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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 Exchange Act).
Yes No X .
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 5, 2004: 5,115,435 shares of common stock
outstanding.
NEW ULM TELECOM, INC. AND SUBSIDIARIES
JUNE 30, 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........................................8-15
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......16-26
Item 3 Quantitative and Qualitative Disclosures About Market Risk..................................26-27
Item 4 Controls and Procedures........................................................................27
PART II OTHER INFORMATION....................................................................................28-29
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.............................................................................28
Item 4 Submission of Matters to a Vote of Security Holders.........................................28-29
Item 6 Exhibits and Report on Form 8-K................................................................29
SIGNATURES......................................................................................................30
INDEX TO EXHIBITS...............................................................................................31
NEW ULM TELECOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2004 2003
-------------------- --------------------
CURRENT ASSETS
Cash and cash equivalents $ 2,759,532 $ 2,201,435
Receivables, net of allowance for doubtful
accounts of $125,298 and $102,500 - Note 12 970,974 2,649,347
Inventories 491,605 336,958
Prepaid expenses 135,301 271,716
-------------------- --------------------
4,357,412 5,459,456
-------------------- --------------------
INVESTMENTS AND OTHER ASSETS
Goodwill and intangibles, net of amortization 3,243,364 3,244,390
Cellular investments 16,157,577 15,155,015
Other 1,731,474 1,181,089
-------------------- --------------------
21,132,415 19,580,494
-------------------- --------------------
PROPERTY, PLANT AND EQUIPMENT
Telecommunications plant 55,250,657 54,108,739
Other property and equipment 2,587,554 2,562,539
Cable television plant 2,289,639 2,207,476
-------------------- --------------------
60,127,850 58,878,754
Less accumulated depreciation 32,717,895 30,588,170
-------------------- --------------------
27,409,955 28,290,584
-------------------- --------------------
TOTAL ASSETS $ 52,899,782 $ 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)
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2004 2003
--------------------- ---------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,515,217 $ 2,515,217
Accounts payable 688,453 1,011,579
Accrued income taxes 44,062 -
Other accrued taxes 81,498 75,188
Other accrued liabilities 564,367 612,552
--------------------- ---------------------
3,893,597 4,214,536
--------------------- ---------------------
LONG-TERM DEBT, LESS CURRENT PORTION 16,380,413 17,630,413
--------------------- ---------------------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS
Loan guarantee - Note 11 375,000 -
Income taxes 5,243,963 5,243,963
Investment tax credits 1,554 3,165
--------------------- ---------------------
5,620,517 5,247,128
--------------------- ---------------------
STOCKHOLDERS' EQUITY
Preferred stock - $1.66 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding - -
Common stock - $1.66 par value, 90,000,000 shares
authorized, 5,115,435 and 5,115,585 shares issued and
outstanding, respectively 8,525,725 8,525,975
Retained earnings 18,479,530 17,712,482
--------------------- ---------------------
27,005,255 26,238,457
--------------------- ---------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 52,899,782 $ 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
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
OPERATING REVENUES
Local network $ 1,004,634 $ 917,305 $ 1,992,139 $ 1,777,365
Network access - Note 12 1,101,945 1,794,065 2,688,396 3,337,333
Billing and collecting 19,164 24,904 40,655 53,622
Miscellaneous 110,312 101,684 219,281 211,974
Video services 446,934 329,167 857,906 616,852
Other nonregulated services 867,010 832,800 1,744,535 1,594,181
-------------- -------------- -------------- --------------
3,549,999 3,999,925 7,542,912 7,591,327
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Plant operations 496,080 517,823 1,010,931 991,720
Depreciation and amortization 1,065,908 1,024,866 2,131,818 2,049,652
Customer 268,200 254,825 546,819 468,516
General and administrative 560,267 509,213 1,115,457 1,015,011
Other operating expenses 711,775 606,847 1,477,817 1,223,361
-------------- -------------- -------------- --------------
3,102,230 2,913,574 6,282,842 5,748,260
-------------- -------------- -------------- --------------
OPERATING INCOME 447,769 1,086,351 1,260,070 1,843,067
-------------- -------------- -------------- --------------
OTHER (EXPENSES) INCOME
Interest expense (128,153) (154,053) (262,275) (306,359)
Interest income 6,517 21,171 20,781 29,493
Cellular investment income 773,252 844,605 1,562,254 1,613,752
Other investment income (4,935) 21,480 160,877 232,067
-------------- -------------- -------------- --------------
646,681 733,203 1,481,637 1,568,953
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 1,094,450 1,819,554 2,741,707 3,412,020
INCOME TAXES 455,150 729,648 1,121,274 1,379,537
-------------- -------------- -------------- --------------
NET INCOME $ 639,300 $ 1,089,906 $ 1,620,433 $ 2,032,483
============== ============== ============== ==============
BASIC AND DILUTED
NET INCOME PER SHARE - NOTE 2 $ 0.13 $ 0.21 $ 0.32 $ 0.40
============== ============== ============== ==============
DIVIDENDS PER SHARE $ 0.0833 $ 0.0833 $ 0.1666 $ 0.1666
============== ============== ============== ==============
WEIGHTED AVERAGE
SHARES OUTSTANDING 5,115,435 5,115,585 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
SIX MONTHS ENDED JUNE 30, 2004
Common Stock Retained
Shares Amount Earnings
--------------- --------------- ---------------
BALANCE on December 31, 2003 5,115,585 $ 8,525,975 $ 17,712,482
Net income 1,620,433
Dividends (852,233)
Retired stock (150) (250) (1,152)
--------------- --------------- ---------------
BALANCE on June 30, 2004 5,115,435 $ 8,525,725 $ 18,479,530
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
6
NEW ULM TELECOM, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
----------------------------------------
JUNE 30, 2004 JUNE 30, 2003
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,620,433 $ 2,032,483
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,131,818 2,049,652
Cellular investment income (1,562,254) (1,613,752)
Distributions from cellular investements 559,692 401,698
Deferred investment tax credits (1,611) (1,771)
(Increase) Decrease in:
Receivables 1,678,373 1,197,550
Inventories (154,647) 168,849
Prepaid expenses 136,415 56,942
Increase (Decrease) in:
Accounts payable 26,362 92,261
Accrued income taxes 44,062 41,612
Other accrued taxes 6,310 5,523
Other accrued liabilities (48,185) (36,690)
----------------- ---------------
Net cash provided by operating activities 4,436,768 4,394,357
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (1,599,651) (2,593,981)
Repayment of notes receivable - 674,037
Other, net (175,385) (182,031)
----------------- ---------------
Net cash used in investing activities (1,775,036) (2,101,975)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt (1,250,000) (1,264,130)
Retired Stock (1,402) -
Dividends paid (852,233) (852,258)
----------------- ---------------
Net cash used by financing activities (2,103,635) (2,116,388)
----------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 558,097 175,994
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,201,435 1,914,113
----------------- ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,759,532 $ 2,090,107
================= ===============
The accompanying notes are an integral part of the financial statements.
7
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of New Ulm Telecom,
Inc. and its wholly owned subsidiaries (the "Company"). All material
intercompany transactions and accounts have been eliminated. Accounting
practices prescribed by regulatory authorities have been considered in the
preparation of the financial statements and formulation of accounting policies
for the Company. These policies conform with generally accepted accounting
principles as applied to regulated public utilities in accordance with Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. 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. 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 June 30, 2004 and
statements of income and the statements of cash flows for the periods ended June
30, 2004 and 2003 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which
8
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows at June 30,
2004 have been made.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003. The results of
operations for the period ended June 30, 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 June 30, 2004 and
5,115,585 at June 30, 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.
NOTE 4 - STATEMENTS OF CASH FLOW
Supplemental Disclosures of Cash Flow Information:
Cash paid during the six months ended June 30:
2004 2003
---- ----
Interest $261,734 $ 313,563
Income taxes $279,000 $ 215,000
9
Noncash investing activities included $148,080 and $362,969 during the periods
ended June 30, 2004 and 2003, respectively, relating to plant and equipment
additions placed in service, which are reflected in accounts payable at June 30,
2004 and 2003. A noncash investing activity included $375,000 for the period
ended June 30, 2004 relating to the guarantee of indebtedness of FiberComm,
L.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. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. At June 30, 2004, there
was $11,250,000 of direct borrowing outstanding under this facility at an
interest rate of 2.78%. The Company also entered into a $10 million secured
ten-year reducing revolving credit facility during fiscal 2001, maturing in
2011. The borrowing under the credit facility bear interest, at the Company's
option, at either fixed or variable rates linked to the Company's overall
leverage ratio. At June 30, 2004, there was $7,500,000 of direct borrowing
outstanding under this facility at an interest rate of 2.78%.
NOTE 6 - MATERIALS, SUPPLIES AND INVENTORIES
Materials, supplies and inventories are recorded at the lower of average cost or
market.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the provisions of this accounting standard, goodwill
and intangible assets with indefinite useful lives are no longer amortized, but
are instead tested for impairment or useful lives on at least an annual basis.
At June 30, 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 June 30, 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 (LMDS) and Personal Communications Service
(PCS) licenses totaling $212,093,566. MWH has determined that these licenses
have indefinite useful lives and ceased amortization effective January 1, 2002.
10
Changes in goodwill are summarized below:
June 30, 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:
June 30, December 31,
2004 2003
------------------- --------------------
Gross Carrying Amount $ 30,785 $ 30,785
Accumulated amortization (6,327) (5,301)
------------------- --------------------
$ 24,458 $ 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 JUNE 30, 2004
Operating revenues $ 3,244,947 $ 5,151,186 $ 435,890 $ (5,282,024) $ 3,549,999
Operating expenses 3,054,419 4,161,384 228,418 (4,341,991) 3,102,230
------------ ------------ ------------ ------------ ------------
Operating income 190,528 989,802 207,472 (940,033) 447,769
Interest expense (109,252) (213,828) -- 194,927 (128,153)
Cellular investment income -- -- -- 773,252 773,252
Other investment income 1,582 28,146 -- (28,146) 1,582
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 82,858 $ 804,120 $ 207,472 $ -- $ 1,094,450
============ ============ ============ ============ ============
Depreciation and amortization $ 1,045,973 $ 717,876 $ 19,935 $ (717,876) $ 1,065,908
============ ============ ============ ============ ============
Total assets $ 83,168,362 $ 47,233,268 $ 5,003,044 $(82,504,892) $ 52,899,782
============ ============ ============ ============ ============
Capital expenditures $ 763,845 $ 705,114 $ -- $ (705,114) $ 763,845
============ ============ ============ ============ ============
Telecom Cellular Phonery
Segment Segment Segment Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 2003
Operating revenues $ 3,682,248 $ 4,240,140 $ 473,561 $ (4,396,024) $ 3,999,925
Operating expenses 2,860,059 3,210,394 232,101 (3,388,980) 2,913,574
------------ ------------ ------------ ------------ ------------
Operating income 822,189 1,029,746 241,460 (1,007,044) 1,086,351
Interest expense (150,188) (110,311) -- 106,446 (154,053)
Cellular investment income -- -- -- 844,778 844,605
Other investment income 42,639 (55,820) 12 55,820 42,651
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 714,640 $ 863,615 $ 241,472 $ (0) $ 1,819,554
============ ============ ============ ============ ============
Depreciation and amortization $ 1,001,501 $ 541,222 $ 23,365 $ (541,222) $ 1,024,866
============ ============ ============ ============ ============
Total assets $ 80,467,567 $ 40,884,620 $ 4,387,558 $(73,829,810) $ 51,909,935
============ ============ ============ ============ ============
Capital expenditures $ 828,475 $ 620,974 $ -- $ (620,974) $ 828,475
============ ============ ============ ============ ============
12
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
Telecom Cellular Phonery
Segment Segment Segment Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED JUNE 30, 2004
Operating revenues $ 6,907,330 $ 9,922,926 $ 923,186 $(10,210,530) $ 7,542,912
Operating expenses 6,170,294 $ 8,162,682 464,945 $ (8,515,079) 6,282,842
------------ ------------ ------------ ------------ ------------
Operating income 737,036 1,760,244 458,241 (1,695,451) 1,260,070
Interest expense (224,057) (429,770) -- 391,552 (262,275)
Cellular investment income -- -- -- 1,562,254 1,562,254
Other investment income 181,658 258,355 -- (258,355) 181,658
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 694,637 $ 1,588,829 $ 458,241 $ -- $ 2,741,707
============ ============ ============ ============ ============
Depreciation and amortization $ 2,091,948 $ 1,410,402 $ 39,870 $ (1,410,402) $ 2,131,818
============ ============ ============ ============ ============
Total assets $ 83,168,362 $ 47,233,268 $ 5,003,044 $(82,504,892) $ 52,899,782
============ ============ ============ ============ ============
Capital expenditures $ 1,599,651 $ 1,574,291 $ -- $ (1,574,291) $ 1,599,651
============ ============ ============ ============ ============
Telecom Cellular Phonery
Segment Segment Segment Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED JUNE 30, 2003
Operating revenues $ 6,990,636 $ 8,005,855 $ 897,588 $ (8,302,752) $ 7,591,327
Operating expenses 5,602,065 $ 6,028,997 492,095 $ (6,374,897) 5,748,260
------------ ------------ ------------ ------------ ------------
Operating income 1,388,571 1,976,858 405,493 (1,927,855) 1,843,067
Interest expense (261,069) (359,220) -- 313,930 (306,359)
Cellular investment income -- (173) -- 1,613,925 1,613,752
Other investment income 261,512 -- 48 -- 261,560
------------ ------------ ------------ ------------ ------------
Income before income taxes $ 1,389,014 $ 1,617,465 $ 405,541 $ -- $ 3,412,020
============ ============ ============ ============ ============
Depreciation and amortization $ 2,013,845 $ 1,053,071 $ 35,807 $ (1,053,071) $ 2,049,652
============ ============ ============ ============ ============
Total assets $ 80,467,567 $ 40,884,620 $ 4,387,558 $(73,829,810) $ 51,909,935
============ ============ ============ ============ ============
Capital expenditures $ 2,593,981 $ 1,298,221 $ -- $ (1,298,221) $ 2,593,981
============ ============ ============ ============ ============
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
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
13
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.
14
On January 30, 2004, New Ulm guaranteed the indebtedness of FiberComm, L.L.C. (a
25.2075% 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.L.C. New Ulm Telecom, Inc.'s liability for the guarantee is not
to exceed 12.5% of the indebtedness of FiberComm, L.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 of
$375,000 in connection with this guarantee, which is the maximum potential
liability under the terms of the guarantee.
NOTE 12 - NETWORK ACCESS - QWEST BILLING DISPUTE
In June 2004, the Company adjusted its estimated receivables downward by
$428,697, with a corresponding reduction of network access revenue by $408,952
and other nonregulated services revenue by $19,745. This adjustment relates to
disputed network access charges billings from Qwest for a period dating back to
1995. This dispute is current and ongoing. The Company adjusted its estimated
revenues downward and its reserves upward to reflect its current expectation
regarding the outcome of this matter. The dispute is expected to be resolved by
the Minnesota Public Utilities Commission.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-Q contains forward-looking statements that are based on
management's current expectations, estimates and projections about the industry
in which the Company operates and management's beliefs and assumptions. Such
forward-looking statements are subject to important risks and uncertainties that
could cause the Company's future actual results to differ materially from such
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and probabilities, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that might cause
differences include:
o increased competition in core business sectors which may
decrease market share and or affect the pricing of services
and products;
o the ability to retain key employees;
o changing market conditions which may affect growth rates in the
industry;
o the ability to secure financing for future expansion and operations;
o the ability to improve operations with new technologies;
o required investment in technological innovations which may deplete
capital resources;
o the continuation of historical trends;
o the economy in general;
o the future of the communications industry and communications services;
o the effect of legal and regulatory changes;
o the sufficiency of cash generated from current operations to fund
future liquidity needs; and
o other risks and uncertainties which may affect the operating results.
Additional information concerning these and other factors that could cause
actual results or events to differ materially from current expectations are
contained herein and in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2003. Readers are cautioned not to attribute undue
certainty to these forward-looking statements, which speak only as of the date
on which they were made. Except as otherwise required by law, the Company
undertakes no obligation to update any of its forward-looking statements for any
reason.
OVERVIEW
- --------
The Company operates 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%
16
interest in Midwest Wireless Holdings L.L.C. (MWH) and records this investment
on the equity method of accounting. The equity method is used due to the
influence the Company has over the operations and management of MWH. 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 $3,549,999 for the three months ended
June 30, 2004, for a decrease of 11.2% or $449,926 compared to the same
period in 2003. Total operating revenues were $7,542,912 for the six
months ended June 30, 2004, for a decrease of 0.6% or $48,415 compared
to the same period in 2003. The Telecom sector was responsible for the
majority of the decrease in revenues. The Telecom sector decrease was
the result of access revenue reductions. These access revenue
reductions reflect the continued decline in access minutes of use,
reduced access rates, and a revenue reduction relating to Qwest
disputed billings. Due to this ongoing dispute, network access revenues
were decreased by $408,952 in June 2004. This represents an adjustment
for recognized revenues since 1995 (the start of the dispute). While
the billing dispute with Qwest is ongoing, management believes it has
taken an appropriately conservative approach and does not expect to
make future adjustments for this dispute. The Company anticipates that
it will continue to be affected by the common industry trends of
declining access minutes of use and reduced access rates. The Company
believes, that despite the decline in the Telecom sector revenues, that
this sector has positioned itself for future revenue growth. The
Company believes that growth will be realized through increases in
revenue due to new and expanded service offerings: digital video and
digital subscriber line (DSL), Internet service provision, and the
continued growth of a Competitive Local Exchange Carrier (CLEC) in the
City of Redwood Falls. The Company also continually evaluates new and
emerging technologies to keep the Company's service offerings
innovative and competitive. 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. The Company expects that continued infrastructure
investment will allow the Company to continue to offer its customers
new technologies as they emerge, and the geographic expansion of the
Company's service offerings will provide this segment with continued
future growth. The Cellular segment saw an increase in its sales and
service revenues of cellular phones and accessories. The New Ulm
Phonery segment saw increased operating revenues through increased
sales of customer premise equipment (CPE), and an increase in the
resale of long distance services. These increases were offset by a
$19,745 reduction in leased access capacity revenues due to the ongoing
17
dispute with Qwest.
* OPERATING EXPENSES:
-------------------
Operating expenses for the three months ended June 30, 2004 increased
$188,656 or 6.5% compared to the same period in 2003. Operating
expenses for the six months ended June 30, 2004 increased $534,582 or
9.3% compared to the same period in 2003, with the Telecom segment
responsible for a $568,230 increase in operating expenses. Depreciation
expense for the Telecom segment saw an increase of $78,102 for the
first six months of 2004 compared to 2003, reflecting continued
investments in the Telecom segment's infrastructure. The remainder of
the increase in the Telecom segment reflected the additional general
and administrative expenses associated with the commitment of the
Company to compete in all aspects of communication services and to
provide exceptional customer service for the Company's complete array
of products and services to all the communities that it serves.
* OPERATING INCOME:
-----------------
Operating income for the three months ended June 30, 2004 decreased
$638,582 or 58.8% over the three months ended June 30, 2003. Operating
income for the six-month period ended June 30, 2004 decreased $581,997
or 31.6% compared to the six-month period ended June 30, 2003. The
decrease in income was caused by an estimated revenue reduction due to
the Qwest billing dispute (see Note 12 on page 15), as well as
increases in operating expenses. The primary source of the increase in
operating expenses was the expenses associated with the Telecom
segment's operations.
* OTHER INCOME:
-------------
Overall, other income for the three months ended June 30, 2004
decreased $86,522 compared to the three months ended June 30, 2003.
Other income decreased $87,316 for the six-month period ended June 30,
2004 compared with the same period in 2003.
Other investment income decreased $71,190 for the six months ended June
30, 2004 over the same period in 2003 due to a decrease of investment
income for Fibercomm, 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 decreased $51,498. Despite the
small decrease in investment income, the profitability of Midwest
Wireless continues to provide the Company with year-to-year income.
There was a $44,084 decrease in interest expense for the six-month
period ended June 30, 2004 compared to the same period in 2003. The
decrease in interest expense was due to a reduced debt load and lower
effective interest rates.
18
* NET INCOME:
-----------
Net income was $639,300 for the three months ended June 30, 2004
compared with $1,089,906 for the same period in 2003. Net income was
$1,620,433 for the six-month period ending June 30, 2004 compared with
$2,032,483 for the same six-month period in 2003. The $412,050 or 20.3%
decrease in net income for the six-months ending June 30, 2004 was
primarily attributed to the decrease in operating income.
Summary of Operations
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Income:
Telecom Segment $ 190,528 $ 822,189 $ 737,036 $ 1,388,571
Cellular Segment 49,769 22,702 64,793 49,003
Phonery Segment 207,472 241,460 458,241 405,493
----------- ----------- ----------- -----------
Total 447,769 1,086,351 1,260,070 1,843,067
Other Income 774,834 887,256 1,743,912 1,875,312
Interest Expense (128,153) (154,053) (262,275) (306,359)
Income Taxes (455,150) (729,648) (1,121,274) (1,379,537)
----------- ----------- ----------- -----------
Net Income $ 639,300 $ 1,089,906 $ 1,620,433 $ 2,032,483
=========== =========== =========== ===========
Basic and Diluted
Earnings Per Share $ .13 $ .21 $ .32 $ .40
Weighted Average
Shares Outstanding 5,115,435 5,115,585 5,115,435 5,115,585
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
- -----------------------------------------
TELECOM SEGMENT OPERATIONS
New Ulm Telecom segment revenues represented 91.4% of the Company's consolidated
operating revenues for the three-month period ended June 30, 2004 and 91.6% of
the Company's consolidated operating revenues for the six-month period ended
June 30, 2004 before intercompany eliminations. Revenues are primarily earned by
providing approximately 17,000
19
customers access to the local network in Minnesota and Iowa, and providing
interexchange access for long distance 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 June 30, 2004 decreased $437,300 or 11.9% over the
same period in 2003. Total Telecom segment revenues for the six-month period
ending June 30, 2004 decreased $83,305 or 1.2% compared to the same period last
year. All information contained in the following table is before intercompany
eliminations.
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Revenues:
Local Network $ 1,028,085 $ 954,826 $ 2,037,735 $ 1,852,407
Network Access 1,109,145 1,805,627 2,702,796 $ 3,359,551
Other 1,107,717 921,794 2,166,799 $ 1,778,677
----------- ----------- ----------- -----------
Total Operating Revenues 3,244,947 3,682,247 6,907,330 6,990,635
----------- ----------- ----------- -----------
Cash Operating Expenses 2,008,446 1,853,095 4,078,346 3,588,218
Noncash Operating Expenses 1,045,973 1,006,963 2,091,948 2,013,846
----------- ----------- ----------- -----------
Total Operating Expenses 3,054,419 2,860,058 6,170,294 5,602,064
----------- ----------- ----------- -----------
Operating Income 190,528 822,189 737,036 1,388,571
----------- ----------- ----------- -----------
Net Income (Loss) $ (37,099) $ 432,150 $ 401,812 $ 828,187
=========== =========== =========== ===========
Local network revenue increased in the Telecom segment by $73,259 or 7.7% for
the three months ended June 30, 2004 compared to the same period in 2003. Local
network revenue increased in the Telecom segment by $185,328 or 10.0% for the
six months ended June 30, 2004 over the same period ended June 30, 2003. Local
network revenue increased during these periods 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 $96,424 in
local network revenue for the six-months ended June 30, 2004. 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 $75,000
of the increase in local network revenue for the six-months ended June 30, 2004.
Targeted marketing, promotions and packaging of vertical services, most notably
the introduction of digital subscriber line (DSL) to supplement basic line
charges, accounted for the remainder of the increase in local network revenue.
Network access revenue decreased $696,482 or 38.6% for the three months ended
June 30, 2004 compared with the same period in 2003. Network access revenue
decreased $656,755 or 19.5% for the six months ended June 30, 2004. The Telecom
segment experienced a 6.3% decrease in access minutes for the six months ended
June 30, 2004. Decreases in access minutes and downward pressure on access
charges have become a common industry trend. The Telecom segment reduced its
decline in its access minutes by providing services as a CLEC in Redwood
20
Falls, MN in September 2002. Also, 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 Telecom segment entities
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 the Company's ILECs. The net effect of the decline in access minutes of
use and the offsetting increase in Universal Service Funds accounted for a
network access revenue decrease of approximately $250,000. In addition, the
Telecom segment recognized a $408,952 reduction in revenues due to an ongoing
access billing dispute with Qwest, an interexchange carrier that provides long
distance service. This dispute relates to the use of estimated terminating
traffic and the related access charges. The dispute is ongoing and is expected
to be resolved by the Minnesota Public Utilities Commission. The Company has
adjusted its reserves to correspond with its present expectations regarding this
pending matter.
Other operating revenues increased $185,923 or 20.2% for the three months ended
June 30, 2004 compared with the same period in 2003. Other operating revenues
increased $388,122 or 21.8% for the six months ended June 30, 2004. 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, Sanborn and Redwood Falls, MN was responsible for
$241,054 of the increase in these revenues for the six months ended June 30,
2004. The remainder of the revenue increase was attributed to Telecom segment's
sale of Internet services.
Cash operating expenses increased $165,351 or 9.0% for the three-month period
ended June 30, 2004 and $490,128 or 13.7% for the six-month period ended June
30, 2004 compared with the same periods in 2003. Cash operating expenses have
increased due to the continued growth of CLEC operation in Redwood Falls, MN and
the increasing array of services offered such as video and DSL that allow the
Company to offer the "triple-play" of services to its customers. The Telecom
segment recognized the value of being able to compete in all aspects of
communication services. This realization 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 brand
recognition, and provide solutions for our customers' evolving communications
needs. The Telecom segment also realizes the potential for growth by
competitively offering its range of services to an increasing number of
communities. The Telecom segment began offering its services in the City of
Redwood Falls, MN in September 2002. The Company is always striving for cost
efficiencies and technological improvement to enhance its operating margins for
the Telecom segment.
Noncash operating expenses increased $39,010 or 3.9% for the three months ended
June 30, 2004 compared with the same period in 2003. Noncash operating expenses
increased $78,102 or 3.9% for the six months ended June 30, 2004 compared with
the same period ended June 30, 2003. Depreciation expense was the cause of these
increases. The increases in depreciation expense were reflective of the new
investments in the segment's infrastructure as previously discussed.
21
Operating income decreased $631,661 or 76.8% for the three months ended June 30,
2004 compared to the three-month period ended June 30, 2003. The decrease in
operating income for the three-month period was primarily due to a decrease in
network access revenue. There were two main causes of this decrease. First, this
decrease was the result of funds received in 2003 to true up the segment's
Universal Service Funding for Safety Net Additive for 2002 and the first six
months of 2003. This resulted in a $197,148 decrease in the amount of funds
received for the three months ended June 30, 2004 compared to the same period in
2003. Secondly, this segment realized a $408,952 reduction in revenues during
the three months ended June 30, 2004 due to the ongoing access billing dispute
with Qwest, that the Company expects to be resolved by the Minnesota Public
Utilities Commission (See note 12 on page 15).
Operating income decreased $651,535 or 46.9% for the six-month period ended June
30, 2004 compared to the same period in 2003. The decrease in operating income
was due to a reduction in estimated revenues due to the Qwest billing dispute
(see Note 12 on page 15), and 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. An
$83,305 decrease in revenues combined with a $568,230 increase in operating
expenses resulted in the $651,535 decrease in operating income for the six-month
period.
CELLULAR SEGMENT OPERATIONS
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 increased by
$27,067 for the three month period ending June 30, 2004 compared to June 30,
2003, and increased $15,790 for the six month period ending June 30, 2004
compared to June 30, 2003. The Cellular segment receives commissions from MWH
for subscribing customers to their service. These commissions allow the Cellular
segment to give customers discounts on cellular phones as incentives for
customers to subscribe to MWH's cellular phone service. Cellular investment
income decreased $71,353 or 8.4% for the three months ended June 30, 2004
compared to the same period ended in 2003, and decreased $50,498 or 3.1% for the
six months ended June 30, 2004 as compared to June 30, 2003. These decreases
reflected the increasing costs for MWH to compete in a highly competitive market
place. The Cellular segment information for its investment in MWH is shown in
the following table using the proportionate consolidation method.
22
Three Months Ended June 30, Six Months Ended June 30,
----------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Proportionate Method:
Operating Revenues 5,031,098 4,171,107 9,708,898 7,884,064
Cash Operating Expenses 3,373,189 2,622,843 6,603,045 4,903,139
Noncash Operating Expenses 717,876 541,221 1,410,402 1,053,070
---------- ---------- ---------- ----------
Total Operating Expenses 4,091,065 3,164,064 8,013,447 5,956,209
---------- ---------- ---------- ----------
Operating Income 940,033 1,007,043 1,695,451 1,927,855
---------- ---------- ---------- ----------
Cellular Investment Income $ 773,252 $ 844,605 $1,562,254 $1,613,752
========== ========== ========== ==========
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.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Revenues: $ 120,088 $ 69,032 $ 214,028 $ 121,791
----------- ----------- ----------- -----------
Cash Operating Expenses 70,319 46,330 149,235 72,788
Noncash Operating Expenses -- -- -- --
----------- ----------- ----------- -----------
Total Operating Expenses 70,319 46,330 149,235 72,788
----------- ----------- ----------- -----------
Operating Income 49,769 22,702 64,793 49,003
----------- ----------- ----------- -----------
Interest Expense (18,901) (3,865) (38,218) (45,290)
Cellular Investment Income 773,252 843,605 1,562,254 1,612,752
Net Income $ 478,693 $ 514,007 $ 945,830 $ 962,877
=========== =========== =========== ===========
PHONERY SEGMENT OPERATIONS
The Phonery segment represented 12.3% of the consolidated operating revenues for
the three-month period ended June 30, 2004 and 12.2% of the consolidated
operating revenues for the six-month period ended June 30, 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 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.
23
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Operating Revenues: $ 435,890 $ 473,561 $ 923,186 $ 897,588
------------ ------------ ------------ ------------
Cash Operating Expenses 208,483 214,197 425,075 456,288
Noncash Operating Expenses 19,935 17,904 39,870 35,807
------------ ------------ ------------ ------------
Total Operating Expenses 228,418 232,101 464,945 492,095
------------ ------------ ------------ ------------
Operating Income 207,472 241,460 458,241 405,493
------------ ------------ ------------ ------------
Net Income $ 123,508 $ 143,749 $ 272,791 $ 241,419
============ ============ ============ ============
Operating revenue decreased $37,671 or 8.0% for the three months ended June 30,
2004 compared to the same period in 2003. Operating revenue increased $25,598 or
2.9% for the six months ended June 30, 2004 compared to the same period in 2003.
An increase in sales, service and installation revenues accounted for
approximately $22,000 and an increase in the resale of long distance toll
revenues accounted for approximately $23,000 for the six months ended June 30,
2004. These six-month increases were offset by a decrease of approximately
$31,000 in leased network capacity revenues. The decrease in leased network
capacity revenues included a $19,745 decrease related to the Qwest dispute
previously discussed in the Telecom segment.
Cash operating expenses decreased $5,714 or 2.7% for the three months ended June
30, 2004 compared to the three months ended June 30, 2003. Cash operating
expenses decreased $31,213 or 6.8% for the six months ended June 30, 2004
compared to the same period in 2003. This six-month decrease can be attributed
to a decrease in expenses for leased network capacity 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 $2,031 or 11.3% for the quarter ended June
30, 2004 compared with the same period in 2003. Noncash operating expenses
increased $4,063 or 11.3% for the six-month period ended June 30, 2004 compared
to the same period in 2003. The increases were attributable to an increase in
depreciation expense.
Operating income decreased by $33,988 or 14.1% for the three months ended June
30, 2004 compared to the three months ended June 30, 2003. This decrease was due
to a reduction in leased network capacity revenues resulting from decreases in
access minutes of use and the revenue reduction related to the Qwest billing
dispute. Operating income increased by $52,748 or 11.3% for the six months ended
June 30, 2004 compared to the same period in 2003. The six-month increase in
income was the result of increased CPE sales and service, as well as increased
resale of long distance toll service.
24
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CAPITAL STRUCTURE
The total long-term capital (long-term debt plus shareholders' equity) of the
Company was $43,385,668 at June 30, 2004, reflecting 62.2% equity and 37.8%
debt. This compares to a capital structure of $43,686,870 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 $4,436,768 for the six-month period ended June
30, 2004 compared to $4,394,357 for the six-month period ended June 30, 2003.
Cash flows from operations for the six months ended June 30, 2004 and 2003 were
primarily attributable to net income plus non-cash expenses for depreciation and
amortization.
Cash flows used in investing activities were $1,775,036 for the six months ended
June 30, 2004 compared to $2,101,975 for the same period in 2003 and capital
expenditures relating to on-going businesses were $1,775,036 for the six month
period ended June 30, 2004 compared to $2,101,975 for the six month period ended
June 30, 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. The decrease in notes receivable
was $674,037 for the first six months of 2003. The decrease of $674,037 in notes
receivable for 2003 was due to repayment in full of the note receivable from Mr.
Bill Otis, President.
Cash flows used by financing activities was $2,103,635 for the six-month period
ended June 30, 2004 compared to cash flows used by financing activities of
$2,116,388 for the six-month period ended June 30, 2003. Included in cash flows
used in financing activities were debt repayments, retired stock, and dividend
payments.
DIVIDENDS
The Company paid dividends of $852,233 during the first six months of 2004 and
$852,258 for the first six months of 2003. The dividends amounted to $.0833 per
share per quarter. 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.
25
WORKING CAPITAL
The Company had working capital of $463,815 as of June 30, 2004, compared to
working capital of $1,244,920 as of December 31, 2003. The decrease of $781,105
in working capital reflects the Company's decrease in receivables. The decrease
in receivables was caused by a reduction of income taxes receivable and the
reduction of the net receivable from Qwest due to the ongoing access billing
dispute previously discussed in the segment reporting. The ratio of current
assets to current liabilities was 1.1:1.0 as of June 30, 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 June 30, 2004, there was
$11,250,000 of direct borrowings outstanding under this facility at a variable
interest rate of 2.78%.
In addition, the Company entered into a $10 million secured ten-year reducing
revolving credit facility maturing in 2011. The borrowings under the credit
facility bear interest, at the Company's option, at either fixed or variable
rates linked to the Company's overall leverage ratio. Principal payments of
$250,000 per quarter began once borrowing commenced. At March 31, 2004, there
was $7,500,000 of direct borrowings outstanding under this facility at a
variable interest rate of 2.78%.
OTHER
The Company has not conducted a public equity offering. It operates with
original equity capital, retained earnings and indebtedness in the form of
senior debt and bank lines of credit. The Company believes its debt to total
capital proportions of 40 to 60 percent will be adequate for at least the next
twelve months.
By utilizing cash flow from operations and current cash balances, the Company
believes it has adequate resources to meet its anticipated operating, capital
expenditures, and debt service requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does the Company use derivative financial instruments in its
operations or investment portfolio. The Company's earnings are affected by
changes in interest rates as its long-term debt is based on a national variable
rate. If interest rates for the portion of the Company's long-term debt based on
variable rates had averaged 10% more (approximately 3%) for the first six months
of 2004, the Company's interest expense would have increased approximately
$26,000. Should interest rates
26
rise significantly, management expects that it would act to mitigate its
exposure to the change by converting a portion of its variable-rate debt to
fixed-rate debt.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed, is accumulated and communicated to management timely. At the end
of the period covered by this report, the Company carried out an evaluation
under the supervision and with the participation of its management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be disclosed in
periodic filings with the SEC.
During the Company's most recent fiscal quarter, there has been no change in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
27
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(a) At the Company's annual shareholder meeting, held May 20, 2004, the
shareholders approved the following amendment to the Company's Articles
of Incorporation:
o Addition of a provision that provides that a person who
violates the Company's restriction on share ownership may not
vote shares owned or acquired that are in excess of seven
percent of the Company's outstanding stock ("Excess Shares").
o Addition of a provision that provides that Excess Shares may
be redeemed by the Company upon written notice given within 60
days after the Company first has notice of such ownership of
Excess Shares at market value of the Excess Shares on the date
the Company mails such written notice, subject to any required
approval of such redemption by the Company's shareholders at
any regular or special meeting of the shareholders.
o Addition of a provision that provides that shares acquired by
a person in excess of seven percent of the Company's
outstanding capital stock should not constitute Excess Shares
if issued in a Board-approved transaction or a
shareholder-approved transaction.
o Amendment of the definition of ownership to provide that
ownership will be based upon "beneficial ownership" as defined
in Minnesota Business Corporation Act (MBCA) Section 302A.011,
Subd. 41.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the registrant was held May 20, 2004
in New Ulm, MN. The total number of shares outstanding and entitled to vote at
the meeting was 5,115,435 of which 4,327,793 were present either in person or by
proxy. Two matters were presented to the shareholders, both of which passed.
Two directors were elected to serve three-year terms. The names of the directors
elected at the annual meeting and the applicable votes were as follows:
DIRECTOR FOR WITHHELD ABSTAIN
James Jensen 4,263,168 35,130 46,100
Perry Meyer 4,240,423 24,665 46,100
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The Board Members continuing and whose terms expire at subsequent annual
meetings are as follows:
2005 Annual Meeting 2006 Annual Meeting
Robert Ranweiler Mary Ellen Domeier
Duane Lambrecht Rosemary Dittrich
Gary Nelson
Article III of the Company's Articles of Incorporation, was amended to add
provisions in the Company's Articles of Incorporation, which provides that
except for board-approved issuances by the Company, no person shall beneficially
own more than seven percent (7%) of the outstanding capital stock of the
Company, by adding provisions providing that (i) to the extent capital stock is
acquired in excess of such permitted limit ("Excess Shares"), such Excess Shares
may not be voted; and (ii) the Company has the right to redeem Excess Shares.
The votes for this amendment were as follows:
BROKER
FOR WITHHELD ABSTAIN NON-VOTES
Amendment to
Article III, Section 2 3,475,389 704,742 32,338 176,447
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" on page 31 of this Form 10-Q.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ULM TELECOM, INC.
Dated: August 5, 2004 By /s/ James P. Jensen
-------------------------
James P. Jensen, Chairman
Dated: August 5, 2004 By /s/ Bill Otis
-------------------------
Bill Otis, President
30
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3 Restated Articles of Incorporation, As Amended
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
31