Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

o     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)

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  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  o       No  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o       No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of November 11, 2005: 5,115,435 shares of common stock outstanding.

 NEW ULM TELECOM, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2005

2

Table of Contents

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.

3

Table of Contents

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.

4

Table of Contents

NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

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

5

Table of Contents

NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEAR ENDED DECEMBER 31, 2004 AND
NINE MONTHS ENDED SEPTEMBER 30, 2005

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

6

Table of Contents

NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

7

Table of Contents

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 in consolidation. Accounting practices prescribed by regulatory authorities have been considered in the preparation of the financial statements and formulation of accounting policies for the Company. These policies conform with generally accepted accounting principles as applied to regulated public utilities in accordance with Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71).

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates. The Company’s financial statements are also affected by depreciation rates prescribed by regulators, which may result in different depreciation rates than for an unregulated enterprise.

Revenues are recognized when earned, regardless of the period in which they are billed. Interstate network access revenues are furnished in conjunction with interexchange carriers and are determined by cost separation studies and nationwide average schedules. Revenues include estimates pending finalization of cost studies. Interstate network access revenues are based upon interstate tariffs filed with the Federal Communications Commission by the National Exchange Carrier Association and state tariffs filed with state regulatory agencies. Management believes recorded revenues are reasonable based on estimates of cost separation studies, which are typically settled within two years. During the quarter ended June 30, 2005 network access revenues were increased by $493,178, and during the quarter ended September 30, 2005 network access revenues were increased by $89,335, as a result of changes to prior years’ estimated revenues. Local network and intrastate access revenues are based on tariffs filed with the state regulatory commissions. Revenues from system sales and services are derived from the sale, installation, and servicing of communication systems. In accordance with EITF 00-21, these deliverables are separate units of accounting. Customer contracts of sales and installations are recognized using the completed-contract method, which recognizes income when the contract is substantially complete. Rental revenues are recognized over the rental period.

8

Table of Contents

Income taxes have been calculated in proportion to the earnings and tax credits generated by operations. 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, 2005, and statements of income for the three and nine month periods ended September 30, 2005 and 2004, and the statements of cash flows for the nine month periods ended September 30, 2005 and 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at September 30, 2005 and the results of operations for the three-month and nine-month periods ended September 30, 2005 and 2004, and changes in cash flows for the nine-month periods ended September 30, 2005 and 2004 have been made.

The accompanying unaudited 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 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 year ended December 31, 2004. The results of operations for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the operating results to be expected for the entire year.

NOTE 2 – STATEMENTS OF CASH FLOWS

Supplemental Disclosures of Cash Flows Information:

        Cash paid, net of refunds, during the nine months ended September 30:

Noncash investing activities included $68,884 and $83,038 during the periods ended September 30, 2005 and 2004, respectively, relating to plant and equipment additions placed in service, which are reflected in accounts payable at September 30, 2005 and 2004.

NOTE 3 – SECURED REDUCING REVOLVING CREDIT FACILITY

In fiscal 2001, the Company entered into a $15 million secured ten-year reducing revolving credit facility maturing in 2011. At September 30, 2005, there were $9,375,000 of direct borrowings outstanding under this facility at a variable interest rate of 5.50%. 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, 2005, there were $6,250,000 of direct borrowings outstanding under this facility at a variable interest rate of 5.50%.

9

Table of Contents

NOTE 4 – GOODWILL AND INTANGIBLE ASSETS

At September 30, 2005, 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 annually tests the goodwill of $3,218,906, associated with wireline acquisitions under SFAS 142 and has determined that the goodwill associated with this investment is not impaired. The cellular investment goodwill of $4,890,389 was considered under APB Opinion 18 and it was determined to not be impaired.

The Company owned 9.88% of Midwest Wireless Holdings, LLC (MWH) at September 30, 2005 (9.88% at December 31, 2004). 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, 2004, 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 are not impaired.

The components of goodwill are summarized below:

Definite lived intangibles are summarized below:

Intangible assets with definite lives are amortized over their useful lives. The estimated amortization expense for intangible assets will be $2,053 per year for the next five years.

10

Table of Contents

NOTE 5 – 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 9.88% cellular investment in MWH. The cellular investment in the Cellular sector is recorded on the equity method on the financial statements and is presented in this note using the proportionate consolidation method. The Company records its 9.88% investment in MWH using the proportionate consolidation method so that it can be compared to the cellular industry, as well as the Company’s other business segments, and because the Company’s chief operating decision maker (CODM) reviews the performance of MWH using the proportionate 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 beginning on page 12:

11

Table of Contents

NOTE 5 – SEGMENT INFORMATION (continued)

12

Table of Contents

NOTE 5 – SEGMENT INFORMATION (continued)

13

Table of Contents

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, 2004. 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in our financial statements and accompanying notes. Note 1 to the consolidated financial statements describes the significant accounting policies and methods used in preparing the financial statements. The Company bases its estimates on historical experience or various assumptions that are believed to be reasonable under the circumstances, and the results from the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates. There have been no changes to our critical accounting policies since we filed our 2004 Annual Report on Form 10-K with the SEC on March 30, 2005. For a description of our critical accounting policies, please refer to our 2004 Annual Report on Form 10-K

14

Table of Contents

OVERVIEW

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 9.88% cellular investment in MWH. The cellular investment in the Cellular sector is recorded on the equity method on the financial statements and is presented using the proportionate consolidation method. The Company records its 9.88% investment in MWH using the proportionate consolidation method so that it can be compared to the cellular industry, as well as the Company’s other business segments, and because the Company’s chief operating decision maker (CODM) reviews the performance of MWH using the proportionate method. The Phonery sector includes the sales and service of customer premise equipment (CPE), 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.

15

Table of Contents

16

Table of Contents

17

Table of Contents

Summary of Operations

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

Telecom Segment Operations

New Ulm Telecom segment revenues represented 87.7% of the Company’s consolidated operating revenues for the three-month period ended September 30, 2005 and 87.3% of the Company’s consolidated operating revenues for the nine-month period ended September 30, 2005 before intercompany eliminations. Revenues are primarily earned by providing approximately 17,000 customers access to the local network in Minnesota and Iowa, and providing inter-exchange 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, 2005 increased $414,791 or 11.3% over the same period in 2004. Total Telecom segment revenues for the nine-month period ending September 30, 2005 increased $1,187,548 or 11.2% compared to the same period last year. All information contained in the following table is before intercompany eliminations.

18

Table of Contents

Local network revenue decreased in the Telecom segment by $73,133 or 6.8% for the three months ended September 30, 2005 compared to the same period in 2004. Local network revenue decreased in the Telecom segment by $52,029 or 1.7% for the nine months ended September 30, 2005 over the same period ended September 30, 2004. Local network revenue decreased during these periods primarily as a result of decreased access lines. Targeted marketing, promotions and packaging of vertical services, most notably the introduction of digital subscriber line (DSL) to supplement basic line charges, have helped sustain local network revenue near historical levels, despite declines in access line counts.

Network access revenue increased $387,419 or 26.5% for the three months ended September 30, 2005 compared with the same period in 2004. Network access revenue increased $937,523 or 22.5% for the nine months ended September 30, 2005. An increase of $89,335 for the three months ended September 30, 2005 and an increase of $582,513 for the nine months ended September 30, 2005, were due to upward settlement adjustments as a result of changes to prior years’ estimated cost study results. The Telecom segment experienced a 4.3% decrease in access minutes for the nine months ended September 30, 2005. Decreases in access minutes and downward pressure on access charges have become a common industry trend. The effect of the decrease in access minutes of use was lessened due to the increased number of access subscribers in the Redwood Falls, MN CLEC during the first nine months of 2005 as compared to the same period in 2004. In order to minimize the impact on the Company, the Company continues to monitor the negative effects of network access pricing and the downward trend in access minutes of use.

Other operating revenues increased $100,505 or 8.9% for the three months ended September 30, 2005 compared with the same period in 2004. Other operating revenues increased $302,054 or 9.2% for the nine months ended September 30, 2005. 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 $183,537 of the increase in these revenues for the nine months ended September 30, 2005. The remainder of the revenue increase was primarily attributable to the Telecom segment’s sale of Internet services.

19

Table of Contents

Operating expenses, excluding depreciation and amortization, increased $140,448 or 6.8% for the three-month period ended September 30, 2005 and increased $463,051 or 7.5% for the nine-month period ended September 30, 2005 compared with the same periods in 2004. Cash operating expenses have increased due to the continued growth of the 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 develop brand recognition, and provide solutions for our customers’ 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 its top priority, deserving the Company’s best service, attitude and consideration. The Telecom segment also realizes that the potential for growth exists from 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.

Depreciation and amortization expenses decreased $7,191 or 0.7% for the three months ended September 30, 2005 compared with the same period in 2004. Depreciation and amortization expenses decreased $18,875 or 0.6% for the nine months ended September 30, 2005 compared with the same period ended September 30, 2004. Decreased depreciation expense was the cause of these decreases. The decreases were due to certain long-lived assets that have become fully depreciated, while the Company continues to make investments in the Telecom segment’s infrastructure.

Operating income increased $281,534 or 49.7% for the three months ended September 30, 2005 compared to the three-month period ended September 30, 2004. Operating income increased $743,372 or 57.0% for the nine months ended September 30, 2005 compared to the same period in 2004. The increase in operating income for the three-month period was partially due to the $89,335 increase in network access revenues resulting from adjustments to prior years’ estimated cost study results. The remainder of the three-month increase in operating income was the result of increases in other operating revenues. The nine-month increase in operating income was primarily due to the $582,513 increase in network access revenues resulting from adjustments to prior years’ estimated cost study results. Operating income also increased during the nine months ended September 30, 2005 due to an $183,537 increase in video service revenues and a $104,982 increase in Internet service revenues, resulting from an increase in customers subscribing to these services. A $1,187,548 increase in revenues combined with a $444,176 increase in operating expenses resulted in the $743,372 increase in operating income for the nine-month period.

20

Table of Contents

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 decreased by $3,226 for the three month period ending September 30, 2005 compared to September 30, 2004, and decreased $5,604 for the nine month period ending September 30, 2005 compared to September 30, 2004. The three-month and nine-month decreases were primarily due to changes in the sale of cellular phones and commissions received for subscribing customers to MWH cellular service. The commissions allow the Cellular segment to give customers discounts on cellular phones as incentives to customers for subscription to MWH’s cellular phone service. Cellular investment income increased $488,161 or 46.9% for the three months ended September 30, 2005 compared to the same period in 2004, and increased $1,819,126 or 69.9% for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004. These increases were the result of revenue and income growth as MWH continues to gain market share and offer customers new phones, new features and new service plan options. The Cellular segment information for its investment in MWH is shown in the following table using the proportionate consolidation method. The Company records its 9.88% investment in MWH using the proportionate consolidation method so that it can be compared to the cellular industry, as well as the Company’s other business segments, and because the Company’s CODM reviews the performance of MWH using the proportionate method. A recap of the Company’s investment in MWH using the proportionate method is as follows:

A recap of income for the Cellular segment, using the equity method to record earnings on its investment in MWH, is contained in the following table.

21

Table of Contents

Phonery Segment Operations

The Phonery segment represented 9.7% of the consolidated operating revenues for the three-month period ended September 30, 2005 and 10.2% of the consolidated operating revenues for the nine-month period ended September 30, 2005 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.