge for any of its existing goodwill as of December 31, 2003 or
prior years.
22
Depreciation of Property, Plant and Equipment
- ---------------------------------------------
The Company uses the group life method to depreciate the assets of its telephone
companies. Telephone plant acquired in a given year is grouped into similar
categories and depreciated over the remaining estimated useful life of the
group. Due to rapid changes in technology and new competitors, selecting the
estimated economic life of telecommunications plant and equipment requires a
significant amount of judgment. The Company periodically reviews data on
expected utilization of new equipment, asset retirement activity and net salvage
values to determine adjustments to its depreciation rates. The Company has not
made any changes to the lives of assets resulting in a significant impact in the
three years presented.
Revenue Recognition:
- --------------------
The Company recognizes revenue when services are rendered. The majority of the
Company's revenues are earned from providing services to its customers and
providing access to its network to inter-exchange carriers.
Revenues earned from the Company's customers come primarily from connection to
its local network, cable television services, and, internet services, (both
dial-up and high-speed DSL). Revenues for these services provided to the
Company's customers are billed based on set rates for monthly service or based
on the amount of time the customer is utilizing the Company's facilities. The
revenue for these services are recognized when the service is rendered.
Revenues earned from allowing inter-exchange carriers access to the Company's
network are based on utilization of the network by the carriers as measured by
minutes of use of the network by the individual carriers billed at tariffed
access rates for both interstate calls and intrastate calls. Revenues for these
services are recognized based on the period the access is provided.
Interstate access rates are established by a nationwide pooling of companies
known as the National Exchange Carriers Association (NECA). The FCC established
NECA in 1983 to develop and administer interstate access service rates, terms
and conditions. Revenues are pooled and redistributed on the basis of each
Company's actual or average costs. New Ulm settlements from the pools are based
on its actual costs to provide service, while Western and Peoples settle based
on nationwide average schedules. Access revenues for New Ulm include an estimate
of the final cost study for the year which is trued up subsequent to December
31. Management believes the estimates included in the preliminary cost study are
reasonable. There has been a decline in the level of interstate access charges
paid by the carriers in recent years, and the Company believes this trend will
continue. The net effect of these changes are not expected to have a material
effect on the Company's interstate access revenues in 2004.
Intrastate access rates are filed with the state regulatory commissions in
Minnesota and Iowa.
23
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS". SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. The statement establishes
accounting standards for recognition and measurement of a liability for an asset
retirement obligation and an associated asset retirement cost. The statement
applies to tangible long-lived assets, including individual assets, functional
groups of related assets and significant parts of assets. It covers a company's
legal obligations resulting from the acquisition, construction, development or
normal operation of a capital asset. The FCC has notified the Company's ILECs
that SFAS No. 143 will not be adopted for regulatory accounting purposes. The
provisions of SFAS No. 143 did not have a significant effect on the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS". SFAS No. 144 was effective January 1, 2002. SFAS
No. 144 sets forth requirements for measuring and recognizing impairment losses
on long-lived assets. The statement also establishes financial reporting
requirements when impairment losses are recognized. Adoption of SFAS No. 144 did
not have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No.146, "ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES". SFAS No. 146 replaces 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)". This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. The provisions of this statement were effective for exit or disposal
activities that were initiated after December 31, 2002. Adoption of SFAS No. 146
did not have a significant impact on the Company's financial position or 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". This interpretation elaborates on the disclosures
required in financial statements concerning obligations under certain
guarantees. It also clarifies the requirements related to the recognition of
liabilities by a guarantor at the inception of certain guarantees. The
disclosure requirements of this interpretation were effective on December 31,
2002, but did not require any additional disclosures on the part of the Company.
The recognition provisions of the interpretation effective for 2003 are
applicable only to guarantees issued or modified after December 31, 2002. The
adoption of these provisions did not have a material impact on the Company's
financial position or results of operations
In January 2003, the FASB issued FIN 46, "CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, AN INTERPRETATION OF ARB NO. 51", which requires companies to
consolidate certain types of variable interest entities. A variable interest
entity is an entity that has inadequate invested equity at risk to meet expected
future losses, or whose holders of the equity investments lack any of the
following three characteristics: (1) the ability to make our decisions about the
entity's activities; (2) the obligation to absorb the entity's losses if they
occur; or (3) the right to receive the entity's future returns if they occur.
FIN 46 is applicable immediately for variable interest entities created after
January 31, 2003. For variable interest entities created before February 1,
2003, the provisions of the interpretation are effective for financial
statements issued for the first period ending after June 15, 2003. The adoption
of the provisions of FIN 46 is not expected to have a material impact on the
Company's financial position or results of operations.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does the Company use derivative financial instruments in its
operations or investment portfolio. The Company's earnings are affected by
changes in interest rates as its long-term debt is based on a national variable
rate. If interest rates for the portion of the Company's long-term debt based on
variable rates had averaged 10% more for the entire year ended December 31,
2003, the Company's interest expense would have increased approximately $60,000
in 2003. Should interest rates rise significantly, management would likely act
to mitigate its exposure to the change by converting a portion of its
variable-rate debt to fixed-rate debt.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota
We have audited the accompanying consolidated balance sheets of New Ulm Telecom,
Inc. (a Minnesota corporation) and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Midwest Wireless Holdings
L.L.C., a limited liability company, the investment in which, as discussed in
Note 3 to the financial statements, is accounted for by the equity method of
accounting. The investment in Midwest Wireless Holdings L.L.C. was $15,155,015
and $13,392,129 as of December 31, 2003 and 2002, respectively, and the equity
in its net income was $2,710,717, and $2,788,861 for the years ended December
31, 2003 and 2002. The financial statements of Midwest Wireless Holdings L.L.C.
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Midwest Wireless
Holdings L.L.C., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as, evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of New Ulm Telecom, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KIESLING ASSOCIATES LLP
West Des Moines, Iowa
February 6, 2004
26
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of New Ulm Telecom, Inc. and subsidiaries
for the year ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, stockholders'
equity and cash flows of New Ulm Telecom, Inc. and subsidiaries for the year
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ OLSEN THIELEN & CO., LTD.
St. Paul, Minnesota
February 21, 2002
27
NEW ULM TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
ASSETS
2003 2002
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents $2,201,435 $1,914,113
Receivables, Net of Allowance for Doubtful
Accounts of $102,500 and $100,950 2,649,347 2,626,492
Materials, Supplies, and Inventories 336,958 502,315
Prepaid Expenses 271,716 183,751
----------- -----------
Total Current Assets 5,459,456 5,226,671
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Cellular Investments (Note 3) 15,155,015 13,392,129
Goodwill and Intangibles, Net of Amortization (Note 4) 3,244,390 3,246,442
Notes Receivable from Officer (Note 10) -- 674,037
Other Investments 1,181,089 1,042,896
----------- -----------
Total Investments and Other Assets 19,580,494 18,355,504
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
Telecommunications Plant 54,108,739 51,864,392
Other Property and Equipment 2,562,539 2,438,378
Cable Television Plant 2,207,476 1,850,221
----------- -----------
Total Property, Plant and Equipment 58,878,754 56,152,991
Less Accumulated Depreciation 30,588,170 26,423,783
----------- -----------
Net Property, Plant and Equipment 28,290,584 29,729,208
----------- -----------
TOTAL ASSETS $53,330,534 $53,311,383
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
28
NEW ULM TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
----------- -----------
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $2,515,217 $2,514,130
Accounts Payable 1,011,579 2,223,687
Other Accrued Taxes 75,188 67,842
Other Accrued Liabilities 612,552 564,188
----------- -----------
Total Current Liabilities 4,214,536 5,369,847
----------- -----------
LONG-TERM DEBT, Less Current Portion (Note 6) 17,630,413 20,152,961
----------- -----------
DEFERRED CREDITS:
Income Taxes (Note 7) 5,243,963 3,651,647
Investment Tax Credits 3,165 6,708
----------- -----------
Total Deferred Credits 5,247,128 3,658,355
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock - $1.66 Par Value; 10,000,000 Share 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 17,712,482 15,604,245
----------- -----------
Total Stockholders' Equity 26,238,457 24,130,220
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $53,330,534 $53,311,383
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
29
NEW ULM TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
---------- ---------- ----------
OPERATING REVENUES:
Local Network $3,821,522 $3,565,358 $3,126,394
Network Access 6,782,834 6,201,044 6,198,446
Billing and Collection 97,783 139,053 231,016
Miscellaneous 424,051 408,446 424,237
Nonregulated 4,714,847 4,020,342 3,354,729
---------- ---------- ----------
Total Operating Revenues 15,841,037 14,334,243 13,334,822
---------- ---------- ----------
OPERATING EXPENSES:
Plant Operations 1,994,538 1,691,595 1,728,872
Depreciation 4,255,810 3,635,243 2,946,012
Amortization 33,095 31,006 129,143
Customer Operations 915,596 876,001 687,306
Corporate Operations 1,997,116 2,253,628 2,004,173
Other Operating 2,671,105 2,266,385 1,911,141
---------- ---------- ----------
Total Operating Expenses 11,867,260 10,753,858 9,406,647
---------- ---------- ----------
OPERATING INCOME 3,973,777 3,580,385 3,928,175
---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest Expense (583,971) (628,417) (672,342)
Interest Expense - Debt Retirement -- (271,200) --
Interest and Dividend Income 47,793 83,547 83,432
Interest During Construction -- 42,645 30,442
Gain on Dissolution -- 1,157,915 --
Equity Earnings in Cellular Partnership 2,710,717 2,788,861 1,208,636
Other Investment Income (Expense) 218,988 (129,405) 160,534
---------- ---------- ----------
Total Other Income (Expenses) 2,393,527 3,043,946 810,702
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 6,367,304 6,624,331 4,738,877
INCOME TAXES 2,554,550 2,634,350 1,970,639
---------- ---------- ----------
NET INCOME $3,812,754 $3,989,981 $2,768,238
========== ========== ==========
BASIC AND DILUTED NET INCOME
PER SHARE $ 0.75 $ 0.78 $ 0.54
========== ========== ==========
DIVIDENDS PER SHARE $ 0.33 $ 0.33 $ 0.33
========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
30
NEW ULM TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
Common Stock
------------------------------ Retained
Shares Amount Earnings
---------- ----------- -----------
BALANCE on December 31, 2000 1,731,955 $8,659,775 $13,106,729
Retired Stock (26,760) (133,800) (846,777)
Net Income 2,768,238
Dividends (1,709,409)
Three-for-One Stock Split 3,410,390
---------- ----------- -----------
BALANCE on December 31, 2001 5,115,585 8,525,975 13,318,781
Net Income 3,989,981
Dividends (1,704,517)
---------- ----------- -----------
BALANCE on December 31, 2002 5,115,585 8,525,975 15,604,245
Net Income 3,812,754
Dividends (1,704,517)
---------- ----------- -----------
BALANCE on December 31, 2003 5,115,585 $8,525,975 $17,712,482
========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
31
NEW ULM TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $3,812,754 $ 3,989,981 $2,768,238
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 4,288,905 3,666,249 3,075,155
Undistributed Earnings of Cellular Investment (1,762,886) (1,817,374) (589,112)
Deferred Income Taxes 1,592,316 1,365,804 806,879
Deferred Investment Tax Credits (3,543) (3,543) (3,543)
Gain from Dissolution -- (1,157,915) --
Changes in Assets and Liabilities:
Receivables (22,855) (748,048) (385,156)
Inventories 165,357 464,250 894,404
Prepaid Expenses (87,965) (71,541) 15,350
Accounts Payable 71,771 (1,928) (344,446)
Other Accrued Taxes 7,346 1,607 (37,778)
Other Accrued Liabilities 48,364 79,730 31,785
----------- ------------ -----------
Net Cash Provided By Operating Activities 8,109,564 5,767,272 6,231,776
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment, Net (4,132,108) (7,766,799) (7,544,751)
Redemption of Notes Receivable, Net of Investment 674,037 266,219 41,227
Purchase of Cellular Investments -- (4,106,010) --
Other, Net (138,193) 111,840 (202,660)
----------- ------------ -----------
Net Cash Used In Investing Activities (3,596,264) (11,494,750) (7,706,184)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments of Long-Term Debt (2,521,461) (4,077,821) (866,667)
Issuance of Long-Term Debt -- 9,178,246 8,576,000
Retired Stock -- -- (980,577)
Dividends Paid (1,704,517) (1,704,517) (1,709,409)
----------- ------------ -----------
Net Cash Provided By (Used In) Financing Activities (4,225,978) 3,395,908 5,019,347
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 287,322 (2,331,570) 3,544,939
CASH AND CASH EQUIVALENTS at Beginning of Year 1,914,113 4,245,683 700,744
----------- ------------ -----------
CASH AND CASH EQUIVALENTS at End of Year $ 2,201,435 $ 1,914,113 $ 4,245,683
=========== ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
32
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
New Ulm Telecom, Inc.'s (Company) principal line of business is providing local
telephone service, internet, digital video, and access to long distance
telephone service through local exchange networks. The Company owns and operates
three independent telephone companies serving seven communities in southern
Minnesota, one community in Iowa and the adjacent rural areas. The Company also
has investments in cellular entities and a competitive local exchange carrier
(CLEC), and operates cable television systems in eight communities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its five wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
ACCOUNTING ESTIMATES
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amount of revenues and
expenses during the operating period. Actual results could differ from those
estimates.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at the
time of purchase are considered cash equivalents.
RECEIVABLES
Receivables are stated at the amounts the Company expects to collect from
outstanding balances. The Company provides for probable uncollectible amounts
through charges to earnings and credits to the valuation allowance based on its
assessment of the current status of individual accounts. Balances that are still
outstanding after the Company has used reasonable collection efforts are written
off through charges to the valuation allowance and credits to receivable
accounts. Changes in the valuation allowance have not been material to the
financial statements.
MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories are recorded at the lower of average cost or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at original cost. Additions,
improvements or major renewals are capitalized. When telecommunications assets
are sold, retired or otherwise disposed of in the ordinary course of business,
the cost plus removal costs less salvage is charged to accumulated depreciation
and the original cost is credited to the asset accounts. Any gains or losses on
non-telecommunications property and equipment retirements are reflected in the
current year operations.
33
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOVERABILITY OF LONG-LIVED ASSETS
The Company reviews its long-lived assets whenever events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable.
The Company determines potential impairment by comparing the carrying value of
its assets with the sum of the undiscounted cash flows expected to be provided
by operating and eventually disposing of the asset. Should the sum of the
expected future net cash flows be less than carrying values, the Company would
determine whether an impairment loss should be recognized. No impairment losses
have been identified in the financial statements.
INVESTMENTS AND OTHER ASSETS
Investments in a Midwest Wireless Holdings, L.L.C. and FiberComm, L.C. are
recorded using the equity method of accounting, which reflects original cost and
equity in undistributed earnings and losses, because management of the Company
believes they have the ability to significantly influence the operating and
financial policies of these companies.
Long-term investments in other companies that are not intended for resale or are
not readily marketable are valued at the lower of cost or net realizable value.
GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of acquisitions and equity
method investments over the fair value of the net assets acquired. The Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
142, "GOODWILL AND OTHER INTANGIBLE ASSETS," effective January 1, 2002. SFAS No.
142 requires that goodwill no longer be amortized, but instead be reviewed
annually for possible impairment. In its reviews, the Company has determined
that the goodwill is not impaired. Intangible assets with definite lines
continue to be amortized.
REVENUE RECOGNITION
Revenues are recognized when earned. Local network, cable television and
internet revenues are recognized over the period a subscriber is connected to
the network. Interstate access revenues are based on settlements with the
National Exchange Carrier Association. Interstate access settlements are based
on cost studies for New Ulm Telecom, Inc. and by nationwide average cost
schedules for two of its subsidiaries, Western Telephone Company and Peoples
Telephone Company. Access revenues for New Ulm Telecom, Inc. include estimates
which management believes are reasonable, pending finalization of cost studies.
Local network and intrastate access revenues are based on tariffs filed with the
state regulatory commissions.
INTEREST DURING CONSTRUCTION
The Company includes in its telecommunications plant account an average cost of
debt used for the construction of the plant.
34
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES AND INVESTMENT TAX CREDITS
The provision for income taxes consists of an amount for taxes currently payable
and a provision for tax consequences deferred to future periods. Deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Significant components of the
Company's deferred taxes arise from differences in the basis in property, plant,
and equipment due to the use of accelerated depreciation methods for tax
purposes and partnerships due to the difference between book and tax income. For
financial statement purposes, deferred investment tax credits are being
amortized as a reduction of the provision for income taxes over the estimated
useful lives of the related property, plant and equipment.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and receivables. The Company places its
cash investments with high credit quality financial institutions in accounts
which, at times, may exceed the federally insured limits. The Company has not
experienced any losses in these accounts and does not believe it is exposed to
any significant credit risk. Concentrations of credit risk with respect to trade
receivables are limited due to the Company's large number of customers.
BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic and diluted net income per common share is based on the weighted average
number of shares outstanding of 5,115,585 for 2003, 5,115,585 for 2002, and
5,135,655 for 2001. All per share data has been restated to reflect the
three-for-one stock split effective January 10, 2002.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment for December 31, 2003 and 2002 includes the
following:
2003 2002
----------- -----------
Telecommunications Plant:
Land $ 210,039 $ 210,039
Buildings 1,912,586 1,910,799
Other Support Assets 3,271,432 3,213,688
Central Office Equipment 24,195,567 22,470,994
Cable and Wire Facilities 24,042,585 23,725,725
Other Plant and Equipment 320,020 320,020
Plant Under Construction 156,510 13,127
----------- -----------
54,108,739 51,864,392
----------- -----------
Other Plant:
Other Property 2,562,539 2,438,378
Cable Television Plant 2,207,476 1,850,221
----------- -----------
4,770,015 4,288,599
----------- -----------
Total Property, Plant and Equipment $58,878,754 $56,152,991
=========== ===========
Depreciation is computed using the straight-line method based on estimated
service or remaining useful lives of the various classes of depreciable assets.
The composite depreciation rates on telecommunications plant and equipment for
the three years ended December 31, 2003, 2002 and 2001 were 7.6%, 7.4% and 7.2%,
respectively. Other property is depreciated over estimated useful lives of three
to fifteen years.
35
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - CELLULAR INVESTMENTS
Cellular investments include a 9.88% and 9.92% ownership interest in units of
Midwest Wireless Holdings L.L.C. (MWH) at December 31, 2003 and 2002,
respectively. This entity provides cellular phone service to southern Minnesota,
northwestern Iowa and southwestern Wisconsin. The difference between the
carrying amount of the MWH investment and the underlying equity in the net
assets of MWH at the time of purchase of ownership interests is $4,890,389 as of
December 31, 2003, net of accumulated amortization of $156,391. Amortization
expense of $48,764 was included as a reduction of cellular investment income in
2001.
Cellular investments consist of the following:
2003 2002
----------- -----------
Cost Less Accumulated Amortization $ 7,596,308 $ 7,596,308
Cumulative Income 12,850,662 10,139,945
Cumulative Distributions (5,291,965) (4,344,124)
----------- -----------
Total $15,155,015 $13,392,129
=========== ===========
Income and cash distributions from MWH were as follows for the years ended
December 31, 2003, 2002 and 2001:
2003 2002 2001
---------- ---------- ----------
Income Recorded $2,710,717 $2,788,861 $1,208,636
Cash Distributions 947,831 971,487 619,524
The following is summarized financial information from MWH as of and for the
years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
------------ ------------ ------------
Current Assets $ 15,927,067 $ 12,445,979 $ 17,372,431
Noncurrent Assets 360,331,919 305,838,514 285,452,749
Current Liabilities 36,133,737 56,909,149 48,394,693
Noncurrent Liabilities 184,480,187 124,875,462 137,442,305
Members' Equity 155,645,062 136,499,882 117,188,182
Revenues 176,563,840 162,697,183 140,538,515
Operating Income 38,208,083 39,641,304 28,018,634
Net Income 26,695,403 28,113,520 16,588,360
In January of 2002, Cherokee Cellular, Inc. and Three Lakes Cellular, Inc. were
dissolved. These corporations contained units in Midwest Wireless Holdings
L.L.C. Peoples Telephone Company owned stock in each corporation. The units of
Midwest Wireless Holdings L.L.C. were transferred directly to the shareholders
of Cherokee Cellular, Inc. and Three Lakes Cellular, Inc. The Company recognized
a nonmonetary gain of $1,157,915 on the transfer of units in Midwest Wireless
Holdings L.L.C.
36
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - GOODWILL AND INTANGIBLES
Effective January 1, 2002, the Company adopted SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." Under the provisions of SFAS No. 142, goodwill and
intangible assets with indefinite useful lives are no longer amortized, but are
instead tested for impairment on at least an annual basis.
During 2003, the Company tested the value of its goodwill as required by SFAS
No. 142. The Company determined that the carrying value of these assets was not
impaired.
Goodwill and other non-amortizable intangibles consist of the following:
2003 2002
----------- -----------
Balance Beginning of Year $ 8,109,295 $ 5,012,929
Goodwill Acquired -- 3,096,366
----------- -----------
Balance End of Year $ 8,109,295 $ 8,109,295
=========== ===========
Included Under the Caption at Year End:
Goodwill and Intangibles $ 3,218,906 $ 3,218,906
Cellular Investments 4,890,389 4,890,389
----------- -----------
$ 8,109,295 $ 8,109,295
=========== ===========
Amortizable intangibles consist of the following:
2003 2002
----------- -----------
Balance Beginning of Year $ 27,536 $ 29,589
Intangible amortization (2,052) (2,053)
----------- -----------
Balance End of Year $ 25,484 $ 27,536
=========== ===========
The following table adjusts previously reported net income to exclude
amortization expense recognized from goodwill as if SFAS No. 142 had been in
effect in 2001 for both the Company's goodwill amortization and the effect of
Midwest Wireless Holdings L.L.C.'s goodwill amortization which was also ceased:
2003 2002 2001
---------- ---------- ----------
Reported Net Income $3,812,754 $3,989,981 $2,768,238
Goodwill Amortization (Net of Income
Taxes of $67,614) -- -- 94,924
Midwest Wireless Holdings LLC Goodwill
Amortization (Net of Income taxes of 136,600) -- -- 204,943
---------- ---------- ----------
Adjusted Net Income $3,812,754 $3,989,981 $3,068,105
========== ========== ==========
Basic and diluted earnings per share:
Reported net income 0.75 0.78 0.54
Goodwill amortization -- -- 0.02
Midwest Wireless Holdings Goodwill Amortization -- -- 0.04
---------- ---------- ----------
Adjusted net income $ 0.75 0.78 0.60
========== ========== ==========
37
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - LINE OF CREDIT
The Company had a 60 month revolving line of credit of $1,640,000 at 1 1/2% over
the bank reference rate with the Rural Telephone Finance Cooperative. No amounts
were outstanding at December 31, 2003 and 2002 under this line of credit, which
matured in August 2003 and was not renewed.
NOTE 6 - LONG-TERM DEBT
Long-term debt is as follows:
2003 2002
----------- -----------
Unsecured ten year note with the City of Redwood Falls, payable semiannually
(beginning in 2002), at a fixed 5% interest rate
maturing on January 1, 2013 $ 145,630 $ 167,091
Secured ten year reducing revolving credit facility to CoBank, ACB in
quarterly installments of $250,000 (beginning in 2003) plus a national
variable rate of interest through December 20,
2011 (2.62% and 2.82% at December 31, 2003 and 2002) 8,000,000 9,000,000
Secured ten year reducing revolving credit facility to CoBank, ACB in
monthly installments of $125,000 (beginning in 2002) plus a national
variable rate of interest through December 20,
2011 (2.62% and 2.82% at December 31, 2003 and 2002) 12,000,000 13,500,000
----------- -----------
20,145,630 22,667,091
Less amount due within one year 2,515,217 2,514,130
----------- -----------
Long-term debt $17,630,413 $20,152,961
=========== ===========
Substantially all assets of the Company are pledged as security for the
long-term debt under certain loan agreements with CoBank. These mortgage notes
are to repaid in equal quarterly and monthly installments covering principal and
interest beginning in the year after issue and expiring by December 20, 2011.
The security and loan agreements underlying the CoBank notes contain certain
restrictions on distributions to stockholders, investment in, or loans to
others. In addition, the Company is required to maintain certain financial
ratios for current assets to current liabilities, net worth to total assets,
long-term debt to operating cash flow and debt service coverage.
Principal payments required during the next five years are as follows: 2004 -
$2,514,845; 2005 - $2,515,597; 2006 - $2,516,387; 2007 - $2,517,216; and 2008 -
$2,518,088.
Cash payments for interest, net of amounts capitalized, were $595,409, $549,704,
and $683,189 in 2003, 2002, and 2001, respectively.
During 2002, the Company paid off the remaining balances on its loans with
Phoenix Mutual Life. Interest and fees of $271,200 were incurred in connection
with the extinguishment of this debt.
38
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS
Income taxes reflected in the Consolidated Statements of Income consist of the
following:
2003 2002 2001
----------- ----------- -----------
Taxes Currently Payable:
Federal $ 631,463 $ 827,468 $ 873,398
State 334,314 444,621 293,905
Deferred Income Taxes 1,592,316 1,365,804 806,879
Amortization of Investment Tax Credits (3,543) (3,543) (3,543)
----------- ----------- -----------
Total Income Tax Expense $ 2,554,550 $ 2,634,350 $ 1,970,639
=========== =========== ===========
The differences between the statutory federal tax rate and the effective tax
rate were as follows:
2003 2002 2001
------ ------ ------
Statutory Tax Rate 35.0% 35.0% 35.0%
Effect of:
Surtax exemption (1.0) (1.0) (1.0)
State income taxes, net of federal tax benefit 5.9 6.7 6.5
Amortization of investment tax credits (0.1) (0.1) (0.1)
Non-deductible expenses 0.1 0.4 1.4
Other, net 0.2 (1.2) (0.2)
------ ------ ------
Effective tax rate 40.1% 39.8% 41.6%
====== ====== ======
Deferred income taxes reflected in the Consolidated Balance Sheets are
summarized as follows:
2003 2002
----------- -----------
Deferred Tax (Assets)/Liabilities:
Depreciation $ 3,918,252 $ 3,207,677
Partnership basis 1,483,780 592,523
Other (158,069) (148,553)
----------- -----------
Total $ 5,243,963 $ 3,651,647
=========== ===========
Cash payments net of refunds for income taxes were $1,097,107, $2,068,031, and
$1,530,207 in 2003, 2002, and 2001, respectively.
NOTE 8 - RETIREMENT PLAN
The Company has a 401(k) employee savings plan in effect for its employees who
meet certain age and service requirements. The Company's contribution to its
401(k) employee savings plan was $190,076, $169,527 and $166,387 in 2003, 2002
and 2001, respectively.
39
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value.
LONG-TERM INVESTMENTS: It was not practicable to estimate a fair value for
common stock investments in companies carried on the cost basis due to a lack of
quoted market prices. The Company believes the original cost is not impaired at
December 31, 2003.
LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated
based on the discounted value of the future cash flows expected to be paid using
current rates of borrowing for similar types of debt. Fair value of the debt
approximates carrying value.
NOTE 10 - RELATED PARTY TRANSACTIONS
The officer note receivable was secured by 153,690 shares of New Ulm Telecom,
Inc. common stock and had a 6.09% interest rate. A prior, variable interest rate
note became due on January 1, 2001 and was renewed. This note requires an annual
payment of $55,228, including interest, with payments commencing on January 1,
2002 and a final balloon payment due on January 1, 2006. The note was paid in
full in May 2003.
NOTE 11 - COMMITMENTS
The Company's capital budget for 2004 is approximately $2,770,000, which will be
financed through internally generated funds. As of December 31, 2003, the
Company has no purchase commitments.
NOTE 12 - NONCASH INVESTING ACTIVITIES
Noncash investing activities included $497,568, $1,781,447 and $149,403 during
the years ended December 31, 2003, 2002 and 2001, respectively, relating to
plant and equipment additions placed in service during 2003, 2002 and 2001,
respectively, which are reflected in accounts payable at year end.
40
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - SEGMENT INFORMATION
The Company is organized into five business segments: New Ulm Telecom, Inc.,
three of its wholly-owned subsidiaries (Western Telephone Company, Peoples
Telephone Company, and New Ulm Phonery, Inc.), and a cellular investment
recorded using the equity method of accounting. No single customer accounted for
a material portion of the Company's revenues in any of the last three years. The
cellular investment is the Company's investment in Midwest Wireless Holdings
L.L.C. and is shown using the proportionate method.
Segment information is as follows:
Western Peoples
New Ulm Telephone Telephone New Ulm Cellular
Telecom, Inc. Company Company Phonery, Inc. Investment
------------ ------------ ----------- ------------- ------------
Year Ended December 31, 2003:
Operating Revenues $ 10,126,826 $ 2,397,142 $ 1,040,871 $ 2,367,533 $ 17,830,689
Operating Expenses 8,829,819 1,212,848 649,355 1,488,032 14,036,627
------------ ------------ ----------- ----------- ------------
Operating Income 1,297,007 1,184,294 391,516 879,501 3,794,062
Interest Expense (359,373) (46,317) (86,304) (5,748) (715,431)
Cellular Investment Income -- -- -- -- --
Other Investment Income 173,930 6,058 86,740 53 (367,914)
------------ ------------ ----------- ----------- ------------
Income Before Income Taxes $ 1,111,564 $ 1,144,035 $ 391,952 $ 873,806 $ 2,710,717
============ ============ =========== =========== ============
Depreciation and Amortization $ 3,589,200 $ 421,361 $ 144,909 $ 133,435 $ 2,270,044
============ ============ =========== =========== ============
Total Assets $ 65,446,605 $ 10,905,289 $ 6,147,973 $ 4,771,965 $ 37,362,517
============ ============ =========== =========== ============
Capital Expenditures $ 3,525,192 $ 427,415 $ 61,780 $ 117,721 $ 2,902,985
============ ============ =========== =========== ============
Year Ended December 31, 2002:
Operating Revenues $ 8,631,748 $ 2,332,222 $ 997,627 $ 2,081,868 $ 16,139,561
Operating Expenses 7,555,546 1,223,263 597,458 1,255,929 12,207,143
------------ ------------ ----------- ----------- ------------
Operating Income 1,076,202 1,108,959 400,169 825,939 3,932,418
Interest Expense (580,080) (107,760) (116,500) (5,955) (801,375)
Cellular Investment Income -- -- -- -- --
Gain on Dissolution -- -- 1,157,915 -- --
Other Investment Income 21,394 2,084 (27,450) 759 (342,182)
------------ ------------ ----------- ----------- ------------
Income Before Income Taxes $ 517,516 $ 1,003,283 $ 1,414,134 $ 820,743 $ 2,788,861
============ ============ =========== =========== ============
Depreciation and Amortization $ 2,969,242 $ 390,469 $ 148,950 $ 157,588 $ 1,916,390
============ ============ =========== =========== ============
Total Assets $ 67,261,902 $ 10,151,203 $ 5,341,543 $ 4,195,423 $ 31,573,822
============ ============ =========== =========== ============
Capital Expenditures $ 6,828,746 $ 716,534 $ 118,340 $ 103,179 $ 3,164,667
============ ============ =========== =========== ============
Year Ended December 31, 2001:
Operating Revenues $ 7,687,791 $ 2,341,132 $ 1,042,744 $ 1,895,268 $ 10,601,290
Operating Expenses 6,493,827 1,063,092 552,100 1,144,518 8,526,239
------------ ------------ ----------- ----------- ------------
Operating Income 1,193,964 1,278,040 490,644 750,750 2,075,051
Interest Expense (620,072) (36,029) (16,241) -- (713,755)
Cellular Investment Income -- -- -- -- -
Other Investment Income 65,049 4,744 202,739 1,876 (152,660)
------------ ------------ ----------- ----------- ------------
Income Before Income Taxes $ 638,941 $ 1,246,755 $ 677,142 $ 752,626 $ 1,208,636
============ ============ =========== =========== ============
Depreciation and Amortization $ 2,431,752 $ 385,197 $ 135,024 $ 123,182 $ 1,692,507
============ ============ =========== =========== ============
Total Assets $ 52,070,721 $ 9,996,520 $ 4,149,850 $ 3,634,562 $ 22,969,308
============ ============ =========== =========== ============
Capital Expenditures $ 6,723,454 $ 181,906 $ 206,403 $ 432,988 $ 2,562,355
============ ============ =========== =========== ============
41
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - SEGMENT INFORMATION (Continued)
Segment information is as follows (continued):
Segment
Totals Others Eliminations Consolidated
------------- ------------ ------------- ------------
Year Ended December 31, 2003:
Operating Revenues $ 33,763,061 $ 829,486 $ (18,751,510) $ 15,841,037
Operating Expenses 26,216,681 608,027 (14,957,448) 11,867,260
------------- ------------ ------------- ------------
Operating Income 7,546,380 221,459 (3,794,062) 3,973,777
Interest Expense (1,213,173) (86,229) 715,431 (583,971)
Cellular Investment Income -- -- 2,710,717 2,710,717
Other Investment Income (101,133) -- 367,914 266,781
------------- ------------ ------------- ------------
Income Before Income Taxes $ 6,232,074 $ 135,230 $ -- $ 6,367,304
============= ============ ============= ============
Depreciation and Amortization $ 6,558,949 $ -- $ (2,270,044) $ 4,288,905
============= ============ ============= ============
Total Assets $ 124,634,349 $ 8,800,158 $ (80,103,973) $ 53,330,534
============= ============ ============= ============
Capital Expenditures $ 7,035,093 $ -- $ (2,902,985) $ 4,132,108
============= ============ ============= ============
Year Ended December 31, 2002:
Operating Revenues $ 30,183,026 $ 675,046 $ (16,523,829) $ 14,334,243
Operating Expenses 22,839,339 505,930 (12,591,411) 10,753,858
------------- ------------ ------------- ------------
Operating Income 7,343,687 169,116 (3,932,418) 3,580,385
Interest Expense (1,611,670) (89,322) 801,375 (899,617)
Cellular Investment Income -- -- 2,788,861 2,788,861
Gain on Dissolution 1,157,915 -- -- 1,157,915
Other Investment Income (345,395) -- 342,182 (3,213)
------------- ------------ ------------- ------------
Income Before Income Taxes $ 6,544,537 $ 79,794 $ -- $ 6,624,331
============= ============ ============= ============
Depreciation and Amortization $ 5,582,639 $ -- $ (1,916,390) $ 3,666,249
============= ============ ============= ============
Total Assets $ 118,523,893 $ 7,332,933 $ (72,545,443) $ 53,311,383
============= ============ ============= ============
Capital Expenditures $ 10,931,466 $ -- $ (3,164,667) $ 7,766,799
============= ============ ============= ============
Year Ended December 31, 2001:
Operating Revenues $ 23,568,225 $ 697,083 $ (10,031,822) $ 14,233,486
Operating Expenses 17,779,776 482,306 (7,956,771) 10,305,311
------------- ------------ ------------- ------------
Operating Income 5,788,449 214,777 (2,075,051) 3,928,175
Interest Expense (1,386,097) -- 713,755 (672,342)
Cellular Investment Income -- -- 1,208,636 1,208,636
Other Investment Income 121,748 -- 152,660 274,408
------------- ------------ ------------- ------------
Income Before Income Taxes $ 4,524,100 $ 214,777 $ -- $ 4,738,877
============= ============ ============= ============
Depreciation and Amortization $ 4,767,662 $ -- $ (1,692,507) $ 3,075,155
============= ============ ============= ============
Total Assets $ 92,820,961 $ 5,933,600 $ (55,902,781) $ 42,851,780
============= ============ ============= ============
Capital Expenditures $ 10,107,106 $ -- $ (2,562,355) $ 7,544,751
============= ============ ============= ============
42
ITEM 8. SUPPLEMENTARY FINANCIAL INFORMATION
- -------------------------------------------
UNAUDITED QUARTERLY OPERATING RESULTS
Quarter Ended
-------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- ----------------- ----------------
2003:
Revenues $ 3,591,402 $ 3,999,925 $ 3,939,761 $ 4,309,949
Operating Income 756,716 1,086,351 931,842 1,198,868
Net Income 942,577 1,089,906 932,095 848,176
Basic and Diluted Net Income
per Share 0.18 0.21 0.18 0.17
2002:
Revenues $ 3,666,152 $ 3,699,541 $ 3,554,737 $ 3,413,813
Operating Income 1,087,180 1,053,457 579,817 859,931
Net Income 1,618,275 966,870 641,733 763,103
Basic and Diluted Net Income
per Share 0.32 0.19 0.13 0.14
All per share data has been restated to reflect the three-for-one stock split
effective January 10, 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The disclosure called for by paragraph(a) of this item has been "previously
reported" as that term is defined in Rule 12b-2 under the Exchange Act.
7ITEM 9A. 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 our management, including
its Chief Executive Officer and Interim Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Interim 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 that is required to be
included in periodic SEC filings.
During the fourth quarter of 2003, there were no significant changes in the
Company's internal control over financial reporting or in other factors that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The Company incorporates by reference the information contained under the
captions "Proposal No. 1: Election of Directors," "The Board of Directors and
Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in its
definitive proxy statement for the annual meeting of shareholders to be held May
20, 2004.
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, information regarding executive officers of the
Company is provided in Part I of this Form 10-K under separate caption.
The Company has adopted a code of conduct that applies to its principal
executive officer, principal financial officer and principal accounting officer.
This code of conduct is available on the Company's website at www.newulmtel.net
and in print upon written request to New Ulm Telecom, Inc., 27 North Minnesota
Street, New Ulm, Minnesota 56073, Attention: Chief Financial Officer. Any
amendment to, or waiver from, a provision of our code of conduct will be posted
to the above-referenced website.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The Company incorporates by reference the information contained under the
captions "Compensation of Executive Officers" and "Compensation of Directors" in
its definitive proxy statement for the annual meeting of shareholders to be held
May 20, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The Company incorporates by reference the information contained under the
captions "Security Ownership of Certain Beneficial Owners and Management" in its
definitive proxy statement for the annual meeting of shareholders to be held May
20, 2004. The Company does not maintain any equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The Company incorporates by reference the information contained under the
caption "Certain Relationships and Related Transactions" in its definitive proxy
statement for the annual meeting of shareholders to be held May 20, 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- -----------------------------------------------
The Company incorporates by reference the information contained under the
caption "Independent Auditors" in its definitive proxy statement for the annual
meeting of shareholders to be held May 20, 2004.
44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. Consolidated Financial Statements
--------------------
Included in Part II, Item 8, of this report:
Pages
-----
Independent Auditors' Report 26 - 27
Consolidated Balance Sheets at December 31, 2003 and 2002 28 - 29
Consolidated Statements of Income for the Three Years Ended
December 31, 2003, 2002 and 2001 30
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 2003, 2002 and 2001 31
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 2003, 2002 and 2001 32
Notes to Consolidated Financial Statements 33 - 42
(a) 2. Consolidated Financial Statement schedules:
Independent Auditors' Report on Financial Statement Schedule 46
Schedule II - Valuation and Qualifying Accounts 47
Separate financial statements of Midwest Wireless Holdings L.L.C., a 50
percent or less owned equity method investment, are included as part of
this report because this entity constitutes a "significant subsidiary"
pursuant to the provisions of
Regulation S-X, Article 3-09. 48 - 65
Other schedules are omitted because they are not required or are not
applicable, or the required information is shown in the financial
statements or notes thereto.
(a) 3. Exhibits Required
- -------------------------
See "Index to Exhibits" 67
b) Reports on Form 8-K Filed During the Three Months Ended December 31, 2003
- ----------------------------------------------------------------------------
None
45
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of
New Ulm Telecom, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 6, 2004 also included an audit of the financial statement
schedules listed in Item 15(a)2 of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ KIESLING ASSOCIATES LLP
West Des Moines, Iowa
February 6, 2004
46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Uncollectible Accounts
1/1/03 2003 12/31/03
Beginning 2003 2003 Write- Ending
Customer Balance Additions Recoveries Offs Balance
- ---------------------------------- ------------ ----------- ------------- ------------- ------------
New Ulm $ 15,450 $ 42,266 $ 39,575 $ (78,791) $ 18,500
Western 10,500 17,232 3,732 (16,464) 15,000
Peoples 6,000 (2,102) 2,152 (50) 6,000
Phonery 22,000 (8,054) - (13,946) -
------------ ----------- ----------- ------------- ------------
53,950 49,342 45,459 (109,251) 39,500
------------ ----------- ----------- ------------- ------------
Interexchange Carriers
- ----------------------
New Ulm 18,000 32,747 - (11,747) 39,000
Western 29,000 (5,000) - - 24,000
------------ ----------- ----------- ------------- ------------
Total 47,000 27,747 - (11,747) 63,000
------------ ----------- ----------- ------------- ------------
$ 100,950 $ 77,089 $ 45,459 $ (120,998) $ 102,500
============ =========== =========== ============= ============
47
MIDWEST WIRELESS
HOLDINGS L.L.C.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
48
REPORT OF INDEPENDENT AUDITORS
To the Board of Managers and Members of
Midwest Wireless Holdings L.L.C.
In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of operations, changes in
members' equity, and cash flows present fairly, in all material respects, the
consolidated financial position of Midwest Wireless Holdings L.L.C. (the
"Company") and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations, changes in members' equity, and
their cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS, on January 1, 2003.
As discussed in Note 3 to the financial statements, the Company adopted SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, on January 1, 2002.
/s/ PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 6, 2004
49
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
ASSETS
Current assets
Cash and cash equivalents $ 1,888,366 $ 1,367,210
Accounts receivable, less allowance for doubtful accounts of
$690,115 and $550,403 in 2003 and 2002, respectively 10,157,442 8,155,607
Inventories 2,579,643 1,411,573
Other current assets 1,301,616 1,511,589
------------ ------------
Total current assets 15,927,067 12,445,979
Property, cellular plant and equipment, net 121,086,239 102,219,504
Intangible assets, net 230,141,013 194,612,163
Investments in cooperatives 9,104,667 9,006,847
------------ ------------
Total assets $376,258,986 $318,284,493
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Current portion of debt $ 16,361,168 $ 14,655,912
Revolving loan -- 25,000,000
Accounts payable 6,136,971 5,643,416
Accrued commissions 1,941,673 1,436,325
Other accrued expenses 11,693,925 10,173,496
------------ ------------
Total current liabilities 36,133,737 56,909,149
Other liabilities 3,381,894 988,120
Debt 169,480,481 114,458,723
------------ ------------
Total liabilities 208,996,112 172,355,992
Minority interest 11,617,812 9,428,619
Commitments
Members' equity 155,645,062 136,499,882
------------ ------------
Total liabilities and members' equity $376,258,986 $318,284,493
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
50
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
Operating revenues
Subscriber service $140,823,140 $118,573,698 $ 93,477,223
Roamer service 28,107,407 37,205,402 36,953,474
Equipment sales 6,244,201 6,352,249 10,058,368
Service fees 4,389,092 565,834 49,450
------------ ------------ ------------
179,563,840 162,697,183 140,538,515
------------ ------------ ------------
Operating expenses
Operations and maintenance (exclusive of
items shown separately below) 33,987,898 30,506,792 24,776,324
Cost of equipment sold 12,115,073 10,448,214 13,654,007
Home roamer costs 31,280,458 27,668,831 20,468,432
Depreciation 22,593,187 19,318,449 17,822,738
Amortization of intangible assets 267,278 -- 4,505,851
Selling, general and administrative 41,111,864 35,113,593 31,292,529
------------ ------------ ------------
141,355,758 123,055,879 112,519,881
------------ ------------ ------------
Operating income 38,208,082 39,641,304 28,018,634
------------ ------------ ------------
Other income (expense)
Interest expense (7,204,744) (8,078,374) (9,416,290)
Interest and dividend income 2,887 92,915 136,870
Other (61,529) 34,669 (41,784)
------------ ------------ ------------
Total other expense (7,263,386) (7,950,790) (9,321,204)
------------ ------------ ------------
Minority interest (3,494,303) (3,576,994) (2,109,070)
------------ ------------ ------------
Income from continuing operations before
cumulative effect of change in accounting
principle 27,450,393 28,113,520 16,588,360
Cumulative effect of change in accounting
principle net of minority interest (754,990) -- --
------------ ------------ ------------
Net income $ 26,695,403 $ 28,113,520 $ 16,588,360
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
51
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
TOTAL
CAPITAL ACCUMULATED MEMBERS'
CONTRIBUTIONS INCOME EQUITY
BALANCES AT DECEMBER 31, 2000 $84,797,020 $23,977,701 $108,774,721
Distributions to members -- (8,174,899) (8,174,899)
Net income -- 16,588,360 16,588,360
----------- ----------- ------------
BALANCES AT DECEMBER 31, 2001 84,797,020 32,391,162 117,188,182
Redemption (83,921) (374,030) (457,951)
Distributions to members -- (8,343,869) (8,343,869)
Net income -- 28,113,520 28,113,520
----------- ----------- ------------
BALANCES AT DECEMBER 31, 2002 84,713,099 51,786,783 136,499,882
Issuance of units related to the acquisition
of Iowa properties 1,941,468 -- 1,941,468
Distributions to members -- (9,491,691) (9,491,691)
Net income -- 26,695,403 26,695,403
----------- ----------- ------------
BALANCES AT DECEMBER 31, 2003 $86,654,567 $68,990,495 $155,645,062
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
52
MIDWEST WIRELESS HOLDINGS L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $26,695,403 $28,113,520 $16,588,360
Adjustments to reconcile net income to net cash provided by
operating activities
Net income allocated to minority interest 3,398,600 3,576,994 2,109,070
Provision for bad debts 1,327,703 928,358 1,115,719
Depreciation 22,593,187 19,318,449 17,822,738
Amortization of intangibles 267,278 -- 4,505,851
Gain on disposal of fixed assets (125,277) (3,645) (2,124)
Writeoff of Cellular 2000, Inc. investment -- 25,000 --
Patronage received in form of cooperative stock (361,318) (310,848) (132,785)
Cumulative effect of accounting change 850,693 -- --
Changes in assets and liabilities
Accounts receivable (2,434,724) 1,851,263 (3,299,942)
Inventories (1,168,070) 796,314 510,885
Other assets 234,808 (277,868) (546,637)
Accounts payable 493,555 1,674,214 (2,156,106)
Accrued expenses 179,454 863,987 1,888,444
Other liabilities 1,863,618 (425,552) (689,617)
----------- ----------- -----------
Net cash provided by operating activities 53,814,910 56,130,186 37,713,856
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of cellular properties (42,780,847) -- --
Payments for property, cellular plant and equipment (29,234,491) (31,901,881) (33,804,163)
Proceeds from the disposal of fixed assets 518,573 -- 37,571
Purchase of FCC licenses -- (7,400,239) (22,400,000)
Purchases of cooperative stock -- (22,440) (1,176,440)
Redemption of cooperative stock 421,527 72,970 68,313
Payments for deferred acquisition costs -- -- (192,511)
----------- ----------- -----------
Net cash used in investing activities (71,075,238) (39,251,590) (57,467,230)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds on revolving loan (25,000,000) 5,000,000 17,500,000
Proceeds from debt borrowings 68,297,657 -- 23,473,686
Payments on debt (14,815,075) (13,679,659) (11,016,802)
Distributions to members (9,491,691) (8,343,869) (8,174,899)
Distribution from subsidiary to minority interest (1,209,407) (1,062,371) (1,039,851)
Redemption of units -- (457,951) --
----------- ----------- -----------
Net cash provided by (used in) financing activities 17,781,484 (18,543,850) 20,742,134
----------- ----------- -----------
Net change in cash and cash equivalents 521,156 (1,665,254) 988,760
CASH AND CASH EQUIVALENTS
Beginning of year 1,367,210 3,032,464 2,043,704
----------- ----------- -----------
End of year $ 1,888,366 $ 1,367,210 $ 3,032,464
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE
Cash paid during the year for interest $ 8,165,844 $ 8,828,483 $10,540,203
Equity units issued for acquisitions 1,941,468 -- --
NONCASH INVESTING ACTIVITIES
Equipment acquired under capital leases 3,244,433 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
53
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION
Midwest Wireless Holdings L.L.C. (the "Company") was formed in November
1999 as a Delaware limited liability company to acquire and operate
cellular communications properties in the Midwest portion of the United
States of America. Upon its formation, the Company exchanged its equity
units for approximately 86% of the equity units of Midwest Wireless
Communications, L.L.C.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the Company's wholly owned
subsidiaries, Midwest Wireless Iowa, L.L.C. and Midwest Wireless
Wisconsin, L.L.C., as well as its majority owned subsidiary, Midwest
Wireless Communications, L.L.C. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the periods reported. Actual results could
differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company provides cellular service and cellular telephones to a
diversified group of consumers within a concentrated geographical area.
The Company performs credit evaluations of its customers and requires a
deposit when deemed necessary. Receivables are generally due within 30
days.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and highly liquid
investments with original maturities of three months or less. The Company
has funds in excess of federally insured limits as of December 31, 2003
and 2002.
CELLULAR TELEPHONE INVENTORIES
Inventories consist primarily of cellular phones and accessories held for
resale with cost determined using the specific identification method.
Losses on sales of cellular phones are recognized in the period in which
sales are made as a cost of acquiring subscribers.
54
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROPERTY, CELLULAR PLANT AND EQUIPMENT
Property, cellular plant and equipment is stated at its original cost.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the cellular plant and equipment. The estimated useful
lives of the cellular plant and equipment are as follows:
Building and improvements 3-30 years
Other equipment 2-20 years
Communication and network equipment 7-15 years
Vehicles 3 years
Computer equipment 3 years
Major renewals or betterments are capitalized, while repair and
maintenance expenditures are charged to operations as incurred. Interest
incurred on external borrowings during construction is capitalized. The
cost and accumulated depreciation of property, cellular plant and
equipment disposed of or sold are eliminated from their respective
accounts, and the resulting gain or loss is recorded in operations.
INTANGIBLE ASSETS
Customer relationships are amortized on a straight-line basis over two to
six years. FCC licenses consist of the cost of acquiring cellular,
personal communication services ("PCS"), and local multi-point
distribution licenses. It also includes the value assigned to cellular
licenses acquired through the acquisitions of operating cellular systems.
The Company ceased amortization of its licenses effective January 1,
2002, with the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (Note 3).
LONG-LIVED ASSETS
The Company periodically reviews long-lived assets and fixed assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Recoverability is
based on projected cash flows on an undiscounted basis.
On January 1, 2003, the Company adopted SFAS No. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS. This statement relates to the costs of
closing facilities and removing assets. SFAS No. 143 requires entities to
record the fair value of a legal liability for an asset retirement
obligation ("ARO") in the period it is incurred if a reasonable estimate
of fair value can be made. This cost is initially capitalized and
amortized over the remaining life of the underlying assets. Once the
obligation is ultimately settled, any difference between the final cost
and the recorded liability is recognized as a gain or loss. For the
Company, an ARO includes those costs associated with removing component
equipment that is subject to retirement from cell sites that reside upon
leased property. As a result of adopting SFAS No. 143, on January 1,
2003, the Company recorded an ARO of $1,266,744 and a cumulative effect
of this reduction in net income, reflecting the change in accounting
principle of $850,693. The cumulative effect of this change resulted from
accumulated accretion and depreciation of the ARO and related asset as of
January 1, 2003 through December 31, 2002. After a minority interest
effect of $95,703, the net charge was $754,990. Accretion and
depreciation expenses for the year 2003 related to the ARO were $186,161.
55
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
Service revenue consists of the base monthly service fee and airtime
revenue. Base monthly service fees are billed one month in advance and
are recognized in the month earned. Airtime and roamer revenue is
recognized when the service is provided. The Company recognizes revenue
for equipment installation when the installation is completed and the
Company recognizes equipment revenue when the equipment is delivered and
accepted by customers.
ROAMING REVENUE RECLASSIFICATION
The Company generates revenue from charges to its customers when they use
their cellular phones in other wireless providers' markets ("Incollect
Revenue"). Until 2002, the Company included Incollect Revenue on a net
basis as a component of Home Roamer Costs as an operating expense in its
statement of operations. Expense associated with Incollect Revenue,
charged by third-party wireless providers, is also included in Home
Roamer Costs. The Company used this method because, historically, it had
passed through to its customers most of the costs related to Incollect
Revenue. However, the wireless industry and the Company have increasingly
been using pricing plans that include flat rate pricing and larger home
service areas. Under these types of plans, amounts charged to the Company
by other wireless providers may not necessarily be passed through to its
customers.
In 2002, the Company adopted a policy to include Incollect Revenue as
Subscriber Service revenue rather than in Home Roamer Costs on a net
basis. Roamer Service Revenue includes only the revenue from other
wireless providers' customers who use the Company's network ("Outcollect
Revenue"). Subscriber Service Revenue and Home Roamer Costs in the 2001
and 2000 consolidated financial statements were reclassified to conform
to this presentation. This change in presentation has no impact on
operating income, net income or members' equity.
The Company recorded Incollect Revenue of $9,021,044, $8,434,482 and
$7,549,289 for the years ended December 31, 2003, 2002 and 2001,
respectively.
INCOME TAXES
No provision for income taxes has been recorded since all income, losses
and tax credits are allocated to the members for inclusion in their
respective income tax returns.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising expenses
were $3,310,758, $3,317,280 and $4,448,949 for the years ended December
31, 2003, 2002 and 2001, respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method. Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the fair value of the
stock at the date of the grant over the amount an employee must pay to
acquire the stock. Such compensation costs are amortized on a
straight-line basis over the underlying option's vesting term. No such
compensation expense was recognized for the years ended December 31,
2003, 2002 and 2001.
56
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
If the Company had elected to recognize compensation expense for options
granted using the fair value method, net income would have been as
follows:
2003 2002 2001
Net income, as reported $26,695,403 $28,113,520 $16,588,360
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards (199,789) (337,615) (214,783)
----------- ----------- -----------
Pro forma net income $26,495,614 $27,775,905 $16,373,577
----------- ----------- -----------
3. GOODWILL, FCC LICENSES AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142. Effective
with the adoption of this standard, the Company no longer amortizes FCC
licenses ("licenses"), which consist of licenses that provide the Company
with the exclusive right to utilize certain radio frequency spectrum to
provide wireless communication services. Although the licenses are issued
for only a fixed time, generally ten years, they are subject to renewal
by the FCC; but the renewals of licenses have occurred routinely and at
nominal cost. Moreover, there are currently no legal, regulatory,
contractual, competitive, economic, or other factors that limit the
useful lives of the licenses. As a result, licenses are treated as
indefinite-lived intangible assets and will not be amortized but rather
are tested annually for impairment. The Company evaluates the useful life
determination for licenses each reporting period to determine whether
events and circumstances continue to support an indefinite life.
In connection with the adoption of SFAS No. 142, the Company completed a
transitional and impairment test for its licenses and determined that
there was no impairment. The Company also completed annual impairment
tests on December 31, 2003 and 2002, and determined that there was no
impairment. The Company utilized a fair value approach, primarily using
discounted cash flows, to complete the impairment tests.
On October 15, 2003, the Company acquired various cellular communications
properties (Note 5). The Company allocated a portion of the excess
purchase price over the fair value of the net tangible assets acquired to
goodwill. The Company does not amortize goodwill, but will complete
annual impairment tests of the goodwill to determine if impairment
exists. As a result of this acquisition, $9,426,669 of goodwill was
recorded with no accumulated amortization.
On a prospective basis, the Company is required to test both goodwill and
indefinite-lived intangible assets for impairment on an annual basis
based upon a fair value approach. Additionally, goodwill will be tested
for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of entity
below its carrying value. These events or circumstances would include a
significant change in the business climate, including a significant
sustained decline in an entity's market value, legal factors, operating
performance indicators, competition, sale or disposition of a significant
portion of the business, or other factors. Other indefinite-lived
intangible assets will be tested between annual tests if events or
changes in circumstances indicate that the asset might be impaired. The
Company will next perform its annual impairment test for both goodwill
and licenses during the fourth quarter of 2004.
57
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Indefinite-lived intangible assets consist of the following at
December 31:
2003 2002
FCC licenses $222,015,830 $204,534,427
Less: Accumulated amortization (9,922,264) (9,922,264)
------------ ------------
$212,093,566 $194,612,163
============ ============
The changes in the carrying amount of goodwill and FCC licenses for the
year ended December 31, 2003, are as follows:
GOODWILL FCC LICENSES
Balance as of January 1, 2003 $ -- $194,612,163
Goodwill or FCC licenses acquired
or finally allocated during
the year 9,426,669 17,481,403
------------ ------------
Balance as of December 31, 2003 $ 9,426,669 $212,093,566
============ ============
The adjusted amounts shown below reflect the effect of retroactive
application of discontinuance of the amortization of licenses as if the
new method of accounting had been in effect during 2001.
2003 2002 2001
Net income
Reported net income $ 26,695,403 $ 28,113,520 $ 16,588,360
Amortization -- -- 4,505,851
------------ ------------ ------------
Adjusted net income $ 26,695,403 $ 28,113,520 $ 21,094,211
============ ============ ============
Definite-lived intangible assets consist of the following at December 31:
2003 2002
Customer relationships $ 8,888,056 $ --
Less: Accumulated amortization (267,278) --
------------ ------------
$ 8,620,778 $ --
============ ============
Amortization expense related to definite-lived intangible assets was
$267,278 in 2003.
58
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Estimated amortization expense of identified intangible assets for the
next five years is as follows:
2004 $ 1,551,518
2005 1,510,927
2006 1,450,000
2007 1,450,000
2008 1,450,000
4. SELECT ACCOUNT INFORMATION
PROPERTY, CELLULAR PLANT AND EQUIPMENT
2003 2002
Land $ 5,736,838 $ 3,643,696
Plant in service 189,462,369 153,533,992
Plant under construction 10,378,016 6,815,296
------------ ------------
205,577,223 163,992,984
Less: Accumulated depreciation (84,490,984) (61,773,480)
------------ ------------
$121,086,239 $102,219,504
============ ============
The Company capitalized interest in the amount of $385,157, $443,911 and
$581,879 for the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003 and 2002, accounts payable included
$612,404 and 2,100,831, respectively, related to the purchase of
property, cellular, plant and equipment. Property, cellular plant and
equipment includes plant in service under lease with a cost basis of
$3,244,433 and accumulated depreciation of $118,251.
5. ACQUISITIONS
On October 15, 2003, the Company, through its wholly owned subsidiary,
Midwest Wireless Iowa, L.L.C., completed an acquisition of cellular
communications properties providing services to a 17-county area of Iowa.
The acquisition was accounted for as a purchase. Accordingly, the Company
allocated the excess purchase price over the fair value of the net
tangible assets acquired to FCC licenses, Goodwill and Customer
Relationships. The fair value of the acquired intangible assets was based
on an independent appraisal of the FCC licenses and Customer
Relationships. The Company is amortizing the value of Customer
Relationships over six years. As a result, the financial statements
include the operations related to the acquisition beginning at the
acquisition date.
59
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table presents the computation of the purchase price, the
estimated fair value of tangible assets, FCC Licenses, Customer
Relationships acquired, and the amount allocated to goodwill. Amounts
were allocated to tangible assets and liabilities based upon their fair
values as of the date of acquisition. The fair value of property,
cellular plant and equipment was based upon an independent appraisal.
Cash $41,018,532
Equity units issued 1,941,468
Acquisition costs 1,092,858
Liabilities assumed and resulting from acquisition
Accounts payable and accrued liabilities 19,250
Customer deposits 64,450
Deferred revenue 425,393
Allowance for customer conversion 1,337,230
-----------
Total purchase price 45,899,181
-----------
Estimated fair value of tangible assets acquired
Accounts receivable 816,334
Prepaid expenses and unbilled revenue 103,315
Investment in cooperatives 158,029
Property, cellular plant and equipment 9,694,834
-----------
Total tangible assets 10,772,512
-----------
Estimated fair value of intangible assets acquired
Customer relationships 8,700,000
FCC licenses 17,000,000
-----------
Total intangible assets 25,700,000
-----------
Net assets acquired 36,472,512
-----------
Goodwill $ 9,426,669
===========
On June 25, 2001, the Company acquired eight digital PCS licenses from
McLeod USA, Inc. for a total purchase price of $22,400,000. The purchase
is for spectrum licenses only and does not include any other assets. The
licenses cover a total population of approximately 1.4 million in 63
counties in northern Iowa, southern Minnesota, eastern South Dakota,
eastern Nebraska and western Illinois. The purchase price together with
costs incurred of approximately $100,000 to complete the transaction was
allocated to FCC licenses.
In July 2002, the Company acquired three digital PCS licenses for
$7,385,058. The agreement is for the purchase of spectrum licenses only
and does not include any other assets. The licenses cover 26 counties
primarily in southern Minnesota.
6. MEMBERS' CAPITAL
Members' capital includes capital contributions made by the members and
the accumulated income resulting from operations. Company income or loss
is allocated to the individual members based upon their ownership
percentage, as defined in the Limited Liability Company Agreement (the
"Agreement"). Pursuant to the Agreement, members are not obligated for
the debts and obligations of the Company, including accumulated losses in
excess of capital contributions.
60
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under the Agreement certain restrictions exist that dictate the specific
terms of any transfer or sale of units. Upon receipt of a bona fide offer
in writing from a third party, the other members and then the Company
have the right to purchase all, but not less than all, of the units at
the bona fide offer price within a specified time frame.
The Agreement also contains the right of co-sale under which no member
may transfer its units to an acquiring person, as defined in the
Agreement, who after such transfer would be an acquiring person without
assuring that each of the other members may participate in the transfer
of units under the same terms and conditions. The right of co-sale would
terminate in the event the Company completes a sale of securities
pursuant to a securities act or if the Company's market capitalization
would exceed $200,000,000.
Each member is entitled to one vote for each unit owned. Certain
restrictions on voting rights exist when units are sold to an acquiring
person.
7. DEBT
Debt consists of the following:
RATE AT BALANCE AT
DECEMBER 31 DECEMBER 31
---------------- ----------------------------------
MATURITY 2003 2002 2003 2002
RTFC note, variable rate 5/12/09 4.40% 5.50% $ 8,469,711 $ 9,735,315
RTFC note, variable rate 4/30/09 4.40% 5.50% 17,726,490 20,375,286
RTFC note, variable rate 7/29/08 4.40% 5.75% 5,012,518 5,882,114
RTFC note, variable rate 7/28/08 4.40% 5.50% 4,585,861 5,381,438
RTFC note, variable rate 3/2/10 4.40% 5.50% 71,511,346 80,191,775
RTFC note, variable rate 2/3/15 4.40% 5.50% 7,152,796 7,548,707
CoBank note, variable rate 10/20/03 5.00% -- 25,000,000
CoBank note, variable rate 6/30/09 4.75% 55,000,000 --
CoBank note, variable rate 6/30/09 4.75% 13,297,657 --
Farm Credit Leasing 10/16/06 3.82% 1,969,350 --
Farm Credit Leasing 11/30/08 4.00% 1,115,920 --
------------- -------------
$ 185,841,649 $ 154,114,635
Less: Current maturities (16,361,168) (39,655,912)
------------- -------------
$ 169,480,481 $ 114,458,723
============= =============
The Company has entered into various agreements (the "Agreements") with
the Rural Telephone Finance Cooperative ("RTFC"). In 2000, the Company
entered into an agreement to fund the acquisitions of the Iowa and
Wisconsin cellular markets and the construction of a new headquarters
building. The Agreements provide for borrowings of up to $159,725,739.
The principal and interest on the variable and fixed rate notes are
payable in quarterly installments. The Agreements provide the Company the
option to fix the interest rate on borrowings (or portions thereof)
through the maturity date. The variable rate is based on RTFC's cost of
capital and is adjusted monthly. The Agreements also provide for a
revolving loan of up to $10,000,000. Borrowings under the revolving loan
bear interest at the prime rate plus 1.5%. The outstanding principal and
interest are due upon maturity. At December 31, 2003 and 2002, the
Company had no borrowings outstanding under the RTFC revolving loan.
61
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Agreements require the Company to maintain an investment in RTFC in
the amount of at least 5% of the outstanding debt balance. The Agreements
also contain covenants that restrict distributions to members and require
the Company to maintain a current ratio of not less than 1.25. At
December 31, 2002 and 2003, the Company was not in compliance with this
covenant, but a waiver was provided by RTFC. Substantially all assets of
the Company are pledged as collateral under the Agreement.
On October 22, 2001, the Company entered into an agreement with CoBank,
ACB ("CoBank") to fund the acquisition of various PCS licenses, capital
expenditures and operating funds. The original agreement provided for
borrowings of up to $40,000,000 (the "revolving loan"). At December 31,
2001, the Company had drawn $20,000,000 on the revolving loan. At
December 31, 2001, borrowings under the agreement bore interest at LIBOR
plus 2.5% or 4.85%. On November 22, 2002, the Company amended the
agreement to provide for borrowings of up to $65,000,000, amended the
interest rate pricing, and extended the expiration date to October 20,
2003. At December 31, 2002, the Company had drawn $25,000,000 on the
revolving loan. At December 31, 2002, borrowings under the agreement bore
interest at LIBOR plus 3.5% or 5.0%. On October 15, 2003, the Company
amended the agreement to provide for borrowings up to $80,000,000
including a single draw term loan of $55,000,000 with interest at LIBOR
plus 3.5% or prime plus 2.5%, a $20,000,000 revolving loan ("Revolver B")
with interest at LIBOR plus 3.5% or prime plus 2.5%, and a $5,000,000
secured cash management revolving loan ("Revolver A") with interest at
prime plus 0.75%. The total facility matures on June 30, 2009. The term
facility has scheduled principal payments beginning the first quarter of
2005, Revolver B has mandatory commitment reductions beginning in the
first quarter of 2007.
The CoBank loan is subject to various covenants including a limit on the
ratio of indebtedness to annualized operating cash flow, a minimum ratio
of operating cash flow to interest paid, and a minimum debt coverage
service ratio. Substantially all the assets of the Company are pledged as
collateral under the agreement with CoBank.
RTFC and CoBank have agreed to share a security interest in the Company's
assets on a pro rata basis.
On October 10, 2003, the Company entered into a lease agreement with Farm
Credit Leasing. It entered into a lease under the agreement on October
15, 2003, for the lease of a switch and related equipment located in Des
Moines, Iowa. The cost of the equipment leased was $2,000,000. The lease
provides for monthly payments of $48,385 for 36 months. The Company has
the option to acquire the equipment at the end of the lease for $400,000
or renew the lease for an additional 12 months. On December 24, 2003, the
Company entered into a second lease under the agreement for the lease of
network equipment. The cost of the equipment was $1,040,177. The lease
provides for monthly payments of $15,963 for 60 months. The Company has
the option to acquire the equipment at the end of the lease for $208,035
or renew the lease for an additional 12 months. Both of these leases have
been recorded as capital leases and therefore the assets subject to the
lease have been capitalized and the lease obligation has been recorded as
debt.
62
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Maturities of debt are as follows:
2004 $ 16,361,168
2005 22,566,421
2006 26,521,849
2007 34,353,076
2008 43,385,638
Thereafter 42,653,497
------------
$185,841,649
============
8. OPERATING LEASE COMMITMENTS
Future minimum rental payments required under operating leases,
principally for real estate related to tower sites, and other contractual
commitments that have initial or remaining noncancellable terms in excess
of one year at December 31, 2003, are as follows:
2004 $ 1,366,937
2005 1,154,048
2006 920,650
2007 648,342
2008 335,151
Thereafter 814,999
------------
$ 5,240,127
============
Rental expense was $2,079,076, $1,645,524 and $955,514 for the years
ended December 31, 2003, 2002 and 2001, respectively.
9. EMPLOYEE BENEFITS
The Company established the Midwest Wireless Holdings L.L.C. and
Subsidiary Companies 401(k) Profit Sharing Plan and Trust (formerly the
Midwest Wireless Communications L.L.C. Profit Sharing Plan and Trust)
(the "401(k) Plan") for all employees who meet certain service and age
requirements. The 401(k) Plan is comprised of an employer matching
contribution component and a profit sharing component. Employer matching
contributions to this component of the plan were $493,124, $473,644 and
$376,783 for the years ended December 31, 2003, 2002 and 2001,
respectively. Profit sharing contribution expenses were $597,716,
$544,981 and $455,778 for the years ended December 31, 2003, 2002 and
2001, respectively. Profit sharing contributions are 100% vested after
five years of employment.
63
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Effective January 1, 1997, the Company established the Midwest Wireless
Holdings L.L.C. Appreciation Rights Plan, as amended (formerly the
Midwest Wireless Communications L.L.C. Appreciation Rights Plan) (the
"Plan") for certain key employees. The Plan is designed to create two
classes of appreciation rights, Class A and Class B, which become fully
vested three years and five years, respectively, after the first day of
the year the rights are granted. Participants in the Plan are eligible to
receive awards based on defined increases in members' equity from the
date of grant through the end of the vesting period. The Board of
Managers granted both Class A and Class B appreciation rights in 1997.
Under the terms of the Plan, no additional Class B appreciation rights
will be granted, and additional Class A appreciation rights will be
granted at the discretion of the Board of Managers. However, effective
January 1, 2002, the Plan was amended to enable additional Class B
appreciation rights to be granted in 2002. In 2000 and 2001, the Board of
Managers issued additional Class A appreciation rights to certain key
employees and in 2000 authorized an additional 9,000 rights for new Plan
participants. The Company recognized $1,359,360, $1,287,172 and
$1,053,863 in compensation expense related to the Plan for the years
ended December 31, 2003, 2002 and 2001, respectively.
10. OPTION PLAN
During 2000, the Company's Board of Managers adopted and approved the
Midwest Wireless Holdings L.L.C. Unit Option Plan, as amended. Effective
July 2001, the Plan was amended to clarify certain language and
definitions in the Plan. Under the Plan, options to purchase 46,742 of
the Company's membership units may be granted to employees with terms and
vesting periods determined by the Company's Board of Managers at the date
of grant. The exercise price is equal to the fair value of the units at
the time the option is granted, as determined by the Board of Managers.
Options granted under the plan expire ten years from the date of grant.
The options granted vest 100% three years after they are granted. At
December 31, 2003, there were 30,343 units available for issuance under
this plan.
OPTIONS OUTSTANDING
--------------------------
WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER PRICE PER
GRANT OF UNITS UNIT
Balances at December 31, 2001 37,940 8,802 $309.37
Granted (4,809) 4,809 $344.00
------ ------
Balances at December 31, 2002 33,131 13,611 $321.60
Granted (2,788) 2,788 $263.84
------ ------
Balances at December 31, 2003 30,343 16,399 $311.78
====== ======
The weighted average fair value of options at the date of grant was
$58.03, $66.12 and $52.73 in 2003, 2002 and 2001, respectively.
64
MIDWEST WIRELESS HOLDINGS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE
$263.84 2,788 9.01 $263.84 -- --
$299.06 4,092 6.59 $299.06 4,092 $299.06
$318.32 4,285 7.01 $318.32 4,285 $318.32
$318.32 425 7.65 $318.32 425 $318.32
$344.00 4,809 8.01 $344.00 -- --
The fair value for each option grant was estimated at the date of grant
using the minimum value method with the following assumptions:
FISCAL YEAR
-----------------------------------
2003 2002 2001
Dividend yield 3.46% 2.33% 2.47%
Risk-free interest rate 4.07% 5.20% 4.73%
Expected lives 10 years 10 years 10 years
65
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEW ULM TELECOM, INC.
(Registrant)
Date: March 26, 2004 By /s/ Bill Otis
-------------- ------------------------------------------------
Bill Otis, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
KNOW ALL BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints __Bill Otis___ as his or her true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
SEC, granting unto said attorney-in-fact and agent, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Date: March 26, 2004 By /s/ Bill Otis
-------------- ------------------------------------------------
Bill Otis, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nancy Blankenhagen
------------------------------------------------
Nancy Blankenhagen, Interim Chief Financial
Officer and Treasurer (Interim Principal
Financial and Accounting Officer)
/s/ James Jensen
------------------------------------------------
James Jensen, Chairman of the Board
/s/ Duane Lambrecht
------------------------------------------------
Duane Lambrecht, Director
/s/ Gary Nelson
------------------------------------------------
Gary Nelson, Director
/s/ Rosemary Dittrich
------------------------------------------------
Rosemary Dittrich, Director
/s/ Mary Ellen Domeier
------------------------------------------------
Mary Ellen Domeier, Director
/s/ Perry Meyer
------------------------------------------------
Perry Meyer, Director
/s/ Robert Ranweiler
------------------------------------------------
Robert Ranweiler, Director
66
INDEX TO EXHIBITS
Exhibits are required to be filed by Item 601 of Regulation S-K are included as
Exhibits to this report as follows:
3.1 Restated Articles of Incorporation (incorporated by reference to
the New Ulm Telecom, Inc. quarterly report on Form 10-Q (file No.
000-03024) filed on August 12, 2003).
3.2 Restated By-Laws (incorporated by reference to the New Ulm
Telecom, Inc. annual report on Form 10-K (file No. 000-03024) for
the fiscal year ended December 31, 1986).
4.1 The registrant, by signing this Report, agrees to furnish the
Securities and Exchange Commission, upon its request, a copy
of any instrument which defines the rights of holders of
long-term debt of the registrant and all of its subsidiaries for
which consolidated financial statements are required to be filed,
and which authorizes a total amount of securities not in excess
of 10% of the total assets of the registrant and its subsidiaries
on a consolidated basis.
21* Subsidiaries of the Registrant
24* Power of Attorney (Included on Signature Page)
31.1* Chief Executive Officer Certification pursuant to Exchange Act
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Chief Financial Officer Certification pursuant to Exchange Act
Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1* Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith
67