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Nuvera Communications, Inc. - Annual Report: 2008 (Form 10-K)

Table of Contents


 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K


 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF         

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2008

or

 

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)


 

 

 

Minnesota

 

41-0440990

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

27 North Minnesota Street

New Ulm, Minnesota 56073

(Address of principal executive offices and zip code)

 

Registrant’s telephone number including area code: 507-354-4111

 

Securities registered pursuant to Section 12 (b) of the Act: None

 

Securities registered pursuant to Section 12 (g) of the Act:

 

Common Stock, $1.66 par value

Title of Class

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o No x

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 for 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, accelerated filer, a non-accelerated filer or a smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

o Large Accelerated Filer     x Accelerated Filer     o Non-Accelerated Filer     x Smaller Reporting Company

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

As of June 30, 2008, the aggregate market value of the common stock held by non-affiliates of the registrant was $50,185,678 based on the last sale price of $10.40 on The OTC Bulletin Board.

The total number of shares of the registrant’s common stock outstanding as of March 12, 2009: 5,115,435.

Documents Incorporated by Reference: Certain information required by Part III, Items 10-14 of this document is incorporated by reference to specified portions of the registrant’s definitive proxy statement for the annual meeting of shareholders to be held May 28, 2009.

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TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page

 

 

 

 

Part I

 

 

 

 

Item 1.

Business

 

3

 

Item 1A.

Risk Factors

 

10

 

Item 1B.

Unresolved Staff Comments

 

15

 

Item 2.

Properties

 

16

 

Item 3.

Legal Proceedings

 

18

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

18

 

 

 

 

 

 

Part II

 

 

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

19

 

Item 6.

Selected Financial Data

 

20

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

Item 8.

Financial Statements and Supplementary Data

 

38

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

67

 

Item 9A.

Controls and Procedures

 

67

 

Item 9B.

Other Information

 

72

 

 

 

 

 

 

Part III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

72

 

Item 11.

Executive Compensation

 

72

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

72

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

73

 

Item 14.

Principal Accountant Fees and Services

 

73

 

 

 

 

 

 

Part IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

74

 

 

 

 

 

 

Signatures

 

97

 

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PART I

This Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, 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. These forward-looking statements are subject to important risks and uncertainties that could cause the Company’s future actual results to differ materially from these statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and probabilities that are difficult to predict. Therefore, the Company’s actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements, whether as a result of new information, future events or the receipt of new information. See “Risk Factors” in Item 1A of this Form 10-K. 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.

Item 1. Business

General Development of Business

New Ulm Telecom, Inc. was incorporated in 1905 under the laws of the State of Minnesota, with headquarters in New Ulm, Minnesota. The Company’s principal line of business is the operation of four incumbent local exchange carriers (ILECs): New Ulm Telecom, Inc., Hutchinson Telephone Company, Western Telephone Company, and Peoples Telephone Company. This business consists of connecting customers to the telephone network, providing switched service and dedicated private lines, connecting customers to long distance service providers and providing many other services associated with ILECs. The Company also provides cable television services (CATV), Internet access services, including both dial-up access and high-speed digital subscriber line (DSL) access, and long distance service. The Company installs and maintains telephone systems to the areas in and around its ILEC service territory in southern Minnesota and northern Iowa. The Company has two competitive local exchange carriers (CLECs); one in the city of Redwood Falls, Minnesota, and a second in the city of Litchfield, Minnesota. The Company operates under the name NU-Telecom in its markets.

On November 3, 2006, the Company acquired a 33.33% ownership interest in Hector Communications Corporation (HCC), which offers ILEC, CATV, and Internet services to various communities in Minnesota and Wisconsin.

On January 4, 2008, the Company completed its acquisition of Hutchinson Telephone Company (HTC), which operates as a subsidiary of New Ulm Telecom, Inc. The acquisition of HTC has resulted in a combined company that provides phone, video and internet services with over 50,000 connections in a number of Minnesota and Iowa communities. Additional information is available in Note 3 to the Consolidated Financial Statements of this Form 10-K.

On November 10, 2008, the Company opened TechTrends, Inc. in New Ulm, Minnesota. TechTrends, Inc. is a Company-owned and operated retail store carrying computers and computer accessories, in addition to offering computer repair and website design services. TechTrends is also able to offer a full array of customer services to the NU-Telecom customers such as answering billing questions and taking monthly payments.

For purposes of this report, unless the context requires otherwise, all references to the “Company” mean New Ulm Telecom, Inc. and its subsidiaries.

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The Company maintains a website at www.nutelecom.net. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K are available free of charge at www.nutelecom.net, as soon as reasonably practicable after the material is filed with or furnished to the SEC.

The Company and its subsidiaries are organized into three business segments as follows:

Telecom Segment

This segment contains the operations of:

 

 

 

 

 

The Company’s incumbent local exchange carriers (ILECs):

 

 

New Ulm Telecom, Inc. (New Ulm), the parent company;

 

 

Hutchinson Telephone Company (HTC), a wholly-owned subsidiary of New Ulm;

 

 

Western Telephone Company (Western), a wholly-owned subsidiary of New Ulm;

 

 

Peoples Telephone Company (Peoples), a wholly-owned subsidiary of New Ulm;

 

The Company’s competitive local exchange carriers (CLECs):

 

 

New Ulm, located in Redwood Falls, Minnesota;

 

 

Hutchinson Telecommunications, Inc. (HTI), a wholly-owned subsidiary of HTC, located in Litchfield, Minnesota;

 

The Company’s investments and interests in the following entities, including some management responsibilities:

 

 

Hector Communications Corporation (33.33% ownership interest);

 

 

FiberComm, LC, a CLEC located in Sioux City, Iowa (25.18% ownership interest);

 

 

En-Tel Communications, LLC, a CLEC based in Willmar, Minnesota (31.88% ownership interest);

 

 

Broadband Visions, LLC, which provides video headend and Internet services (16.38% ownership interest);

 

 

Independent Emergency Services, LLC, which provides E-911 services to the State of Minnesota and Minnesota Counties (14.29% ownership interest);

 

 

SHAL Networks, Inc. and SHAL, LLC which together construct and lease fiber-optic communication lines and transport facilities throughout Minnesota (33.33% ownership interest);

 

 

Direct Communications, LLC which provides services on behalf of SHAL (33.33% ownership interest), and

 

The Company’s operations that provide Internet and video services.

 

Cellular Segment

 

 

 

 

This segment contains the sales and service of cellular phones and accessories, and prior to October 2, 2006 the Company’s investment in Midwest Wireless Holdings (MWH) in which New Ulm Cellular #9, Inc. (Cell #9), a wholly-owned subsidiary, owned 7.55% and Peoples owned 2.33%. The Company’s total ownership of Midwest Wireless Holdings (MWH) was 9.88% as of December 31, 2005 and was sold to Alltel on October 2, 2006.

 

Phonery Segment

 

 

 

 

This segment contains the sales and service of customer premise equipment (CPE) and transport operations of New Ulm Phonery, Inc. (Phonery), Western, Peoples, and HTC, all of which are wholly-owned subsidiaries. This Segment also contains the resale of long distance toll service operations of New Ulm Long Distance, Inc., HTI; and the retail operation of TechTrends, Inc., all wholly-owned subsidiaries.

No single customer accounted for a material portion of the Company’s revenues in any of the last three years.

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Financial information about the Company’s industry segments is included in Note 20 to the Consolidated Financial Statements of this Form 10-K.

Narrative Description of Business

Telecom Segment

The Company generates the majority of its revenue from its core business, the operation of four independent telephone companies, its CLEC operations, its Internet and video operations. The Company conducts this core business in the Telecom segment.

The Telecom segment operates four ILECs (New Ulm, Western, HTC, and Peoples) and two CLECs in the cities of Redwood Falls, and Litchfield, Minnesota. New Ulm, Western, and HTC are independent telephone companies that are regulated by the Minnesota Public Utilities Commission (MPUC), and Peoples is an independent telephone company that is regulated by the Iowa Utilities Board (IUB). The Telecom segment has not experienced a major change in the scope or direction of its operations during the past year, except that the Company significantly expanded the size of its operations with the January 2008 acquisition of HTC. At December 31, 2008, the Company served approximately 30,000 access lines. The Company provides telephone service in Minnesota to the cities of New Ulm, Courtland, Klossner, Searles, Redwood Falls (city only), Springfield, Sanborn, Hutchinson, and Litchfield (city only), and the adjacent rural areas in Brown, Nicollet, Blue Earth, Redwood, McLeod, and Meeker counties in south central Minnesota, approximately 60 to 120 miles southwest of Minneapolis, Minnesota. In addition, the Company also provides telephone services to the community of Aurelia, IA. The segment also operates multiple cable television systems in Minnesota (including the cities of New Ulm, Courtland, Redwood Falls, Springfield, Sanborn, Jeffers, Hutchinson, Litchfield, Cologne, Mayer, and New Germany), and one cable television system in Aurelia, Iowa. These systems serve approximately 9,500 customers.

The Telecom segment derives its principal revenues from (i) local service charges to its residential and business subscribers and (ii) access charges to inter-exchange carriers for providing the carriers access to the Company’s local phone networks. The Company also receives revenue from long distance carriers for providing the billing and collection of long distance toll calls to the Company’s subscribers.

Alternatives to the Company’s service include customers leasing private line switched voice and data services in or adjacent to the territories served by the Company, which permit the bypassing of local telephone facilities. In addition, microwave transmission services, wireless communications, fiber optic and coaxial cable deployment, Voice over Internet Protocol (VoIP), satellite and other services permit bypass of the local exchange network. These alternatives to local exchange service represent a potential threat to the Company’s long-term ability to provide local exchange services at economical rates.

In order to meet the competition present in the industry, New Ulm, HTC, Western and Peoples have deployed new technology for their local exchange networks to increase operating efficiencies and to provide new services to customers. These new technologies include the latest release of digital switching technology on all of the ILECs’ switches and installation of a new Common Channel Signaling System No. 7 (SS7) out-of-band system for all of its access lines. New Ulm, Western, Peoples, HTC, and HTI have also connected fiber rings (redundant route designs which allow traffic to re-route if trouble appears in the network) that protect its local networks and enable them to provide a reliable level of service to their customers. The value of the local network is also enhanced by the ability of these companies to offer access to high-speed Internet with DSL to over 98% of customers. DSL technology offers customers access to high-speed Internet and traditional voice connectivity over the same connection. In addition, New Ulm, Western, HTC, and HTI have further enhanced the networks to offer video services over the same facilities that provide their customers with voice and Internet access. This technology is available to approximately 85% of access lines.

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The Company currently has competition in the Cities of Redwood Falls, and Litchfield, Minnesota in the provision of traditional telephone service. Qwest is the incumbent provider. New Ulm entered Redwood Falls as a CLEC in September 2002, and HTI operates as a CLEC in Litchfield. Competition currently exists in the other communities and areas served by New Ulm, Western, Peoples, and HTC for traditional telephone service from wireless communications, and the Company expects competition to increase from service providers offering VoIP. The Company is also facing competition in the Minnesota communities of New Ulm, Redwood Falls, Springfield, Hutchinson, and Litchfield in the provision of video services. Comcast is the incumbent provider for video services in New Ulm and Mediacom is the incumbent provider in Redwood Falls, Springfield, Hutchinson, and Litchfield. Several companies also compete with the Company in providing Internet services. New Ulm, Western, Peoples, HTC, and HTI respond to competitive pressure with active programs to market products, to bundle services and to enhance infrastructure for higher customer satisfaction.

Competition also exists for some of the services provided by inter-exchange carriers, such as customer billing services, dedicated private lines, and network switching. This competition comes primarily from the inter-exchange carriers themselves. The provision of these services is of a contractual nature and is primarily directed by the inter-exchange carriers. Other services, such as directory advertising, operator services and cellular communications, are open to competition. Competition is based primarily on service and customer experience.

Cellular Segment

The Cellular segment derives its revenue from the sales and service of cellular phones and accessories. Prior to October 2, 2006, revenues were also derived from the Company’s ownership in MWH which was sold to Alltel on October 2, 2006. Cell #9 owned a 7.55% interest and Peoples owned a 2.33% interest in MWH. MWH provided cellular phone service in southern Minnesota, northwestern Iowa and southwestern Wisconsin. The Company recorded equity earnings in MWH from Cell #9’s and Peoples’ equity ownership in MWH.

Phonery Segment

The Phonery segment provides sales and service of CPE and transport operations of Phonery, Western, Peoples, HTC, and HTI. This segment’s activities also include the resale of long distance toll service operations of New Ulm Long Distance, Inc, and HTI.

The Phonery segment is a non-regulated telecommunications business which sells and services telephone apparatus, toll transport services and provides voice-mail services on a retail level primarily in the areas served by New Ulm, Western, Peoples, TechTrends, Inc., HTC, and HTI. Phonery specializes in quality custom installation and maintenance of local networking and transport solutions in telecommunications for end user customers.

There are a number of companies engaged in the sale of telephone equipment at the retail level, competing with the Phonery segment. Competition is based primarily on price, service, and customer experience. No company is dominant in this field.

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Regulatory Matters

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities.

The services offered by the Company are subject to varying levels of regulatory oversight. Federal and state regulatory agencies share responsibility for enforcing statutes and rules relative to the provision of communications services. Interstate and international telecommunications services are subject to regulation by the FCC. Intrastate services are governed by the relevant state regulatory commission. The Telecommunications Act of 1996 and the rules enacted under it also gave oversight of interconnection arrangements and access to network elements to the state commissions. Digital TV services are also governed by FCC rules and by municipal franchise agreements on the local level. There are also varying levels of regulatory oversight depending on the nature of the services offered or if the services are offered by an incumbent or competitive carrier.

All carriers must comply with the Federal Communications Act of 1934, as amended, which requires, among other things, that our interstate services be provided at just and reasonable rates and on non-discriminatory terms and conditions. The Federal Communications Act of 1934 also requires FCC approval before the Company can transfer control of operating companies, assign, acquire or transfer licenses or authorizations issued by the FCC, or before any interstate service is discontinued. The Federal Communications Act of 1934 was amended by the Telecommunications Act of 1996, which has had a dramatic effect on the competitive environment in the telecommunications industry. In addition to these laws, the Company is also subject to rules promulgated by the FCC and could be affected by any regulatory decisions or orders they issue.

Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of each company’s actual or average costs. There has been a change in the composition of interstate access charges in recent years, shifting more of the charges to the end user and reducing the amount of access charges paid by inter-exchange carriers. The Company believes this trend will continue.

The FCC continues to examine inter-carrier compensation (payments from one telecommunications company to another for use of interconnecting networks). This examination could lead to significant changes in the way the Company is compensated for use of its local network in the future.

Prior to and since the introduction of the Missoula Intercarrier Compensation Plan in 2006, there have been ongoing discussions at the FCC regarding changes in intercarrier compensation. It is possible that an ILEC could experience a change in revenue if intercarrier compensation reform is adopted by the FCC. There is no definite timeline for the FCC to act, so it is not possible to predict when any change in revenue will occur or the extent of the impact.

The MPUC has considered intrastate access reform and universal service for several years. The MPUC opened the most recent docket on the issue of state access reform in 2006. After requesting comments to refresh the record at that time there was little activity in this area throughout 2008. The IUB had previously not exercised oversight in the access rates of small local exchange carriers. In November of 2007, however, the IUB indicated it intends to assume that role. In January 2009, the IUB ordered rate reductions in the rates of a tariff filed on behalf of numerous ILECs by a state trade association. This ruling will affect Peoples ILEC. In September of 2008, the IUB also issued an inquiry docket regarding establishing a state Universal Service Fund in Iowa. The Company cannot estimate the impact, if any, of future potential state access revenue changes or the availability of state universal service support.

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In recent years, interexchange carriers and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to network traffic. A prime example of this is the claim that companies who provide voice communication services over IP technology are exempt from having to pay access charges. In 2005, the FCC ruled that it was impossible to separate the voice traffic of VoIP into interstate and intrastate jurisdictions, and therefore, such providers would be regulated by the FCC and not by state regulatory commissions. The FCC is currently considering the question of whether or not VoIP services are subject to access charges. In January 2009, the FCC declined to declare IP traffic as exempt from access charges. Another petition requesting that the FCC specifically declare that IP traffic is subject to access charges is still pending. The Company believes that long distance and other communication providers will continue to challenge the applicability of access charges either before the FCC or with local exchange carriers. To date, no long distance or other carriers have made claims contesting the applicability of access charges. There can be no assurance, however, that these claims will not be made in the future. Further, if such a claim is made, the Company may not be able to estimate the impact.

The U.S. 8th Circuit Court of Appeals has upheld a ruling by the United States District Court, District of Minnesota, in issuing an injunction providing relief from regulation of any service provider of VoIP based services in Minnesota. In July 2006, the FCC ruled that VoIP services are subject to Federal Universal Service Fund Contributions, but any further regulation of VoIP under consideration at the FCC is uncertain. Future decisions regarding the regulation of VoIP may result in a change in the business relationship between our companies and the interexchange carriers as interconnections with certain VoIP providers may not be governed by tariffed access charges. The Company cannot, at this time, estimate the revenue impact, if any, related to these events.

Due to the combination of rate reforms instituted by the FCC, competitive substitution by wireless and other carriers and customer usage trends, the aggregate amount of interstate network access charges paid by long distance carriers to access providers such as our ILECs and CLEC, has decreased and it is projected that this will continue.

The Company’s local exchange telephone companies are subject to the jurisdiction of Minnesota and Iowa with respect to a variety of matters, including rates for intrastate access services, the conditions and quality of service. Rates for local telephone service are not established directly by regulatory authorities, but regulatory authority over other matters limits the Company’s ability to implement rate increases. In addition, the regulatory process inherently restricts the Company’s ability to immediately pass cost increases along to customers unless the cost increases are anticipated and the rate increases are implemented prospectively.

The Company is subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. The Company could be subject to certain environmental laws that impose liability for the entire cost of cleanup at a contaminated site, regardless of fault or the lawfulness of the activity that resulted in contamination. It is believed that our operations are in substantial compliance with applicable environmental laws and regulations.

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Competition

As a result of the Telecommunications Act of 1996, telephone companies no longer have an exclusive franchise service area. Under the law, competitors may offer telephone service to the Company’s customers and request access to the Company’s local network facilities. The law also permits existing telephone companies to offer telephone service outside existing franchise service area. The law includes universal service provisions, interconnection requirements, and rules mandating how competition will be implemented. The FCC and state regulatory agencies are responsible for establishing rule-making procedures to implement the law. The rule-making procedures are not complete and a number of court cases have already been filed challenging various aspects of the rules and procedures. Until the rule-making procedures are complete and the court issues settled, the Company cannot predict how this law will affect its business.

Since the mid-1990’s, the Company’s business strategy has been to position itself as a “one-stop” telecommunications provider. The Company believes that its customers value the fact that it is the “local company” whose goal is to meet the customers’ total communications needs. The Company believes that it has several competitive advantages: its prices and costs are low; its service quality and reputation are high; its commitment to the communities it services is outstanding; its investment in technology is strong; and it has a direct billing relationship with almost all of the customers in its service territories.

The long-range effect of competition on the provision of telecommunications services and equipment will depend on technological advances, regulatory actions at the state and federal levels, court decisions, and possible additional future state and federal legislation. The trend resulting from past legislation has been to expand competition in the telecommunications industry.

Employees

As of March 1, 2009, the Company had 140 full-time equivalent employees.

Executive Officers of the Registrant

Set forth below are the names, ages and positions of the executive officers of the Company as of March 1, 2009.

 

 

 

Name and Age

 

Position

 

 

 

Bill Otis
(51)

 

President and Chief Executive Officer
- New Ulm Telecom, Inc.

 

 

 

Barbara Bornhoft
(52)

 

Vice-President and Chief Operating
Officer/Secretary

 

 

- New Ulm Telecom, Inc.

 

 

 

Nancy Blankenhagen

 

Chief Financial Officer and Treasurer

(48)

 

- New Ulm Telecom, Inc.

The executive officers of the Company are elected annually and serve at the discretion of the Board of Directors. Mr. Otis, President and Chief Executive Officer and Ms. Bornhoft, Vice-President and Chief Operating Officer have written employment contracts. The Company’s other executive officer is not employed pursuant to a written employment contract. There are no familial relationships between any director or executive officer, except that the Chairman of the Board, Mr. James P. Jensen is the brother-in-law of Director, Mr. Gary Nelson.

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Background of Executive Officers

Bill Otis has been President and Chief Executive Officer of the Company since 1985. Prior to being President and Chief Executive Officer of the Company, he was the Office Manager/Controller for New Ulm Telecom, Inc. from 1979 to 1985. Mr. Otis also serves as a Director, Chairman, and President of Hector Communications Corporation, and is Chairman of the Board and President of both Independent Emergency Services, LLC, and Broadband Visions, LLC. Mr. Otis also sits on the Board of Governors for SHAL, LLC, SHAL Networks, Inc., En-Tel Communications, LLC, and FiberComm, LC.

Barbara Bornhoft has been Vice President and Chief Operating Officer/Secretary of the Company since 1998. Ms. Bornhoft has been employed with New Ulm Telecom, Inc. since 1990. Ms. Bornhoft is also a director of Hector Communications Corporation and Broadband Visions, LLC. She also serves as Vice President for both Independent Emergency Services, LLC, and Broadband Visions, LLC.

Nancy Blankenhagen has been Chief Financial Officer/Treasurer of the Company since May 2004. Ms. Blankenhagen was the Interim Chief Financial Officer/Treasurer of the Company from February 2004 to May 2004. Prior to that role, Ms. Blankenhagen had been an accountant for the Company since 1989. Ms. Blankenhagen also serves as Chief Financial Officer and Treasurer for Independent Emergency Services, LLC, and Broadband Visions, LLC.

 

 

Item 1A.

Risk Factors.

The Company’s business faces many risks, all of which may not be described below. Additional risks of which the Company is currently unaware or believes to be immaterial may also result in events that could impair its business operations. If any of the events or circumstances described in the following risks actually occur, the Company’s business, financial condition or results of operations may suffer, and the trading price of its stock could decline.

The Company is subject to increased competition in core business segments that may have an adverse impact.

As an incumbent carrier, the Company has historically experienced limited competition in its rural telephone company markets. Nevertheless, the market for communications services is highly competitive. Regulation and technological innovation change quickly in the communications industry, and changes in these factors historically have had, and may in the future have, a significant impact on competitive dynamics. In most of the Company’s rural markets, it faces competition from wireless technology, which may increase as wireless technology improves. The Company also faces competition from wireline and cable television operators. The Company may face additional competition from new market entrants such as providers of wireless broadband, Voice over Internet Protocol, satellite communications and electric utilities. The Internet services market is also highly competitive, and the Company expects that competition will intensify. Many of the Company’s competitors have brand recognition, and have financial, personnel, marketing and other resources that are significantly greater than the Company’s. In addition, consolidation and strategic alliances within the communications industry or the development of new technologies could affect the Company’s competitive position. The Company cannot predict the number of competitors that will emerge, especially as a result of existing or new federal and state regulatory or legislative actions, but increased competition from existing and new entities could have a material adverse effect on the Company’s business.

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Competition may lead to loss of revenues and profitability as a result of numerous factors, including:

 

 

 

 

loss of customers;

 

 

 

 

reduced usage of the Company’s network by its existing customers who may use alternative providers for long distance and data services;

 

 

 

 

reductions in the prices for the Company’s services which may be necessary to meet competition; and

 

 

 

 

increases in marketing expenditures and discount and promotional campaigns.

In addition, the Company’s provision of long distance service is subject to a highly competitive market served by large nation-wide carriers that enjoy brand name recognition.

The Company’s businesses may be adversely affected if it is unable to hire and retain qualified employees.

The Company’s performance is largely dependent on the talents and efforts of highly skilled individuals in the operations of its telecommunication businesses, including telephone operations and telecommunications equipment sales and service. Technological advances force the Company’s employees to keep pace with advances. The Company’s ability to compete effectively depends upon its ability to retain and motivate its existing employees, and attract new qualified employees.

The Company may not be able to successfully introduce new products and services.

The Company’s success depends upon its ability to successfully introduce new products and services, such as the ability of its competitive local exchange carrier (CLEC) business, which was initiated in 2002 in the City of Redwood Falls, MN, and acquired with the HTC acquisition in Litchfield, MN in 2008, to provide competitive local service in a new market. Success is also dependent on the Company’s ability to offer bundled service packages on terms attractive to its customers, and the Company’s ability to successfully expand its service offerings geographically.

The Company may not accurately predict technological trends or the success of new products in these markets. New product development often requires long-term forecasting of market trends, development and implementation of new technologies and processes and substantial capital investment. In addition, the Company does not know whether its products and services will meet with market acceptance or be profitable. If the Company fails to anticipate or respond in a cost-effective and timely manner to technological developments, changes in industry standards or customer requirements, experiences any significant delays in product development or introduction, or if any of the Company’s relationships with its vendors deteriorate significantly, the Company’s business, operating results and financial condition could be materially adversely affected.

Shifts in the Company’s product mix may result in declines in operating income.

Possible changes in the demand for the Company’s products and services including lower-than-anticipated-demand for telephone services, reductions in access lines per household or minutes of use volume associated with telephone service, migration in technology from circuit-switched to IP-based technology for services, and for network solutions for the Company’s Telecom segment, may result in lower gross margins and operating profitability. In addition, operating income could decrease based on the amount of new products the Company sells that have lower start-up gross margins than its existing products and services. All of these factors could reduce the Company’s operating income.

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Technological advances in the telecommunications industry create increased operating costs.

The telecommunications industry has seen ever increasing technological advances over the past several years. These technological advances increase costs to maintain and improve networks and provide top-end communication products and services that are demanded by the Company’s customer base in order to stay competitive with other companies that offer similar services. Wireless communications, mobile/non-fixed point service and various Internet and satellite communication innovations also create technological competition for the Company.

Future regulation may result in lower revenues.

The outcome of future regulatory and judicial proceedings pertaining to interconnection agreements and access charge reform may result in greater-than-anticipated reductions in revenues received from federal and state access charges related to long distance traffic. Regulatory rules and policies also may adversely affect the Company’s ability to change its prices for telephone services in response to competitive pressures.

The Company may not generate sufficient funds from operations to fund future liquidity needs.

The Company may not retain a sufficient amount of cash to finance a material expansion of its business, or to fund its operations consistent with past levels of funding in the event of a significant business downturn. In addition, because historically the Company has distributed a portion of available cash to its shareholders in the form of dividends, the Company’s ability to pursue any material expansion of its business, including through acquisitions or increased capital spending, may depend on its ability to obtain financing. There can be no assurance that such financing will be available to the Company on acceptable terms.

The Company’s ability to consummate acquisitions and to make payments on its indebtedness will depend on its ability to generate cash flow from operations in the future. This ability is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control. There can be no assurance that the business will generate sufficient cash flow from operations or that future borrowings will be available to the Company in an amount sufficient to enable payment of indebtedness or to fund other liquidity needs.

A significant amount of cash flow from operations will be dedicated to capital expenditures and debt service. As a result, the Company may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or unanticipated capital expenditures or to fund its operations. In addition, if capital expenditures are reduced, the regulatory settlement payments the company receives may decline.

A failure in operational systems or infrastructure could impair liquidity, disrupt business, damage the Company’s reputation and cause loss.

Shortcomings or failures in the Company’s internal processes, people or systems could impair its liquidity, disrupt its business, result in liability to customers or regulatory intervention, damage the Company’s reputation or result in financial loss. For example, telephone operations rely on a central switch to complete local and long distance phone calls to various customers. An interruption in the switch operations could lead to interrupted service for customers. In addition, financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond the Company’s control, thereby adversely affecting its ability to process transactions. Despite the existence of contingency plans, the Company’s ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports its businesses and the communities in which these businesses are located.

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Unanticipated increases in capital spending, operating or administrative costs, or the impact of new business opportunities requiring significant up-front investments.

The Company operates in cash-flow-dependent businesses. Its existing networks require large capitalized up-front investments for growth and maintenance. Its operating expenses in the form of payroll for a highly trained workforce and the maintenance cost of telecommunications networks are also large uses of cash. Its debt service obligation and dividends to shareholders also require significant cash each year. New business development may require additional up-front investment in assets and funding of early stage operating losses. The risk is from any sudden unanticipated increases in cash outflow. This could alter the Company’s future business plans, which possibly could affect its growth.

Customer payment defaults could have an adverse effect on the Company’s financial condition and results of operations.

As a result of adverse conditions in the communications market, some inter-exchange carriers (IXCs) have experienced and may continue to experience serious financial difficulties. In some cases these difficulties have resulted or may result in bankruptcy filings or cessation of operations. If IXCs experiencing financial problems default on paying amounts owed, the Company may not be able to collect these amounts or recognize expected revenue. It is possible those customers from whom the Company expects to derive substantial revenue will default or that the level of defaults will increase. Any material payment defaults by customers would have an adverse effect on results of operations and financial condition. The Company currently manages this exposure through an allowance for doubtful accounts. An unexpected bankruptcy or default from an IXC may not be fully reserved in the allowance.

The Company’s stock price is volatile.

Based on the trading history of the Company’s common stock and the nature of the market for publicly traded securities of companies in the telecommunications industry, the Company believes that some factors have caused and are likely to continue to cause the market price of its common stock to fluctuate substantially. These fluctuations could occur day-to-day or over a longer period of time. The factors that may cause such fluctuations include, without limitation:

 

 

announcements of new products and services by the Company or its competitors;

 

 

quarterly fluctuations in the Company’s financial results or the financial results of the Company’s competitors or customers;

 

 

increased competition with the Company’s competitors or among its customers;

 

 

consolidation among the Company’s competitors or customers;

 

 

disputes concerning intellectual property rights;

 

 

the financial health of New Ulm Telecom, Inc., its competitors or its customers;

 

 

developments in telecommunications regulations;

 

 

general economic conditions in the U.S. or internationally;

 

 

thinly traded stock; and

 

 

rumors or speculation regarding New Ulm Telecom, Inc.’s future business results and actions.

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In addition, stocks of companies in the telecommunications industry in the past have experienced significant price and volume fluctuations that are often unrelated to the operating performance of such companies. Any such market volatility may adversely affect the market price of the Company’s common stock.

If the Company seeks to secure additional financing, it may not be able to obtain it.

The Company currently anticipates that its available cash resources, which include its existing cash and cash equivalents, will be sufficient to meet its anticipated needs for working capital and capital expenditures to execute its near-term business plan, based on current business operations and economic conditions. If the Company’s estimates are incorrect and it is unable to generate sufficient cash flows from operations, the Company has the ability to use funds available under the loans established in January 2008. The Company entered into an agreement to purchase HTC for approximately $83 million as of January 4, 2008 (see Note 3 to the Consolidated Financial Statements of this Form 10-K). The Company borrowed approximately $60 million from Co-Bank to finance the acquisition.

The Company’s future success will depend in part on its ability to profitably manage Hector Communications Corporation and Hutchinson Telephone Company

On November 3, 2006, New Ulm Telecom, Inc. acquired a one-third interest in Hector Communications Corporation, and on January 4, 2008, New Ulm completed the acquisition of Hutchinson Telephone Company.

The acquisition of any new business always carries with it certain risks. There can be no assurance that the Company will be able to integrate and profitably operate Hutchinson Telephone Company, or that the Company, together with its partners, will be able to profitably manage Hector Communications Corporation. The Company’s failure to profitably operate either Hector Communications Corporation or Hutchinson Telephone Company could have an adverse effect on the Company.

The Company incurred significant debt in connection with its acquisition of Hutchinson Telephone Company, pledged its assets to the lender, and agreed to limitation on its dividends.

In connection with its January 2008 acquisition of Hutchinson Telephone Company, the Company borrowed approximately $60 million from CoBank, ACB. In connection with these borrowings, New Ulm and HTC and their respective subsidiaries have entered into security agreements under which substantially these entities’ assets have been pledged to CoBank for performance under the loans. In addition, New Ulm, HTC and their respective subsidiaries have guaranteed all the obligations under the credit facility. These loan agreements also put restrictions on the ability of New Ulm to pay cash dividends to its shareholders, but New Ulm is allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if New Ulm’s “Total Leverage Ratio,” that is, the ratio of its Indebtedness to EDBITA (in each case as defined in the loan documents) is less than 3:50 to 1:00, and (b) in either case if New Ulm is not in default or potential default under the credit agreements. If New Ulm fails to comply with these covenants, its ability to pay dividends would be limited.

During the first three quarters of 2008, the specified financial ratios outlined in the loan agreements were achieved. For the period ended December 31, 2008, the Company did not meet its “equity to total asset ratio” requirement. The company has obtained a waiver from CoBank, ACB for this covenant for the December 31, 2008 period. All other specified financial ratios outlined in the loan agreements were achieved at December 31, 2008.

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New Ulm must comply with the Section 404 in connection with its year end financial statements and has reported a material weaknesses.

As of June 30, 2006 (the last day of the second quarter of the Company’s 2006 fiscal year), the market capitalization for the Company’s common stock held by non-affiliates (persons other than directors and officers) was approximately $81 million. The Company, therefore, became an accelerated filer in connection with its filing of the financial statements for the year ended December 31, 2006.

As a result, the Company became subject to the internal control assessment provisions of Section 404 of the Sarbanes-Oxley Act of 2002. The Company, under the supervision of its management, conducted an assessment of its internal controls. The Company determined that there was a material weakness in its internal control over reliance on an outside consultant as of December 31, 2006. The Company determined that it did not have adequate controls over an outside consultant. The Company had hired an outside consultant to prepare its Carrier Access Billings (CABs). At December 31, 2006, the Company did not have in place an internal review process to ensure that the amounts being invoiced to inter-exchange carriers contained the correct rates and number of access minutes billed. As of December 31, 2007 the Company had contracted with Mid America Computer Corp. (MACC) to perform its carrier access billing. MACC has documented and certified controls as evidenced by its SAS 70 certification.

The Company was able to remediate this material weakness from December 31, 2006. No material weakness was noted in 2007.

The Company, under management’s supervision, conducted its annual assessment of its internal controls in connection with its preparation of financial statements for the year ended December 31, 2008. The Company determined that there was a material weakness in its internal control over reliance on an independent tax consultant as of December 31, 2008. For the year ended December 31, 2008, the Company determined that it did not have adequate controls over an independent tax consultant. Specifically, the Company did not have, and through its engagement of an independent tax consultant, did not acquire, adequate technical expertise to effectively oversee and review the Company’s tax accounting for the Company’s ownership of an equity method investment. The Company hired an independent tax consultant to prepare its income tax provision and returns. There was an error in the tax treatment of its equity method investment that has been corrected in the 2008 financial statements. Management is currently reviewing options to secure adequate controls.

While the Company is undertaking to remediate its material weakness, there can be no assurance that the Company may not suffer additional material weaknesses in the future.

The changing economic climate may result in changes in our customers’ purchasing habits and result in declines in our operating income

Recent events in the American economy, including higher unemployment and a general business slowdown, may affect results of operations. As a result of real or perceived economic factors, some residential or business customers may decide to lower the levels of products and services they purchase from the Company. Although New Ulm Telecom, Inc. has not experienced any significant effect from the economic slowdown in our results through December 31, 2008, a continuing economic slowdown may adversely affect future revenues.

 

 

Item 1B.

Unresolved Staff Comments.

None.

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Item 2.            Properties

The four operating telephone companies (New Ulm, Western, Peoples, and HTC) own central office equipment that is used to record, switch and transmit telephone calls, as described below.

New Ulm’s host central office equipment was purchased in 1991 and consists of a Nortel Networks DMS-100/200 digital switch. New Ulm also has remote switching sites in three locations: two in New Ulm and one in the city of Courtland. The equipment at these remote switching sites is housed within specially designed central office equipment buildings. In 2005, the Company installed a Tekelec T7000 softswitch that is located in the New Ulm central office.

Western installed Nortel Networks remote central office equipment in 1996. This remote switching equipment utilizes the host switch in New Ulm. Western also has a remote switching site in the city of Sanborn. The equipment at Sanborn is housed within a specially designed central office equipment building.

Peoples’ central office equipment was installed in 1999 and consists of a Nortel Networks RSC digital remote switch. Peoples leases host switching facilities from FiberComm, LC, in which it owns a 25.18% equity interest.

HTC’s central office equipment includes a Lucent 5E system, installed in 1990; and a Meta-E Softswitch, which was put into service in 2005. HTC is the switch location for all customers of Hutchinson and Litchfield. Additionally, HTC is the headend satellite reception site for Broadband Visions, LLC, a shared headend.

The Company believes that its property is suitable and adequate to provide the necessary services and believes all properties are adequately insured. Note 6 to the Consolidated Financial Statements of this Form 10-K describes the mortgages and collateral relating to the above referenced properties, while Note 2 to the Consolidated Financial Statements of this Form 10-K describes the Company’s depreciation policy.

The Company owns various buildings and related land as follows:

 

 

 

 

(1)

New Ulm owns a building that is located at 400 Second Street North, New Ulm, Minnesota. It was originally constructed in 1918, with various additions and remodeling through the years. This building contains business offices and central office equipment. The building also has warehouse and garage space. This building contains approximately 23,700 square feet of floor space.

 

 

 

 

(2)

New Ulm owns a warehouse that is located at 1201 North Front Street, New Ulm, Minnesota. The warehouse has 13,680 square feet of space and is used primarily as a storage facility for trucks, generators, trailers, plows and inventory used in outside plant construction.

 

 

 

 

(3)

New Ulm owns three remote central office buildings that are located on the north side of New Ulm, the south side of New Ulm, and in Courtland. These buildings contain central office equipment that remote off New Ulm’s main central office equipment.

 

 

 

 

(4)

New Ulm owns three towers and the land on which they are constructed. One is located north/northwest of the city of New Ulm along Highway 14 in Nicollet County, another is located north of St. George, Minnesota, and the third is located at the 400 Second North location.

 

 

 

 

(5)

New Ulm owns land located at the corner of 7th Street South and Valley Street in New Ulm, Minnesota. This lot is utilized as storage for poles and cable inventory and contains approximately 5,000 square feet of fenced-in storage area.

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(6)

New Ulm leases a building located at 27 North Minnesota, New Ulm, Minnesota. The building contains approximately 14,000 square feet of space and is used primarily as a retail location housing customer support services and the corporate business office.

 

 

 

 

(7)

New Ulm owns a building located at 137 E. 2nd Street, Redwood Falls, Minnesota. This building contains business offices and central office equipment. This building contains approximately 1,540 square feet of floor space.

 

 

 

 

(8)

New Ulm owns three remote equipment office buildings in Redwood Falls, Minnesota that are located at 1105 South Mill Street, 220 Veda Drive and 620 Walnut Street. These buildings contain central office equipment that remote off New Ulm’s main central office equipment.

 

 

 

 

(9)

New Ulm owns two additional parcels within the city limits of New Ulm. The first is parcel, legally described as Lot 3, Block 1 and Lot 2 Block 3, Airport Industrial Park, on which a new remote and retail facility is located. The building contains approximately 2,400 square feet of floor space, with approximately 1,350 square feet used as retail space. The remaining space is used as a remote central office. The second parcel is legally described as Lot 3, Block 1 Bridge Street Industrial Park First Addition which is vacant and available for future use.

 

 

 

 

(10)

Western owns a building at 22 South Marshall, Springfield, Minnesota. This building contains the business office and central office equipment. This building contains approximately 2,100 square feet of floor space.

 

 

 

 

(11)

Western owns a building in Sanborn, Minnesota, which contains central office equipment that remotes off Western’s central office equipment.

 

 

 

 

(12)

Western owns a warehouse located at 22 South Marshall, Springfield, Minnesota. This building is used as a storage facility for vehicles, other work equipment and inventory used in outside plant construction. This building contains approximately 3,750 square feet of space.

 

 

 

 

(13)

Western owns a tower in the city of Sanborn. Western has a lease on the land on which the tower is located.

 

 

 

 

(14)

Peoples owns a building at 221 Main Street, Aurelia, Iowa that houses the business office, central office equipment and cable television head-end equipment. The building contains approximately 1,875 square feet of floor space.

 

 

 

 

(15)

Peoples owns a building that is adjacent to its main office building at 217 Main Street, Aurelia, Iowa. This building is available to expand the present main office building. The building contains approximately 1,875 square feet of floor space.

 

 

 

 

(16)

Peoples owns a building at 133 ½ Main Street, Aurelia, Iowa, that contains approximately 1,100 square feet of warehouse space and 525 square feet of office space.

 

 

 

 

(17)

Peoples also owns a vacant lot at 121 Main Street, Aurelia, Iowa, that is 25’ x 100’.

 

 

 

 

(18)

HTC owns a building located at 235 Franklin Street SW, Hutchinson, Minnesota. This building houses the business office and central office. The building contains approximately 22,616 square feet of floor space.

 

 

 

 

(19)

HTC owns a building at 345 Michigan Street SE, Hutchinson, Minnesota, that houses its outside plant equipment. There are three buildings at this location, containing approximately 19,200 square feet.

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(20)

HTC owns a tower located at 345 Michigan Street SE. This tower has approximately 288 square feet of floor space.

 

 

 

 

(21)

HTI owns a building at 421 South CSAH 34, Litchfield, Minnesota. This building houses the business office and contains approximately 6,100 square feet of floor space.

 

 

 

 

(22)

HTI owns a tower in the city of Darwin, Minnesota. The tower is located at 20877 County Road 9, Darwin, Minnesota, and has approximately 120 square feet of floor space.

 

 

 

 

(23)

HTI owns a second tower in the city of Buffalo Lake, Minnesota. This tower is located at 55106 county Rd 38, Buffalo Lake. It has approximately 120 square feet of floor space.

 

 

 

 

(24)

HTC owns a POP Hut in Glencoe, Minnesota. This facility is located at 101 11th Street E, Glencoe, Minnesota and is approximately 600 square feet.

 

 

 

 

(25)

HTC owns a GRE Hut in Glencoe, Minnesota. This facility is located at 602 County Rd 3, Glencoe, Minnesota. The building has approximately 48 square feet of floor space.

In addition, New Ulm, Western, Peoples, HTC, and HTI own the lines, cables, and associated outside physical plant for use in providing telephone and cable television services.

The Phonery owns equipment leased to subscribers such as telephone sets and other similarly-used instruments.

 

 

Item 3.            Legal Proceedings

As of March 27, 2009, there was no material litigation pending or threatened involving the Company or any of its subsidiaries in any court, nor are there any proceedings known to be contemplated by governmental authorities.

 

 

Item 4.            Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this
Form 10-K.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

The Company’s common stock is traded on the OTC Bulletin Board under the symbol “NULM”. The table below sets forth the approximate high and low bid prices for the Company’s common stock for the periods indicated as reported by the OTC Bulletin Board. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

High

 

Low

 

 

 

 

 

 

 

 

 

2008:

 

 

 

 

 

 

 

1st quarter

 

$

12.75

 

$

10.70

 

2nd quarter

 

$

10.95

 

$

8.50

 

3rd quarter

 

$

12.00

 

$

8.01

 

4th quarter

 

$

10.98

 

$

6.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007:

 

 

 

 

 

 

 

1st quarter

 

$

12.50

 

$

10.70

 

2nd quarter

 

$

13.13

 

$

11.00

 

3rd quarter

 

$

15.00

 

$

11.90

 

4th quarter

 

$

13.25

 

$

10.50

 

Record Holders

As of February 21, 2009, there were approximately 1,360 holders of record of the Company’s common stock.

Dividends

The Board of Directors review quarterly dividend declarations based on anticipated earnings, capital requirements and the operating and financial condition of the Company. There were security and loan agreements underlying CoBank, ACB notes in 2006 and 2008, that contained certain restrictions on distributions to shareholders and investment in, or loans to, others. See Note 6 to the Consolidated Financial Statements of this Form 10-K for additional information.

The following table shows the per share dividend payments in 2008, 2007, and 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

First Quarter

 

$

0.1000

 

$

0.1000

 

$

0.0900

 

Second Quarter

 

$

0.1000

 

$

0.1000

 

$

0.0900

 

Third Quarter

 

$

0.1000

 

$

0.1000

 

$

0.0900

 

Fourth Quarter

 

$

0.1000

 

$

0.1000

 

$

0.0900

 

Special Dividend

 

 

 

 

 

$

2.7500

 

Total Dividends Paid

 

$

0.4000

 

$

0.4000

 

$

3.1100

 

 

 

 

 

 

 

 

 

 

 

 

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Item 6. Selected Financial Data

Selected Income Statement Data for the Company (consolidated):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

35,294,331

 

$

17,300,936

 

$

16,882,234

 

$

17,344,837

 

$

15,100,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

29,294,003

 

 

14,239,568

 

 

13,531,118

 

 

13,071,656

 

 

12,468,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

6,000,328

 

 

3,061,368

 

 

3,351,116

 

 

4,273,181

 

 

2,631,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

684,425

 

 

4,583,457

 

 

56,065,372

 

 

5,112,117

 

 

2,964,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

 

3,992,227

 

 

3,061,853

 

 

24,305,283

 

 

3,925,246

 

 

2,303,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

2,692,526

 

 

4,582,972

 

 

35,111,205

 

 

5,460,052

 

 

3,291,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Per Share

 

$

.53

 

$

.90

 

$

6.86

 

$

1.07

 

$

.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Per Share

 

$

.40

 

$

.40

 

$

3.11

 

$

.34

 

$

.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

$

9,374,152

 

$

11,649,394

 

$

32,241,708

 

$

4,273,791

 

$

4,679,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

6,974,876

 

 

2,359,781

 

 

23,505,397

 

 

4,917,710

 

 

4,452,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working Capital

 

 

2,399,276

 

 

9,289,613

 

 

8,736,311

 

 

(643,919

)

 

226,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

130,593,654

 

 

59,052,895

 

 

80,055,841

 

 

55,303,909

 

 

53,835,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

51,770,828

 

 

88,915

 

 

106,132

 

 

15,114,426

 

 

17,630,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

51,701,902

 

 

53,284,651

 

 

50,747,853

 

 

31,545,651

 

 

27,824,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book Value Per Share

 

$

10.11

 

$

10.42

 

$

9.92

 

$

6.17

 

$

5.44

 

Information contained in the above tables for 2008 is affected by the acquisition of HTC on January 4, 2008.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company’s future results of operation and other forward-looking statements are subject to risks and uncertainties, including, but not limited to, the effects of deregulation in the telecommunications industry as a result of the Telecommunications Act of 1996. These forward-looking statements are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from these statements and the Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events or the receipt of new information. See “Risk Factors” in Item 1A of this Form 10-K.

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Results of Operations for 2008, 2007 and 2006

The Company operates three business segments: Telecom, Cellular and Phonery. The majority of its operations consist of the Telecom segment that provides telephone and related ancillary services, Internet services, and cable television services to several communities in Minnesota and Iowa. The Cellular segment includes the sale and service of cellular phones and accessories, and a 9.88% interest in MWH (sold to Alltel on October 2, 2006), which it recorded on the equity method of accounting due to the influence the Company had over the operations and management of MWH. The Phonery segment includes the sales and service of customer premise equipment (CPE), transport operations, and the resale of long distance toll service.

Consolidated Results of Operations

2008 Compared to 2007

Operating Revenues

Consolidated revenues for 2008 were $35,294,331, compared with $17,300,936 in 2007, an increase of $17,993,395, or 104.0%. Without the addition of HTC, total operating revenues would have increased $776,732 or 4.5% in 2008 as compared to 2007. Without the effect of the acquisition of HTC, the Cellular and the Phonery segments would have experienced decreases as compared to 2007, and the Telecom segment would have seen an increase in revenues of approximately $1,090,000.

The Telecom segment showed increased revenue of $18,301,054, as compared to the same period in 2007 due to the acquisition of HTC. Without the addition of HTC, local network revenues and network access revenues would have increased approximately $733,000.

All income statement categories experienced increases in revenues due to the acquisition of HTC on January 4, 2008. Without the addition of HTC, the Telecom segment would have increased in its local network revenues approximately $5,000. Excluding HTC revenue, network access revenues would have increased about $728,000, due to access settlements and revenues from new and expanded service offerings: digital video, digital subscriber line (DSL), Internet access, and the operations of a CLEC in the city of Redwood Falls, Minnesota. The Telecom segment has invested heavily in its infrastructure, which has enabled it to enhance its local network so that it could offer a “triple-play” of services to its subscribers. In the telecommunications industry, a “triple-play” of services refers to offering telephone, Internet, and video services over the same infrastructure. The Company expects that continued infrastructure investment will enable it to offer its customers new technologies as they emerge. The Company believes the geographic expansion of its service offerings will provide this segment with future growth.

Despite the industry trend of continuing downward pressure on the Telecom segment’s network access revenues, the segment experienced increased revenues due to access settlements. The increase in network access revenues due to settlements was enhanced due to the Company’s eligibility for high-cost loop funding through the Universal Service Fund for its ILEC operations in Springfield and Sanborn, Minnesota, Aurelia, Iowa, and the immediately surrounding areas served by these affected ILECs. In order to minimize the impact, the Company continues to monitor the negative effects of network access pricing and downward trend in access minutes of use that could affect future revenues in the Telecom sector. Also, the FCC continues to examine inter-carrier compensation (payments from one telecommunications company to another for the use of interconnecting networks). The FCC currently has an open docket on intercarrier compensation as well as several dockets on Voice over Internet Protocol (VoIP). The Company cannot predict the outcome of these proceedings, nor can it estimate the impact, if any, on the Company.

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Table of Contents

The Company believes that, despite the regulatory and competitive challenges faced by the Telecom segment, the Company has positioned itself for future revenue growth. The Company believes that future growth will be realized through increases in revenue due to new and expanded service offerings. The Company also continually evaluates new and emerging technologies to keep the Company’s service offerings innovative and competitive. The Company expects that continued infrastructure investment will enable it to continue to offer its customers new technologies as they emerge, and that geographic expansion of the Company’s service offerings, in particular through the acquisition of HTC, will provide this segment with continued future growth

The Cellular segment experienced a $104,314 increase in revenues compared with the same period in 2007. The Phonery segment had a $2,077,679 increase in revenues compared with the same period in 2007. Without the addition of HTC, the Cellular segment would have realized a decrease in revenues of $166,959 and the Phonery segment would have realized a decrease of $62,296.

Operating Expenses

Operating expenses for 2008 were $29,294,003 compared to $14,239,568 in 2007, an increase of $15,054,435, or 105.7%, compared to 2007. This increase is due primarily to the acquisition of HTC. Without the acquisition of HTC, operating expenses would have increased 7.2%, due to increased operating expenditures in the Telecom segment. Without the addition of HTC, the Phonery segment would have experienced an 8.6% decrease in operating expenses, and the Cellular segment experienced a 42.5% decrease. Depreciation and amortization expense for the Telecom segment increased by $4,956,768 in 2008 compared to 2007. Without the addition of HTC, this segment would have experienced an increase of $41,687. This increase resulted as the Company has continued its investment in the Telecom segment’s infrastructure. The increase in operating expenses, excluding depreciation and amortization, was attributed to the increased cost of providing services and an increasing customer base for the segment’s expanded services, such as digital video, DSL, and Internet service. In addition, operating expenses increased due to increased costs to continue to comply with the Sarbanes-Oxley Act Section 404 requirements. 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 2008 increased $2,938,960 or 96.0% over 2007. Without the addition of HTC, operating income would have decreased approximately $242,000, primarily due to increases in plant operations and general and administrative expenses, from the Telecom segment’s operations.

Other Income

Overall, other income for 2008 decreased $3,899,032 compared to 2007. The decrease is primarily due to the increase in interest expense associated with borrowing from CoBank in January 2008 to finance the acquisition of HTC, and an impairment of goodwill in the amount of $2.3 million described in Note 5 to the Consolidated Financial Statements of this Form 10-K, partially offset by the gain in January 2008 resulting from the receipt of the final $5.1 million payment for the 2006 sale of MWH to Alltel compared to the receipt in April 2007 of a $3.1 million payment.

There was a $3,285,763 increase in interest expense in 2008 compared to 2007 due to the Company’s borrowings from CoBank, ACB commencing in January 2008 to finance the acquisition of HTC.

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Table of Contents

The Company’s investment income in Hector Communications Corporation for 2008 was $625,981, as compared to $536,504 for 2007. The Company acquired a 33.33% ownership interest in Hector on November 3, 2006.

Other investment income decreased $33,115 for 2008 compared to 2007, primarily due to a decrease in equity method investment income. Without the HTC acquisition, other investment income would have seen a decrease of $117,384 due primarily to the FiberComm LC.

The sale of marketable securities held by HTC at acquisition generated a loss of $162,999.

There was a $396,384 decrease in interest and dividend income for 2008 compared to 2007. The decrease was due to fewer funds available for investment.

Net Income

Net income was $2,692,526 for 2008 compared with $4,582,972 for 2007. The decrease of $1,890,446, or 41.2%, decrease in net income was primarily the result of the $2.3 million impairment to goodwill.

2007 Compared to 2006

2007 consolidated revenues were $17,301,000, compared with $16,882,000 in 2006, an increase of $419,000, or 2.5%.

The Telecom segment showed decreased local network revenue of approximately $80,000. This decrease, a common industry trend, was due to declining access lines as customers increasingly utilized wireless phones, dropped second phone lines in their homes when they moved their Internet service from a dial-up platform to a DSL platform, and utilized Voice over Internet Protocol (VoIP) or other services that bypass the local exchange network. With DSL, one access line allows customers to use a telephone and be connected to the Internet at the same time.

The Telecom segment experienced decreases in its operating revenues resulting from a decrease in access revenue. The decline in access revenue reflects industry trends of declining access usage and continued downward pricing pressures. The Telecom segment’s decrease in operating revenues is primarily due to these trends. Partially offsetting the decrease in access revenue, the Telecom segment experienced increases in unregulated revenues for video and Internet services due to an increase in customers.

The Company believes, despite the negative industry trends, that the revenues in the Telecom segment will experience future growth. The Company expects that the decreases in access revenue will be offset by growth from new and expanded service offerings: digital video and digital subscriber line (DSL), Internet service provision, and the complete array of the Company’s services offered through its Competitive Local Exchange Carrier (CLEC) in the city of Redwood Falls, Minnesota. The Company also expects that the continued marketing of service bundles, which offer customers discounts for subscribing to multiple services, will help retain current customers and attract new customers. Also, the Company continually evaluates new and emerging technologies to keep the Company’s service offerings innovative and competitive. The Telecom segment has made significant investments in its infrastructure, which has allowed it to enhance its local network so that it can offer a “triple-play” of services to its subscribers. The Company expects that continued investment in its infrastructure will allow it to continue to expand its offering to customers, including new technologies as they emerge, such as hi-definition television (HDTV) introduced in 2007, and that the geographic expansion of the Company’s service offerings will provide this segment with continued future growth. The Telecom segment invested $4,005,000 in its infrastructure in 2007, which allowed it to enhance its local network, and offer new services to its subscribers.

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Table of Contents

The Cellular segment experienced a $160,000 increase in revenues due to an increase in its sales and service revenues of cellular phones and accessories. The Phonery segment had a $191,000 increase in revenues, primarily due to an increase in transport revenues.

2007 consolidated operating expenses were $14,240,000, compared with $13,531,000 in 2006, an increase of $709,000 or 5.2%. The Telecom segment had an increase of $379,000 due to expenses from an increase in the number of customers subscribing to Internet and video services, additional plant operating expenses associated with the maintenance of its infrastructure, and additional selling, general and administrative expenses associated with the commitment of the Company to compete in all aspects of communications services and to provide exceptional customer service for the Company’s complete array of products and services in the communities that it serves. The Company incurred $81,000 and $137,000 in out-of-pocket expenses in 2007 and 2006 respectively, to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The Cellular segment had a $179,000 increase in cost of goods sold and sales expense due to the increase in cellular phone and accessory sales. The Phonery segment had an increase to cost of goods sold of $187,000 due to an increase in sales.

2007 consolidated net income was $4,583,000 compared with $35,111,000 in 2006. The decrease in consolidated net income of $30,528,000 was primarily due to the 2006 gain booked on the sale of the Company’s MWH investment ($50,153,000 before income taxes), compared to the 2007 gain booked from the sale of the Company’s MWH investment ($3,117,000 before income taxes). The revenues generated by the Company’s non-regulated service offerings such as DSL and video services, cellular and CPE sales increased in 2007 as compared to 2006. In addition, the Company had an increase in interest income due to more funds available for investment in 2007.

Results of Operations by Business Segment

Telecom Segment

The Telecom segment revenues represented 87.2% of the Company’s 2008 consolidated operating revenues before eliminations. Revenues are primarily earned by providing approximately 30,000 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 by providing Internet services, including high-speed DSL Internet access, and video services to its subscribers, directory advertising, through billing and collecting for various long distance companies, and for management services provided to HCC. 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 2008 Telecom segment revenues increased $18,301,054 or 117.9% compared to 2007, due to the acquisition of HTC. Without the addition of HTC, the segment would have experienced a 7.0% increase in operating revenues for the year. All information contained in the following table is before intercompany eliminations.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

Telecom Segment

 

2008

 

2007

 

2006

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

Local Network

 

$

7,496,194

 

$

3,958,892

 

$

4,038,947

 

Network Access

 

 

14,681,089

 

 

5,921,277

 

 

6,409,470

 

Other

 

 

11,640,123

 

 

5,636,183

 

 

4,963,670

 

Total Operating Revenues

 

 

33,817,406

 

 

15,516,352

 

 

15,412,087

 

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

20,883,438

 

 

9,688,213

 

 

9,071,687

 

Depreciation and Amortization

 

 

8,774,280

 

 

3,817,512

 

 

4,055,177

 

Total Operating Expenses

 

 

29,657,718

 

 

13,505,725

 

 

13,126,864

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

4,159,688

 

$

2,010,627

 

$

2,285,223

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(1,509,808

)

$

1,943,756

 

$

1,586,953

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

3,997,478

 

$

4,004,509

 

$

1,950,205

 

Local network revenue increased in the Telecom segment by $3,537,302 or 89.4% in 2008 over 2007 and decreased $80,055 or 2.0% in 2007 over 2006. The number of access lines served increased 93.2% in 2008 over 2007, and decreased 2.4% in 2007 over 2006. The increase in access lines in 2008 was due to the acquisition of HTC, and 2007 was primarily due to the decreased demand for access lines as the Company’s customers increasingly selected DSL Internet services at higher speeds than is available through traditional dial-up service.

Without the addition of HTC, local network revenue would have increased by approximately $5,000. Local network revenues continue to experience downward revenue pressure as a result of the continuing decline in the number of access lines. The decrease in access lines is due to customers increasingly utilizing other technologies, such as wireless phones and IP services, as well as customers dropping second phone lines when they move their Internet service from a dial-up platform to a DSL platform.

DSL is used to provide both traditional voice connectivity and access to high-speed Internet service over the same facilities, which eliminates the need for customers to have second lines dedicated solely to providing Internet service. The decrease in access lines is also attributed to an increasing number of customers who only subscribe to wireless service. In addition, charges for the regulated voice portion of DSL service were responsible for an increase of $84,500 in 2008 revenue, and a increase of $23,000 for 2007. The industry downward revenue trend was minimized by the success of the promotion and packaging of vertical services, most notably DSL, and focused marketing to potential customers. The Telecom segment has also entered into a number of interconnection agreements with wireless providers, which allow these providers access to its customers at the local service level. The interconnection agreements were a source of local network revenues for 2008 and 2007, contributing approximately $69,700 and $109,000, respectively.

Network access revenue increased $8,759,812 or 147.9% in 2008, compared with 2007, due to the acquisition of HTC. This increase is the result of carrier settlements and additional revenues due to the acquisition of HTC. Without HTC, an increase of approximately $728,000 or 12.3% would have been realized. The Telecom segment has continually invested in its infrastructure. These capital expenditures have maintained and enhanced this segment’s infrastructure and have allowed the Company to receive additional settlements from the National Exchange Carrier Association (NECA). Investment in the local loop (access line cost) has made the Company eligible for high-cost loop funding through the Universal Service Fund.

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Table of Contents

The Telecom segment has invested approximately $10,000,000 in capital expenditures since 2006. These capital expenditures, which have enhanced this segment’s infrastructure, allowed New Ulm and its subsidiaries to receive additional settlements from the NECA. The additional investment in the local loop (access line cost) has made the Company eligible for high-cost loop funding and safety net universal funding through the Universal Service Fund, minimizing the decrease in network access revenues. In 2008, the Telecom segment saw a decrease of $23,566 in the receipt of this funding compared to 2007.

Other operating revenues increased $6,003,940 or 106.5% for 2008, compared with 2007, due to the acquisition of HTC. Without the acquisition of HTC, other operating revenues would have increased 6.3% in 2008 over 2007. 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 cities of Redwood Falls and Litchfield, Minnesota. The video product offered in New Ulm, Essig, Searles, Courtland, Springfield, Sanborn, Redwood Falls, Hutchinson and Litchfield, Minnesota was responsible for $2,638,905 of the increase in these revenues. Without HTC, video revenues would have increased about $64,000. Cable television services continued to be offered in the Minnesota communities of Jeffers, Cologne, Mayer, New Germany, and New Market Township, and were responsible for a $7,394 decrease in other operating revenues. The revenues from billing management services, and miscellaneous receipts totaled $1,759,620 for 2008, an increase of approximately $788,400 from 2007. Excluding HTC, the increase would have been approximately $133,600. The remainder of the revenue increase was primarily attributed to Telecom segment’s sale of Internet services in the amount of $2,584,058. Excluding HTC, internet revenues would have increased $159,518.

Operating expenses, excluding depreciation and amortization, increased $11,195,225 or 115.6% in 2008, compared with 2007, primarily due to the acquisition of HTC. Without the addition of HTC, operating expenses, excluding depreciation and amortization, would have increased by 14.4%. Operating expenses increased as a result of increased selling, general and administrative costs, particularly those associated with compliance with Sarbanes-Oxley Act Section 404, the increasing expenses associated with the expanded array of services offered, such as video and DSL that allow the Company to offer the “triple-play” of services to its customers and the expenses associated with offering services to HTC customers. The Telecom segment has recognized the value in being able to compete in all aspects of communication services. The Company continues 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), offers additional services (video and DSL), pursues aggressive marketing to develop brand recognition, and provides solutions for customers’ evolving communication 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, and deserving of the Company’s best service, attitude and consideration. The Company is applying these same customer-centric philosophies at HTC.

Depreciation and amortization expenses increased $4,956,768 or 129.8% in 2008, compared with 2007, primarily due to the acquisition of HTC. Excluding depreciation and amortization from HTC, the increase would have been $41,687, as the Company continues to make investments in the Telecom segment’s infrastructure.

The Telecom segment capital expenditures for 2008 were $3,997,478. For 2007 and 2006, expenditures were $4,004,509 and $1,950,205 respectively. The most significant projects for 2008 were circuit improvements, buried and fiber optic cable, and investment into IP technology. Construction projects for 2007 consisted of circuit equipment improvements in excess of $1.1 million, in addition to significant increases to buried and fiber optic cable. Construction projects for 2006 consisted of continued build-out of facilities and the installation of electronics to provide video and DSL in the rural areas surrounding New Ulm. The segment’s capital budget for 2009 is approximately $6,000,000.

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Table of Contents

Operating income increased $2,149,061 or 106.9% in 2008, compared to 2007, primarily due to the acquisition of HTC. The increase in operating income was due to the increase in revenues for video and Internet services from an increase in customers, and the increase in revenues due to the billing services that the Company provides to HCC. This is partially offset by 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 customer-focused service for the Telecom segment’s complete array of products and services. The Company is always striving for cost efficiencies and technological improvement to enhance its operating margins for the Telecom segment. The $18,301,054 increase in revenues combined with the $16,151,993 increase in operating expenses resulted in the $2,149,061 increase in operating income when comparing 2008 to 2007.

Cellular Segment

The Cellular segment operations include the sales and service of cellular phones and accessories and represents 2.1% of the 2008 consolidated operating revenues before eliminations. The operating revenue from sales of cellular phones and accessories increased by $104,314 in 2008, compared with 2007, due primarily to an increase in the sale of cellular phones through the acquisition of HTC.

The Cellular segment information for its investment in MWH is shown in the following table using the proportionate consolidation method. The Company recorded its 9.88% investment in MWH using the proportionate consolidation method so that it could 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) reviewed the performance of MWH using the proportionate method. A recap of the Company’s investment in MWH (prior to its October 2, 2006 sale to Alltel) using the proportionate method is as follows:

 

 

 

 

 

 

 

2006

 

 

 

 

 

Proportionate Method:

 

 

 

 

Operating Revenues

 

$

20,940,667

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

12,273,174

 

Depreciation and Amortization Expenses

 

 

2,216,856

 

Total Operating Expenses

 

 

14,490,030

 

 

 

 

 

 

Operating Income

 

 

6,450,637

 

 

 

 

 

 

Net Income

 

$

5,925,389

 

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Table of Contents

A recap of income for the Cellular segment, using the equity method to record earnings on its investment in MWH (prior to its October 2, 2006 sale to Alltel), is contained in the following table:

 

 

 

 

 

 

 

 

 

 

 

Cellular Segment

 

2008

 

2007

 

2006

 

Operating Revenues

 

$

813,121

 

$

708,807

 

$

549,226

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

525,979

 

 

564,561

 

 

386,003

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

287,142

 

 

144,246

 

 

163,223

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

158,163

 

 

212,290

 

 

 

Interest Expense

 

 

 

 

 

 

(96,870

)

Cellular Investment Income

 

 

 

 

 

 

5,925,389

 

Gain on Sale of MWH

 

 

5,123,797

 

 

3,116,624

 

 

50,152,885

 

Income Taxes

 

 

(2,283,332

)

 

(1,373,580

)

 

(23,155,539

)

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

3,285,770

 

$

2,099,580

 

$

32,989,088

 

As previously disclosed, on November 17, 2005, MWH and Alltel entered into a definitive agreement under which Alltel agreed to purchase MWH. The total compensation to be paid by Alltel was $1.075 billion, including payments to MWH shareholders, payments to minority interest holders in certain MWH properties and assumption of MWH’s outstanding debt. The transaction was completed on October 2, 2006, and New Ulm Telecom, Inc. received 90% of its proceeds or approximately $74 million on October 6, 2006. New Ulm received its prorata share of the amount held in escrow in April 2007 and January 2008. These additional payments received were approximately $3.1 million in April 2007 and approximately $5.1 million in January 2008.

Phonery Segment

The Phonery segment represented 10.7% of 2008 consolidated operating revenues 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 customer premise equipment (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.

 

 

 

 

 

 

 

 

 

 

 

Phonery Segment

 

2008

 

2007

 

2006

 

Operating Revenue

 

$

4,135,180

 

$

2,057,501

 

$

1,866,787

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

2,373,757

 

 

1,074,741

 

 

898,621

 

Depreciation and Amortization

 

 

207,925

 

 

76,265

 

 

65,496

 

Total Operating Expenses

 

 

2,581,682

 

 

1,151,006

 

 

964,117

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

1,553,498

 

 

906,495

 

 

902,670

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

916,564

 

$

539,636

 

$

535,164

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

112,291

 

$

24,564

 

$

15,951

 

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Table of Contents

Phonery revenues increased $2,077,679 or 101.0% in 2008, and $190,714 or 10.2% in 2007. The 2008 increase can be attributed to the acquisition of HTC. Without this acquisition, Phonery revenues in 2008 would have decreased $62,296, or 3.0%. The 2007 increase was primarily due to the increased CPE Sales and installation revenues of approximately $154,000 and an increase in leased network revenue of approximately $48,000, offset by a decrease of approximately $20,000 in the resale of long distance toll revenues.

Operating expenses, excluding depreciation and amortization, increased $1,299,016 or 120.9% for 2008 compared to 2007, primarily due to the acquisition of HTC. Without the addition of HTC, the operating expenses would have decreased by approximately $153,000 or 14.2%. This segment strives for cost efficiencies, while continuing to endeavor to reach the customer service goal of 100% customer satisfaction. This segment continues to seek new technologies to better serve customer needs and to operate efficiently.

Depreciation and amortization expenses increased $131,660 or 172.6% for 2008 compared with 2007, primarily due to the acquisition of HTC. Without the addition of HTC, the depreciation and amortization expenses would have increased $54,681 or 71.7%. The 2008 increase is indicative of the continued investment in this segment’s assets.

Other Income and Interest Expense

Interest expense increased approximately $3,286,000 in 2008 compared to 2007 and decreased $775,000 in 2007 compared to 2006. Interest expense increased in 2008 as a result of its January 2008 borrowings to finance its acquisition of Hutchinson Telephone Company. The 2007 decrease was due to the receipt of the proceeds of the MWH sale, a portion of which was applied to extinguish debt with CoBank ACB in 2006.

Interest income decreased approximately $396,000 in 2008 compared to 2007 and increased $276,000 in 2007 compared to 2006. The decrease in 2008 was due to fewer funds available for investment due to the acquisition of HTC in January 2008. The increase in 2007 was the result of increased funds available for investment, primarily because of the sale of MWH.

Other investment income decreased approximately $33,000 in 2008 compared to 2007, as compared to an increase of $27,000 in 2007 compared to 2006. Included in other income was the Company’s 25.18% equity ownership in FiberComm, LC. The Company recorded a $51,730 loss from FiberComm, LC in 2008, a $42,000 loss in 2007 and a $98,000 loss in 2006. In prior years, included in other investment income was the patronage credit the Company earns from CoBank, ACB as part of its debt agreements with CoBank, ACB. There were no credits received in 2008 as there were no outstanding loans in 2007. The patronage earned in 2007 was $128,000 as compared to $164,000 in 2006. The Company records its patronage when it is received.

Liquidity and Capital Resources

Cash Flows from Operations

Cash generated in operations for the year ended December 31, 2008 was $9,252,963, as compared to cash used by operations of $17,962,196 in 2007 and cash generated of $4,362,868 in 2006.

The 2008 increase was primarily due to the acquisition of HTC and the timing of tax payments related to the gain on the MWH sale. The 2007 decrease was primarily driven by the payment of income tax on the gain associated with the 2006 sale of MWH. The 2006 decrease (after eliminating all effects from the sale of the cellular investment, including taxes) was due to an increase in receivables, a decrease in accounts payable and a reduction in deferred income taxes.

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Table of Contents

Cash generated by operations continues to be the Company’s primary source of funding for existing operations, capital expenditures, debt service, and dividend payments to shareholders. At December 31, 2008, the Company had working capital of $2,399,276 as compared to working capital of $9,289,613 at December 31, 2007. Cash and cash equivalents at December 31, 2008 were $3,320,510 as compared to $9,510,309 at December 31, 2007.

Cash Flows from Investing Activities

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.

Cash flows used in investing activities were $64,806,038 for the year ended 2008 compared to $921,811 used in investing activities in 2007. In 2008, cash used in the purchase of HTC was $66 million. The Company received proceeds from the MWH sale of its cellular investment of $5,123,797 in 2008, $3,116,624 in 2007, and $74,318,762 in 2006. Capital expenditures relating to on-going businesses were $4,109,769 in 2008, $4,029,073 in 2007, and $1,966,156 in 2006. The Company expects total plant additions of approximately $6,000,000 in 2009. The Company will finance these upgrades from working capital.

Cash Flows Used In Financing Activities

In 2008 cash provided by financing activities was $49,363,276. This was due to the issuance of long-term debt of $59,700,000, offset by long-term debt repayments of $8,018,087, loan issuance costs of $272,465, and the distribution of $2,046,172 in dividends to stockholders. In 2007, cash was used to repay $17,217 of long-term debt and distribute $2,046,174 of dividends to stockholders. In 2006, cash was used to repay $15,008,294 of long-term debt and to distribute $15,909,003 in dividends to shareholders.

Guarantees

The Company has guaranteed several obligations of its New Ulm and HTC subsidiaries and joint venture investments. See Note 15 to the Consolidated Financial Statements of this Form 10-K.

Dividends

The Company paid dividends of $2,046,172 in 2008, $2,046,174 in 2007, and $15,909,003 in 2006. This represented dividends of $0.40 per share for 2008, $0.40 per share for 2007, and $3.11 per share for 2006. The Company continues to reinvest in its infrastructure while maintaining dividends to shareholders. The Board of Directors reviews dividend declarations based on anticipated earnings, capital requirements, the operating and financial condition of the Company, and any loan requirements.

The Company’s loan agreements have put restrictions on the ability of the Company to pay cash dividends to its shareholders. However, the Company is allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if New Ulm’s “Total Leverage Ratio,” that is, the ratio of its “Indebtedness” to “EBITDA” (in each case as defined in the loan documents) is equal to or less than 3:50 to 1:00, and (b) in either case if New Ulm is not in default or potential default under the loan agreements. If New Ulm fails to comply with these covenants, its ability to pay dividends would be limited.

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During the first three quarters of 2008, the specified financial ratios outlined in the loan agreements were achieved. For the period ended December 31, 2008, the Company did not meet its “equity to total asset ratio” requirement. The company has obtained a waiver from CoBank, ACB for this covenant for the December 31, 2008 period. All other specified financial ratios outlined in the loan agreements were achieved at December 31, 2008.

Share Repurchase

The Company repurchased no shares in 2008, 2007, or 2006. At this time, the Company does not anticipate any significant share repurchases in 2009 and the Board of Directors has not authorized a share repurchase program.

Contractual Obligations

The Company has had a series of borrowings from CoBank in the past. On October 30, 2006, the Company paid the balance on its $10 million CoBank, ACB reducing revolving credit facility. On December 22, 2006, the Company paid the remaining balance on its $15 million term loan. It also terminated its reducing revolving credit facility.

As of December 31, 2008, the Company had an unsecured loan in the amount of $70,828, with the City of Redwood Falls, Minnesota that bears interest at 5% and matures on January 1, 2012.

In connection with its acquisition of HTC in 2008, New Ulm and HTC as New Ulm’s new subsidiary entered into a credit facility with CoBank, ACB. Information about the Company’s contractual obligations, along with the cash principal payments due each period on its unsecured note payable and long-term debt (see Note 6 to the Consolidated Financial Statements of this Form 10-K).

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Total

 

2009

 

2010-2011

 

2012-2013

 

Thereafter

 

Deferred Compensation

 

3,407,575

 

914,338

 

1,364,374

 

262,989

 

865,874

 

Long-term Debt

 

51,770,828

 

519,003

 

6,416,941

 

6,886,883

 

37,948,001

 

Interest on Long-term Debt (A)

 

15,285,402

 

2,765,276

 

5,417,666

 

4,931,834

 

2,170,626

 

Loan Guarantees

 

6,361,414

 

693,387

 

1,551,068

 

1,993,705

 

2,123,254

 

Operating Lease

 

88,020

 

29,340

 

58,680

 

 

 

Purchase Obligation (B)

 

1,227,522

 

1,227,522

 

 

 

 

Total Contractual Cash Obligations

 

78,140,761

 

6,148,866

 

14,808,729

 

14,075,411

 

43,107,755

 


 

A. Interest on long-term debt is estimated using rates in effect as of December 31, 2008. The Company uses interest rate swap agreements to manage our cash flow exposure to interest rate movements on a portion of our variable rate debt obligations (see Note 7 of the Notes to the Consolidated Financial Statements).

B. Purchase obligations consist primarily of commitments incurred for capital improvements.

Liquidity Outlook

The Company’s short-term and long-term liquidity needs arise primarily from: (i) capital expenditures; (ii) working capital requirements as may be needed to support the growth of its business; (iii) dividend payments on its common stock; and (iv) potential acquisitions.

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The Company’s primary sources of liquidity for the year ended December 31, 2008 were proceeds from cash generated from operations, cash reserves held at the beginning of the period, and long-term debt proceeds. At December 31, 2008, the Company had working capital of $2,399,276.

The Company has not conducted a public equity offering. It operates with original equity capital, retained earnings and additions to indebtedness in the form of senior debt and bank lines of credit.

Management believes adequate internal and external resources are available to finance ongoing operating requirements, including capital expenditures, business development and debt service, for at least the next twelve months.

Effects of Inflation

It is the opinion of management that the effects of the recent economic swings have been mitigated by prudent borrowing practices, anticipating the need for enhancements to equipment, and budgeting strategies. While the trend is uncertain going into 2009, Management anticipates that even with the economic downturns in the current economy, customers will continue to utilize telecommunications systems and services at levels that approximate their past use.

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 the Company to make judgments, assumptions, and estimates that affect the amounts reported in the Company’s 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 considers the accounting policies described below to be the most critical accounting policies because these policies are impacted significantly by estimates it makes. The Company bases its estimates on historical experience or various assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

Valuation of Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. In assessing the recoverability of long-lived assets, the Company compares the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, the Company would write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows expected from those assets. Changes in these estimates could have a material adverse effect on the assessment of its long-lived assets, thereby requiring a write-down of the assets. Write-downs of long-lived assets are recorded as impairment charges and are a component of operating expenses. The Company has reviewed its long-lived assets and concluded that no impairment charge on its long-lived assets is necessary.

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Valuation of Goodwill

The Company has goodwill on its books related to prior acquisitions of telephone properties. The Company is required to test goodwill for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss. See Note 5 to the Consolidated Financial Statements of this Form 10-K for further details and a discussion of the Company recording a $2.291 million goodwill impairment in the fourth quarter of 2008.

Depreciation of Property, Plant, and Equipment

The Company uses the group life method to depreciate the assets of its telephone companies. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. Due to rapid changes in technology and new competitors, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. The Company periodically reviews data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to its depreciation rates. The Company has not made any significant changes to the lives of assets in the three year period ended December 31, 2008.

Revenue Recognition

The Company recognizes revenues when earned, regardless of the period in which billed. The majority of the Company’s revenues are earned from providing services to its customers and providing access to its network to inter-exchange carriers.

Revenues earned from the Company’s customers come primarily from connection to its local network, cable television services, and Internet services (both dial-up and high-speed DSL). Revenues for these services are billed based on set rates for monthly service or based on the amount of time the customer is utilizing the Company’s facilities. The revenue for these services is recognized when the service is rendered.

Revenues earned from allowing inter-exchange carriers access to the Company’s network are based on utilization of the network by the carriers as measured by minutes of use of the network by the individual carriers, billed at tariffed access rates for both interstate calls and intrastate calls. Revenues for these services are recognized based on the period the access is provided.

Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of each Company’s actual or average costs. New Ulm settlements from the pools are based on its actual costs to provide service, while Western, Peoples, and Hutchinson settle on nationwide average schedules. Access revenues for New Ulm include an estimate of the final cost study for the year which is trued-up subsequent to December 31. Management believes the estimates included in the preliminary cost study are reasonable. The Company cannot predict the future impact that industry changes will have on interstate access revenues in 2009.

Intrastate access rates are filed with state regulatory commissions in Minnesota and Iowa.

Revenues from system sales and services are derived from the sale, installation, and servicing of communication systems. In accordance with FASB EITF 00-21, these deliverables are separate units of accounting. Customer contracts for 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.

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Income Taxes

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Significant components of the Company’s deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax bases. The Company’s effective income tax rate is higher than the U.S. rate because of state income taxes and permanent differences including the 2008 impairment of goodwill.

Effective January 1, 2007, New Ulm Telecom, Inc. adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109. As required by FIN 48, the Company recognized the financial statement benefit of tax positions only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. 

At the adoption date of January 1, 2007, the Company had no unrecognized tax benefits that needed to be adjusted.

At December 31, 2008, the Company had approximately $145,500 of net unrecognized tax benefits that, if recognized, would favorably affect the income tax provision when recorded. The Company expects that there will not be any additional unrecognized tax benefits to be recorded within the next year based on the tax treatment of an installment sale. (See Note 8 to the Consolidated Financial Statements of this Form 10-K.)

The Company is primarily subject to U.S., Minnesota and Iowa income tax. Tax years subsequent to 2004 remain open to examination by U.S. federal and state tax authorities. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2008, the Company had no accrual for interest or penalties related to income tax matters.

Derivative Instruments

The Company’s use of financial derivative instruments to manage its overall cash flow exposure to fluctuations in interest rates. The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended by Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 Accounting for Derivative Instruments and Hedging Activities” (“SFAS 149”), which requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case the gains and losses are included in other comprehensive income rather than in earnings.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”) for its financial assets. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The adoption of SFAS 157 did not have a material impact on the Company’s financial condition and results of operations, as there were no financial assets or liabilities that were measured on a recurring basis as of January 1, 2008. Financial Accounting Standards Board staff position 157-2 delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.

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SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value of the Company’s interest rate swap agreements were determined based on Level 2 inputs using observable inputs other than quoted prices in active markets for identical assets and liabilities to determine fair value.

The Company utilizes interest-rate swap agreements that qualify as cash-flow hedges to manage its exposure to interest rate fluctuations on a portion of its variable-interest rate debt. The market value of the cumulative gain or loss on financial derivative instruments is reported as a component of accumulated other comprehensive income loss in stockholders’ equity and is recognized in earnings over the term of the swap agreement.

Equity Method Investment

The Company is an investor in several partnerships and limited liability corporations. The Company’s percentage of ownership in these joint ventures ranges from 14.29% to 33.33%. The Company uses the equity method of accounting for these investments.

Intangible Assets

The Company amortizes its definite-lived intangible assets over their estimated useful lives. Customer lists are amortized over fourteen to fifteen years, regulatory rights are amortized over fifteen years, and non-competition agreements are amortized over five years. Intangible assets with finite lives are amortized over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. In accordance with SFAS No. 142, intangible assets determined to have an indefinite useful life are not amortized.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, a revision of SFAS No. 141. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific items, including acquisition costs, acquired contingent liabilities, restructuring costs, deferred tax asset valuation allowances and income tax uncertainties after the acquisition date. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) is effective for, and will be applied to, all future business combinations transacted on or after January 1, 2009. The adoption of SFAS No. 141(R) will not have a material impact on the Company’s consolidated financial statements.

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, for its financial assets and liabilities. The Company’s adoption of SFAS No. 157 did not impact its financial position, results of operations, liquidity or disclosures, as there were no financial assets or liabilities that are measured at fair value on a recurring basis as of January 1, 2008. In accordance with FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, the Company elected to defer until January 1, 2009, the adoption of SFAS No. 157 for all non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. This includes goodwill and non-financial long-lived assets that are measured at fair value in impairment testing. The Company cannot predict the impact on the Company’s financial position, results of operations or liquidity due to the adoption of SFAS No. 157 for those non-financial assets and liabilities within the scope of FSP 157-2.

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SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets and liabilities.

Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The fair value of the Company’s interest-rate swap agreements discussed in Note 7 to the Consolidated Financial Statements of this Form 10-K, were determined based on Level 2 inputs.

In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2 “Effective Date of FASB Statement No. 157” which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and non-financial liabilities assumed in a business combination. The Company has not applied the provisions of SFAS No. 157 to its non-financial assets and non-financial liabilities in accordance with FSP FAS 157- 2.

On September 30, 2008, the Office of the Chief Accountant of the SEC and the FASB jointly issued a release to offer guidance on Statement 157. SFAS 157-3 clarifies the application of Statement 157 by providing an example to illustrate key considerations in determination of the fair value of a financial asset when the market for that financial asset is not active.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated Financial Statements (“SFAS 160”), an amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding their interest of the parent and its non-controlling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company does not expect adoption of this pronouncement to have a material impact on its financial position, results of operations and cash flows.

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In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles,” which has been established by the FASB as a framework for entities to identify the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP. SFAS No. 162 is not expected to result in a change in current practices. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC”) approval of the Public Company Accounting Oversight Board’s (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company intends to adopt SFAS No. 162 within the required period.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company will be assessing the impact of SFAS No. 161 on its disclosures.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company does not have operations subject to risks of foreign currency fluctuations. The Company does, however, use derivative financial instruments to manage cash flow exposure to interest rate fluctuations. The Company’s objectives for holding derivatives are to minimize interest rate risks using the most effective methods to eliminate or reduce the impact of these exposures. Variable rate debt instruments are subject to interest rate risk. On March 19, 2008, the Company executed interest-rate swap agreements, effectively locking in the interest rate on $6,000,000 of variable-rate debt through March of 2011 and $33,000,000 of variable-rate debt through March 2013. On June 23, 2008, the Company executed interest-rate swap agreements, effectively locking in the interest rate on $3,000,000 of variable-rate debt through June of 2011 and $3,000,000 of variable-rate debt through June 2013. A summary of these agreements is contained in Note 7 to the Consolidated Financial Statements of this Form 10-K.

The gain or loss on current derivative instruments is reported as a component of other comprehensive income (loss) accumulated in stockholders’ equity. It is recognized in retained earnings when the protection agreement is terminated. At the conclusion of the full term maturity of the protection agreement, no gain or loss is recognized. The Company’s earnings are affected by changes in interest rates as a portion of our long-term debt has variable interest rates based on LIBOR. If interest rates for the portion of our long-term debt based on variable rates had averaged 10% more for the year ended December 31, 2008, interest expense would have increased approximately $70,000.

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Item 8. Financial Statements and Supplementary Data

          REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota

We have audited the accompanying consolidated balance sheet of New Ulm Telecom, Inc. (a Minnesota corporation) and subsidiaries as of December 31, 2008, and the related consolidated statements of income, stockholders’ equity and cash flows for the year ended December 31, 2008. New Ulm Telecom, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of New Ulm Telecom, Inc. and subsidiaries as of December 31, 2008, and the results of their operations and their cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), New Ulm Telecom, Inc.’s internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 30, 2009 expressed an adverse opinion.

/s/ Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
March 30, 2009

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To the Shareholders and Board of Directors
New Ulm Telecom, Inc.
New Ulm, Minnesota

We have audited the accompanying consolidated balance sheet of New Ulm Telecom, Inc. (a Minnesota corporation) and subsidiaries as of December 31, 2007, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2007. New Ulm Telecom Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Hector Communications Corporation, which is accounted for by the equity method of accounting. The investment in Hector Communications Corporation was $18,699,104 at December 31, 2007 and the equity in its net income was $536,504 and $162,600 for each of the two years in the period ended December 31, 2007. The financial statements of Hector Communications Corporation were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amount included for Hector Communications Corporation is based solely on the report of the other auditors.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of New Ulm Telecom, Inc. and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for each of the year ends in the two-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

/s/ Kiesling Associates LLP
West Des Moines, Iowa
March 14, 2008

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

 

 

ASSETS


 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

3,320,510

 

$

9,510,309

 

Receivables, Net of Allowance for Doubtful Accounts of $449,500 and $384,477

 

 

2,334,746

 

 

1,036,911

 

HTC Escrow Receivable

 

 

1,158,412

 

 

 

Income Taxes Receivable

 

 

 

 

458,442

 

Materials, Supplies, and Inventories

 

 

1,132,009

 

 

362,884

 

Deferred Income Taxes

 

 

1,070,103

 

 

 

Prepaid Expenses

 

 

358,372

 

 

280,848

 

Total Current Assets

 

 

9,374,152

 

 

11,649,394

 

 

 

 

 

 

 

 

 

INVESTMENTS AND OTHER ASSETS:

 

 

 

 

 

 

 

Goodwill

 

 

29,516,277

 

 

3,218,906

 

Intangibles

 

 

26,017,128

 

 

17,275

 

Hector Investment

 

 

18,509,695

 

 

18,699,104

 

Other Investments

 

 

6,379,707

 

 

1,553,519

 

Deferred Charges and Other Assets

 

 

349,857

 

 

1,114,964

 

Total Investments and Other Assets

 

 

80,772,664

 

 

24,603,768

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

Telecommunications Plant

 

 

86,215,098

 

 

63,309,122

 

Other Property

 

 

3,844,092

 

 

3,173,127

 

Video Plant

 

 

3,909,314

 

 

2,656,683

 

Total Property, Plant and Equipment

 

 

93,968,504

 

 

69,138,932

 

Less Accumulated Depreciation

 

 

53,521,666

 

 

46,339,199

 

Net Property, Plant and Equipment

 

 

40,446,838

 

 

22,799,733

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

130,593,654

 

$

59,052,895

 

The accompanying notes are an integral part of these consolidated financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 2008 AND 2007

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY


 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current Portion of Long-Term Debt

 

$

519,003

 

$

27,472

 

Accounts Payable

 

 

1,550,877

 

 

1,515,996

 

Accrued Income Taxes

 

 

1,570,860

 

 

 

Other Accrued Taxes

 

 

186,674

 

 

88,342

 

Deferred Compensation

 

 

914,338

 

 

 

Other Accrued Liabilities

 

 

2,233,124

 

 

727,971

 

Total Current Liabilities

 

 

6,974,876

 

 

2,359,781

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, Less Current Portion

 

 

51,251,825

 

 

61,443

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

Loan Guarantees

 

 

2,270,153

 

 

328,336

 

Deferred Income Taxes

 

 

13,334,880

 

 

3,018,684

 

Other Accrued Liabilities

 

 

191,988

 

 

 

Deferred Compensation

 

 

2,493,237

 

 

 

Financial Derivative Instruments

 

 

2,374,793

 

 

 

Total Noncurrent Liabilities

 

 

20,665,051

 

 

3,347,020

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Accumulated Other Comprehensive Income (Loss)

 

 

(2,229,103

)

 

 

Retained Earnings

 

 

45,405,280

 

 

44,758,926

 

Total Stockholders’ Equity

 

 

51,701,902

 

 

53,284,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

130,593,654

 

$

59,052,895

 

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

 

 

 

 

 

 

 

 

 

 

                     

 

 

2008

 

2007

 

2006

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

Local Network

 

$

7,386,727

 

$

3,865,088

 

$

3,945,143

 

Network Access

 

 

14,555,198

 

 

5,891,920

 

 

6,380,661

 

Directory Advertising, Billing and Other Services

 

 

1,550,103

 

 

752,815

 

 

485,060

 

Video Services

 

 

4,426,531

 

 

2,334,580

 

 

2,096,670

 

Internet Services

 

 

2,548,751

 

 

1,690,225

 

 

1,558,687

 

Other Nonregulated Services

 

 

4,827,021

 

 

2,766,308

 

 

2,416,013

 

Total Operating Revenues

 

 

35,294,331

 

 

17,300,936

 

 

16,882,234

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

Plant Operations, Excluding Depreciation and Amortization

 

$

5,666,472

 

$

2,511,302

 

$

2,457,050

 

Cost of Video Services

 

 

3,680,884

 

 

1,689,616

 

 

1,484,890

 

Cost of Internet Services

 

 

1,228,491

 

 

597,465

 

 

595,501

 

Cost of Other Nonregulated Services

 

 

2,646,087

 

 

1,518,707

 

 

1,157,547

 

Depreciation and Amortization

 

 

8,982,205

 

 

3,893,777

 

 

4,120,673

 

Selling, General and Administrative

 

 

7,089,864

 

 

4,028,701

 

 

3,715,457

 

Total Operating Expenses

 

 

29,294,003

 

 

14,239,568

 

 

13,531,118

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

6,000,328

 

 

3,061,368

 

 

3,351,116

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

 

 

 

Gain on Sale of Cellular Investment

 

 

5,123,797

 

 

3,116,624

 

 

50,152,885

 

Equity in Earnings of Hector Investment

 

 

625,981

 

 

536,504

 

 

162,600

 

Interest and Dividend Income

 

 

498,727

 

 

895,111

 

 

619,439

 

Interest During Construction

 

 

145,471

 

 

 

 

29,858

 

Gain (Loss) on Disposal of Assets

 

 

22,321

 

 

 

 

(32,836

)

Equity in Earnings of Cellular Investment

 

 

 

 

 

 

5,925,389

 

Interest Expense

 

 

(3,317,978

)

 

(32,215

)

 

(807,655

)

Impairment of Goodwill

 

 

(2,291,000

)

 

 

 

 

Loss on Sale of Marketable Securities

 

 

(162,999

)

 

 

 

 

Other Investment Income

 

 

40,105

 

 

73,220

 

 

46,389

 

Abandoned Acquisition Costs

 

 

 

 

(5,787

)

 

(30,697

)

Total Other Income (Expenses)

 

 

684,425

 

 

4,583,457

 

 

56,065,372

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

6,684,753

 

 

7,644,825

 

 

59,416,488

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAXES

 

 

3,992,227

 

 

3,061,853

 

 

24,305,283

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

2,692,526

 

$

4,582,972

 

$

35,111,205

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME PER SHARE

 

$

0.53

 

$

0.90

 

$

6.86

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.40

 

$

0.40

 

$

3.11

 

The accompanying notes are an integral part of these consolidated financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total
Stockholders’
Equity

 

 

 

Common Stock

 

 

Retained
Earnings

 

 

 

 

Shares

 

Amount

 

 

 

 

 

BALANCE on December 31, 2005

 

 

5,115,435

 

$

8,525,725

 

$

 

$

23,019,926

 

$

31,545,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

35,111,205

 

 

35,111,205

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(15,909,003

)

 

(15,909,003

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2006

 

 

5,115,435

 

 

8,525,725

 

 

 

 

42,222,128

 

 

50,747,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

4,582,972

 

 

4,582,972

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(2,046,174

)

 

(2,046,174

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2007

 

 

5,115,435

 

 

8,525,725

 

 

 

 

44,758,926

 

 

53,284,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

2,692,526

 

 

2,692,526

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(2,046,172

)

 

(2,046,172

)

Unrealized Gains (Losses) of Equity Method Investee

 

 

 

 

 

 

 

 

(815,390

)

 

 

 

 

(815,390

)

Unrealized Gains (Losses) on Interest Rate Swaps, Net of Deferred Income Taxes

 

 

 

 

 

 

 

 

(1,413,713

)

 

 

 

 

(1,413,713

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2008

 

 

5,115,435

 

$

8,525,725

 

$

(2,229,103

)

$

45,405,280

 

$

51,701,902

 

The accompanying notes are an integral part of these consolidated financial statements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,692,526

 

$

4,582,972

 

$

35,111,205

 

Adjustments to Reconcile Net Income to Net Cash

 

 

 

 

 

 

 

 

 

 

Provided by (Used in) Operating Activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

9,021,128

 

 

3,893,777

 

 

4,120,673

 

Undistributed Earnings of Cellular Investment

 

 

 

 

 

 

(3,197,149

)

Gain on Sale of Celluar Investment

 

 

(5,123,797

)

 

(3,116,624

)

 

(50,152,885

)

Impairment of Goodwill

 

 

2,291,000

 

 

 

 

 

Undistributed Earnings of Hector Investment

 

 

(625,981

)

 

(536,504

)

 

(162,600

)

(Gain) Loss on Disposal of Assets

 

 

(22,321

)

 

 

 

32,836

 

Loss on Sale of Securities

 

 

162,999

 

 

 

 

 

Deferred Income Taxes

 

 

(756,860

)

 

(225,450

)

 

(2,623,784

)

Changes in Assets and Liabilities, net of Effects of Acquisition:

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

(330,295

)

 

300,456

 

 

(280,193

)

Income Taxes Receivable

 

 

1,023,421

 

 

 

 

 

Inventories

 

 

(72,398

)

 

(123,177

)

 

12,361

 

Prepaid Expenses

 

 

166,233

 

 

(73,921

)

 

50,858

 

Deferred Charges

 

 

1,007,121

 

 

(1,103,024

)

 

 

Accounts Payable

 

 

(1,562,377

)

 

1,265,920

 

 

(304,182

)

Accrued Income Taxes

 

 

1,570,860

 

 

(22,850,482

)

 

21,718,046

 

Other Accrued Taxes

 

 

8,887

 

 

11,514

 

 

(1,989

)

Other Accrued Liabilities

 

 

880,923

 

 

12,347

 

 

39,671

 

Deferred Compensation

 

 

(1,078,106

)

 

 

 

 

Net Cash Provided By (Used In) Operating Activities

 

 

9,252,963

 

 

(17,962,196

)

 

4,362,868

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Additions to Property, Plant and Equipment, Net

 

 

(4,109,769

)

 

(4,029,073

)

 

(1,966,156

)

Purchase of HTC (2008); Hector (2006)

 

 

(65,900,719

)

 

 

 

(18,000,000

)

Proceeds from Sale of Cellular Investment

 

 

5,123,797

 

 

3,116,624

 

 

74,318,762

 

HTC Escrow Receivable

 

 

(1,158,412

)

 

 

 

 

Proceeds from Disposal of Assets

 

 

23,500

 

 

 

 

 

Proceeds from Sale of Marketable Securities

 

 

1,454,231

 

 

 

 

 

Other, Net

 

 

(238,666

)

 

(9,362

)

 

(47,234

)

Net Cash Provided By (Used In) Investing Activities

 

 

(64,806,038

)

 

(921,811

)

 

54,305,372

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Principal Payments of Long-Term Debt

 

 

(8,018,087

)

 

(17,217

)

 

(15,008,294

)

Loan Origination Fees

 

 

(272,465

)

 

 

 

 

Issuance of Long-Term Debt

 

 

59,700,000

 

 

 

 

 

Dividends Paid

 

 

(2,046,172

)

 

(2,046,174

)

 

(15,909,003

)

Net Cash Provided by (Used In) Financing Activities

 

 

49,363,276

 

 

(2,063,391

)

 

(30,917,297

)

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(6,189,799

)

 

(20,947,398

)

 

27,750,943

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS at Beginning of Year

 

 

9,510,309

 

 

30,457,707

 

 

2,706,764

 

CASH AND CASH EQUIVALENTS at End of Year

 

$

3,320,510

 

$

9,510,309

 

$

30,457,707

 

The accompanying notes are an integral part of these consolidated financial statements.

44


Table of Contents

 

NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

New Ulm Telecom, Inc.’s (Company) principal line of business is providing local telephone service, Internet, digital video, and access to long-distance telephone service through local exchange networks. The Company owns and operates four independent telephone companies serving nine communities in southern Minnesota, one community in Iowa and the adjacent rural areas, two competitive local exchange carriers (CLECs), and operates cable television systems in ten communities. The Company also has investments (See “Investments and Other Assets” in this Note to the Financial Statements).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions have been eliminated in consolidation.

Accounting Estimates

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the operating period. Actual results could differ from those estimates.

Cash Equivalents

All highly liquid investments (primarily US Government Bonds and Agency Bonds) with a maturity of three months or less at the time of purchase are considered cash equivalents.

Receivables

Receivables are stated at the amounts the Company expects to collect from outstanding balances. The Company provides for probable uncollectible amounts through charges to earnings and credits to the valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through charges to the valuation allowance and credits to receivable accounts.

Materials, Supplies and Inventories

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

Property, Plant and Equipment

Property, plant and equipment are recorded at original cost. Additions, improvements or major renewals are capitalized. When telecommunications assets are sold, retired or otherwise disposed of in the ordinary course of business, the cost, less salvage, is charged to accumulated depreciation and the original cost is credited to the asset accounts. Any gains or losses on non-telecommunications property and equipment retirements are reflected in the current year operations.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Recoverability of Long-Lived Assets

The Company reviews its long-lived assets annually or when events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Company determines potential impairment by comparing the carrying value of its assets with the sum of the undiscounted cash flows expected to be provided by operating and eventually disposing of the asset. Should the sum of the expected future net cash flows be less than carrying values, the Company would determine whether an impairment loss should be recognized. No impairment losses have been identified in the financial statements.

Investments and Other Assets

The Company is an investor in several partnerships and limited liability corporations The Company uses the equity method of accounting for these investments, which reflects original cost and recognition of the Company’s share of operating income or losses from the respective operations. The Company has investments in FiberComm, LLC, Hector Communications Corporation, SHAL Networks, Inc., SHAL, LLC., Direct Communications, En-Tel Communications, LLC, Independent Emergency Services, LLC, and Broadband Visions, LLC. The Company had an investment in Midwest Wireless Holdings, L.L.C. (MWH) (prior to its October 2, 2006 sale to Alltel).

Long-term investments in other companies that are not intended for resale or are not readily marketable are valued at the lower of cost or net realizable value.

Goodwill and Intangible Assets

The Company reviews its goodwill and intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, in accordance with SFAS No. 142 Goodwill and Other Intangibles.

The test for goodwill impairment is a two-step process. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; thus, the second step of the impairment testing is unnecessary. The second step, used to measure the amount of impairment loss, compares the implied value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. In accordance with SFAS 142, intangible assets determined to have an indefinite useful life are not amortized. Intangible assets with a determinable life are amortized over the useful life. See Note 5 to the Consolidated Financial Statements of this Form 10-K for further details.

Revenue Recognition

Revenues are recognized when earned, regardless of the period in which they are billed. Interstate network access revenues are received 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, each of these deliverables is accounted for separately. 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.

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Table of Contents

 

NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Interest During Construction

The Company includes in its telecommunications plant account an average cost of debt used for the construction of the plant.

Income Taxes and Investment Tax Credits

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Significant components of the Company’s deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnerships and intangible assets due to the differences between book and tax bases. The Company’s effective income tax rate is higher than the U.S. rate due to the effect of state income taxes and the impairment of goodwill in 2008.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109. As required by FIN 48, the Company recognized the financial statement benefit of tax positions only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

At the adoption date of January 1, 2007, the Company had no unrecognized tax benefits that needed to be adjusted. The Company recognizes interest and penalties accrued on unrecognized tax benefits, as well as interest received from favorable tax settlements, within income tax expense. At December 31, 2008, the Company had approximately $145,500 of net unrecognized tax benefits that, if recognized, would favorably affect the income tax provision when recorded. As of December 31, 2007, and December 31, 2008, the Company had no accrual for interest or penalties related to income tax matters. The Company is primarily subject to U.S., Minnesota and Iowa income tax. Tax years subsequent to 2004 remain open to examination by U.S. federal and state tax authorities.

Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash investments and receivables. The Company places its cash investments with high credit quality financial institutions in accounts which, at times, may exceed the federally insured limits. The Company has not experienced any losses in these accounts and does not believe it is exposed to any significant credit risk. Concentrations of credit risk with respect to trade receivables are limited due to the Company’s large number of customers.

Collection of Taxes from Customers

Sales, excise, and other taxes are imposed on most of the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.

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Table of Contents

 

NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Fair Value Measurements

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, for its financial assets and liabilities. The Company’s adoption of SFAS No. 157 did not affect its financial position, results of operations, liquidity or disclosures, as there were no financial assets or liabilities that are measured at fair value on a recurring basis as of January 1, 2008. In accordance with FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, the Company elected to defer until January 1, 2009, the adoption of SFAS No. 157 for all non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. This includes goodwill and non-financial long-lived assets that are measured at fair value in impairment testing. The Company cannot predict the impact on the Company’s financial position, results of operations or liquidity due to the adoption of SFAS No. 157 for those non-financial assets and liabilities within the scope of FSP 157-2.

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 outstanding of 5,115,435.

NOTE 2 – PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment for December 31, 2008 and 2007 includes the following:

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Telecommunications Plant:

 

 

 

 

 

 

 

Land

 

$

422,575

 

$

176,783

 

Buildings

 

 

6,381,340

 

 

2,163,270

 

Other Support Assets

 

 

5,721,205

 

 

3,538,097

 

Central Office Equipment

 

 

30,943,925

 

 

29,071,543

 

Cable and Wire Facilities

 

 

38,649,645

 

 

25,989,689

 

Other Plant and Equipment

 

 

394,323

 

 

394,323

 

Plant Under Construction

 

 

3,702,083

 

 

1,975,417

 

 

 

 

86,215,098

 

 

63,309,122

 

 

 

 

 

 

 

 

 

Other Property

 

 

3,844,092

 

 

3,173,127

 

Video Plant

 

 

3,909,314

 

 

2,656,683

 

 

 

 

 

 

 

 

 

Total Property, Plant and Equipment

 

$

93,968,504

 

$

69,138,932

 

Depreciation is computed using the straight-line method based on estimated service or remaining useful lives of the various classes of depreciable assets. Depreciation expense was $7,182,058, $3,891,725 and $4,118,621 in 2008, 2007, and 2006. The composite depreciation rates on telecommunications plant and equipment for the three years ended December 31, 2008, 2007 and 2006 were 7.6%, 5.9%, and 6.5%. Other property is depreciated over estimated useful lives of three to fifteen years.

NOTE 3 – ACQUISITION OF HUTCHINSON TELEPHONE COMPANY

On January 4, 2008, New Ulm Telecom, Inc. completed the acquisition of Hutchinson Telephone Company for approximately $83 million pursuant to the terms of the Agreement and Plan of Merger dated as of August 3, 2007, as amended. The transaction was structured as a reverse triangular merger under which a newly formed subsidiary of New Ulm merged into HTC at closing, with HTC continuing as a subsidiary of New Ulm. The acquisition has resulted in a combined company that provides phone, video and Internet services with approximately 50,000 connections in a number of Minnesota and Iowa communities.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Under the Merger Agreement, approximately $72.0 million was distributed to former shareholders of HTC immediately. An additional $5.7 million was placed in an escrow account covering (i) indemnification of New Ulm in the amount of $5.2 million covering the representations and warranties of HTC for a period of 15 months from closing and (ii) a “True-Up Reserve” and “Shareholder Fund Amount” in the aggregate amount of $500,000.

The remaining HTC escrow receivable of $1,158,412 is shown on the Balance Sheet in current assets, and is in dispute related to the working capital reconciliation from the acquisition of HTC. The Company expects to collect the full amount.

Statement of Financial Accounting Standards No. 141, “Business Combinations,” establishes criteria for determining whether intangible assets should be recognized separately from goodwill. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” provides that goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment on at least an annual basis.

Operations for the Company reflect business activity from HTC from date of acquisition on January 4, 2008.

The total allocation of the net purchase price of HTC based on an independent valuation is shown below:

 

 

 

 

 

Current Assets

 

$

20,949,280

 

Property, Plant, and Equipment

 

 

19,829,176

 

Investments

 

 

3,687,200

 

Customer Relationship Intangible

 

 

19,200,000

 

Trade Name Intangible

 

 

800,000

 

Regulatory Rights Intangible

 

 

4,000,000

 

Video Franchise Intangible

 

 

3,000,000

 

Non-Competition Agreement Intangible

 

 

800,000

 

Excess Costs Over Net Assets Acquired (Goodwill)

 

 

28,588,372

 

Other Assets

 

 

1,030,689

 

Current Liabilities

 

 

(1,611,524

)

Deferred Liabilities

 

 

(17,504,769

)

Total Purchase Price

 

 

82,768,424

 

Less Cash and Cash Equivalents Acquired

 

 

(12,789,488

)

Less Deferred Compensation Agreements

 

 

(4,078,217

)

 

 

 

 

 

Cash Paid for Acquisition

 

$

65,900,719

 

The acquisition was accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities were recorded at estimated fair values as of the date of acquisition. Based upon the Company’s final purchase price allocation, the excess of the purchase price and acquisition costs over the fair value of the net identifiable tangible assets acquired was approximately $56 million. The Company recorded intangible assets related to the acquired company’s customer relationships of $19,200,000, trade names of $800,000, regulatory rights of $4,000,000, video franchises of $3,000,000 and a non-compete agreement of $800,000. The estimated useful life of the customer relationships intangible asset is 14 years, regulatory rights intangible asset is 15 years, and non-compete agreement intangible asset is 5 years. The trade names intangible asset and video franchises intangible asset have indefinite lives and are not subject to amortization. The Company cannot deduct the goodwill on this transaction for income tax purposes.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Pro Forma Financial Information on the Acquisition of HTC

The following pro forma results presented are for 2007 as if the HTC acquisition had been completed on January 1, 2007. The Company is providing these unaudited pro forma condensed Statements of Income to facilitate analysis of the 2008 Statements of Income. No pro forma results have been presented for 2008 as the closing occurred on January 4, 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TWELVE MONTHS ENDED DECEMBER 31, 2007

 

 

 

New Ulm

 

Hutchinson
Telephone Co.

 

Pro Forma
Adjustments

 

New Ulm
Telecom, Inc.
Pro Forma
Combined

 

Revenues

 

$

17,300,936

 

$

16,565,919

 

$

 

$

33,866,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

4,582,972

 

$

3,429,436

 

$

(2,963,000

) *

$

5,049,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Net Income Per Share

 

$

0.90

 

$

0.67

 

$

(0.58

)

$

0.99

 


 

 

 

 

*

These adjustments include Amortization and Interest Expense, net of the related tax benefit.

NOTE 4 - CELLULAR INVESTMENT

Cellular investment included a 9.88% ownership interest in units of MWH at December 31, 2005 (the Company’s ownership interest in MWH was sold to Alltel on October 2, 2006). This entity provided cellular phone service to southern Minnesota, northwestern Iowa and southwestern Wisconsin. The difference between the carrying amount of the MWH investment and the underlying equity in the net assets of MWH at the time of purchase of ownership interests was $4,890,389 as of December 31, 2005, net of accumulated amortization of $156,391.

Income and cash distributions from MWH were as follows for the year ended December 31, 2006:

 

 

 

 

 

Income Recorded

 

$

5,925,389

 

Cash Distributions

 

 

2,728,240

 

The following is summarized financial information from MWH as of and for the period ended October 2, 2006:

 

 

 

 

 

Current Assets

 

$

36,130,833

 

Noncurrent Assets

 

 

356,934,252

 

Current Liabilities

 

 

118,687,337

 

Noncurrent Liabilities

 

 

3,518,305

 

Members’ Equity

 

 

270,859,443

 

Revenues

 

 

219,577,883

 

Operating Income

 

 

72,917,668

 

Net Income

 

 

60,174,958

 

In November 2005, Alltel Corporation (Alltel) entered into a definitive agreement to purchase MWH licenses, customers and network assets for $1.075 billion in cash (see Note 17 to the Consolidated Financial Statements of this Form 10-K).

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 5 - GOODWILL AND INTANGIBLES

The Company accounts for goodwill and other intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the provisions of this accounting standard, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment on at least an annual basis and when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. At December 31, 2008, the Company’s goodwill totaled $29,516,277 of which $3,218,905 is related to wireline acquisitions made in previous years. Goodwill was increased by $28,588,372 during 2008 for the acquisition of HTC, and decreased $2,291,000 for impairment of goodwill.

As required by Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill and other intangible assets with indefinite lives are not amortized, but are tested for impairment on an annual basis, or earlier if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. Such circumstances include but are not limited to (1) a significant adverse change in the business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. Determining an impairment involves estimating the fair value of a reporting unit using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.

During 2008, the Company monitored events and changes in circumstances that could result in an impairment of goodwill. Due to the changes in financial and credit markets, and overall valuations of telecommunications properties, the Company tested its goodwill in the fourth quarter of 2008. As a result of this testing, the Company determined that the carrying value of the reporting unit exceeded the fair value and recorded a non-cash impairment charge of $2,291,000. The non-cash impairment charge did not and is not expected to have any impact on the Company’s operations.

The Company’s intangible assets subject to amortization consist of acquired customer relationships, regulatory rights, and noncompetition agreement. Amortization expense was $1,839,070, $2,052, and $2,052 for 2008, 2007, and 2006. Amortization expense for the next five years is estimated to be:

 

 

 

 

 

2009

 

$

1,800,147

 

2010

 

 

1,800,147

 

2011

 

 

1,800,147

 

2012

 

 

1,800,147

 

2013

 

 

1,640,147

 

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Intangible assets with definite lives are amortized over useful lives. The components of the Company’s identified intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

Useful
lives

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers Relationships

 

14-15 yrs

 

$

19,230,785

 

 

1,386,990

 

$

30,785

 

$

13,510

 

Regulatory Rights

 

15 yrs

 

 

4,000,000

 

 

266,667

 

 

 

 

 

Non-Competition Agreement

 

5 yrs

 

 

800,000

 

 

160,000

 

 

 

 

 

Indefinitely-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

 

 

 

800,000

 

 

 

 

 

 

 

Video Franchise

 

 

 

 

3,000,000

 

 

 

 

 

 

 

Total

 

 

 

$

27,830,785

 

$

1,813,657

 

$

30,785

 

$

13,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net identified Intangible Assets

 

 

 

 

 

 

$

26,017,128

 

 

 

 

$

17,275

 

NOTE 6 - LONG-TERM DEBT

Substantially all assets of the Company are pledged as security for the long-term debt under certain loan agreements with CoBank, ACB. These mortgage notes are to be repaid in quarterly installments, covering principal and interest, beginning in the year of issue and maturing on December 31, 2014.

The security and loan agreements underlying the CoBank, ACB notes contained certain restrictions on distributions to shareholders, investment in, or loans to, others. In addition, the Company is required to maintain certain financial ratios for total leverage, equity to total assets, and debt service. During the first three quarters of 2008, the specified financial ratios outlined in the loan agreements were achieved. For the period ended December 31, 2008, the Company did not meet its “equity to total asset ratio” requirement. The company has obtained a waiver from CoBank, ACB for this covenant for the December 31, 2008 period. All other specified financial ratios outlined in the loan agreements were achieved at December 31, 2008.

Secured Credit Facility:

In connection with its acquisition of HTC, New Ulm and HTC as New Ulm’s new subsidiary entered into a credit facility with CoBank, ACB. Under the credit facility, New Ulm and HTC entered into separate Master Loan Agreements (MLA) and a series of supplements to the respective MLAs.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Under the terms of the two MLAs and supplements, New Ulm and HTC have borrowed $59,700,000 and entered into promissory notes on the following terms:

 

 

 

New Ulm

 

 

 

● $15,000,000 term note with interest payable monthly. Twelve quarterly principal payments of $125,000 are due commencing March 31, 2008 through December 31, 2010. Sixteen quarterly principal payments of $250,000 are due commencing March 31, 2011 through December 31, 2014. A final balloon payment of $9,500,000 is due at maturity of the note on December 31, 2014.

 

 

 

● $10,000,000 revolving note with interest payable monthly. Final maturity of the note is December 31, 2014.

 

 

 

Each New Ulm note initially bears interest at a “LIBOR Margin” rate equal to 2.50 percent over the applicable LIBOR rate. The LIBOR Margin decreases as New Ulm’s “Leverage Ratio” decreases.

 

 

 

Hutchinson Telephone Company

 

 

 

● $29,700,000 term note with interest payable monthly. Twenty quarterly principal payments of $609,500 are due commencing March 31, 2010 through December 31, 2014. A final balloon payment of $17,510,000 is due at maturity of the note on December 31, 2014.

 

 

 

● $2,000,000 revolving note with interest payable monthly. Final maturity of the note is December 31, 2014.

 

 

 

● $3,000,000 term note with interest payable monthly. Final maturity of the note is April 3, 2008. This note has been paid off.

 

 

 

Each HTC note initially bore interest at a “LIBOR Margin” rate equal to 2.75 percent over the applicable LIBOR rate. The LIBOR Margin decreases as HTC’s “Leverage Ratio” decreases.

New Ulm and HTC and their respective subsidiaries also have entered into security agreements under which substantially all the assets of New Ulm, HTC and their respective subsidiaries have been pledged to CoBank for performance under the loans. In addition, New Ulm, HTC and their respective subsidiaries have guaranteed all the obligations under the credit facility.

The loan agreements also put restrictions on the ability of New Ulm to pay cash dividends to its shareholders, but New Ulm is allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if New Ulm’s “Total Leverage Ratio,” that is, the ratio of its “Indebtedness” to “EBITDA” (in each case as defined in the loan documents) is equal to or less than 3:50 to 1:00, and (b) in either case if New Ulm is not in default or potential default under the loan agreements.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

Long-term debt is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Secured seven-year reducing credit facility to CoBank, ACB, in quarterly installments of $125,000 (beginning in 2008 - refer to “Secured Credit Facility” for description of summary of installments due), plus a notional variable rate of interest through December 31, 2014.

 

$

14,500,000

 

$

 

 

 

 

 

 

 

 

 

Secured seven-year revolving credit facility to CoBank, ACB, with a notional variable rate of interest through December 31, 2014.

 

 

7,500,000

 

 

 

 

 

 

 

 

 

 

 

Secured seven-year reducing revolving credit facility to CoBank, ACB in quarterly installments of $609,500 (beginning in 2010 - refer to “Secured Credit Facility” for description of summary of installments due), plus a notional variable rate of interest through December 31, 2014.

 

 

29,700,000

 

 

 

 

 

 

 

 

 

 

 

Secured seven-year revolving credit facility to CoBank, ACB with a notional variable rate of interest through December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured ten-year note with the City of Redwood Falls payable semi-annually (beginning in 2002), at a fixed 5% interest rate maturing on January 1, 2012.

 

 

70,828

 

 

88,915

 

 

 

 

51,770,828

 

 

88,915

 

Less: Amount due within one year

 

 

519,003

 

 

27,472

 

Total Long Term Debt

 

$

51,251,825

 

$

61,443

 

As described in Note 7 to the Consolidated Financial Statements of this Form 10-K, the Company has entered into interest rate swaps that effectively fix the interest rates covering $45.0 million at a weighted average rate of 5.72% at December 31, 2008. The additional $11.2 million available under the credit facility remains subject to variable interest rates, with a current outstanding balance of $6.7 million, at an effective weighted average interest rate of 2.825% at December 31, 2008.

Required principal payments for the five years 2009 through 2013 are as follows:

 

 

 

 

 

2009

 

$

519,003

 

2010

 

$

2,957,965

 

2011

 

$

3,458,976

 

2012

 

$

3,448,883

 

2013

 

$

3,438,000

 

Cash payments for interest, net of amounts capitalized, were $3,222,283, $46,045, and $832,314 in 2008, 2007, and 2006.

NOTE 7 – INTEREST RATE SWAPS

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company generally uses variable-rate debt to finance its operations, capital expenditures and acquisitions. These variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company in consultation with its primary lender, CoBank, ACB determined it was prudent for the Company to limit the variability of a portion of its interest payments.

To meet this objective, both New Ulm and HTC entered into separate Interest Rate Swap Agreements with CoBank, ACB dated February 26, 2008. Under these Interest Rate Swap Agreements and subsequent swaps that each cover a specified notional dollar amount, New Ulm and HTC have changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of these interest rate swaps, the Company (either New Ulm or HTC) pays a fixed contractual interest rate and either (i) makes an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receives a payment if the LIBOR variable rate payment is above the contractual rate.

Pursuant to these Interest Rate Swap Agreements, the Company entered into interest rate swaps covering (i) $39.0 million of its aggregate indebtedness to CoBank, ACB effective March 19, 2008 and (ii) an additional $6.0 million of its aggregate indebtedness to CoBank, ACB effective June 23, 2008. These swaps effectively lock in the interest rate on (i) $6.0 million of variable-rate debt through March of 2011, (ii) $33.0 million of variable-rate debt through March 2013, (iii) $3.0 million of variable-rate debt through June of 2011, and (iv) $3.0 million of variable-rate debt through June 2013.

As of December 31, 2008, the Company had the following interest rate swaps in effect.

 

 

 

 

 

 

 

 

 

Borrower

 

Maturity Date

 

Notional Amount

 

Effective Interest Rate (1)

 

 

 

 

 

 

 

 

 

New Ulm

 

03/31/2011

 

$

2,000,000

 

4.92%: (LIBOR Rate of 2.67%, plus 2.25% LIBOR Margin)

 

 

 

 

 

 

 

 

New Ulm

 

03/31/2013

 

$

11,250,000

 

5.51%; (LIBOR Rate of 3.26%, plus 2.25% LIBOR Margin)

 

 

 

 

 

 

 

 

New Ulm

 

06/30/2011

 

$

3,000,000

 

6.40%; (LIBOR Rate of 4.15%, plus 2.25% LIBOR Margin)

 

 

 

 

 

 

 

 

New Ulm

 

06/30/2013

 

$

3,000,000

 

6.79% (LIBOR Rate of 4.54% plus 2.25% LIBOR Margin)

 

 

 

 

 

 

 

 

HTC

 

03/31/2011

 

$

4,000,000

 

5.17% (LIBOR Rate of 2.67%, plus 2.50% LIBOR Margin)

 

 

 

 

 

 

 

 

HTC

 

03/31/2013

 

$

21,750,000

 

5.76%; (LIBOR Rate of 3.26%, plus 2.50% LIBOR Margin)

(1) As noted above in Secured Credit Facility, each note initially bears interest at a LIBOR rate determined by the maturity of the note, plus a “LIBOR Margin” rate equal to 2.25% over the applicable LIBOR rate for New Ulm and 2.50% in the case of HTC. The LIBOR Margin decreases as the borrower’s “Leverage Ratio” decreases. The “Current Effective Interest Rate” in the table reflects the rate the Company pays giving effect to the swaps.

These interest rate swaps qualify as cash flow hedges for accounting purposes under SFAS No. 133. The effect of these hedging transactions has been reflected in the financial statements for the period ending December 31, 2008, accounting for a net $1,413,713 unrealized loss reported in other comprehensive loss.

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Table of Contents

 

NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company determined the fair value of its interest rate swap agreements at December 31, 2008 based on valuations received from CoBank, ACB. The fair value indicates an estimated amount the Company would receive if the contracts were canceled or transferred to other parties. At December 31, 2008, the fair value loss on the swaps was $2,374,793, which has been recorded net of deferred tax benefit of $961,080, for the $1,413,713 in other comprehensive loss.

NOTE 8 - INCOME TAXES AND INVESTMENT TAX CREDITS

Income taxes reflected in the Consolidated Statements of Income consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

Taxes currently payable

 

 

 

 

 

 

 

 

 

 

Federal

 

 

3,593,900

 

 

2,655,807

 

 

20,718,269

 

State

 

 

1,155,187

 

 

631,496

 

 

6,210,798

 

Deferred Income Taxes

 

 

(756,860

)

 

(225,450

)

 

(2,623,784

)

 

 

 

 

 

 

 

 

 

 

 

Total Income Tax Expense

 

 

3,992,227

 

 

3,061,853

 

 

24,305,283

 

A change in the estimated amount provided for the 2006 corporate income taxes has been recorded in the estimated income taxes for the year ended December 31, 2007 and is reflected in the 2007 tax rate. The change occurred as a result of a reduced state tax liability (net of federal tax) of approximately $632,000 or $0.12 per share, as reported on the 2006 tax return as filed.

Effective January 1, 2007, New Ulm Telecom, Inc. adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109. As required by FIN 48, the financial statement benefit of a tax position is recognized only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

At the adoption date of January 1, 2007, the Company had no unrecognized tax benefits for which adjustments were needed. The Company recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. At the adoption date of January 1, 2007, the Company recognized no interest or penalties related to uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Balance Beginning of Year

 

$

155,616

 

$

 

Gross Increases

 

 

 

 

 

HTC Acquisition

 

 

26,524

 

 

 

Current Period Tax Positions

 

 

48,400

 

 

155,616

 

Gross Decreases

 

 

 

 

 

Prior Period Tax Positions

 

 

(85,108

)

 

 

Current Period Tax Positions

 

 

 

 

 

Settlements

 

 

 

 

 

Lapse of Statute of Limitations

 

 

 

 

 

Balance at End of Year

 

$

145,432

 

$

155,616

 

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Included in the balance at December 31, 2008 are unrecognized tax benefits related to positions taken on state income tax return filings and amounts based on the tax treatment of an installment sale.

At the adoption date of January 1, 2007, the Company had no unrecognized tax benefits that, if recognized, would affect the effective tax rate. As of December 31, 2008 and 2007 the Company had $145,432 and $155,616 of unrecognized tax benefits respectively that, if recognized, would affect the effective tax rate.

The Company is primarily subject to U.S., Minnesota and Iowa income tax. Tax years subsequent to 2004 remain open to examination by U.S. federal and state tax authorities. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. Currently, the Internal Revenue Service is examining the Company’s 2006 and 2007 Federal tax returns. The examination of these returns is expected to be completed in the second quarter of 2009. As of December 31, 2008, the Company had no accrual for interest or penalties related to income tax matters.

The differences between the statutory federal tax rate and the effective tax rate were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

Statutory Tax Rate

 

 

35.00

%

 

35.0

%

 

35.0

%

Effect of:

 

 

 

 

 

 

 

 

 

 

Surtax exemption

 

 

(1.0

)

 

(1.0

)

 

 

State income taxes net of federal tax benefit

 

 

10.09

 

 

6.4

 

 

5.6

 

Impairment of Goodwill

 

 

11.65

 

 

 

 

 

Other, net

 

 

3.98

 

 

(0.4

)

 

0.3

 

Effective tax rate

 

 

59.72

%

 

40.0

%

 

40.9

%

Deferred income taxes and unrecognized tax benefits reflected in the Consolidated Balance Sheets are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

2007

 

2006

 

Current Deferred Tax (Assets) / Liablities

 

 

 

 

 

 

 

 

 

 

Accrued Expenses

 

$

(403,873

)

$

 

$

 

Deferred Compensation

 

 

(359,714

)

 

 

 

 

Other

 

 

(306,516

)

 

 

 

 

Subtotal Current Deferred Tax (Assets) / Liabilities

 

 

(1,070,103

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Current Deferred Tax (Assets) / Liablities

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

5,343,249

 

 

3,485,432

 

 

3,406,934

 

Intangible Assets

 

 

8,931,787

 

 

 

 

 

Unrealized Losses on Interest Rate Swaps

 

 

(961,080

)

 

 

 

 

Deferred Compensation

 

 

(1,004,900

)

 

 

 

 

Partnership Basis

 

 

880,392

 

 

(259,776

)

 

82,300

 

Other

 

 

 

 

(362,589

)

 

(245,100

)

Subtotal Deferred Tax (Assets) / Liabilities Long-Term

 

 

13,189,448

 

 

2,863,067

 

 

3,244,134

 

Unrecognized Tax Benefit

 

 

145,432

 

 

155,616

 

 

 

Total

 

 

12,264,777

 

$

3,018,683

 

$

3,244,134

 

Cash payments for income taxes, net of refunds, were $2,484,485, $26,137,785, and $5,221,021, in 2008, 2007, and 2006.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 - RETIREMENT PLAN

The Company has a 401(k) employee savings plan in effect for those employees who meet certain age and service requirements. The Company’s contribution to its 401(k) employee savings plan was $426,266, $226,201, and $215,231 in 2008, 2007 and 2006.

NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS

It was not practicable to estimate a fair value for investments in companies carried on the cost basis due to a lack of quoted market prices. The Company conducted an evaluation of its investments in all of its companies in connection with the preparation of its audited financial statements. The goodwill impairment is described in Note 5 to the Consolidated Financial Statements of this Form 10-K. After giving effect to this adjustment, the Company believes the carrying value of its investments is not impaired.

The fair value of the Company’s long-term debt is estimated based on the discounted value of the future cash flows expected to be paid using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value.

The Company’s financial instruments also include cash equivalents, trade accounts receivable, and accounts payable for which current carrying amounts approximate fair market value.

NOTE 11 – FAIR VALUE MEASUREMENTS

As discussed in Note 1, the Company adopted SFAS No. 157 on January 1, 2008, which among other things, requires enhanced disclosures about assets and liabilities measured at fair value. Adoption of SFAS No. 157 was limited to financial assets and liabilities, and primarily relates to the Company’s interest rate swap agreements.

SFAS No. 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

 

 

 

Level 1:

 

Inputs are quoted prices in active markets for identical assets or liabilities.

 

Level 2:

 

Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market–corroborated inputs which are derived principally from or corroborated by observable market data.

 

Level 3:

 

Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

In 2008, the Company entered into interest rate swaps to manage its cash flow exposure to fluctuations in interest rates. These instruments were designated as cash flow hedges and were effective at mitigating the risk of fluctuations on interest rates in the market place. As a result, any gains or losses related to changes in the fair value of these derivatives are accounted for as a component of accumulated other comprehensive income for as long as the hedge remains effective.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Based on Level 2 Inputs on the interest rate swap agreements had incurred a loss of $2,374,793 at December 31, 2008.

NOTE 12 - COMMITMENTS

The Company’s capital budget for 2009 is approximately $6,000,000, which will be financed through internally generated funds. At December 31, 2008, the Company had signed a purchase agreement in the amount of $1,527,522 with a supplier for the purchase of an integrated business support systems/operations support systems solution. As of December 31, 2008, the Company had $1,227,522 remaining due on its commitment. This purchase will upgrade the current systems and offer enhanced operability and reporting functions.

NOTE 13 - NONCASH INVESTING ACTIVITIES

Noncash investing activities included $999,180, $107,780, and $152,460 during the years ended December 31, 2008, 2007 and 2006, relating to plant and equipment additions placed in service during 2008, 2007 and 2006, which are reflected in accounts payable at year end.

NOTE 14 – OTHER INVESTMENTS

The Company is a co-investor with other rural telephone companies in several partnerships and limited liability corporations. These joint ventures make it possible to offer certain services to customers, including digital video services and fiber optic transport services, that the Company could not afford to offer on its own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. The Company recognizes income and losses from these investments on the equity method of accounting. For a listing of the Company’s investments, see Note 20 – Segment Information of the Consolidated Financial Statements to this Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

Cost
and
Guarantees

 

Prior
Income
(Loss)

 

2008
Income
(Loss)

 

Cumulative
Distributions

 

Total

 

December 31,
2007
Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Equity Method Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

En-Tel

 

$

3,348,484

 

$

(3,152,761

)

$

(210,593

)

$

 

$

(14,870

)

$

 

SHAL, LLC

 

 

1,446,612

 

 

57,147

 

 

129,169

 

 

(723,000

)

 

1,132,306

 

 

 

SHAL Networks, Inc.

 

 

571,517

 

 

1,979,581

 

 

35,170

 

 

(1,300,000

)

 

1,286,268

 

 

 

Other Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,738,109

 

 

929,556

 

Other Non-Equity Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,237,894

 

 

623,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Other Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,379,707

 

$

1,553,519

 

The carrying value of SHAL, LLC, SHAL Networks, Inc. and IES exceed the underlying net assets by $943,781 as a result of the purchase price allocation.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 15 - GUARANTEES

On January 30, 2004, the Company guaranteed a portion of the indebtedness of FiberComm, LC in connection with the refinancing of a 15-year loan made by American State Bank to FiberComm, LC. The Company had recorded a liability of $375,000 in connection with this guarantee, which was the maximum potential liability under the terms of the guarantee.

The Company’s HTC subsidiary, which was acquired on January 4, 2008, has guaranteed several loans as set forth below:

 

 

 

Through HTC, the Company has a 33.33% ownership in SHAL Networks, Inc. and SHAL, LLC (collectively “SHAL”), which was formed to provide fiber optic cable facilities in Minnesota. The Company, along with the other members of SHAL, has agreed to guarantee portions of SHAL’s debt to Rural Telephone Finance Cooperative (RTFC). The Company would be required to pay guaranteed portions if SHAL cannot make payments or if the debt is called. At December 31, 2008, SHAL owed $5,205,070 on the guaranteed debt. The note is due in 2014. HTC has guaranteed 33.33% of the principal on this note, which was $1,735,023 at December 31, 2008. This guarantee has not been reflected on the Company’s financial statement.

 

 

 

Through HTC, the Company also has a 31.88% ownership in En-Tel Communications, LLC (En-Tel), which was formed to provide competitive local exchange services in the Willmar, Minnesota area. HTC, along with some of the other members of En-Tel, agreed to guarantee portions of En-Tel’s two debt obligations to the RTFC. HTC and the other members would be required to pay their respective guaranteed portions if En-Tel cannot make payments or if the debt is called. The first En-Tel note was entered into on November 13, 2000 in the amount of $12,138,889, and is due in 2015. At December 31, 2008, En-Tel owed $7,883,398 on this first note. HTC has guaranteed 25% of the principal of this note. The second En-Tel note was entered into on December 2, 2003 in the amount $5,500,000 and is due in 2018. At December 31, 2008, En-Tel owed $4,561,081 on this second note. HTC has guaranteed 50% of the principal of this note. As part of its purchase price allocation, the Company has recorded $1,895,153 as a liability related to the En-Tel guarantees.

NOTE 16 – DEFERRED COMPENSATION

The Company, due to the acquisition of HTC, has recorded other deferred compensation relating to the estimated present value of executive compensation payable to certain past executives of HTC.

Compensation over the next five years includes deferred wages, consulting fees, and a non-compete agreement totaling $2,365,166, and continuation of certain employee benefits.

NOTE 17 – SALE OF MIDWEST WIRELESS HOLDINGS LLC

Prior to the sale of MWH, the Company owned approximately 9.88% of MWH. In November 2005, MWH and Alltel entered into an agreement for Alltel to purchase MWH. The transaction was closed October 2, 2006 after the satisfaction of conditions and the receipt of regulatory approvals. Under the terms of the agreement, all of the members of MWH sold their membership interests to Alltel. Upon closing, New Ulm Telecom, Inc. received approximately 90% of the sale proceeds or approximately $74 million on October 6, 2006. Alltel delivered the other 10% to the escrow agent. New Ulm received its prorata share of the amount in escrow during April 2007, approximately $3.1 million, plus accrued interest; and January 2008, approximately $5.1 million, plus accrued interest.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 18 – COMPREHENSIVE INCOME (LOSS)

The Company’s comprehensive income (loss) includes two items in addition to net income (loss). The first is unrealized loss resulting from the Company’s one-third ownership of Hector Communications Corporation (HCC), and the resulting share of HCC’s other comprehensive income (loss). HCC’s comprehensive income (loss) differs from the “HCC investment income” reported on the Company’s Consolidated Statements of Income. The second item reflects the change in the unrealized gains (losses) of the interest rate swap agreements, net of deferred income taxes, which the Company has entered into with CoBank, ACB, covering $45.0 million of the Company’s indebtedness to CoBank, ACB, as described in Note 7 to the Consolidated Financial Statements of this Form 10-K.

The components of comprehensive income (loss) were comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2008

 

2007

 

2006

 

Net Income

 

$

2,692,526

 

$

4,582,972

 

$

35,111,205

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

Unrealized Gains (Losses) of Equity Method Investment

 

 

(815,390

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains (Losses) of

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements, Net of

 

 

 

 

 

 

 

 

 

 

Deferred Income Taxes

 

 

(1,413,713

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

$

463,423

 

$

4,582,972

 

$

35,111,205

 

NOTE 19 – INVESTMENT IN HECTOR COMMUNICATION CORPORATION (HCC)

On November 3, 2006, the Company acquired a one-third interest in HCC. HCC is equally owned by New Ulm Telecom, Inc., Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Each of the owners provides management and other operational services to HCC and its subsidiaries.

New Ulm Telecom, Inc.’s President and CEO, Mr. Bill Otis, has been named Chairman of the Board and President of HCC

Hector investment consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

Equity Investment

 

$

18,000,000

 

$

18,000,000

 

$

18,000,000

 

Loan Guarantee

 

 

 

 

 

 

2,133,333

 

Cumulative Income

 

 

1,325,085

 

 

699,104

 

 

162,600

 

Cumulative Other Comprehensive Income

 

 

(815,390

)

 

 

 

 

Cumulative Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

18,509,695

 

$

18,699,104

 

$

20,295,933

 

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Income from HCC was as follows for year ended December 31, 2008, December 31, 2007, and for the period from acquisition (November 3, 2006) to December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

Balance Beginning of Year

 

$

699,104

 

$

162,600

 

$

 

Current Income

 

 

625,981

 

 

536,504

 

 

162,600

 

Current Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Undistributed Earnings

 

$

1,325,085

 

$

699,104

 

$

162,600

 

The following is summarized financial information from HCC as of the year ended December 31, 2008, December 31, 2007, and for the period from acquisition (November 3, 2006) to December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

Current Assets

 

$

6,836,347

 

$

12,195,812

 

$

34,920,241

 

Noncurrent Assets

 

 

136,784,812

 

 

142,804,473

 

 

142,206,163

 

Current Liabilities

 

 

10,073,803

 

 

7,796,698

 

 

33,123,755

 

Noncurrent Liabilities

 

 

78,018,053

 

 

91,639,903

 

 

89,638,886

 

Stockholders’ Equity

 

 

55,529,303

 

 

55,563,684

 

 

54,363,763

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

28,871,947

 

 

30,484,910

 

 

5,295,962

 

Operating Income

 

 

6,644,057

 

 

7,186,478

 

 

1,571,100

 

Net Income

 

 

1,877,944

 

 

1,609,214

 

 

488,133

 

The audited financial statements of HCC are included in this Form 10-K.

NOTE 20 – SEGMENT INFORMATION

The Company and its subsidiaries are organized into three business segments as follows:

Telecom Segment

 

 

 

 

 

This segment contains the operations of:

 

 

 

 

The Company’s incumbent local exchange carriers (ILECs):

 

 

 

 

 

 

§

New Ulm Telecom, Inc. (New Ulm), the parent company;

 

 

 

 

 

 

§

Hutchinson Telephone Company (HTC), a wholly-owned subsidiary of New Ulm;

 

 

 

 

 

 

§

Western Telephone Company (Western), a wholly-owned subsidiary of New Ulm;

 

 

 

 

 

 

§

Peoples Telephone Company (Peoples), a wholly-owned subsidiary of New Ulm;

 

 

 

 

 

The Company’s competitive local exchange carriers (CLECs):

 

 

 

 

 

§

New Ulm, located in Redwood Falls, Minnesota;

 

 

 

 

 

 

§

Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield, Minnesota;

 

 

 

 

 

The Company’s investments and interests in the following entities, including some management responsibilities:

 

 

 

 

 

§

Hector Communications Corporation (33.33% ownership interest);

 

 

 

 

 

 

§

FiberComm, LC, a CLEC located in Sioux City, Iowa (25.18% ownership interest);

 

 

 

 

 

 

§

En-Tel Communications, LLC, a CLEC based in Willmar, Minnesota (32.80% ownership interest);

 

 

 

 

 

 

§

Broadband Visions, LLC, which provides video headend and Internet services (16.38% ownership interest);

 

 

 

 

 

 

§

Independent Emergency Services, LLC, which provides E-911 services to the State of Minnesota and Minnesota Counties (14.29% ownership interest);

 

 

 

 

 

 

§

SHAL Networks, Inc. and SHAL, LLC which together construct and lease fiber-optic communication lines and transport facilities throughout Minnesota (33.33% ownership interest);

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

§

Direct Communications, LLC which provides services on behalf of SHAL (33.33% ownership interest), and

 

 

 

 

 

The Company’s operations that provide Internet and video services.

 

 

 

Cellular Segment

 

 

This Segment contains the sales and service of cellular phones and accessories, and prior to October 2, 2006, included the Company’s investment in MWH in which New Ulm Cellular #9, Inc. (Cell #9), a wholly-owned subsidiary of New Ulm, owned 7.55% and Peoples owned 2.33%. The Company’s total ownership of MWH was 9.88% as of December 31, 2005. This interest was sold to Alltel on October 2, 2006.

 

 

 

Phonery Segment

 

 

This Segment contains the sales and service of customer premise equipment (CPE) and transport operations of New Ulm Phonery, Inc. (Phonery), Western, Peoples, HTC, all of which are wholly-owned subsidiaries. This segment also contains the resale of long distance toll service operations of New Ulm Long Distance, Inc. and HTI; and the retail operations of TechTrends, Inc., all wholly-owned subsidiaries.

No single customer accounted for a material portion of the Company’s revenues in any of the last three years.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Segment information is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecom
Segment

 

Cellular
Segment

 

Phonery
Segment

 

Eliminations

 

Consolidated

 

Year Ended December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

33,817,406

 

$

813,121

 

$

4,135,180

 

$

(3,471,376

)

$

35,294,331

 

Depreciation and Amortization

 

 

8,774,280

 

 

 

 

207,925

 

 

 

 

8,982,205

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

20,883,438

 

 

525,979

 

 

2,373,757

 

 

(3,471,376

)

 

20,311,798

 

Operating Income

 

 

4,159,688

 

 

287,142

 

 

1,553,498

 

 

 

 

6,000,328

 

Interest Expense

 

 

(3,317,978

)

 

 

 

 

 

 

 

(3,317,978

)

Gain on Sale of Cellular Investment

 

 

 

 

 

5,123,797

 

 

 

 

 

 

5,123,797

 

Impairment of Goodwill

 

 

(2,291,000

)

 

 

 

 

 

 

 

(2,291,000

)

Hector Investment Income

 

 

625,981

 

 

 

 

 

 

 

 

625,981

 

Other Investment Income

 

 

385,462

 

 

158,163

 

 

 

 

 

 

543,625

 

Income Taxes

 

 

(1,071,961

)

 

(2,283,332

)

 

(636,934

)

 

 

 

(3,992,227

)

Net Income (Loss)

 

$

(1,509,808

)

$

3,285,770

 

$

916,564

 

$

 

$

2,692,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

122,470,725

 

$

72,536

 

$

8,050,393

 

$

 

$

130,593,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

3,997,478

 

$

 

$

112,291

 

$

 

$

4,109,769

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecom
Segment

 

Cellular Segment

 

Phonery
Segment

 

Eliminations

 

Consolidated

 

Year Ended December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

15,516,352

 

$

708,807

 

$

2,057,501

 

$

(981,724

)

$

17,300,936

 

Depreciation and Amortization

 

 

3,817,512

 

 

 

 

76,265

 

 

 

 

3,893,777

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

9,688,213

 

 

564,561

 

 

1,074,741

 

 

(981,724

)

 

10,345,791

 

Operating Income

 

 

2,010,627

 

 

144,246

 

 

906,495

 

 

 

 

3,061,368

 

Interest Expense

 

 

(32,215

)

 

 

 

 

 

 

 

(32,215

)

Gain on Sale of Cellular Investment

 

 

 

 

3,116,624

 

 

 

 

 

 

3,116,624

 

Hector Investment Income

 

 

536,504

 

 

 

 

 

 

 

 

536,504

 

Other Investment Income

 

 

750,254

 

 

212,290

 

 

 

 

 

 

962,544

 

Income Taxes

 

 

(1,321,414

)

 

(1,373,580

)

 

(366,859

)

 

 

 

(3,061,853

)

Net Income

 

$

1,943,756

 

$

2,099,580

 

$

539,636

 

$

 

$

4,582,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

51,750,530

 

$

76,071

 

$

7,226,294

 

 

 

 

$

59,052,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

4,004,509

 

$

 

$

24,564

 

$

 

$

4,029,073

 

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecom
Segment

 

Cellular Segment

 

Phonery
Segment

 

Eliminations

 

Consolidated

 

Year Ended December 31, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

15,412,087

 

$

21,489,893

 

$

1,866,787

 

$

(21,886,533

)

$

16,882,234

 

Depreciation and Amortization

 

 

4,055,177

 

 

2,216,856

 

 

65,496

 

 

(2,216,856

)

 

4,120,673

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

9,071,687

 

 

12,659,177

 

 

898,621

 

 

(13,219,040

)

 

9,410,445

 

Operating Income

 

 

2,285,223

 

 

6,613,860

 

 

902,670

 

 

(6,450,637

)

 

3,351,116

 

Interest Expense

 

 

(710,785

)

 

(608,925

)

 

 

 

512,055

 

 

(807,655

)

Cellular Investment Income

 

 

 

 

 

 

 

 

 

 

 

5,925,389

 

 

5,925,389

 

Gain on Sale of Cellular Investment

 

 

 

 

50,152,885

 

 

 

 

 

 

50,152,885

 

Hector Investment Income

 

 

162,600

 

 

 

 

 

 

 

 

162,600

 

Other Investment Income

 

 

632,153

 

 

(13,193

)

 

 

 

13,193

 

 

632,153

 

Income Taxes

 

 

(782,238

)

 

(23,155,539

)

 

(367,506

)

 

 

 

(24,305,283

)

Net Income

 

$

1,586,953

 

$

32,989,088

 

$

535,164

 

$

 

$

35,111,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

34,448,033

 

$

39,070,144

 

$

6,537,664

 

$

 

$

80,055,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

1,950,205

 

$

2,294,359

 

$

15,951

 

$

(2,294,359

)

$

1,966,156

 

NOTE 21 – UNAUDITED QUARTERLY OPERATING RESULTS

UNAUDITED QUARTERLY OPERATING RESULTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31

 

June 30

 

September 30

 

December 31

 

Total

 

2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues1

 

$

8,966,960

 

$

8,992,383

 

$

9,211,834

 

$

8,123,154

 

$

35,294,331

 

Operating Income

 

 

1,758,036

 

 

1,419,610

 

 

1,908,992

 

 

913,690

 

 

6,000,328

 

Net Income 2

 

 

4,017,252

 

 

346,108

 

 

923,337

 

 

(2,594,171

)

 

2,692,526

 

Basic and Diluted Net Income per Share

 

$

0.79

 

$

0.07

 

$

0.18

 

$

(0.51

)

$

0.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,077,107

 

$

4,176,631

 

$

4,412,028

 

$

4,635,170

 

$

17,300,936

 

Operating Income

 

 

612,271

 

 

503,988

 

 

931,933

 

 

1,013,176

 

 

3,061,368

 

Net Income

 

 

737,606

 

 

2,477,940

 

 

1,486,484

 

 

(119,058

)

 

4,582,972

 

Basic and Diluted Net Income per Share

 

$

0.14

 

$

0.48

 

$

0.29

 

$

(0.01

)

$

0.90

 

The Company’s net income for the quarters ended June 30, 2007 and March 31, 2008 increased due to the gain on the installment portion of the sale of its cellular investment (MWH) to Alltel, less income taxes.

          1Includes revenues of HTC.

          2Includes goodwill impairment of $2,291,000 during the fourth quarter of 2008.

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NEW ULM TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 22 – TRANSACTIONS WITH EQUITY METHOD INVESTMENTS

The Company receives and provides services to various partnerships and limited liability companies in which it is an investor. Services received include directory services, digital video, special access, central office switching, and telecommunications circuits. Services provided include board meeting attendance, labor and materials to extend an existing fiber route, internet help desk services, management services, and labor. Cost of services the Company receives from affiliated parties may not be indicative of the costs of such services had they been obtained from different parties.

Total revenues from transactions with affiliates were $2,049,451, $499,242, and $12,988 for 2008, 2007, and 2006. Total expenses from transactions with affiliates were $663,693, $284,923, and $328,354 for 2008, 2007, and 2006.

NOTE 23 — SUBSEQUENT EVENTS

The Company expects to guarantee a portion of the indebtedness of FiberComm, LC in connection with additional financing by American State Bank to FiberComm, LC. The proceeds of the financing are being used for a fiber-optic cable project. The amount of the additional financing will be $1,250,000. The Company’s maximum potential liability under the terms of this additional guarantee is $312,500.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On June 24, 2008, Kiesling Associates LLP (“Kiesling’) was dismissed as the independent public accountants for New Ulm Telecom, Inc. (the “Company”). Kiesling performed audits of the Company’s consolidated financial statements for the years ended December 31, 2005, 2006 and 2007. Kiesling’s reports did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to dismiss Kiesling was recommended and approved by the Audit Committee of the Board of Directors.

During the two years ended December 31, 2007, and from January 1, 2008 through June 24, 2008, the effective date of Kiesling’s dismissal, (a) there were no disagreements between the Company and Kiesling on any matter of accounting principles or practice, financial statement disclosure, or auditing scope or procedure, which disagreements would have caused Kiesling to make reference to the subject matter of these disagreements in connection with its report on the Company’s financial statements for these years, and (b) there were no reportable events.

The Company requested that Kiesling furnish it with a letter addressed to the SEC stating whether or not Kiesling agreed with the statements made by the Company set forth above, and if not, stating the respects in which Kiesling did not agree. The Company provided Kiesling with a copy of the foregoing disclosures. Kiesling has furnished a letter addressed to the SEC dated June 27, 2008, stating that it agrees with the above statements.

Selection of Olsen Thielen & Co., Ltd.

On June 24, 2008, the Audit Committee of the Board of Directors of the Company recommended and approved the engagement of Olsen Thielen & Co., Ltd. (“Olsen Thielen”) as the Company’s independent auditors for the fiscal year ended December 31, 2008 to replace Kiesling.

During the two most recent fiscal years and the subsequent interim period through the date of Form 8-K, the Company did not consult with Olsen Thielen regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company’s financial statements; or (iii) any matter that was either subject of a disagreement or a reportable event.

Olsen Thielen served as independent auditors for Hutchinson Telephone Company, however, which was acquired by the Company in January 2008. The Form 8-K/A filed with SEC on March 23, 2008 included financial statements of Hutchinson Telephone Company for the years ended December 31, 2005, 2006 and 2007, as audited by Olsen Thielen.

Olsen Thielen also audits Hector Communication Corporation (“Hector”) a one-third owned equity method investee of the Company. Hector’s financial statements have been included in the Company’s 10-K filings since its acquisition on November 2006.

Item 9A. Controls and Procedures

Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, and except as described below in Management’s Report on Internal Control over Financial Reporting, the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer have concluded that, as of December 31, 2008, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is authorized, recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). The Company’s internal controls are designed to provide reasonable assurance to the Company’s management, Board of Directors and Audit Committee regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

All internal controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles so that there is more than a remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Management, including its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s evaluation identified a material weakness in the Company’s internal control over reliance on an independent tax consultant. Specifically, the Company did not have, and through its engagement of an independent tax consultant, did not acquire, adequate technical expertise to effectively oversee and review the Company’s tax accounting for the Company’s ownership of an equity method investment. The Company hired an independent tax consultant to prepare its income tax provision and returns. There was an error in the tax treatment of its equity method investment that has been corrected in the 2008 financial statements. As a result of the material weakness discussed above, management has determined that its internal control over financial reporting was not effective as of December 31, 2008.

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Remediation Steps Related to Material Weaknesses

Management recognizes that the Company does not currently exercise adequate oversight in relation to its income tax provision and return preparation. Management is currently assessing options to remediate this material weakness.

Attestation Report of the Registered Public Accounting Firm

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has been audited by Olsen Thielen, an independent registered public accounting firm, as stated in their report that follows:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors
New Ulm Telecom, Inc.

We have audited New Ulm Telecom, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). New Ulm Telecom, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report entitled “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. In its assessment, the Company identified a material weakness in the internal control over reliance on an independent tax consultant in relation to its income tax provision and returns preparation. There was an error in the tax treatment of an equity method investment that has been corrected in the 2008 financial statements. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 financial statements, and this report does not affect our reported dated March 30, 2009 on those financial statements.

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In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, New Ulm Telecom, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and cash flows of New Ulm Telecom, Inc. and subsidiaries and our report dated March 30, 2009 expressed an unqualified opinion.

/s/ Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
March 30, 2009

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Changes in Internal Controls over Financial Reporting During 2008 Fourth Quarter

During the fourth quarter of 2008, the Company implemented various improvements to internal controls, which included: (i) applying existing controls to the newly acquired HTC entity for purchase order process, customer service payment recording process, bank reconciliation review process, and human resource process, including hiring and termination process; (ii) updating and distributing employee handbooks that include the Company’s Information Security Policy; (iii) holding training with all employees on Code of Conduct and use of customer proprietary network information (CPNI), and (iv) contracting with MACC to provide carrier access billing services for HTC and HTI. Except for the items discussed above, there have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The Company incorporates by reference the information contained under the captions “Proposal No. 1: Election of Directors,” “The Board of Directors and Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in its definitive proxy statement for the annual meeting of shareholders to be held May 28, 2009.

Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information regarding executive officers of the Company is provided in Part I of this Form 10-K under separate caption.

The Company has adopted a code of conduct that applies to all officers, directors, and employees. This code of conduct is available on the Company’s website at www.nutelecom.net and in print upon written request to New Ulm Telecom, Inc., 27 North Minnesota Street, New Ulm, Minnesota 56073, Attention: Chief Financial Officer. Any amendment to, or waiver from, a provision of the Company’s code of conduct will be posted to the above-referenced website.

Item 11. Executive Compensation

The Company incorporates by reference the information contained under the captions “Executive Compensation” and “Non-Employee Director Compensation” in its definitive proxy statement for the annual meeting of stockholders to be held May 28, 2009.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The Company incorporates by reference the information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in its definitive proxy statement for the annual meeting of stockholders to be held May 28, 2009.

The Company does not maintain any equity compensation plans.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

The Company incorporates by reference the information contained under the caption “Certain Relationships and Related Transactions” in its definitive proxy statement for the annual meeting of stockholders to be held May 28, 2009.

Item 14. Principal Accounting Fees and Services

The Company incorporates by reference the information contained under the caption “Independent Registered Public Accounting Firm” in its definitive proxy statement for the annual meeting of stockholders to be held May 28, 2009.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

 

 

 

 

 

(a) 1.

 

Consolidated Financial Statements
Included in Part II, Item 8, of this report:

 

 

 

 

 

 

 

 

 

 

 

Pages

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

38-39

 

 

 

 

 

 

 

Consolidated Balance Sheets at December 31, 2008 and 2007

 

40-41

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three Years Ended December 31, 2008, 2007, and 2006

 

42

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three Years Ended December 31, 2008, 2007, and 2006

 

43

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2008, 2007, and 2006

 

44

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

45-66

 

 

 

 

 

(a) 2.

 

Consolidated Financial Statement schedules:

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

 

75

 

 

 

 

 

 

 

Schedule II – Valuation and Qualifying Accounts

 

76

 

 

 

 

 

 

 

Other schedules are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.

 

 

 

 

 

 

 

(a) 3.

 

See “Index to Exhibits”

 

 

 

 

 

 

 

(b)

 

Separate financial statements of Hector Communications Corporation a 50 percent or less owned equity method investment, are included as part of this report because this entity constitutes a “significant subsidiary” pursuant to the provisions of Regulation S-X, Article 3-09.

 

77-96

 

 

 

 

 

(c)

 

Exhibits Required

 

 

 

 

 

 

 

 

 

See “Index to Exhibits”

 

98-99

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of
New Ulm Telecom, Inc.

Our audits of the consolidated financial statements referred to in our report dated March 30, 2009 also included an audit of the financial statement schedules listed in Item 15(a)2 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
March 30, 2009

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Schedule II – Valuation and Qualifying Accounts

Allowance for Uncollectible Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1/1/08
Beginning
Balance

 

2008
Additions

 

2008
Recoveries

 

2008
Write-
Offs

 

12/31/08
Ending
Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

126,477

 

$

68,693

 

$

45,913

 

$

(78,583

)

$

162,500

 

Interexchange Carriers

 

 

258,000

 

 

29,000

 

 

 

 

 

 

287,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

384,477

 

$

97,693

 

$

45,913

 

$

(78,583

)

$

449,500

 

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HECTOR COMMUNICATIONS CORPORATION

Consolidated Financial Statements

December 31, 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Hector Communications Corporation
New Ulm, Minnesota

We have audited the accompanying consolidated balance sheets of Hector Communications Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for the years ended December 31, 2008 and 2007 and for the period from acquisition (November 3, 2006) to December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hector Communications Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended December 31, 2008 and 2007 and for the period from acquisition (November 3, 2006) to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/Olsen Thielen & Co., Ltd.

 

St. Paul, Minnesota

 

March 16, 2009

 

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2008 AND 2007

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,227,462

 

$

7,551,276

 

Accounts receivable (net of allowance of $72,833 and $72,548)

 

 

2,209,617

 

 

2,454,914

 

Other receivables

 

 

 

 

904,845

 

Materials, supplies and inventories (Note 1)

 

 

579,251

 

 

854,608

 

Deferred income taxes

 

 

715,000

 

 

308,900

 

Other current assets

 

 

105,017

 

 

121,269

 

Total current assets

 

 

6,836,347

 

 

12,195,812

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT: (Notes 1 and 3)

 

 

45,377,089

 

 

40,479,567

 

less accumulated depreciation

 

 

(13,091,766

)

 

(7,089,124

)

Net property, plant and equipment

 

 

32,285,323

 

 

33,390,443

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Excess of cost over net assets acquired (Note 4)

 

 

60,191,264

 

 

61,867,411

 

Intangibles (Note 4)

 

 

35,619,800

 

 

38,724,400

 

Investment in unconsolidated affiliates (Note 6)

 

 

4,158,544

 

 

3,767,700

 

Other investments (Notes 1, 7 and 9)

 

 

3,877,656

 

 

4,267,685

 

Other assets (Note 1)

 

 

652,225

 

 

786,834

 

Total other assets

 

 

104,499,489

 

 

109,414,030

 

TOTAL ASSETS

 

$

143,621,159

 

$

155,000,285

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current portion of long-term debt (Note 9)

 

$

4,500,000

 

$

4,100,000

 

Accounts payable

 

 

755,021

 

 

887,625

 

Payable to affiliates

 

 

110,257

 

 

128,730

 

Midwest Wireless proceeds payable to USCC (Note 5)

 

 

 

 

832,701

 

Accrued expenses

 

 

1,535,263

 

 

1,847,642

 

Fair Value of Interest Rate Swaps (Note 10)

 

 

1,211,586

 

 

 

Income taxes payable

 

 

1,961,676

 

 

 

Total current liabilities

 

 

10,073,803

 

 

7,796,698

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion (Note 9)

 

 

59,949,725

 

 

71,094,643

 

Deferred Income Taxes (Note 8)

 

 

14,786,658

 

 

18,748,728

 

Fair Value of Interest Rate Swaps (Note 10)

 

 

2,436,662

 

 

907,899

 

Deferred Compensation (Note 11)

 

 

845,008

 

 

888,633

 

Total liabilities

 

 

78,018,053

 

 

91,639,903

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common Stock, par value $0.01 per share; 1,000,000 shares authorized; 900,000 shares issued and outstanding

 

 

9,000

 

 

9,000

 

Paid in Capital

 

 

53,991,000

 

 

53,991,000

 

Retained Earnings

 

 

3,975,471

 

 

2,097,527

 

Accumulated other comprehensive losses

 

 

(2,446,168

)

 

(533,843

)

Total Stockholders’ Equity

 

 

55,529,303

 

 

55,563,684

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

143,621,159

 

$

155,000,285

 

See the notes to the consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 AND THE PERIOD FROM
ACQUISITION (NOVEMBER 3, 2006) TO DECEMBER 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

Voice services

 

$

18,601,793

 

$

20,347,184

 

$

3,427,671

 

Video services

 

 

2,616,771

 

 

2,530,562

 

 

501,888

 

Internet services

 

 

5,203,560

 

 

4,885,670

 

 

759,355

 

Other nonregulated services

 

 

2,449,823

 

 

2,721,494

 

 

607,048

 

Total revenues

 

 

28,871,947

 

 

30,484,910

 

 

5,295,962

 

 

 

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

Plant operations, excluding depreciation

 

 

6,315,371

 

 

5,914,863

 

 

673,973

 

Customer operations

 

 

1,342,481

 

 

1,384,184

 

 

239,988

 

General and administrative

 

 

2,543,234

 

 

3,413,556

 

 

415,275

 

Depreciation and amortization

 

 

9,290,992

 

 

9,936,713

 

 

1,302,627

 

Other operating expenses

 

 

2,735,812

 

 

2,649,116

 

 

1,092,999

 

Total costs and expenses

 

 

22,227,890

 

 

23,298,432

 

 

3,724,862

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

6,644,057

 

 

7,186,478

 

 

1,571,100

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,335,349

)

 

(6,186,228

)

 

(1,089,495

)

Interest and dividend income

 

 

301,896

 

 

662,751

 

 

322,854

 

Income from investments in unconsolidated affiliates (Note 6)

 

 

304,082

 

 

245,245

 

 

28,354

 

Gain on sale of assets

 

 

233,258

 

 

829,968

 

 

 

Other income (expense), net

 

 

(3,496,113

)

 

(4,448,264

)

 

(738,287

)

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

3,147,944

 

 

2,738,214

 

 

832,813

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE (Note 8)

 

 

1,270,000

 

 

1,129,000

 

 

344,500

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

1,877,944

 

$

1,609,214

 

$

488,313

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME PER SHARE

 

$

2.09

 

$

1.79

 

$

0.54

 

See the notes to the consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 AND THE PERIOD FROM
ACQUISITION (NOVEMBER 3, 2006) TO DECEMBER 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,877,944

 

$

1,609,214

 

$

488,313

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on marketable securities

 

 

(449,211

)

 

443,062

 

 

(108,384

)

Income tax benefit (expense) related to unrealized holding gain (loss) on marketable securities

 

 

179,684

 

 

(177,202

)

 

43,354

 

Reclassification adjustment for gains on marketable securities included in net income

 

 

 

 

(323,654

)

 

 

Income tax expense related to reclassification adjustments for gains included in net income

 

 

 

 

129,460

 

 

 

Unrealized loss on interest rate swap agreement

 

 

(2,740,349

)

 

(807,919

)

 

(99,980

)

Income tax benefit related to unrealized loss on interest rate swap agreement

 

 

1,097,551

 

 

326,960

 

 

40,460

 

Other comprehensive loss

 

 

(1,912,325

)

 

(409,293

)

 

(124,550

)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(34,381

)

$

1,199,921

 

$

363,763

 

See notes to consolidated financial statements.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 AND FOR THE PERIOD FROM
ACQUISITION (NOVEMBER 3, 2006) TO DECEMBER 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Stock

 

Paid in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at Beginning of Period

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Issued

 

 

9,000

 

 

53,991,000

 

 

 

 

 

 

 

 

54,000,000

 

Net income

 

 

 

 

 

 

 

 

488,313

 

 

 

 

 

488,313

 

Change in unrealized losses on marketable securities, net of deferred taxes

 

 

 

 

 

 

 

 

 

 

 

(65,030

)

 

(65,030

)

Change in unrealized losses on interest rate swap agreement, net of deferred taxes

 

 

 

 

 

 

 

 

 

 

 

(59,520

)

 

(59,520

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at December 31, 2006

 

 

9,000

 

 

53,991,000

 

 

488,313

 

 

(124,550

)

 

54,363,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

1,609,214

 

 

 

 

 

1,609,214

 

Change in unrealized gains on marketable securities, net of deferred taxes

 

 

 

 

 

 

 

 

 

 

 

71,666

 

 

71,666

 

Change in unrealized losses on interest rate swap agreement, net of deferred taxes

 

 

 

 

 

 

 

 

 

 

 

(480,959

)

 

(480,959

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at December 31, 2007

 

 

9,000

 

 

53,991,000

 

 

2,097,527

 

 

(533,843

)

 

55,563,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

1,877,944

 

 

 

 

 

1,877,944

 

Change in unrealized losses on marketable securities, net of deferred taxes

 

 

 

 

 

 

 

 

 

 

 

(269,527

)

 

(269,527

)

Change in unrealized losses on interest rate swap agreements, net of deferred taxes

 

 

 

 

 

 

 

 

 

 

 

(1,642,798

)

 

(1,642,798

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at December 31, 2008

 

$

9,000

 

$

53,991,000

 

$

3,975,471

 

$

(2,446,168

)

$

55,529,303

 

See notes to consolidated financial statements

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 AND FOR THE PERIOD FROM

ACQUISTION (NOVEMBER 2, 2006) TO DECEMER 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,877,944

 

$

1,609,214

 

$

488,313

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,425,596

 

 

10,071,317

 

 

1,305,563

 

Income from unconsolidated affiliates

 

 

(304,082

)

 

(245,245

)

 

(28,354

)

Cash distributions from unconsolidated affiliates

 

 

176,777

 

 

156,432

 

 

39,131

 

Gain on sale of assets

 

 

(233,258

)

 

(829,968

)

 

 

Noncash patronage refund

 

 

(108,716

)

 

(42,838

)

 

 

Noncash interest income from notes

 

 

 

 

(1,019

)

 

(4,443

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

245,297

 

 

146,113

 

 

(345,168

)

Materials and supplies

 

 

275,357

 

 

(117,373

)

 

253,067

 

Other current assets

 

 

921,097

 

 

83,810

 

 

38,913

 

Accounts payable

 

 

(151,077

)

 

(377,430

)

 

(11,055

)

Accrued expenses

 

 

(312,379

)

 

(901,026

)

 

902,982

 

Income taxes payable

 

 

1,961,676

 

 

(17,452,809

)

 

(1,814,376

)

Deferred taxes

 

 

(5,738,238

)

 

(1,830,625

)

 

(126,406

)

Deferred compensation

 

 

(43,625

)

 

39,896

 

 

(25,862

)

Net cash provided by (used in) operating activities

 

 

7,992,369

 

 

(9,691,551

)

 

672,305

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(5,081,267

)

 

(3,133,579

)

 

(562,012

)

Proceeds from sales of CATV Properties

 

 

233,258

 

 

 

 

 

Purchases of investments

 

 

(272,934

)

 

(176,704

)

 

(1,745

)

Increase in intangibles

 

 

 

 

(34,105

)

 

 

Acquisition, net of cash acquired

 

 

 

 

 

 

(101,837,666

)

Payable to USCC

 

 

(832,701

)

 

(3,195,812

)

 

(6,590,091

)

Proceeds from sales of investments

 

 

4,382,379

 

 

3,927,697

 

 

140,726

 

Net cash used in investing activities

 

 

(1,571,265

)

 

(2,612,503

)

 

(108,850,788

)

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

Repayment of notes payable and long-term debt

 

 

(10,744,918

)

 

(10,937,786

)

 

(5,741

)

Proceeds from issuance of long-term debt

 

 

 

 

 

 

85,900,000

 

Loan issuance costs

 

 

 

 

 

 

(922,660

)

Proceeds from issuance of stock

 

 

 

 

 

 

54,000,000

 

Net cash provided by (used in) financing activities

 

 

(10,744,918

)

 

(10,937,786

)

 

138,971,599

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

(4,323,814

)

 

(23,241,840

)

 

30,793,116

 

Cash and Cash Equivalents at Beginning of Period

 

 

7,551,276

 

 

30,793,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

$

3,227,462

 

$

7,551,276

 

$

30,793,116

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

Interest paid during the period

 

$

4,915,370

 

$

6,715,991

 

$

192

 

Income taxes paid during the period

 

 

4,861,678

 

 

20,597,318

 

 

2,285,282

 

See the notes to the consolidated financial statements.

83


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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: On November 3, 2006, Hector Acquisition Corporation (HAC) acquired all of the Company’s outstanding common stock. Simultaneous with the acquisition, HAC was merged into the Company and the new legal entity was renamed Hector Communication Corporation. In connection with this acquisition, the accounts of the Company have been adjusted using the push down basis of accounting to recognize the allocation of the consideration paid for the common stock to the respective net assets acquired.

Hector Communications Corporation owns a 100% interest in five local exchange telephone subsidiaries. The Company also owns a 100% interest in Alliance Telecommunications Corporation, which owns and operates four local exchange telephone companies. At December 31, 2008, the Company’s subsidiaries provided telephone service to 26,960 access lines in 28 rural communities in Minnesota, Wisconsin and North Dakota and cable television services to 4,450 subscribers in Minnesota. The Company is also an investor in partnerships and corporations providing other telecommunications related services.

Principles of consolidation: The consolidated financial statements include the accounts of Hector Communications Corporation and its subsidiaries (“Hector” or the “Company”). All material intercompany transactions and accounts have been eliminated.

Regulatory accounting: Accounting practices prescribed by regulatory authorities have been considered in the preparation of the financial statements and formulation of accounting policies for telephone subsidiaries. These policies conform to accounting principles generally accepted in the United States of America 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).

Estimates: The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Revenue recognition: Revenues are recognized when earned, regardless of the period in which they are billed. 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 Carriers Association and state tariffs filed with state regulatory agencies. Management believes recorded revenues are reasonable based on estimates of final cost separation studies, which are typically settled within two years.

84


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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Presentation of Taxes Collected From Customers: Sales, excise, and other taxes are imposed on most of the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.

Income taxes: The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Significant components of the Company’s deferred taxes arise from differences in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, partnerships due to the differences between book and tax income, and intangible assets which are amortized for book purposes but not deductible for tax purposes.

Net income per share: Basic and diluted net income per common share is based on the weighted average number of common shares outstanding during the period presented.

Cash and cash equivalents: The Company considers temporary cash investments with an original maturity of three months or less to be cash equivalents. The Company places its cash investments with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts. The account balances at times exceed the federally insured limits. The Company has not experienced losses in these accounts and does not believe they are exposed to any significant credit risk.

Accounts receivable: Receivables are stated at the amount the Company expects to collect from outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to the receivable accounts.

A significant portion of the Company’s revenues is received from long distance carriers in the telephone industry. Consequently, the Company is directly affected by the financial well-being of that industry. The credit risk associated with these accounts is minimized due to the large number of long distance carriers.

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

Property, plant and equipment: Property, plant and equipment is recorded at cost. Depreciation is computed using principally the straight-line method based on estimated service or remaining useful lives of the various classes of depreciable assets. Maintenance and repairs are charged to operations and additions or improvements are capitalized. Items of telecommunications property sold, retired or otherwise disposed of in the ordinary course of business are removed from assets and any gains or losses are included in accumulated depreciation. Any gains or losses on non-telecommunications property and equipment retirements are reflected in the current year operations.

Investments in unconsolidated affiliates: The Company is an investor in several partnerships and limited liability corporations (Note 6). The Company’s percentage of ownership in these joint ventures ranges from 5% to 20%. The Company uses the equity method of accounting for these investments, which reflects original cost and recognition of the Company’s share of operating income or losses from the respective operations.

85


Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other investments: The Company owns CoBank stock and investments in the stock of other telecommunications service providers. Long-term investments in corporations that are not intended for resale or are not readily marketable and in which the Company does not exercise significant influence are valued using the cost method. The cost method requires the Company to periodically evaluate these investments for impairment and if impairment is found, reduce the investment’s valuation to its net realizable value. No impairment charges have been taken against these investments.

Intangibles and other assets: Intangible assets owned by the Company include customer relationships, trade names, and regulatory rights acquired and customer lists purchased. Other assets owned by the Company include deferred debt issuance costs, and other deferred charges. In accordance with SFAS 142, intangible assets determined to have an indefinite useful life are not amortized. Intangible assets with a determinable life are amortized over the useful life.

Disclosures about Fair Value of Financial Instruments: Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. The fair value of the Company’s investment securities were determined based on Level 1 inputs. The fair value of the interest rate swap agreements were determined based on Level 2 inputs.

The fair value of the Company’s other financial instruments approximate carrying value except for long-term investments in other companies. Other long-term investments are not intended for resale and are not readily marketable, thus a reasonable estimate of fair value is not practicable. The fair value of long-term debt is estimated based on current rates offered to the Company for debt with similar terms and maturities. The fair value of the Company’s debt approximates carrying value.

Recently Issued Accounting Principles: In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, a revision of SFAS No. 141. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific items, including acquisition costs, acquired contingent liabilities, restructuring costs, deferred tax asset valuation allowances and income tax uncertainties after the acquisition date. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) is effective for, and will be applied to, all future business combinations transacted on or after January 1, 2009. The adoption of SFAS No. 141(R) will not have a material impact on the Company’s consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2 “Effective Date of FASB Statement No. 157” which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and non-financial liabilities assumed in a business combination. The Company has not applied the provisions of SFAS No. 157 to its non-financial assets and non-financial liabilities in accordance with FSP FAS 157- 2.

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that SFAS No. 161 will have on its consolidated financial statements.

In June 2006, The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement standards for the financial statement recognition and measurement of income tax positions taken or expected to be taken in income tax returns. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

In December 2008, the FASB provided for a deferral of the effective date of FIN 48 for certain nonpublic entities to annual financial statements for fiscal years beginning after December 15, 2008. The Company has elected this deferral and accordingly will be required to adopt FIN 48 in its 2009 annual financial statements. Prior to adoption of FIN 48, the Company will continue to evaluate its uncertain tax positions and related income tax contingencies under FASB Statement No. 5, Accounting for Contingencies. SFAS No. 5 requires the Company to accrue for losses it believes are probable and can be reasonably estimated. The Company is currently assessing the impact of FIN 48 but does not expect the adoption of FIN 48 will have a material effect on its financial statements.

Reclassifications: Certain amounts in the 2007 and 2006 financial statements have been reclassified to conform with the 2008 presentation. These reclassifications had no effect on net income or stockholders’ equity for any periods presented.

NOTE 2 - ACQUISITION OF HECTOR COMMUNICATIONS CORPORATION

On November 3, 2006, the Company was acquired by Hector Acquisition Corp (HAC). The purchase price was approximately $157 million (or $102 million net of cash acquired). HAC was a temporary entity incorporated on January 13, 2006 for the purpose of acquiring Hector Communications Corp and was dissolved simultaneously with the transaction closing. There was no activity in HAC prior to the acquisition of Hector Communications Corporation. The three shareholders of the Company are New Ulm Telecom, Inc, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc, each owning 1/3 of the outstanding stock. All three shareholders are experienced in the telecommunications industry and have properties contiguous or near the Company’s service territories. Operations for the Company reflect the business activity from the date of acquisition November 3, 2006. In the acquisition, the following assets were acquired and liabilities were assumed.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - ACQUISITION OF HECTOR COMMUNICATIONS CORPORATION (Continued)

The total allocation of the net purchase price of Hector Communications Corporation as adjusted for the 2007 independent valuation of intangible assets acquired is shown in the table below:

 

 

 

 

 

Current assets

 

$

59,150,606

 

Property, plant and equipment

 

 

37,621,304

 

Investments

 

 

9,291,595

 

Customer relationship intangible

 

 

31,125,000

 

Trade name intangible

 

 

5,611,000

 

Regulatory rights intangible

 

 

5,193,000

 

Excess costs over net assets acquired

 

 

63,973,140

 

Other assets

 

 

20,819

 

Current liabilities

 

 

(33,136,314

)

Long term debt

 

 

(530,092

)

Deferred liabilities

 

 

(21,469,422

)

Total purchase price

 

 

156,850,636

 

Less cash and cash equivalents acquired

 

 

(55,012,970

)

Cash paid for acquisition

 

$

101,837,666

 

The acquisition was accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Based upon the Company’s final purchase price allocation during 2007, the excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately $64 million. The Company recorded an intangible asset related to the acquired company’s customer relationships of $31,125,000, trade name intangible of $5,611,000, regulatory rights intangible of $5,193,000. The estimated useful life of the customer relationship intangible asset is 11.5 years and regulatory rights intangible is 13.5 years. The trade name intangible has an indefinite life and is not subject to amortization. Goodwill on this transaction will not be deductible for income tax purposes.

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

The cost of property, plant and equipment and the estimated useful lives are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated
useful life

 

Dec 31, 2008

 

Dec 31, 2007

 

Land

 

 

 

 

$

414,052

 

$

414,052

 

Buildings

 

 

5-40 years

 

 

3,573,317

 

 

3,489,723

 

Machinery and equipment

 

 

3-15 years

 

 

691,367

 

 

567,123

 

Furniture and fixtures

 

 

5-10 years

 

 

200,948

 

 

17,163

 

Telephone plant

 

 

5-33 years

 

 

38,463,911

 

 

34,444,145

 

Cable television plant

 

 

10-15 years

 

 

1,648,976

 

 

776,962

 

Construction in progress

 

 

 

 

 

384,518

 

 

770,399

 

 

 

 

 

 

 

45,377,089

 

 

40,479,567

 

Less accumulated depreciation

 

 

 

 

 

(13,091,766

)

 

(7,089,124

)

 

 

 

 

 

$

32,285,323

 

$

33,390,443

 

Depreciation expense included in costs and expenses from operations was $6,186,392 and $6,818,700 for the years ended December 31, 2008 and 2007 and $1,198,800 for the period from acquisition (November 3, 2006) to December 31, 2006.

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

On November 3, 2006, the Company was acquired by HAC. A preliminary purchase price allocation resulted in goodwill of $86,347,040. During 2007, the Company obtained an independent appraisal of the identifiable intangible assets acquired as a result of the business combination and revised the purchase price allocation in accordance with the independent appraisal. Along with the valuation of identifiable intangible assets acquired, the appraisal also determined the estimated useful lives of those amortizable assets based on historical customer churn statistics for the customer relationship intangible asset, and the estimated useful life of the Company’s regulated investment base for the identified regulatory rights intangible asset.

In addition, in 2008 and 2007, the Company received $4,323,450 and $2,699,833, respectively, of funds released from an escrow account related to the pre-acquisition sale of Midwest Wireless Holdings as discussed in Note 5. These funds were not recorded in the allocation of the purchase price of the Company as they were contingent on future events. In 2008 and 2007, when the contingency was resolved and the funds were released, they were recorded against goodwill net of the related income taxes.

A summary of changes to the Company’s goodwill is as follows:

 

 

 

 

 

Balance at December 31, 2006

 

$

86,347,040

 

Reclassification of identified intangible assets acquired net of deferred income taxes of $10,555,100

 

 

(22,373,900

)

Midwest Wireless Holdings escrow funds received net of income taxes of $1,026,200

 

 

(1,673,683

)

Other adjustments

 

 

(432,046

)

Balance at December 31, 2007

 

$

61,867,411

 

Additional income taxes on liquidation of Subsidiary holding a portion of the Midwest Wireless investment

 

 

1,003,903

 

Midwest Wireless Holdings escrow funds received net of income taxes of $1,643,400

 

 

(2,680,050

)

Balance at December 31, 2008

 

$

60,191,264

 

The Company accounts for goodwill and other intangible assets under 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 and when changes in circumstances indicate that the value of goodwill may be below its carrying value. In 2008 and 2007, the Company engaged an independent valuation firm to complete its annual impairment test for goodwill acquired. Such testing resulted in no impairment charge to goodwill, as the determined fair value was sufficient to pass the first step of the impairment test in both years.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS (Continued)

The components of the Company’s identified intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

December 31, 2007

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Definitely Lived Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships - 11.58 Yr Life

 

$

31,125,000

 

$

(5,536,624

)

 

$

31,125,000

 

$

(2,818,312

)

Regulatory Rights - 13.61 Yr Life

 

 

5,193,000

 

 

(772,576

)

 

 

5,193,000

 

 

(386,288

)

Indefinitely Lived Intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

 

5,611,000

 

 

 

 

 

5,611,000

 

 

 

Totals

 

$

41,929,000

 

$

(6,309,200

)

 

$

41,929,000

 

$

(3,204,600

)

Net Identified Intangible Assets

 

 

 

 

$

35,619,800

 

 

 

 

 

$

38,724,400

 

Amortization expense of definitely lived intangible assets was $3,104,600 for the years ended December 31, 2008 and 2007 and $100,000 for the period from the date of acquisition (November 3, 2006) through December 31, 2006. Amortization expense for the next five years is estimated at $3,104,600 annually.

NOTE 5 - MIDWEST WIRELESS HOLDINGS LLC

Hector Communications Corporation owned approximately 8% of Midwest Wireless Holdings L.L.C (MWH). In November of 2005, Midwest Wireless Holdings L.L.C. (MWH) and Alltel Corporation (Alltel) entered into an agreement for Alltel to purchase MWH. The transaction was closed October 2, 2006 after the satisfaction of conditions and the receipt of regulatory approvals, which was prior to Hector Acquisition Corporation’s purchase of the Company. Under the terms of the agreement, all of the members of MWH sold their membership interests to Alltel. Upon closing, the members received approximately 90% of the sale proceeds. Alltel delivered the other 10% to the escrow agent. The escrow account was to be used for any true-up adjustments, indemnifications, and other specified costs.

In 2008 and 2007, the Company received $4,323,450 and $2,699,883 of the escrowed funds. These funds net of related income taxes were recorded against goodwill as they related to a pre-acquisition contingency which was resolved subsequent to the acquisition of the Company by HAC.

A portion of the Company’s investment in MWH was held in a subsidiary which was 49% owned by United States Cellular Corporation (USCC). This subsidiary was liquidated in 2008 upon receipt of the final indemnification escrow payments. At December 31, 2007, the Company had a balance payable to USCC which represents the amount of proceeds from the MHW sale due to USCC from the Company. The full liability was paid to USCC in 2008.

NOTE 6 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company is a co-investor with other rural telephone companies in several partnerships and limited liability corporations. These joint ventures make it possible to offer certain services to customers, including directory services, centralized switching or fiber optic transport of messaging, that the Company could not afford to offer on its own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. The Company recognizes income and losses from these investments on the equity method of accounting. The following table summarizes the Company’s ownership percentage, investment at December 31, 2008 and 2007 and income or loss from these investments for the years ended December 31, 2008 and 2007 and the period from acquisition (November 3, 2006) to December 31, 2006.

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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ownership
Interest

 

Book Value at
December 31,
2008

 

Book Value at
December 31,
2007

 

Income
(Loss)
2008

 

Income
(Loss)
2007

 

Income
(Loss)
2006

 

Broadband Visions

 

 

16.7

%

$

856,561

 

$

875,202

 

$

(18,641

)

$

(14,582

)

$

(5,599

)

Communications Mgmt Grp

 

 

6.5

%

 

441,860

 

 

328,183

 

 

126,581

 

 

75,817

 

 

153

 

Independent Pinnacle Services

 

 

7.9

%

 

669,726

 

 

661,898

 

 

69,633

 

 

83,233

 

 

12,406

 

Northern Transport Group

 

 

20.0

%

 

 

 

43,294

 

 

(39,452

)

 

(41,940

)

 

(8,282

)

NW Minnesota Spec Access

 

 

5.3

%

 

10,065

 

 

9,465

 

 

600

 

 

17,298

 

 

2,927

 

702 Communications

 

 

18.1

%

 

1,552,292

 

 

1,494,475

 

 

113,354

 

 

75,476

 

 

20,288

 

West Central Transport

 

 

5.0

%

 

201,457

 

 

190,593

 

 

60,864

 

 

49,943

 

 

6,461

 

Midwest AWS Limited Partners

 

 

13.5

%

 

219,038

 

 

137,857

 

 

(7,639

)

 

 

 

 

SkyCom 700 mhz LLC

 

 

8.42

%

 

207,545

 

 

26,733

 

 

(1,218

)

 

 

 

 

 

 

 

 

 

$

4,158,544

 

$

3,767,700

 

$

304,082

 

$

245,245

 

$

28,354

 

NOTE 7 - MARKETABLE SECURITIES

Marketable securities consist principally of equity securities of other telecommunications companies. The Company’s marketable securities portfolio was classified as available-for-sale at December 31, 2008 and 2007. The cost and fair value of available-for-sale investment securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

$

1,263,806

 

$

 

$

438,151

 

$

825,655

 

December 31, 2007

 

$

1,263,806

 

$

55,676

 

$

44,616

 

$

1,274,866

 

The Company’s available-for-sale securities which were in an unrealized loss position at December 31, 2008 have not been in that position for over 12 months. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2008.

Realized gains on the sales of securities are based on the book value of the securities sold using the specific identification method. In 2007, the Company sold marketable securities for a gain of $323,654. Net proceeds from the sales were $515,665. There were no marketable security sales in 2008 or 2006.

Net unrealized gains (losses) on marketable securities, net of related deferred taxes, are included in stockholders’ equity as accumulated other comprehensive income (loss) at December 31, 2008 and 2007 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized
Gains
(Losses)

 

Deferred
Income
Taxes

 

Accumulated
Comprehensive
Income (Losses)

 

December 31, 2008

 

$

(449,211

)

$

179,211

 

$

(269,527

)

December 31, 2007

 

$

119,408

 

$

(47,742

)

$

71,666

 

December 31, 2006

 

$

(108,384

)

$

43,354

 

$

(65,030

)

These amounts have no cash effect and are not included in the statement of cash flows.

91


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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES

Hector Communications Corporation and its subsidiaries file a consolidated tax return. Income tax expenses (benefits) were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Period from Acquisition
(November 3, 2006) to
December 31, 2006

 

Currently payable taxes:

 

 

 

 

 

 

 

 

 

 

Federal

 

$

5,338,235

 

$

1,948,612

 

$

357,900

 

State

 

 

1,670,003

 

 

533,156

 

 

113,000

 

 

 

 

7,008,238

 

 

2,481,768

 

 

470,900

 

Deferred income tax

 

 

(5,738,238

)

 

(1,352,768

)

 

(126,400

)

 

 

$

1,270,000

 

$

1,129,000

 

$

344,500

 

Deferred tax liabilities and assets as of December 31 related to the following:

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Accelerated depreciation

 

$

3,996,584

 

$

3,794,276

 

Intangibles

 

 

11,931,545

 

 

13,121,123

 

Partnership and LLC investments

 

 

222,778

 

 

2,200,064

 

Other

 

 

 

 

277,143

 

 

 

 

16,150,907

 

 

19,392,,606

 

Deferred tax assets:

 

 

 

 

 

 

 

Deferred compensation

 

 

332,971

 

 

276,457

 

Accrued expenses

 

 

230,383

 

 

308,901

 

Interest rate swaps

 

 

1,464,971

 

 

367,420

 

Other

 

 

50,924

 

 

 

 

 

 

2,079,249

 

 

952,778

 

 

 

$

14,071,658

 

$

18,439,828

 

 

 

 

 

 

 

 

 

Presented on the balance sheet as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current deferred tax asset

 

$

(715,000

)

$

(308,900

)

Non current deferred tax liability

 

 

14,786,658

 

 

18,748,728

 

Net deferred tax

 

$

14,071,658

 

$

18,439,828

 

The provision for income taxes varied from the federal statutory tax rate as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

2007

 

Period from Acquisition
(November 3, 2006) to
December 31, 2006

 

 

Tax at U.S. statutory Rate

 

 

35.0

%

 

35.0

%

 

35.0

%

Surtax exemption

 

 

(1.0

)

 

(1.0

)

 

 

State income taxes, net of federal benefit

 

 

7.2

 

 

7.9

 

 

6.2

 

Other

 

 

(0.8

)

 

(0.7

)

 

(0.1

)

Effective tax rate

 

 

40.4

%

 

41.2

%

 

41.1

%

92


Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - LONG-TERM DEBT

The Company’s long-term debt is as follows:

 

 

 

 

 

 

 

 

 

 

December
31,
2008

 

December
31,
2007

 

 

 

 

 

 

 

 

 

CoBank

 

 

 

 

 

 

 

Term loan facility

 

$

64,300,000

 

$

75,000,000

 

RDUP

 

 

 

 

 

 

 

Rural economic development loan

 

 

149,725

 

 

194,643

 

Total

 

 

64,449,725

 

 

75,194,643

 

Less current portion

 

 

4,500,000

 

 

4,100,000

 

 

 

$

59,949,725

 

$

71,094,643

 

The Term Loan Facility payable to CoBank by the Company was the main vehicle to finance the acquisition by HAC. Principal payments on this facility were deferred for one year and began in December 2007. Principal payments will be due quarterly until September 30, 2013 when the remaining balance of $43,900,000 is due. Interest is payable quarterly at a variable rate (4.56% and 7.44% at December 31, 2008 and 2007). CoBank syndicated $25,000,000 of the original term loan facility to other financial institutions, but remains the administrative agent for the loan.

The Company also has available a Revolving Credit Facility payable to CoBank which is payable in full on November 3, 2013. This revolving credit facility allows the Company to borrow up to $10,000,000 of which $10,000,000 is available as of December 31, 2008 and 2007. Interest is payable quarterly at a variable rate (4.5% at December 31, 2008).

The $6,400,000 Bridge Note Payable to CoBank by the Company was payable in full on December 31, 2007. The Company paid the full balance by July 31, 2007. Interest was payable quarterly at a variable rate.

The RDUP economic development loan consists of a non-interest bearing note payable to the RDUP in equal monthly payments of $3,743. The loan was made to one of the Company’s subsidiaries. This loan matures in 2012. Proceeds from the loan were lent to a city in the subsidiaries’ service territory under identical repayment terms.

As a condition of maintaining the Company’s loan with CoBank, the Company owns stock in the bank. The Company’s investment in CoBank stock was $2,487,815 and $2,379,100 as of December 31, 2008 and 2007.

CoBank is a cooperative, owned and controlled by its customers. Each customer borrowing from the bank on a patronage basis shares in the bank’s net income through payment of patronage refunds. Patronage refunds receivable included in accounts receivable were $467,388 and $556,162 at December 31, 2008 and 2007. Approximately 65% of patronage refunds are received in cash, with the balance in stock in the bank. The accrued patronage refund is reflected in the Company’s operating statement as a reduction of interest expense. The Company recorded $453,806 and $561,948 for the years ending December 31, 2008 and 2007. The Company cannot predict what patronage refunds might be in future years.

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - LONG-TERM DEBT (Continued)

Pledges of the parent company assets and the stock of the Company’s subsidiaries secure the CoBank loans. Interest rates on long-term portions of the loan are variable and consist of a base rate plus an applicable margin of .5% to 3.0% based on the Company’s leverage ratio as defined in the loan agreement.

The security and loan agreements underlying the CoBank notes contain certain restrictions on distributions to stockholders, capital additions and investments in or loans to others. In addition, the Company is required to maintain certain financial ratios relating to leverage, debt service and interest coverage, and equity to total assets. The Company was in compliance with these covenants at December 31, 2008 and 2007.

The annual requirements for principal payments on notes payable and long-term debt are as follows:

 

 

 

 

 

2009

 

$

4,500,000

 

2010

 

 

4,900,000

 

2011

 

 

5,300,000

 

2012

 

 

5,700,000

 

2013

 

 

43,900,000

 

NOTE 10 - INTEREST RATE SWAP

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The Company uses variable-rate debt to finance its capital expenditures and acquisitions. The variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company and its primary lender, CoBank, believe it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Company has entered into interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk. The swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company pays a fixed contractual interest rate plus an additional payment if the variable rate (LIBOR) payment is below a contractual rate, or it receives a payment if the variable rate payment is above the contractual rate.

In 2006, the Company entered into a swap for a notional amount of $38,000,000 delivered November 2006. The term is 3 years and the fixed contractual interest rate is 5.10% plus leverage margin. This swap expires November 2009.

In 2008, the Company entered into a second swap for $13,000,000 delivered September 2008. The term is 3 years and the fixed contractual interest rate is 3.76% plus leverage margin. This swap expires November 2011.

In 2008, the Company entered into another swap agreement for $38,000,000 to be delivered November 2009. This swap delivery is concurrent with the maturity of first swap of $38,000,000 disclosed above. The term is 2 years and the fixed contractual interest rate will be 4.18% plus leverage margin. This swap expires November 2011.

The interest rate swaps qualify as cash flow hedges for accounting purposes under SFAS No. 133 and as such, the gains or losses in the fair value of the swaps are recorded as a separate component of other comprehensive income (loss) rather then in earnings. The fair value of the Company’s interest rate swap agreement is determined from a valuation received from CoBank which is based on the present value of expected future cash flows using discount rates appropriate with the terms of the swaps. At December 31, 2008 and 2007, the fair value loss of the swap was $3,648,248 and $907,899 which has been recorded, net of deferred tax of $1,464,971 and $367,420, as a decrease in comprehensive income (loss).

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Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - EMPLOYEE BENEFIT PLANS

The Company has 401(k) savings plans for its employees. Employees who meet certain age and service requirements may contribute up to $15,500 of their salaries to the plan on a pretax basis. The Company matches a portion of employee contributions. Contributions to the plan by the Company were $84,166 and $101,365 for the years ending December 31, 2008 and 2007 and $28,000 for the period from acquisition (November 3, 2006) to December 31, 2006..

The Company has a deferred compensation agreement with two former officers of one of its subsidiaries. Under the agreement, the salaries of these officers were continued after their retirement based on a formula stated in the agreement. The Company is responsible for 68% of the remaining deferred compensation, with former partners responsible for the remaining 32%. Deferred compensation expense included in operations was $216,857 and $110,165 for the years ended December 31, 2008 and 2007, and $14,300 for the period from acquisition (November 3, 2006) to December 31, 2006. Payments made under the agreement by the Company were $106,694 and $103,336 for the years ended December 31, 2008 and 2007, and $17,000 for the period from acquisition (November 3, 2006) to December 31, 2006.

With the acquisition of the Company by HAC on November 3, 2006, the Company entered into severance agreements with former officers and key employees. A liability was accrued at November 3, 2006 for $1,156,000 for payments due under these agreements. As of December 31, 2006 and 2007, $1,029,000 and $187,930 remained payable under these agreements. The liabilities were fully satisfied during 2008.

NOTE 12 - TRANSACTIONS WITH AFFILIATES

The Company receives and provides services to various partnerships and limited liability corporations in which it is a minority investor. Services received include transport, directory services, centralized equal access and digital television signals. Services provided include commissioned sales and transport. Revenues from transactions with these affiliates were $436,564 and $472,489 for the years ended December 31, 2008 and 2007 and $204,785, for the period from acquisition (November 3, 2006) to December 31, 2006. Expenses from transactions with the affiliates were $521,764 and $610,369 for the years ended December 31, 2008 and 2007, and $195,075 for the period from acquisition (November 3, 2006) to December 31, 2006.

Costs of services the Company receives from affiliated parties may not be indicative of the costs of such services had they been obtained from different parties.

The Company has entered into Management agreements with each of its three shareholders as of November 3, 2006. The terms of the management agreements are one year and will be automatically renewed unless either the Company or the shareholder elects to terminate the service with 120 days written notice. Either party can terminate the agreement at any time with 120 days written notice. The annual management fee began January 1, 2007 and was $399,000 and $300,000 for the years ended December 31, 2008 and 2007.

95


Table of Contents

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - TRANSACTIONS WITH AFFILIATES (Continued)

The Company has also contracted with certain shareholders for corporate overhead functions such as accounting, billing and human resources, maintenance of plant, and internet help desk services. Each contract was effective November 3, 2006 and has duration of one year. Each contract will automatically renew unless either party elects to terminate the service with 120 days written notice. The fees for these services are billed at cost plus 20%. Costs include all direct costs and related employee overhead costs. There were no costs billed under these agreements in the period from acquisition (November 3, 2006) to December 31, 2006. Fees for these services were $1,329,982 and $1,498,134 for the years ended December 31, 2008 and 2007.

In addition, the Company’s shareholders provided labor and materials related to construction of the Company’s property, plant and equipment. The total of these services provided by the Company’s shareholder was $1,096,700 and $850,650 for the years ended December 31, 2008 and 2007. There were no construction related services provided in 2006.

The total balance due from the Company to its shareholders for routine services provided at December 31, 2008 and 2007 was $110,257 and $128,730.

NOTE 13 - SEGMENT INFORMATION

The Company operates in the communication segment and has no other significant business segments. The communication segment consists of voice, data and video communication services delivered to the customer over the Company’s local communications network.

No single customer accounted for a material portion of the Company’s revenues from the years ended December 31, 2008 and 2007 or the period from acquisition (November 3, 2006) to December 31, 2006. The Company has no foreign operations.

NOTE 14 - SHAREHOLDER AGREEMENT

The shareholders of the Company have entered into a Shareholder Agreement that requires any shareholder who is selling or otherwise transferring their shares of stock in the Company to first offer to sell those shares to the Company. In the event the Company elects to not purchase such shares, the other shareholders may elect to purchase the shares. Upon occurrence of certain other events specified in the Shareholder Agreement, the Company and the remaining shareholders may purchase the shares owned by a shareholder. The selling price is determined based upon provisions set forth in the agreement.

96


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

 

 

 

(Registrant)

 

 

Date:

March 30, 2009

 

By

/s/ Bill Otis

 

 

 

 

 

Bill Otis, President and Chief Executive Officer

 

 

 

 

 

 

(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

KNOW ALL BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Bill Otis as his or her true and lawful attorney-in-fact and agent, with full powers of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

 

 

 

 

 

 

Date:

March 30, 2009

 

By

/s/ Bill Otis

 

 

 

 

 

Bill Otis, President and Chief Executive Officer

 

 

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

/s/ Nancy Blankenhagen

 

 

 

 

 

Nancy Blankenhagen, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

/s/ James Jensen

 

 

 

 

 

James Jensen, Chairman of the Board

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Duane Lambrecht

 

 

 

 

 

Duane Lambrecht, Director

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Gary Nelson

 

 

 

 

 

Gary Nelson, Director

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Rosemary Dittrich

 

 

 

 

 

Rosemary Dittrich, Director

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Mary Ellen Domeier

 

 

 

 

 

Mary Ellen Domeier, Director

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Perry Meyer

 

 

 

 

 

Perry Meyer, Director

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Paul Erick

 

 

 

 

 

Paul Erick, Director

 

97


Table of Contents

INDEX TO EXHIBITS

Exhibits required to be filed by Item 601 of Regulation S-K are included as Exhibits to this report as follows:

 

 

 

3.1

 

Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3 contained in the quarterly report on Form 10-Q (file No. 000-03024) filed for the quarter ended June 30, 2004).

 

 

 

3.2

 

Restated By-Laws (incorporated by reference to the New Ulm Telecom, Inc. annual report on Form 10-K for the fiscal year ended December 31, 1986).

 

 

 

10.1+

 

Employment Agreement dated as of July 1, 2006, by and between New Ulm Telecom, Inc. and Mr. Bill Otis (incorporated by reference to Exhibit 10.1 contained in the Company’s Form 8-K filed on July 18, 2006).

 

 

 

10.2+

 

Employment Agreement dated as of July 1, 2006, by and between New Ulm Telecom, Inc. and Ms. Barbara Bornhoft (incorporated by reference to Exhibit 10.1 contained in the Company’s Form 8-K filed on July 18, 2006).

 

 

 

10.3

 

Shareholder Agreement dated as of November 1, 2006, by and among New Ulm Telecom, Inc., Arvig Enterprises, Inc., and Blue Earth Valley Communications, Inc. and each individually (incorporated by reference to Exhibit 10.1 contained in the Company’s Form 10-Q for the quarterly period ended September 30, 2006).

 

 

 

10.4+

 

New Ulm Telecom, Inc. Management Incentive Plan (incorporated by reference to Exhibit 10.4 contained in the Company’s 2007 Form 10-K).

 

 

 

10.5

 

Master Loan Agreement RX0583, dated as of January 4, 2008 between CoBank, ACB and New Ulm Telecom, Inc. (incorporated by reference to Exhibit 10.2 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.6

 

First Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank, ACB and New Ulm Telecom, Inc. (incorporated by reference to Exhibit 10.3 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.7

 

New Ulm Telecom, Inc. $15,000,000 Term Promissory Note (incorporated by reference to Exhibit 10.4 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.8

 

Second Supplement dated January 4, 2008, to the Master Loan Agreement between CoBank, ACB and New Ulm Telecom, Inc. (incorporated by reference to Exhibit 10.5 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.9

 

New Ulm Telecom, Inc. $10,000,000 Revolving Promissory Note (incorporated by reference to Exhibit 10.6 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.10

 

Master Loan Agreement RX0584, dated January 4, 2008 between CoBank, ACB and Hutchinson Telephone Company (as successor to Hutchinson Acquisition Corp) (incorporated by reference to Exhibit 10.7 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.11

 

First Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank, ACB and Hutchinson Telephone Company (incorporated by reference to Exhibit 10.8 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.12

 

Hutchinson Telephone Company $29,700,000 Promissory Note, (incorporated by reference to Exhibit 10.9 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.13

 

Second Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank, ABC and Hutchinson Telephone Company, (incorporated by reference to Exhibit 10.10 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

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Table of Contents

 

 

 

10.14

 

Hutchinson Telephone Company $2,000,000 Revolving Promissory Note, (incorporated by reference to Exhibit 10.11 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.15

 

Third Supplement dated January 4, 2008 to the Master Loan Agreement between CoBank, ACB and Hutchinson Telephone Company, (incorporated by reference to Exhibit 10.12 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.16

 

Hutchinson Telephone Company $3,000,000 Term Promissory Note, (incorporated by reference to Exhibit 10.13 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.17

 

Form of Security Agreement, entered into in connection with January 2008 credit facility from CoBank, ACB (incorporated by reference to Exhibit 10.14 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.18

 

Form of Guarantee, entered into in connection with January 2008 credit facility from CoBank, ACB (incorporated by reference to Exhibit 10.15 contained in the Company’s Form 8-K filed on January 7, 2008).

 

 

 

10.19

 

Interest Rate Swap Agreement dated February 26, 2008 between CoBank, ACB and New Ulm Telecom, Inc. (incorporated by reference to Exhibit 10.1 contained in the Company’s 10-Q for the quarter ended March 31, 2008).

 

 

 

10.20

 

Interest Rate Swap Agreement dated February 26, 2008 between CoBank, ACB and Hutchinson Telephone Company (incorporated by reference to Exhibit 10.2 contained in the Company’s 10-Q for the quarter ended March 31, 2008).

 

 

 

16.1

 

Letter Regarding the Change in Certifying Accountant – Kiesling Associates LLP (incorporated by reference to exhibit 16.1 contained in the Company’s Form 8-K filed on June 27, 2008).

 

 

 

21*

 

Subsidiaries of the Registrant.

 

 

 

24*

 

Power of Attorney (Included on Signature Page).

 

 

 

31.1*

 

Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a), 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(a), 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

* Filed Herewith

+ Indicates Compensatory Plan

99