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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3024
NEW ULM TELECOM, INC.
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 41-0440990
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
27 NORTH MINNESOTA STREET
NEW ULM, MINNESOTA 56073
(Address of Principal Executive Offices, Including Zip Code)
(507) 354-4111
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
----- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X .
----- ------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of May 10, 2004: 5,115,435 shares of common stock outstanding.
NEW ULM TELECOM, INC. AND SUBSIDIARIES
MARCH 31, 2004
PART I FINANCIAL INFORMATION
Item 1 Financial Statements............................................3-7
Unaudited Consolidated Balance Sheets...........................3-4
Unaudited Consolidated Statements of Income.......................5
Unaudited Consolidated Statements of Stockholders' Equity.........6
Unaudited Consolidated Statements of Cash Flows...................7
Notes to Unaudited Consolidated Financial Statements...........8-14
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15-24
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......24
Item 4 Controls and Procedures..........................................25
PART II OTHER INFORMATION.....................................................26
Item 2 Changes in Securities and Use of Proceeds........................26
Item 6 Exhibits and Report on Form 8-K..................................26
SIGNATURES....................................................................26
INDEX TO EXHIBITS.............................................................27
NEW ULM TELECOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,935,079 $ 2,201,435
Receivables, net of allowance for
doubtful accounts of $113,634 and $102,500 1,472,691 2,649,347
Inventories 330,407 336,958
Prepaid expenses 205,385 271,716
----------- -----------
4,943,562 5,459,456
----------- -----------
INVESTMENTS AND OTHER ASSETS
Goodwill and intangibles, net of amortization 3,243,877 3,244,390
Cellular investments 15,701,346 15,155,015
Other 1,478,909 1,181,089
----------- -----------
20,424,132 19,580,494
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telecommunications plant 54,461,672 54,108,739
Other property and equipment 2,572,777 2,562,539
Cable television plant 2,237,142 2,207,476
----------- -----------
59,271,591 58,878,754
Less Accumulated Depreciation 31,653,474 30,588,170
----------- -----------
27,618,117 28,290,584
----------- -----------
TOTAL ASSETS $52,985,811 $53,330,534
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,515,217 $ 2,515,217
Accounts payable 634,940 1,011,579
Other accrued taxes 70,985 75,188
Other accrued liabilities 533,391 612,552
----------- -----------
3,754,533 4,214,536
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 17,005,413 17,630,413
----------- -----------
OTHER NON-CURRENT LIABILITIES AND DEFERRED CREDITS
Loan guarantee 187,500 --
Deferred income taxes 5,243,963 5,243,963
Investment tax credits 2,331 3,165
----------- -----------
5,433,794 5,247,128
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - $1.66 par value, 10,000,000
and 0 shares authorized, 0 shares issued
and outstanding -- --
Common stock - $1.66 par value, 19,200,000
shares authorized, 5,115,435 and 5,115,585
shares issued and outstanding, respectively 8,525,725 8,525,975
Retained earnings 18,266,346 17,712,482
----------- -----------
26,792,071 26,238,457
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $52,985,811 $53,330,534
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
----------- -----------
OPERATING REVENUES
Local network $ 987,505 $ 860,060
Network access 1,586,451 1,543,268
Billing and collecting 21,491 28,718
Miscellaneous 108,969 110,290
Video services 410,972 287,685
Other nonregulated services 877,525 761,381
----------- -----------
3,992,913 3,591,402
----------- -----------
OPERATING EXPENSES
Plant operations 514,851 473,897
Depreciation and amortization 1,065,910 1,024,786
Customer 278,619 213,691
General and administrative 555,190 505,798
Other operating expenses 766,042 616,514
----------- -----------
3,180,612 2,834,686
----------- -----------
OPERATING INCOME 812,301 756,716
----------- -----------
OTHER (EXPENSES) INCOME
Interest expense (134,122) (152,306)
Interest income 14,264 8,322
Cellular investment income 789,002 769,147
Other investment income 165,812 210,587
----------- -----------
834,956 835,750
----------- -----------
INCOME BEFORE INCOME TAXES 1,647,257 1,592,466
INCOME TAXES 666,124 649,889
----------- -----------
NET INCOME $ 981,133 $ 942,577
=========== ===========
BASIC AND DILUTED
NET INCOME PER SHARE - NOTE 2 $ 0.19 $ 0.18
=========== ===========
DIVIDENDS PER SHARE $ 0.0833 $ 0.0833
=========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 5,115,435 5,115,585
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003 AND
THREE MONTHS ENDED MARCH 31, 2004
Common Stock Retained
Shares Amount Earnings
------------ ------------ ------------
BALANCE on December 31, 2003 5,115,585 $ 8,525,975 $ 17,712,482
Net income 981,133
Dividends (426,117)
Retired stock (150) (250) (1,152)
------------ ------------ ------------
BALANCE on March 31, 2004 5,115,435 $ 8,525,725 $ 18,266,346
============ ============ ============
The accompanying notes are an integral part of the financial statements.
6
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED
-----------------------------------
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 981,133 $ 942,577
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,065,910 1,024,786
Cellular investment income (789,002) (769,147)
Distributions from cellular investements 242,671 222,019
Decrease in:
Receivables 1,176,656 664,996
Inventories 6,551 124,211
Prepaid expenses 66,331 32,811
Increase (Decrease) in:
Accounts payable 66,237 69,109
Other accrued taxes (4,203) 13,341
Other accrued liabilities (79,161) 26,857
Deferred investment tax credits (834) (886)
----------- -----------
Net cash provided by operating activities 2,732,289 2,350,674
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (835,806) (1,765,506)
Change in notes receivable -- 17,037
Other, net (110,320) (172,486)
----------- -----------
Net cash used in investing activities (946,126) (1,920,955)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments of Long-Term Debt (625,000) (381,978)
Retire Stock (1,402) --
Dividends Paid (426,117) (426,129)
----------- -----------
Net Cash Used by Financing Activities (1,052,519) (808,107)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 733,644 (378,388)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,201,435 1,914,113
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,935,079 $ 1,535,725
=========== ===========
The accompanying notes are an integral part of the financial statements.
7
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of New Ulm Telecom,
Inc. and its wholly owned subsidiaries (the "Company"). All material
intercompany transactions and accounts have been eliminated. Accounting
practices prescribed by regulatory authorities have been considered in the
preparation of the financial statements and formulation of accounting policies
for the Company. These policies conform with generally accepted accounting
principles as applied to regulated public utilities in accordance with Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. Interstate network access revenues are furnished in conjunction with
interexchange carriers and are determined by cost separation studies and
nationwide average schedules. Revenues include estimates pending finalization of
cost studies. Interstate network access revenues are based upon interstate
tariffs filed with the Federal Communications Commission by the National
Exchange Carrier Association and state tariffs filed with state regulatory
agencies. Management believes recorded revenues are reasonable based on
estimates of cost separation studies, which are typically settled within two
years. Local network and intrastate access revenues are based on tariffs filed
with the state regulatory commissions.
Income taxes have been calculated in proportion to the earnings and tax credits
generated by operations. Investment tax credits have been deferred and are
included in income over the estimated useful lives of the related assets. The
Company's effective income tax rate is higher than the U.S. rate due to the
effect of state income taxes.
The balance sheets and statement of stockholders' equity as of March 31, 2004,
and statements of income and the statements of cash flows for the periods ended
March 31, 2004 and 2003 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial
8
position, results of operations, and changes in cash flows at March 31, 2004 and
for the three-month periods ended March 31, 2004 and 2003 have been made.
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003. The results of
operations for the period ended March 31, 2004 are not necessarily indicative of
the operating results to be expected for the entire year.
NOTE 2 - BASIC AND DILUTED NET INCOME PER COMMON SHARE
Basic and diluted net income per common share is based on the weighted average
number of shares of common stock outstanding of 5,115,435 at March 31, 2004 and
5,115,585 at March 31, 2003.
NOTE 3 - RECLASSIFICATIONS
The consolidated financial statements of New Ulm Telecom, Inc. include New Ulm
Telecom, Inc. and its subsidiaries in the following three business segments: (i)
Telecom Sector, (ii) Cellular Sector and (iii) Phonery Sector. All intercompany
transactions have been eliminated from the consolidated financial statements.
Beginning in the first quarter 2004, New Ulm Telecom, Inc. and its subsidiaries
reported its previously reported business segments of New Ulm Telecom, Western
Telephone, Peoples Telephone, New Ulm Phonery, and Cellular on the basis of
functionality. The new basis of segment reporting reflects the integration of
New Ulm Telecom, Inc.'s management, sales, service and support functions in the
three areas of Telecom, Cellular, and Phonery, as well as reflecting the level
at which management now reviews and makes resource allocation and other
management decisions regarding the operations of the Company. All segment
information reported in 2003 has been reclassified to conform to this new
presentation. These reclassifications had no impact on previously reported
consolidated operating income, net income or shareholders' equity. See Note 8
for segment information.
9
NOTE 4 - STATEMENTS OF CASH FLOW
Supplemental Disclosures of Cash Flow Information:
Cash paid during the three months ended March 31:
2004 2003
---- ----
Interest $134,063 $155,922
Income taxes $12,000 $83,000
Noncash investing activities included $54,692 and $515,569 during the periods
ended March 31, 2004 and 2003, respectively, relating to plant and equipment
additions placed in service, which are reflected in accounts payable at March
31, 2004 and 2003. A noncash investing activity included $187,500 for the period
ended March 31, 2004 relating to the guarantee of indebtedness of FiberComm,
L.C.
NOTE 5 - SECURED REDUCING REVOLVING CREDIT FACILITY
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. At March 31, 2004, there was
$11,625,000 of direct borrowings outstanding under this facility at an interest
rate of 2.57%. The Company also entered into a $10 million secured ten-year
reducing revolving credit facility during fiscal 2001, maturing in 2011. At
March 31, 2004, there was $7,750,000 of direct borrowings outstanding under this
facility at an interest rate of 2.57%.
NOTE 6 - MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories are recorded at the lower of average cost or
market.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the provisions of this accounting standard, goodwill
and intangible assets with indefinite useful lives are no longer amortized, but
are instead tested for impairment on at least an annual basis.
At March 31, 2004, the Company had goodwill for wireline acquisitions of
$3,218,906, and goodwill associated with equity investments, included in
cellular investments, of $4,890,389. The Company determined that these assets
have indefinite useful lives and ceased amortization effective January 1, 2002.
The Company does not presently believe that these assets are impaired.
The Company owned 9.88% of Midwest Wireless Holdings, LLC (MWH) at March 31,
2004 (9.88% at December 31, 2003). The Company accounts for its investment in
MWH using the equity method, and earnings from the investment are material to
the Company's net income. At December 31, 2003 MWH had investments in cellular,
Local Multipoint Distribution Service
10
(LMDS) and Personal Communications Service (PCS) licenses totaling $212,093,566.
MWH has determined that these licenses have indefinite useful lives.
Changes in goodwill are summarized below:
March 31, December 31,
2004 2003
----------- ------------
Goodwill on wireline acquisitions $ 3,218,906 $ 3,218,906
Goodwill on cellular investments 4,890,389 4,890,389
----------- -----------
$ 8,109,295 $ 8,109,295
=========== ===========
Intangible assets subject to amortization pursuant to SFAS No. 142 are
summarized below:
March 31, December 31,
2004 2003
----------- ------------
Gross Carrying Amount $ 30,785 $ 30,785
Accumulated amortization (5,814) (5,301)
-------- --------
$ 24,971 $ 25,484
======== ========
Under SFAS No. 142 intangible assets with definite lives will continue to be
amortized over their useful lives. The estimated amortization expense for
intangible assets will be $2,053 per year for the next five years.
NOTE 8 - SEGMENT INFORMATION
The Company is organized into three business segments: the Telecom sector, the
Cellular sector, and the Phonery sector. The Telecom sector consists of the
operations of its incumbent local exchange carriers (ILEC's), its competitive
local exchange carrier (CLEC), and its operations that provide Internet and
video services. The Cellular sector includes the sales and service of cellular
phones and accessories, and a cellular investment in MWH. The cellular
investment in the Cellular sector is recorded on the equity method and is shown
using the proportionate consolidation method. The Phonery sector includes the
sales and service of customer premise equipment (CPE), transport operations, and
the resale of long distance toll service. No single customer accounted for a
material portion of the Company's revenues in any of the last three years.
Segment information is as follows:
11
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
Telecom Cellular Phonery
Segment Segment Segment Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2004
Operating Revenues $ 3,662,383 $ 4,771,740 $ 487,296 $ (4,928,506) $ 3,992,913
Operating Expenses 3,115,875 4,001,298 236,527 (4,173,088) 3,180,612
------------ ------------ ------------ ------------ ------------
Operating income 546,508 770,442 250,769 (755,418) 812,301
Interest expense (114,805) (215,942) -- 196,625 (134,122)
Cellular Investment Income -- -- -- 789,002 789,002
Other Investment Income 180,076 230,209 -- (230,209) 180,076
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 611,779 $ 784,709 $ 250,769 $ -- $ 1,647,257
============ ============ ============ ============ ============
Depreciation and amortization $ 1,045,975 $ 692,526 $ 19,935 $ (692,526) $ 1,065,910
============ ============ ============ ============ ============
Total Assets $ 83,650,996 $ 46,254,719 $ 4,858,219 $(81,778,123) $ 52,985,811
============ ============ ============ ============ ============
Capital Expenditures $ 835,806 $ 869,177 $ -- $ (869,177) $ 835,806
============ ============ ============ ============ ============
Telecom Cellular Phonery
Segment Segment Segment Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2003
Operating Revenues $ 3,308,388 $ 3,765,715 $ 424,027 $ (3,906,728) $ 3,591,402
Operating Expenses 2,742,006 2,818,603 259,994 (2,985,917) 2,834,686
------------ ------------ ------------ ------------ ------------
Operating income 566,382 947,112 164,033 (920,811) 756,716
Interest expense (110,881) (248,909) -- 207,484 (152,306)
Cellular Investment Income -- -- -- 769,147 769,147
Other Investment Income 218,873 55,820 36 (55,820) 218,909
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 674,374 $ 754,023 $ 164,069 $ -- $ 1,592,466
============ ============ ============ ============ ============
Depreciation and amortization $ 1,012,344 $ 511,849 $ 12,442 $ (511,849) $ 1,024,786
============ ============ ============ ============ ============
Total Assets $ 81,140,958 $ 39,733,068 $ 4,226,404 $(72,812,034) $ 52,288,396
============ ============ ============ ============ ============
Capital Expenditures $ 1,765,506 $ 677,247 $ -- $ (677,247) $ 1,765,506
============ ============ ============ ============ ============
NOTE 9 - RECENT ACCOUNTING DEVELOPMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 are effective
for guarantees issued or modified after December 31, 2002, and are to be applied
12
prospectively. The disclosure requirements were effective for financial
statements for interim or annual periods ending after December 15, 2002. The
Company adopted the initial recognition provisions of Interpretation No. 45 in
January 2003. The initial adoption of Interpretation No. 45 did not have a
material impact on its results of operations or financial position.
In 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 Company 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 provision 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.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this Statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, ELEMENTS OF FINANCIAL STATEMENTS. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. The Company
does not have financial instruments that have characteristics of both
liabilities and equity, therefore, adoption of SFAS No. 150 did not have a
material effect on its financial position and results of operations.
NOTE 10 - CONTINGENCIES
The Company is involved in certain contractual disputes in the ordinary course
of business. The Company does not believe the ultimate resolution of any of
these existing matters will have a material adverse effect on its financial
position, results of operations, or cash flows.
NOTE 11 - GUARANTEES
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.
13
On January 30, 2004, New Ulm guaranteed the indebtedness of FiberComm, L.C. (a
12.59% owned partnership, which is being accounted for by the equity method) in
connection with the refinancing of a 15-year loan made by American State Bank to
FiberComm, L.C. New Ulm Telecom, Inc.'s liability for the guarantee is not to
exceed 6.25% of the indebtedness of FiberComm, L.C. at default, all of the
accrued interest, and the expenses of collection or protection of Lender's
rights and remedies under the guarantee. The Company has recorded a liability
for $187,500 in connection with this guarantee, which is the maximum potential
liability under the terms of the guarantee.
NOTE 12 - SUBSEQUENT EVENT
On April 2, 2004, the Company signed a purchase agreement with West Iowa
Telephone Company ("Seller") to purchase their 12.6175% membership interest in
Fibercomm L.C. for $60,000 and the assumption of the Sellers' guaranty
obligation of $187,500 or 6.25% of Fibercomm L.C.'s indebtedness. On April 16,
2004, the Company made payment to the Seller in the amount of $60,000 and signed
an assumption of the guaranty obligation.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q contains forward-looking statements that are based on
management's current expectations, estimates and projections about the industry
in which the Company operates and management's beliefs and assumptions. Such
forward-looking statements are subject to important risks and uncertainties that
could cause the Company's future actual results to differ materially from such
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and probabilities, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that might cause
differences include:
o increased competition in core business sectors which may decrease
market share and or affect the pricing of services and products;
o the ability to retain key employees;
o changing market conditions which may affect growth rates in the
industry;
o the ability to secure financing for future expansion and
operations;
o the ability to improve operations with new technologies;
o required investment in technological innovations which may 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 risk and uncertainties which may affect the operating
results.
Additional information concerning these and other factors that could cause
actual results or events to differ materially from current expectations are
contained herein and in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2003. 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.
OVERVIEW
- --------
The Company operates three business segments. The majority of its operations
consist of the Telecom segment that provides telephone services, Internet
services, and cable television services to numerous communities in Minnesota and
Iowa. A second segment, the Cellular segment, includes the sales and service of
cellular phones and accessories, and has a 9.88% interest in Midwest Wireless
Holdings L.L.C. (MWH) and records this investment on the equity method of
accounting. The equity method is used due to the influence the Company has over
the
15
operations and management of MWH. The third segment, the Phonery segment,
includes the sales and service of customer premise equipment, transport
operations, and the resale of long distance toll service.
RESULTS OF OPERATIONS
---------------------
CONSOLIDATED OPERATING RESULTS
- ------------------------------
The following is a summarized discussion of consolidated results of operations.
More detailed discussion of operating results by segment follows this
discussion.
OPERATING REVENUES:
-------------------
Total operating revenues were $3,992,913 for the three months ended
March 31, 2004, for an increase of 11.2% or $401,511 compared to the
same period in 2003. All operating segments experienced growth over the
same period in 2003. The Telecom sector realized the majority of the
increase in revenues due to new and expanded service offerings: digital
video, digital subscriber line (DSL), Internet service provision, and
the continued growth of a Competitive Local Exchange Carrier (CLEC) in
the City of Redwood Falls, MN. The Telecom segment has invested heavily
in its infrastructure, which has allowed it to enhance its local
network so that it could offer a "triple-play" of services to its
subscribers. In the telecommunications industry, a "triple-play" of
services refers to offering telephone, Internet, and video services
over the same infrastructure. It is expected that the infrastructure
investment and the geographic expansion of the Company's service
offerings will provide this segment with continued future growth.
Operating revenues were also enhanced in this sector due to a rate
increase for local network service that took place in June 2003. The
Telecom sector also had a slight increase in its network access
revenue, despite the downward pricing pressure on access charges and a
decrease in the access minutes of use. The increase occurred due to the
Company's eligibility for high-cost loop funding through the Universal
Service Fund for its operations in New Ulm, MN and the immediately
surrounding communities served by New Ulm Telecom, Inc. The Company
continues to monitor the negative effects of network access pricing and
the downward trend in access minutes of use that could affect future
revenues in the Telecom sector in order to minimize any impact on the
Company. The Cellular segment saw an increase in its sales and service
revenues of cellular phones and accessories. The Phonery segment
contributed to increased operating revenues through increased sales of
customer premise equipment (CPE), revenues from leased network
capacity, and an increase in the resale of long distance services.
OPERATING EXPENSES:
-------------------
Operating expenses for the three months ended March 31, 2004 increased
$345,926 or 12.2% compared to the same period in 2003, with the Telecom
segment responsible for the vast majority of the increase. Depreciation
expense for the Telecom segment saw an increase of $38,804 in 2004
compared to 2003. This increase was reflective of the new investments
in the Telecom segment's infrastructure. The remainder of the increase
in the Telecom segment reflected the additional general and
administrative expenses
16
associated with the commitment of the Company to compete in all
aspects of communication services and to provide exceptional customer
service for the Company's complete assortment of products and services
to all the communities that it serves.
OPERATING INCOME:
-----------------
Operating income for the three months ended March 31, 2004 increased
$55,585 or 7.4% over the three months ended March 31, 2003. The
increase in income was primarily due to the increase in operating
revenues.
OTHER INCOME:
-------------
Overall, other income for the three months ended March 31, 2004
decreased $794 compared to the three months ended March 31, 2003.
Other investment income decreased $44,775 for the three months ended
March 31, 2004 over the same period in 2003 due to a decrease of
investment income for Fibercom, L.L.C., a competitive local exchange
carrier (CLEC) in Sioux City, Iowa, partially offset by an increase in
the investment income for CoBank, a lender that specializes in
agribusiness, communications, energy and water systems, and
agricultural export financing.
The Company's cellular investment income increased $19,855, as the
profitability of Midwest Wireless continues to show growth.
There was an $18,184 decrease in interest expense for the three-month
period ended March 31, 2004 compared to the same period in 2003. The
decrease in interest expense was due to a reduced debt load and steady
interest rates.
NET INCOME:
-----------
Net income was $981,133 for the three months ended March 31, 2004
compared with $942,577 for the same period in 2003. This $38,556 or
4.1% increase was primarily attributed to the increase in operating
income.
17
Summary of Operations
Quarter Ended March 31,
--------------------------------
2004 2003
---------- ----------
Operating Income:
Telecom Segment $ 546,508 $ 566,382
Cellular Segment 15,024 26,301
Phonery Segment 250,769 164,033
---------- ----------
Total 812,301 756,716
Other Income 969,078 988,056
Interest Expense (134,122) (152,306)
Income Taxes (666,124) (649,889)
---------- ----------
Net Income $ 981,133 $ 942,577
========== ==========
Basic and Diluted
Earnings Per Share $ .19 $ .18
Weighted Average
Shares Outstanding 5,115,435 5,115,585
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
- -----------------------------------------
TELECOM SEGMENT OPERATIONS
The Telecom segment revenues represent 86.3% of the Company's consolidated
operating revenues for the three-month period ended March 31, 2004 before
intercompany eliminations. Revenues are primarily earned by providing
approximately 17,200 customers access to the local network in Minnesota and
Iowa, and by providing interexchange access for long distance network carriers.
The Telecom segment also earns revenue through billing and collecting for
various long distance companies, directory advertising, and providing Internet
services, including high-speed Digital Subscriber Line (DSL) Internet access,
and video services to its subscribers. This segment has invested in its
infrastructure so that it can provide its customers with the latest
technological advances, including being able to offer its "triple-play" of
services. Total Telecom segment revenues for the three-month period ending March
31, 2004 increased $353,995 or 10.7% compared to the same period last year. All
information contained in the following table is before intercompany
eliminations.
18
Quarter Ending March 31,
--------------------------------
2004 2003
----------- -----------
Operating Revenues:
Local Network $ 1,009,650 $ 897,581
Network Access 1,593,651 1,553,924
Other 1,059,082 856,883
----------- ----------
Total Operating Revenues 3,662,383 3,308,388
----------- ----------
Cash Operating Expenses 2,069,900 1,735,123
Noncash Operating Expenses 1,045,975 1,006,883
----------- ----------
Total Operating Expenses 3,115,875 2,742,006
----------- ----------
Operating Income 546,508 566,382
----------- ----------
Net Income $ 364,713 $ 396,037
=========== ==========
Local network revenue increased in the Telecom segment by $112,069 or 12.5% for
the three months ended March 31, 2004 compared to the same period in 2003. Local
network revenue increased during this period as a result of continued growth in
the service offerings for the CLEC in Redwood Falls, MN that began operations in
the third quarter of 2002. The CLEC accounted for an increase of $47,231 in
local network revenue. The local network revenue also saw an increase due to a
rate increase at its Minnesota ILEC locations June 1, 2003. This rate increase
accounted for approximately $46,000 of the increase in local network revenue.
Targeted marketing, promotions, and packaging of vertical services, most notably
the introduction of DSL to supplement basic line charges, accounted for the
remainder of the increase in local network revenue.
Network access revenue increased $39,727 or 2.6% for the three months ended
March 31, 2004 compared with the same period in 2003. The Telecom segment has
invested over $20 million in capital expenditures since 2001. These capital
expenditures have enhanced this segment's infrastructure and have allowed the
Company to receive additional settlements from the National Exchange Carrier
Association (NECA). The additional investment in the local loop (access line
cost) has made the Company eligible for high-cost loop funding through the
Universal Service Fund in its New Ulm Telecom, Inc. ILEC. The Telecom segment
has experienced a 0.1% decrease in access minutes for the three months ended
March 31, 2004, a common industry trend. The effect of the decrease in access
minutes of use was minimized due to the increased number of access subscribers
in the Redwood Falls, MN CLEC during the first quarter of 2004 as compared to
the same period in 2003. The Company continues to monitor the negative effects
of network access pricing and a downward trend in access minutes of use that
could affect future revenues in the Telecom sector in order to minimize any
impact on the Company.
19
Other operating revenues increased $202,199 or 23.6% for the three months ended
March 31, 2004 compared with the same period in 2003. Due to the infrastructure
enhancements that have taken place since 2000, the Telecom segment has been able
to offer its customers a "triple-play" of services over the existing
infrastructure and offer its services on a CLEC basis to the city of Redwood
Falls, MN. The video product offered in New Ulm, Essig, Searles, Courtland,
Springfield and Redwood Falls, MN was responsible for $123,013 of the increase
in these revenues. The remainder of the revenue increase was attributed to
Telecom segment's sale of Internet services.
Cash operating expenses increased $334,777 or 19.3% for the three-month period
ended March 31, 2004 compared with the same period in 2003. Cash operating
expenses have increased due to the continued growth of CLEC operations in
Redwood Falls, MN and the increasing array of services offered such as video and
DSL that allows the Company to offer the "triple-play" of services to its
customers. The Telecom segment has recognized the value in being able to compete
in all aspects of communication services. This realization has motivated the
segment to enhance its awareness of customer satisfaction (including 24 hours a
day, 7 days a week access to Internet support due to customer's desire for this
service), offer additional services (video and DSL), pursue aggressive marketing
to create brand recognition, and provide solutions for our customers'
communications needs. The Telecom segment also realizes potential for growth by
competitively offering its array of services in an increasing number of
communities. The Telecom segment began offering its services competitively in
the City of Redwood Falls, MN in September 2002. The Company is always striving
for cost efficiencies and technological improvement to enhance its operating
margins for the Telecom segment.
Noncash operating expenses increased $39,092 or 3.9% for the three months ended
March 31, 2004 compared with the same period in 2003. Depreciation expense was
the cause of this increase. The increase in depreciation expense was reflective
of the new investments in the segment's infrastructure as previously discussed.
Operating income decreased $19,874 or 3.5% for the three months ended March 31,
2004 compared with the same period in 2003. The decrease in operating income was
primarily due to additional general and administrative expenses associated with
the commitment of the Telecom segment to effectively compete in all aspects of
communication services and to provide superior customer-focused service for the
Telecom segment's complete array of products and services. The $353,995 increase
in revenues combined with a $373,869 increase in operating expenses resulted in
the $19,874 decrease in operating income.
CELLULAR SEGMENT
The Cellular segment operations include the sales and service of cellular phones
and accessories, and the Company's 9.88% ownership interest in MWH. The
operating income from sales of cellular phones and accessories decreased by
$11,277 for the three month period ending March 31, 2004 compared to March 31,
2003. This decline in revenue is due to the discounts on cellular phones given
as incentives for customers to subscribe to MWH's cellular phone service.
Cellular investment income increased $19,855 or 2.6% for the three months ended
March 31,
20
2004 compared to the same period ended in 2003. This increase was the result of
revenue and income growth as MWH continues to gain market share. The Cellular
segment information for its investment in MWH is shown in the following table
using the proportionate consolidation method.
Quarter Ending March 31,
--------------------------------
2004 2003
---------- ----------
Proportionate Method:
Operating Revenues $4,677,800 $3,712,956
Cash Operating Expenses 3,229,856 2,280,296
Noncash Operating Expenses 692,526 511,849
---------- ----------
Total Operating Expenses 3,922,382 2,792,145
---------- ----------
Operating Income 755,418 920,811
---------- ----------
Cellular Investment Income $ 789,002 $ 769,147
========== ==========
A recap of income for the cellular segment, which includes its proportional
share of the income in its investment in MWH, is contained in the following
table.
Quarter Ending March 31,
--------------------------------
2004 2003
---------- ----------
Operating Revenues: $ 93,940 $ 52,759
---------- ----------
Cash Operating Expenses 78,916 26,458
Noncash Operating Expenses -- --
---------- ----------
Total Operating Expenses 78,916 26,458
---------- ----------
Operating Income 15,024 26,301
---------- ----------
Interest Expense (19,317) (41,425)
Cellular Investment Income 789,002 769,147
Net Income $ 467,137 $ 448,870
========== ==========
21
PHONERY SEGMENT
The Phonery segment represents 11.5% of the consolidated operating revenues for
the three-month period ended March 31, 2004 before intercompany eliminations.
Revenues are earned primarily by sales, installation and service of business
telephone systems and data communications equipment. In addition, the Phonery
segment leases network capacity to provide additional network access revenues
and resells long distance toll service. This segment's expertise is the quality
installation and maintenance of CPE, provision of customer long distance needs
and transport solutions in communication to end user customers. All information
contained in the following table is before intercompany eliminations.
Quarter Ending March 31,
--------------------------------
2004 2003
---------- ----------
Operating Revenues: $ 487,296 $ 424,027
---------- ---------
Cash Operating Expenses 216,592 242,091
Noncash Operating Expenses 19,935 17,903
---------- ---------
Total Operating Expenses 236,527 259,994
---------- ---------
Operating Income 250,769 164,033
---------- ---------
Net Income $ 149,283 $ 97,670
========== =========
Operating revenue increased $63,269 or 14.9% for the three months ended March
31, 2004 compared to the same period ended 2003. An increase in sales, service
and installation revenues accounted for approximately $30,000 of the increase in
operating revenue. The Phonery segment realized an $18,809 increase in revenues
from the resale of long distance toll for the first quarter of 2004 as compared
to the first quarter of 2003. The remainder of the increase was accounted for by
a revenue increase in leased network capacity.
Cash operating expenses decreased $25,499 or 10.5% for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. This
three-month decrease can be attributed to a decrease in cost of goods sold, and
this segment's success in achieving cost efficiencies. This segment continues to
seek new technologies to better serve customer needs and to operate efficiently.
Noncash operating expenses increased $2,032 or 11.4% for the quarter ended March
31, 2004 compared with the same period in 2003. The increase was attributable to
an increase in depreciation expense.
Operating income increased by $86,736 or 52.9% for the three months ended March
31, 2004 compared to the three months ended March 31, 2003. This increase in
income was the result of
22
the increases in income from CPE sales and service, leased network access, and
the resale of long distance toll service.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CAPITAL STRUCTURE
The total long-term capital structure (long-term debt plus shareholders' equity)
for the Company was $43,797,484 at March 31, 2004, reflecting 61.2% equity and
38.8% debt. This compares to a capital structure of $43,868,870 at December 31,
2003, reflecting 59.8% equity and 40.2% debt. Management believes adequate
internal and external resources are available to finance ongoing operating
requirements, including capital expenditures, business development, debt service
and the payment of dividends for at least the next 12 months.
CASH FLOWS
Cash provided by operations was $2,732,289 for the three-month period ended
March 31, 2004 compared to $2,350,674 for the three-month period ended March 31,
2003. Cash flows from operations for the three months ended March 31, 2004 and
2003 were primarily attributable to net income plus non-cash expenses for
depreciation and amortization.
Cash flows used in investing activities were $946,126 for the three months ended
March 31, 2004 compared to $1,920,955 for the same period in 2003. Capital
expenditures relating to on-going businesses were $835,806 during the first
three months of 2004 as compared to $1,765,506 for the same period in 2003. 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. The Company expects total plant additions of
approximately $2,770,000 in 2004.
Cash flows used by financing activities was $1,052,519 for the three-month
period ended March 31, 2004 compared to cash flows used by financing activities
of $808,107 for the three-month period ended March 31, 2003. Included in cash
flows used in financing activities were debt repayments, repurchased and retired
stock, and dividend payments.
DIVIDENDS
The Company paid dividends of $426,117 during the first quarter of 2004 and
$426,129 during the first quarter of 2003. These were dividends of $.0833 per
share. The Board of Directors reviews dividend declarations based on anticipated
earnings, capital requirements and the operating and financial condition of the
Company. The Company has made no announcements or plans to change the dividends
above or below historic levels for the remainder of 2004. Paying dividends at
the existing level is not expected to negatively impact the liquidity of the
Company.
23
WORKING CAPITAL
Working capital was $1,189,029 as of March 31, 2004, compared to working capital
of $1,244,920 as of December 31, 2003. The decrease of $55,891 in working
capital reflects the Company's decrease in receivables. The ratio of current
assets to current liabilities was 1.3:1.0 as of March 31, 2004 and 1.3:1.0 as of
December 31, 2003.
LONG-TERM DEBT
In fiscal 2001, the Company entered into a $15 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. This ten-year loan
requires equal monthly payments of $125,000. At March 31, 2004, there were
$11,625,000 of direct borrowings outstanding under this facility at an interest
rate of 2.57%.
In addition, the Company entered into a $10 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. Principal payments of
$250,000 per quarter are required on this loan. At March 31, 2004, there were
$7,750,000 of direct borrowings outstanding under this facility at an interest
rate of 2.57%.
OTHER
The Company has not conducted a public equity offering. It operates with
original equity capital, retained earnings and indebtedness in the form of
senior debt. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does the Company use derivative financial instruments in its
operations or investment portfolio. The Company's earnings are affected by
changes in interest rates as its long-term debt is based on a national variable
rate. If interest rates for the portion of the Company's long-term debt based on
variable rates had averaged 10% more (approximately 3%) for the first three
months of 2004, the Company's interest expense would have increased around
$14,000. Should interest rates rise significantly, management expects that it
would act to mitigate its exposure to the change by converting a portion of its
variable-rate debt to fixed-rate debt.
24
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed, is accumulated and communicated to management timely. At the end
of the period covered by this report, the Company carried out an evaluation
under the supervision and with the participation of its management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be disclosed in
periodic filings with the SEC.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of the Company's most recent evaluation.
25
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(e) During the first quarter of 2004, the Company repurchased 150
shares of its common stock at $9.35 per share in a private
transaction. The repurchase was made pursuant to the default
provisions of a loan agreement between the Company and a
former non-executive officer employee.
As reflected in the following tabular disclosure, the Company
has no publicly announced repurchase plans or programs.
- ------------------------- ---------------- ------------ ---------------------------- ---------------------------------
Period Total Number Average Total Number of Shares Maximum Number (or Approximate
of Shares Price Paid Purchased as Part of Dollar Value) of Shares that
Purchased per Share Publicly Announced Plans May Yet Be Purchased Under the
or Programs Plans or Programs
- ------------------------- ---------------- ------------ ---------------------------- ---------------------------------
1/1/04 - 1/31/04 150 $9.35 0 0
- ------------------------- ---------------- ------------ ---------------------------- ---------------------------------
2/1/04 - 2/29/04 0 N/A 0 0
- ------------------------- ---------------- ------------ ---------------------------- ---------------------------------
3/1/04 - 3/31/04 0 N/A 0 0
- ------------------------- ---------------- ------------ ---------------------------- ---------------------------------
Total 150 $9.35 0 0
- ------------------------- ---------------- ------------ ---------------------------- ---------------------------------
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" on page 27 of this Form 10-Q.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ULM TELECOM, INC.
Dated: May 10, 2004 By /s/ James P. Jensen
--------------------------------
James P. Jensen, Chairman
Dated: May 10, 2004 By /s/ Bill Otis
--------------------------------
Bill Otis, President
26
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
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
27