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Nuvera Communications, Inc. - Quarter Report: 2005 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
___ 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
(State or Other Jurisdiction
of Incorporation or Organization)

41-0440990
(I.R.S. Employer
Identification No.)

27 North Minnesota Street
New Ulm, Minnesota 56073
(Address of Principal Executive Offices, Including Zip Code)

(507) 354-4111
(Registrant’s Telephone Number, Including Area Code)


Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X      No          .  

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

Yes            No    X    .  

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of May 13, 2005: 5,115,435 shares of common stock outstanding.





NEW ULM TELECOM, INC. AND SUBSIDIARIES
MARCH 31, 2005

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  8-13
       Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations  14-24
       Item 3   Quantitative and Qualitative Disclosures About Market Risk  24
       Item 4   Controls and Procedures  24-25  
  
PART II   OTHER INFORMATION  26  
  
       Item 5   Other Information  26  
  
       Item 6   Exhibits  26  
  
SIGNATURES  26  
  
INDEX TO EXHIBITS  27  











NEW ULM TELECOM, INC. AND SUBSIDIARIES

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED BALANCE SHEETS

ASSETS

March 31,
2005

December 31,
2004

CURRENT ASSETS            
   Cash and cash equivalents   $ 3,725,524   $ 2,739,389  
   Receivables, net of allowance for
     doubtful accounts of $148,381 and $136,069    875,193    1,417,572  
   Inventories    249,959    263,183  
   Prepaid expenses    227,829    259,302  


     5,078,505    4,679,446  


 
INVESTMENTS AND OTHER ASSETS
   Cellular investments    18,409,171    17,685,547  
   Goodwill and intangibles, net of amortization    3,241,825    3,242,338  
   Other    1,684,354    1,608,284  


     23,335,350    22,536,169  


 
PROPERTY, PLANT AND EQUIPMENT    
   Telecommunications plant    56,882,126    56,414,779  
   Other property and equipment    2,628,115    2,613,121  
   Cable television plant    2,381,162    2,362,964  


     61,891,403    61,390,864  
   Less Accumulated Depreciation    35,823,828    34,771,111  


     26,067,575    26,619,753  


 
TOTAL ASSETS     $ 54,481,430   $ 53,835,368  



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

March 31,
2005

December 31,
2004

CURRENT LIABILITIES            
   Current portion of long-term debt   $ 2,515,987   $ 2,515,987  
   Accounts payable    1,399,724    1,328,386  
   Accrued income taxes    256,236      
   Other accrued taxes    91,708    77,338  
   Other accrued liabilities    705,799    531,115  


     4,969,454    4,452,826  


 
LONG-TERM DEBT, less current portion      14,489,426    15,114,426  


 
NON-CURRENT LIABILITIES
   Loan guarantee    375,000    375,000  
   Deferred income taxes    6,068,778    6,068,778  


     6,443,778    6,443,778  


 
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 shares issued and outstanding    8,525,725    8,525,725  
   Retained earnings    20,053,047    19,298,613  


     28,578,772    27,824,338  


 
 
TOTAL LIABILITIES AND    
      STOCKHOLDERS’ EQUITY     $ 54,481,430   $ 53,835,368  



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


4



NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THREE MONTHS ENDED
MARCH 31,

2005
2004
OPERATING REVENUES            
   Local network   $ 993,627   $ 987,505  
   Network access    1,448,694    1,586,451  
   Directory advertising, billing and other services    119,797    130,460  
   Video services    495,361    410,972  
   Internet services    308,793    296,289  
   Other nonregulated services    547,258    581,236  


     3,913,530    3,992,913  


 
OPERATING EXPENSES
   Plant operations, excluding depreciation and amortization    554,321    514,851  
   Cost of video services    378,252    328,618  
   Cost of internet services    102,664    118,573  
   Cost of other nonregulated services    327,266    295,508  
   Depreciation and amortization    1,074,977    1,065,910  
   Selling, general and administrative    890,469    857,152  


     3,327,949    3,180,612  


 
OPERATING INCOME    585,581    812,301  


 
OTHER (EXPENSES) INCOME    
   Interest expense    (182,831 )  (134,122 )
   Interest income    40,801    14,264  
   Cellular investment income    1,291,579    789,002  
   Other investment income    248,110    165,812  


     1,397,659    834,956  


 
INCOME BEFORE INCOME TAXES      1,983,240    1,647,257  
 
INCOME TAXES      802,690    666,124  


 
NET INCOME     $ 1,180,550   $ 981,133  


 
BASIC AND DILUTED
NET INCOME PER SHARE – NOTE 2     $ 0.23   $ 0.19  


 
DIVIDENDS PER SHARE     $ 0.0833   $ 0.0833  


 
WEIGHTED AVERAGE
SHARES OUTSTANDING      5,115,435    5,115,435  



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, 2004 AND
THREE MONTHS ENDED MARCH 31, 2005

Common Stock
Retained
Earnings

Shares
Amount
BALANCE on December 31, 2003      5,115,585   $ 8,525,975   $ 17,712,482  
 
Retired Stock    (150 )  (250 )  (1,152 )
Net Income              3,291,749  
Dividends              (1,704,466 )



 
BALANCE on December 31, 2004    5,115,435   $ 8,525,725   $ 19,298,613  
 
Net income              1,180,550  
Dividends              (426,116 )
 



BALANCE on March 31, 2005    5,115,435   $ 8,525,725   $ 20,053,047  




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















6



NEW ULM TELECOM, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THREE MONTHS ENDED
MARCH 31, 2005
MARCH 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES            
   Net income   $ 1,180,550   $ 981,133  
      Adjustments to reconcile net income to
         net cash provided by operating activities:
            Depreciation and amortization    1,074,977    1,065,910  
            Cellular investment income    (1,291,579 )  (789,002 )
            Distributions from cellular investments    567,953    242,671  
            Deferred investment tax credits        (834 )
           Decrease in:  
             Receivables    542,379    1,176,656  
             Inventories    13,224    6,551  
             Prepaid expenses    31,473    66,331  
           Increase (Decrease) in:  
             Accounts payable    67,612    66,237  
             Accrued income taxes    256,236      
             Other accrued taxes    14,370    (4,203 )
             Other accrued liabilities    174,684    (79,161 )


               Net cash provided by operating activities    2,631,879    2,732,289  


 
CASH FLOWS FROM INVESTING ACTIVITIES    
   Additions to property, plant and equipment, net    (518,558 )  (835,806 )
   Other, net    (76,070 )  (110,320 )


               Net cash used in investing activities    (594,628 )  (946,126 )


 
CASH FLOWS FROM FINANCING ACTIVITIES    
   Principal Payments of Long-Term Debt    (625,000 )  (625,000 )
   Retire Stock        (1,402 )
   Dividends Paid    (426,116 )  (426,117 )


               Net Cash Used by Financing Activities    (1,051,116 )  (1,052,519 )


 
NET INCREASE IN CASH AND CASH EQUIVALENTS      986,135    733,644  
 
CASH AND CASH EQUIVALENTS    
   at Beginning of Period      2,739,389    2,201,435  


 
CASH AND CASH EQUIVALENTS
   at End of Period     $ 3,725,524   $ 2,935,079  



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. Interstate network access revenues are based upon interstate tariffs filed with the Federal Communications Commission by the National Exchange Carrier Association and state tariffs filed with state regulatory agencies. Management believes recorded revenues are reasonable based on estimates of cost separation studies, which are typically settled within two years. Local network and intrastate access revenues are based on tariffs filed with the state regulatory commissions. 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.

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.


8



The balance sheets and statement of stockholders’ equity as of March 31, 2005, and statements of income and the statements of cash flows for the periods ended March 31, 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, results of operations, and changes in cash flows at March 31, 2005 and for the three-month periods ended March 31, 2005 and 2004 have been made.

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The results of operations for the period ended March 31, 2005 are not necessarily indicative of the operating results to be expected for the entire year.

NOTE 2 – BASIC AND DILUTED NET INCOME PER COMMON SHARE

Basic and diluted net income per common share is based on the weighted average number of shares of common stock outstanding of 5,115,435 at March 31, 2005 and 2004.

NOTE 3 – STATEMENTS OF CASH FLOW

Supplemental Disclosures of Cash Flow Information:
          Cash paid during the three months ended March 31:

2005
2004
Interest     $ 173,907   $ 134,063  
Income taxes   $ 140,000   $ 12,000  

Noncash investing activities included $91,593 and $54,692 during the periods ended March 31, 2005 and 2004, respectively, relating to plant and equipment additions placed in service, which are reflected in accounts payable at March 31, 2005 and 2004.

NOTE 4 – SECURED REDUCING REVOLVING CREDIT FACILITY

In fiscal 2001, the Company entered into a $15 million secured ten-year reducing revolving credit facility maturing in 2011. At March 31, 2005, there were $10,125,000 of direct borrowings outstanding under this facility at an interest rate of 4.44%. The Company also entered into a $10 million secured ten-year reducing revolving credit facility during fiscal 2001, maturing in 2011. At March 31, 2005, there were $6,750,000 of direct borrowings outstanding under this facility at an interest rate of 4.44%.


9



NOTE 5 – MATERIALS, SUPPLIES AND INVENTORIES

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

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

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

At March 31, 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 determined that these assets have indefinite useful lives and ceased amortization effective January 1, 2002. The Company has tested 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 impairment of 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 March 31, 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 $212,347,514. MWH has determined that these licenses have indefinite useful lives.

The components of goodwill are summarized below:

March 31,
2005

December 31,
2004

Goodwill on wireline acquisitions     $ 3,218,906   $ 3,218,906  
Goodwill on cellular equity investments    4,890,389    4,890,389  


    $ 8,109,295   $ 8,109,295  



Definite lived intangibles are summarized below:

March 31,
2005

December 31,
2004

Gross Carrying Amount     $ 30,785   $ 30,785  
Accumulated amortization    (7,866 )  (7,353 )


    $ 22,919   $ 23,432  




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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.

NOTE 7 – 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 and is shown 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:














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NOTE 7 – SEGMENT INFORMATION (continued)

Telecom
Segment
Cellular
Segment
Phonery
Segment
Eliminations Consolidated





Three Months Ended March 31, 2005                        
Operating Revenues   $ 3,642,541   $ 5,702,008   $ 458,608   $ (5,889,627 ) $ 3,913,530  
Depreciation and Amortization    1,053,697    785,460    21,280    (785,460 )  1,074,977  
Operating Expenses, Excluding  
     Depreciation and Amortization    2,201,975    3,444,380    247,465    (3,640,848 )  2,252,972  





Operating Income    386,869    1,472,168    189,863    (1,463,319 )  585,581  
Interest Expense    (155,698 )  (169,893 )      142,760    (182,831 )
Cellular Investment Income                1,291,579    1,291,579  
Other Investment Income    288,911    (28,980 )      28,980    288,911  
Income (Taxes) Benefit    (210,550 )  (515,302 )  (76,838 )      (802,690 )





Net Income   $ 309,532   $ 757,993   $ 113,025   $   $ 1,180,550  





 
Total Assets   $ 86,313,982   $ 50,064,930   $ 5,506,928   $ (87,404,410 ) $ 54,481,430  





 
Capital Expenditures   $ 518,558   $ 1,093,034   $   $ (1,093,034 ) $ 518,558  





 
Telecom
Segment
Cellular
Segment
Phonery
Segment
Eliminations Consolidated





Three Months Ended March 31, 2004   
Operating Revenues   $ 3,662,383   $ 4,771,740   $ 487,296   $ (4,928,506 ) $ 3,992,913  
Depreciation and Amortization    1,045,975    692,526    19,935    (692,526 )  1,065,910  
Operating Expenses, Excluding  
     Depreciation and Amortization    2,069,900    3,308,772    216,592    (3,480,562 )  2,114,702  





Operating Income    546,508    770,442    250,769    (755,418 )  812,301  
Interest Expense    (114,805 )  (215,942 )      196,625    (134,122 )
Cellular Investment Income                789,002    789,002  
Other Investment Income    180,076    230,209        (230,209 )  180,076  
Income (Taxes) Benefit    (247,066 )  (317,572 )  (101,486 )      (666,124 )





Net Income   $ 364,713   $ 467,137   $ 149,283   $   $ 981,133  





 
Total Assets   $ 83,650,996   $ 46,254,719   $ 4,858,219   $ (81,778,123 ) $ 52,985,811  





 
Capital Expenditures   $ 835,806   $ 869,177   $   $ (869,177 ) $ 835,806  





NOTE 8 – RECENT ACCOUNTING DEVELOPMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,” which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Companies must recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. Originally, SFAS No. 123(R) was effective for all stock-based awards granted beginning with the first interim period after June 15, 2005. On April 14, 2005, The Securities and Exchange


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Commission (SEC) approved a new rule that changed the effective date of SFAS No. 123(R) for public companies to annual, rather than interim, periods that begin after June 15, 2005. The adoption of SFAS 123(R) is not expected to have a material impact on the Company’s financial position or results of operation.



















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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, but are not limited to, the following:

  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, including continued declines in access lines and access minutes of use;
  o   the economy in general;
  o   the future of the communications industry and communications services;
  o   the effect of legal and regulatory changes;
  o   sufficient cash generation from current operations to fund future liquidity needs;
  o   adverse determinations in existing and future disputes regarding network access charge billings; and
  o   other risk and uncertainties which may affect the operating results.

Additional information concerning these and other factors that could cause actual results or events to differ materially from current expectations are contained herein and in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. Except as otherwise required by law, the Company undertakes no obligation to update any of its forward-looking statements for any reason.

OVERVIEW

The Company operates three business segments. The majority of its operations consist of the Telecom segment that provides telephone services, Internet services, and cable television services to numerous communities in Minnesota and Iowa. A second segment, the Cellular segment, includes the sales and service of cellular phones and accessories, and has a 9.88%


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interest in Midwest Wireless Holdings L.L.C. (MWH) and records this investment on the equity method of accounting. The Company uses proportionate consolidation in its segment reporting because this is how the Chief Operating Decision Maker (CODM) reviews the performance 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 $3,913,530 for the three months ended March 31, 2005, for a decrease of 2.0% or $79,383 compared to the same period in 2004. All operating segments experienced small decreases over the same period in 2004. The Telecom sector continues to experience decreases in its network access revenues, a common industry trend. The network access revenue decreases have been partially offset by increases in revenues due to new and expanded service offerings: digital video, digital subscriber line (DSL), Internet service provision, and the continued growth of a Competitive Local Exchange Carrier (CLEC) in the City of Redwood Falls, MN. The Telecom segment has invested heavily in its infrastructure, which has allowed it to enhance its local network so that it could offer a “triple-play” of services to its subscribers. In the telecommunications industry, a “triple-play” of services refers to offering telephone, Internet, and video services over the same infrastructure. It is expected that the infrastructure investment and the geographic expansion of the Company’s service offerings will provide this segment with future growth. The Telecom sector’s decrease in its network access revenue are the result of downward pricing pressure on access charges and a decrease in the access minutes of use. The decrease in network access revenues was minimized due to the Company’s eligibility for high-cost loop funding through the Universal Service Fund for its ILEC operations in New Ulm, Springfield, Sanborn, MN, and Aurelia, IA, and the immediately surrounding communities served by the ILECs’. The Company continues to monitor the negative effects of network access pricing and the downward trend in access minutes of use that could affect future revenues in the Telecom sector in order to minimize the impact on the Company. Also, future network access revenues may be impacted by the FCC’s open docket on inter-carrier compensation as well as several dockets on Voice over Internet Protocol (VoIP). In February 2005, the FCC issued a Further Notice of Public Rule Making (FNPRM) requesting comments on various proposals for inter-carrier compensation reform. The Company cannot predict the outcome of such proceedings nor can it estimate the impact, if any, on the Company. The Cellular segment saw a decrease in its sales and service revenues of cellular phones and accessories. The Phonery segment experienced decreased operating revenues due to decreased sales of customer premise equipment (CPE), and decreased revenues from transport operations.


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  OPERATING EXPENSES:

  Operating expenses for the three months ended March 31, 2005 increased $147,337, or 4.6%, compared to the same period in 2004, with the Telecom segment responsible for the vast majority of the increase. Depreciation expense for the Telecom segment saw an increase of $7,722 in 2005 compared to 2004. This increase reflected the continued investments made by the Company in the Telecom segment’s infrastructure. The majority of the increase in operating expenses was attributed to the increased cost of services related to an increased customer base for the segment’s expanded services, such as digital video, digital subscriber line (DSL), and Internet service provision. The remainder of the increase in the Telecom segment reflected the additional selling, 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 assortment of products and services to the communities that it serves.

  OPERATING INCOME:

  Operating income for the three months ended March 31, 2005 decreased $226,720 or 27.9% over the three months ended March 31, 2004. The decrease in income was primarily due to the decrease in network access revenues and the increase in operating expenses related to the provision of digital video services and Internet services.

  OTHER INCOME:

  Overall, other income for the three months ended March 31, 2005 increased $562,703 compared to the three months ended March 31, 2004.

  The Company’s cellular investment income increased $502,577, as the profitability of Midwest Wireless continued to grow. The 2005 increase in the Company’s cellular investment income was the result of the significant investment made by MWH to enhance its network with the latest technology to provide customers with the new phones, new features and new service plan options their customers desire.

  Other investment income increased $82,298 for the three months ended March 31, 2005 over the same period in 2004. This increase was due to an increase in the investment income from CoBank, a lender that specializes in agribusiness, communications, energy and water systems, and agricultural export financing, offset by a decrease of investment income from Fibercom, L.C., a competitive local exchange carrier (CLEC) in Sioux City, Iowa.

  There was a $48,709 increase in interest expense for the three-month period ended March 31, 2005 compared to the same period in 2004. The increase in interest expense was due to rising interest rates.


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  NET INCOME:

  Net income was $1,180,550 for the three months ended March 31, 2005 compared with $981,133 for the same period in 2004. This $199,417 or 20.3% increase was primarily attributed to the increase in cellular investment income.

Summary of Operations
 
Quarter Ended March 31,
2005
2004
Operating Income:            
   Telecom Segment   $ 386,869   $ 546,508  
   Cellular Segment    8,849    15,024  
   Phonery Segment    189,863    250,769  


 
        Total    585,581    812,301  
 Other Income    1,580,490    969,078  
 Interest Expense    (182,831 )  (134,122 )
 Income Taxes    (802,690 )  (666,124 )


 
 Net Income   $ 1,180,550   $ 981,133  


 
 Basic and Diluted  
 Earnings Per Share   $ .23   $ .19  
 
Weighted Average
   Shares Outstanding    5,115,435    5,115,435  

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

Telecom Segment Operations

The Telecom segment revenues represented 86.9% of the Company’s consolidated operating revenues for the three-month period ended March 31, 2005 before intercompany eliminations. Revenues are primarily earned by providing approximately 17,000 customers access to the local network in ILEC and CLEC operations, and by providing inter-exchange access for long distance network carriers. The Telecom segment also earns revenue through billing and collecting for various long distance companies, directory advertising, and providing Internet services, including high-speed Digital Subscriber Line (DSL) Internet access, and video services to its subscribers. This segment has invested in its infrastructure so that it can provide its customers with the latest technological advances, including being able to offer its “triple-play” of services.


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Total Telecom segment revenues for the three-month period ending March 31, 2005 decreased $19,842 or 0.5% compared to the same period last year. All information contained in the following table is before intercompany eliminations.

Three Months Ended March 31,
2005
2004
Operating Revenues:            
         Local Network   $ 1,017,078   $ 1,009,650  
         Network Access    1,455,987    1,593,651  
         Other    1,169,476    1,059,082  
 


                Total Operating Revenues    3,642,541    3,662,383  


 
Operating Expenses, Excluding Depreciation  
                and Amortization    2,201,975    2,069,900  
Depreciation and Amortization Expenses    1,053,697    1,045,975  
 


                Total Operating Expenses    3,255,672    3,115,875  


 
Operating Income    386,869    546,508  


 
Net Income   $ 309,532   $ 364,713  



Local network revenue increased in the Telecom segment by $7,428 or 0.7% for the three months ended March 31, 2005 compared to the same period in 2004. Local network revenue increased during this period as a result of continued growth in the service offerings for the CLEC in Redwood Falls, MN that began operations in the third quarter of 2002. The CLEC accounted for an increase of $7,267 in local network revenue. Despite a decrease in access lines of approximately 200 for the first quarter of 2005 compared to the same period in 2004, targeted marketing, promotions, and packaging of vertical services, most notably the introduction of DSL to supplement basic line charges, accounted for an increase in local network revenue.

Network access revenue decreased $137,664 or 8.6% for the three months ended March 31, 2005 compared with the same period in 2004. The decrease in network access revenue was reflected by the overall decrease in minutes of use and the negative effects of downward pricing pressure on network access pricing, a common industry trend. The effect of the decrease in access minutes of use was minimized due to the increased number of access subscribers in the Redwood Falls, MN CLEC during the first quarter of 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. The


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Telecom segment has maintained and enhanced its infrastructure, and has invested over $15 million in capital expenditures since 2002. These capital expenditures have enhanced this segment’s infrastructure and have allowed the Company to receive additional settlements from the National Exchange Carrier Association (NECA). The additional investment in the local loop (access line cost) has made the Company eligible for high-cost loop funding through the Universal Service Fund in its New Ulm Telecom, Inc. ILEC. The Telecom segment experienced a 12.2% decrease in access minutes for the three months ended March 31, 2005, a common industry trend.

Other operating revenues increased $110,394 or 10.4% for the three months ended March 31, 2005 compared with the same period in 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 $85,933 of the increase in these revenues. The remainder of the revenue increase was attributed to Telecom segment’s sale of Internet services.

Operating expenses, excluding depreciation and amortization, increased $132,075 or 6.4% for the three-month period ended March 31, 2005 compared with the same period in 2004. Cash operating expenses increased due to the continued growth of CLEC operations in Redwood Falls, MN and the increasing array of services offered such as video and DSL that allow the Company to offer the “triple-play” of services to its customers. The Telecom segment has recognized the value in being able to compete in all aspects of communication services. This realization has motivated the segment to enhance its awareness of customer satisfaction (including 24 hours a day, 7 days a week access to Internet support due to customers’ desire for this service), offer additional services (video and DSL), pursue aggressive marketing to achieve 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 potential for growth by competitively offering its array of services in an increasing number of communities. The Telecom segment began offering its services competitively in the City of Redwood Falls, MN in September 2002. The Company is always striving for cost efficiencies and technological improvement to enhance its operating margins for the Telecom segment.

Depreciation and Amortization expenses increased $7,722 or 0.7% for the three months ended March 31, 2005 compared with the same period in 2004. Depreciation expense was the cause of this increase. The increase in depreciation expense was reflective of the new investments in the segment’s infrastructure as previously discussed.

Operating income decreased $159,639 or 29.2% for the three months ended March 31, 2005 compared with the same period in 2004. The decrease in operating income was primarily due to the cost of providing additional services (video and DSL) to an increasing customer base, 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


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customer-focused service for the Telecom segment’s complete array of products and services. The $19,842 decrease in revenues combined with a $139,797 increase in operating expenses resulted in the $159,639 decrease in operating income.

Cellular Segment

The Cellular segment operations include the sales and service of cellular phones and accessories, and the Company’s 9.88% ownership interest in MWH. The operating income from sales of cellular phones and accessories decreased by $5,290 for the three month period ending March 31, 2005 compared to March 31, 2004, due primarily to a decrease in the sale of cellular phones. The cellular partnership income increased $502,577 or 63.7% for the three months ended March 31, 2005 compared to the same period ended in 2004. This increase was 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 Chief Operating Decision Maker (CODM) reviews the performance of MWH using the proportionate method.

Three Months Ended March 31,
2005
2004
Proportionate Method:            
         Operating Revenues    5,613,358    4,677,800  
         Operating Expenses, Excluding Depreciation
                                    and Amortization    3,364,579    3,229,856  
         Depreciation and Amortization Expenses    785,460    692,526  


                Total Operating Expenses    4,150,039    3,922,382  


Operating Income    1,463,319    755,418  


Cellular Investment Income   $ 1,291,579   $ 789,002  



A recap of income for the cellular segment using the equity method, which includes its proportional share of the income in its investment in MWH, is contained in the following table.


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Three Months Ended March 31,
2005
2004
 
Operating Revenues:     $ 88,650   $ 93,940  


 
Operating Expenses, Excluding Depreciation  
                and Amortization    79,801    78,916  
Depreciation and Amortization Expenses          
 


                Total Operating Expenses    79,801    78,916  


 
Operating Income    8,849    15,024  


 
Interest Expense    (27,133 )  (19,317 )
Cellular Investment Income    1,291,579    789,002  
 
Net Income   $ 757,993   $ 467,137  


Phonery Segment

The Phonery segment represented 11.0% of the consolidated operating revenues for the three-month period ended March 31, 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 toll service. This segment’s expertise is the quality installation and maintenance of CPE, provision of customer long distance needs and transport solutions in communication to end user customers. All information contained in the following table is before intercompany eliminations.










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Three Months Ended March 31,
2005
2004
 
Operating Revenues:     $ 458,608   $ 487,296  


 
Operating Expenses, Excluding Depreciation  
                and Amortization    247,465    216,592  
Depreciation and Amortization Expenses    21,280    19,935  
 


                Total Operating Expenses    268,745    236,527  


 
Operating Income    189,863    250,769  


 
Net Income   $ 113,025   $ 149,283  



Operating revenue decreased $28,688, or 5.9%, for the three months ended March 31, 2005 compared to the same period ended 2004. The Phonery segment experienced steady revenues from the resale of long distance toll recognizing an increase in revenues of less than $1,000 for the first quarter of 2005 as compared to the first quarter of 2004. This small increase was offset by a decrease in sales, service and installation revenues that accounted for approximately $5,000 of the decrease in operating revenue. The remainder of the decrease was due to a decrease in leased network capacity brought about by decreasing access minutes of use.

Operating expenses, excluding depreciation and amortization increased $30,873 or 14.3% for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. This three-month increase can be attributed to an increase in cost of goods sold, increased costs for supplies and materials, and this segment’s customer service goal of achieving 100% customer satisfaction. This segment continues to seek new technologies to better serve customer needs and to operate efficiently.

Depreciation and amortization expenses increased $1,345 or 6.7% for the quarter ended March 31, 2005 compared with the same period in 2004. The increase was attributable to an increase in depreciation expense.

Operating income decreased by $60,906 or 24.3% for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. This decrease in income was the result of the decreases in income from CPE sales and service, and leased network access.


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LIQUIDITY AND CAPITAL RESOURCES

Capital Structure

The total long-term capital structure (long-term debt plus shareholders’ equity) for the Company was $43,068,198 at March 31, 2005, reflecting 66.4% equity and 33.6% debt. This compares to a capital structure of $42,938,764 at December 31, 2004, reflecting 64.8% equity and 35.2% debt. Management believes adequate internal and external resources are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and the payment of dividends for at least the next 12 months.

Cash Flows

Cash provided by operations was $2,631,879 for the three-month period ended March 31, 2005 compared to $2,732,289 for the three-month period ended March 31, 2004. Cash flows from operations for the three months ended March 31, 2005 and 2004 were primarily attributable to net income plus non-cash expenses for depreciation and amortization.

Cash flows used in investing activities were $594,628 for the three months ended March 31, 2005 compared to $946,126 for the same period in 2004. Capital expenditures relating to on-going businesses were $518,558 during the first three months of 2005 as compared to $835,806 for the same period in 2004. 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 $2,650,000 in 2005.

Cash flows used by financing activities was $1,051,116 for the three-month period ended March 31, 2005 compared to cash flows used by financing activities of $1,052,519 for the three-month period ended March 31, 2004. Included in cash flows used in financing activities were debt repayments, repurchased and retired stock, and dividend payments.

Dividends

The Company paid dividends of $426,116 during the first quarter of 2005 and $426,117 during the first quarter of 2004. These were dividends of $.0833 per share. The Board of Directors reviews dividend declarations based on anticipated earnings, capital requirements and the operating and financial condition of the Company. The Company has made no announcements or plans to change the dividends above or below historic levels for the remainder of 2005. Paying dividends at the existing level is not expected to negatively impact the liquidity of the Company.

Working Capital

Working capital was $109,051 as of March 31, 2005, compared to working capital of $226,620 as of December 31, 2004. The decrease of $117,569 in working capital reflects the Company’s


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decrease in receivables. The ratio of current assets to current liabilities was 1.0:1.0 as of March 31, 2005 and 1.1:1.0 as of December 31, 2004.

Long-Term Debt

In fiscal 2001, the Company entered into a $15 million secured ten-year reducing revolving credit facility maturing in 2011. The borrowings under the credit facility bear interest, at the Company’s option, at either fixed or variable rates linked to the Company’s overall leverage ratio. This ten-year loan requires equal monthly payments of $125,000. At March 31, 2005, there were $10,125,000 of direct borrowings outstanding under this facility at an interest rate of 4.44%.

Also, in fiscal year 2001, the Company entered into a $10 million secured ten-year reducing revolving credit facility maturing in 2011. The borrowings under the credit facility bear interest, at the Company’s option, at either fixed or variable rates linked to the Company’s overall leverage ratio. Principal payments of $250,000 per quarter are required on this loan. At March 31, 2005, there were $6,750,000 of direct borrowings outstanding under this facility at an interest rate of 4.44%.

Other

The Company has not conducted a public equity offering. It operates with original equity capital, retained earnings and indebtedness in the form of senior debt. The Company believes its debt to total capital proportions of 34 to 66 percent will be adequate for the foreseeable future.

By utilizing cash flow from operations and current cash balances, the Company feels it has adequate resources to meet its anticipated operating, capital expenditures, and debt service requirements.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have operations subject to risks of foreign currency fluctuations, nor does the Company use derivative financial instruments in its operations or investment portfolio. The Company’s earnings are affected by changes in interest rates as its long-term debt is based on a national variable rate. If interest rates for the portion of the Company’s long-term debt based on variable rates had averaged 10% more (4.09% to 4.50%) for the first three months of 2005, the Company’s interest expense would have increased around $11,000. Should interest rates rise significantly, management expects that it would act to mitigate its exposure to the change by converting a portion of its variable-rate debt to fixed-rate debt.

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


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and communicated to management timely. At the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be disclosed in periodic filings with the SEC.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the Company’s most recent evaluation.















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PART II.   OTHER INFORMATION

ITEM 5.   OTHER INFORMATION

        On May 5, 2005, Paul Erick was elected to our Board of Directors by a vote of our shareholders at our annual meeting. Mr. Erick filled the seat vacated by Robert Ranweiler, who retired from the Company’s Board of Directors, effective May 5, 2005.

ITEM 6.   EXHIBITS

  (a)   Exhibits

  See “Index to Exhibits” on page 27 of this Form 10-Q.

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    NEW ULM TELECOM, INC.  
   
   
Dated:   May 13, 2005    By   /s/   James P. Jensen  

        James P. Jensen, Chairman  
   
   
Dated:   May 13, 2005    By   /s/   Bill Otis  

        Bill Otis, President  













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INDEX TO EXHIBITS

Exhibit
Number
Description
 
31.1   Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14, As Adopted Pursuant  
  to Section 302 of the Sarbanes-Oxley Act of 2002 
  
31.2  Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14, As Adopted Pursuant 
  to Section 302 of the Sarbanes-Oxley Act of 2002 
  
32.1  Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant 
  to Section 906 of the Sarbanes-Oxley Act of 2002 
  
32.2  Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant 
  to Section 906 of the Sarbanes-Oxley Act of 2002 











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