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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 0-3024

NEW ULM TELECOM, INC.
(Exact name of Registrant as specified in its charter)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes _X_   No ___   

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes            No   X     

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of November 4, 2004: 5,115,435 shares of common stock outstanding.

NEW ULM TELECOM, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2004

NEW ULM TELECOM, INC. AND SUBSIDIARIES

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED BALANCE SHEETS

ASSETS

The accompanying notes are an integral part of the financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of the financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of the financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEAR ENDED DECEMBER 31, 2003 AND
NINE MONTHS ENDED SEPTEMBER 30, 2004

The accompanying notes are an integral part of the financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the financial statements.

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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 September 30, 2004 and statements of income and the statements of cash flows for the periods ended September 30, 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

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financial position, results of operations, and changes in cash flows at September 30, 2004 and 2003 and for the periods then ended 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 three and nine month periods ended September 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 September 30, 2004 and 5,115,585 at September 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 nine months ended September 30:

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Noncash investing activities included $83,038 and $418,296 during the periods ended September 30, 2004 and 2003, respectively, relating to plant and equipment additions placed in service, which are reflected in accounts payable at September 30, 2004 and 2003. A noncash investing activity included $375,000 for the period ended September 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 September 30, 2004, there was $10,875,000 of direct borrowing outstanding under this facility at an interest rate of 3.31%. The Company also entered into a $10 million secured ten-year reducing revolving credit facility during fiscal 2001, maturing in 2011. The borrowings under the credit facility bear interest, at the Company’s option, at either fixed or variable rates linked to the Company’s overall leverage ratio. At September 30, 2004, there was $7,250,000 of direct borrowing outstanding under this facility at an interest rate of 3.31%.

NOTE 6 – MATERIALS, SUPPLIES AND INVENTORIES

Materials, supplies and inventories are recorded at the lower of average cost or market.

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the provisions of this accounting standard, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are instead tested for impairment or useful lives on at least an annual basis.

At September 30, 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 September 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.

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Changes in goodwill are summarized below:

Intangible assets subject to amortization pursuant to SFAS No. 142 are summarized below:

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:

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NOTE 8 – SEGMENT INFORMATION (continued)

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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 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 provisions of the interpretation are effective for financial statements issued for the first period ending after June 15, 2003. In December 2003, the FASB issued FIN 46(R). The FASB deferred the effective date for variable-interest entities that are non-special purpose entities created before February 1, 2003, to the first interim or annual reporting period that ends after March 15, 2004. The adoption of FIN 46 and FIN 46(R) 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.

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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.

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 continues to assess its estimated revenues and its reserves related to this dispute to accurately reflect the Company’s current expectations regarding the outcome of this dispute. The dispute is currently before the Minnesota Public Utilities Commission seeking resolution.

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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:

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

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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) which is recorded 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.

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Summary of Operations

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RESULTS OF OPERATIONS BY BUSINESS SEGMENT

Telecom Segment Operations

New Ulm Telecom segment revenues represented 91.8% of the Company’s consolidated operating revenues for the three-month period ended September 30, 2004 and 91.7% of the Company’s consolidated operating revenues for the nine-month period ended September 30, 2004 before intercompany eliminations. Revenues are primarily earned by providing approximately 17,100 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 September 30, 2004 increased $43,096 or 1.2% over the same period in 2003. Total Telecom segment revenues for the nine-month period ending September 30, 2004 decreased $40,209 or 0.4% compared to the same period last year. All information contained in the following table is before intercompany eliminations.

Local network revenue increased in the Telecom segment by $74,232 or 7.4% for the three months ended September 30, 2004 compared to the same period in 2003. Local network revenue increased in the Telecom segment by $259,560 or 9.1% for the nine months ended September 30, 2004 over the same period ended September 30, 2003. The continued growth in the service offerings for the CLEC in Redwood Falls, MN that began operations in the third quarter of 2002 has resulted in an increase in local network revenue. The CLEC accounted for an increase of $100,377 in local network revenue for the nine-months ended September 30, 2004. The local network revenue also increased due to a rate increase at its Minnesota ILEC locations effective June 1, 2003. This rate increase accounted for approximately $75,000 of the increase in local network revenue for the nine-months ended September 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.

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Network access revenue decreased $202,769 or 12.2% for the three months ended September 30, 2004 compared with the same period in 2003. Network access revenue decreased $859,524 or 17.1% for the nine months ended September 30, 2004. In addition, the Telecom segment experienced a 7.9% decrease in access minutes for the nine months ended September 30, 2004. Decreases in access minutes and downward pressure on access charges have become common industry trends. The Telecom segment has been able to reduce the decline in its access minutes by providing services as a CLEC in Redwood Falls, MN beginning 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 decline in access minutes of use and the offsetting increase in Universal Service Funds accounted for a net network access revenue decrease of approximately $450,000 for the nine month ended September 30, 2004. In addition, the Telecom segment recognized a $408,952 reduction in revenues in June 2004 due to the 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’s reserves reflect its present expectations regarding the resolution of this pending matter. (See note 12 on page 15)

Other operating revenues increased $171,633 or 17.9% for the three months ended September 30, 2004 compared with the same period in 2003. Other operating revenues increased $559,755 or 20.4% for the nine months ended September 30, 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, Sanborn and Redwood Falls, MN was responsible for $343,410 of the increase in these revenues for the nine months ended September 30, 2004. The remainder of the revenue increase was attributed to Telecom segment’s sale of Internet services.

Cash operating expenses increased $111,812 or 5.8% for the three-month period ended September 30, 2004 and $601,940 or 10.9% for the nine-month period ended September 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 desire for this service), offer additional services (video and DSL), pursue aggressive marketing to achieve brand recognition, and provide solutions for customers’

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evolving communications needs. The Company has expanded its services and product offerings in an effort to meet its objective of achieving 100% customer satisfaction by making the customer our top priority, deserving our best service, attitude and consideration. 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 $34,885 or 3.5% for the three months ended September 30, 2004 compared with the same period in 2003. Noncash operating expenses increased $112,987 or 3.7% for the nine months ended September 30, 2004 compared with the same period in 2003. Depreciation expense was the primary cause of these increases. The increases in depreciation expense were reflective of the new investments in the segment’s infrastructure as previously discussed.

Operating income decreased $103,601 or 15.5% for the three months ended September 30, 2004 compared to the three-month period ended September 30, 2003. The decrease in operating income for the three-month period was primarily due to a decrease in network access revenue caused by a 17.2% decrease in access minutes of use and the continued downward pressure on access rates, common industry trends.

Operating income decreased $755,136 or 36.7% for the nine-month period ended September 30, 2004 compared to the same period in 2003. There were four main causes of the decrease. First, the Company has a receipt of funds in the first nine months of 2003 to true up the segment’s Universal Service Funding for Safety Net Additive for 2002. This resulted in a $197,148 decrease in the amount of funds received for the first nine months ended September 30, 2004 compared to the same period in 2003. Second, this segment realized a $408,952 reduction in estimated revenues during the three-month period ended June 30, 2004 due to the ongoing access billing dispute with Qwest (see note 12 on page 15). Third, this segment experienced a 7.9% decline in access minutes of use for the nine months ended September 30, 2004 as compared to 2003. Coupled with the downward pressure on access rates, this decline reduced network access revenues by approximately $180,000. Fourth, the segment had additional expenses associated with its growing customer base and its commitment to compete effectively in the telecommunications arena. A $40,209 decrease in revenues combined with a $714,927 increase in operating expenses resulted in the $755,136 decrease in operating income for the nine-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 $9,178 for the three month period ending September 30, 2004 compared to September 30, 2003, and increased $24,968 for the nine month period ending September 30, 2004 compared to September 30, 2003. The Cellular segment receives commissions from MWH for subscribing customers to their service. These

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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 increased $295,077 or 39.6% for the three months ended September 30, 2004 compared to the same period ended in 2003, and increased 243,579 or 10.3% for the nine months ended September 30, 2004 as compared to September 30, 2003. These increases reflected MWH’s success in competing in a highly competitive market place. The Cellular segment’s present investment in MWH is shown in the following table using the proportionate consolidation method.

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.