Annual Statements Open main menu

Nuvera Communications, Inc. - Quarter Report: 2010 June (Form 10-Q)


Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

 

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 


 

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from     to     .


 

 

 

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)

(507) 354-4111
(Registrant’s telephone number, including area code)

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 the definition of “large accelerated filer, accelerated filer, non-accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer o 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

The total number of shares of the registrant’s common stock outstanding as of August 12, 2010: 5,115,435.

1


 

 

 

 

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

 

3-7

 

 

 

 

 

Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009

 

3

 

 

 

 

 

Consolidated Balance Sheets (unaudited) as of June 30, 2010 and December 31, 2009

 

4-5

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009

 

6

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Year Ended December 31, 2009 and for the Six months ended June 30, 2010

 

7

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements (unaudited)

 

8-19

 

 

 

 

Item 2

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

 

19-30

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

30-31

 

 

 

 

Item 4

Controls and Procedures

 

31

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

 

31

 

 

 

 

Item 1A

Risk Factors

 

31

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

31

 

 

 

 

Item 4

Removed and Reserved

 

32

 

 

 

 

Item 5

Other Information

 

32

 

 

 

 

Item 6

Exhibits

 

32

 

 

 

 

 

Signatures

 

33

 

 

 

 

 

Exhibits

 

34-38

2


Table of Contents


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

 

$

1,682,748

 

$

1,752,753

 

$

3,327,219

 

$

3,572,979

 

Network Access

 

 

3,165,919

 

 

3,515,851

 

 

6,631,264

 

 

6,913,427

 

Video

 

 

1,126,967

 

 

1,059,382

 

 

2,205,186

 

 

2,124,645

 

Data

 

 

593,708

 

 

609,651

 

 

1,176,340

 

 

1,216,075

 

Long Distance

 

 

141,106

 

 

185,477

 

 

340,108

 

 

395,804

 

Cellular

 

 

12,392

 

 

150,598

 

 

26,523

 

 

321,915

 

Other Non-Regulated

 

 

853,793

 

 

1,001,530

 

 

1,751,866

 

 

2,176,213

 

Total Operating Revenues

 

 

7,576,633

 

 

8,275,242

 

 

15,458,506

 

 

16,721,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Plant Operations (Excluding Depreciation and Amortization)

 

 

1,452,214

 

 

1,295,131

 

 

2,752,508

 

 

2,574,458

 

Cost of Video

 

 

996,054

 

 

918,487

 

 

1,987,311

 

 

1,879,095

 

Cost of Internet

 

 

257,350

 

 

350,080

 

 

477,007

 

 

679,414

 

Cost of Other Nonregulated Services

 

 

224,041

 

 

577,704

 

 

439,993

 

 

1,226,899

 

Depreciation and Amortization

 

 

2,477,384

 

 

2,374,379

 

 

4,938,999

 

 

4,722,257

 

Selling, General and Administrative

 

 

1,583,418

 

 

1,797,115

 

 

3,151,179

 

 

3,490,283

 

Total Operating Expenses

 

 

6,990,461

 

 

7,312,896

 

 

13,746,997

 

 

14,572,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

586,172

 

 

962,346

 

 

1,711,509

 

 

2,148,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(696,133

)

 

(713,398

)

 

(1,387,740

)

 

(1,471,837

)

Interest Income

 

 

12,799

 

 

18,422

 

 

84,408

 

 

99,151

 

Interest During Construction

 

 

9,803

 

 

99,540

 

 

13,804

 

 

99,540

 

Equity in Earnings of Hector Investment

 

 

109,089

 

 

160,779

 

 

284,629

 

 

372,730

 

CoBank Patronage Dividends

 

 

 

 

 

 

513,436

 

 

556,318

 

Other Investment Income

 

 

55,720

 

 

3,662

 

 

77,505

 

 

10,453

 

Total Other Income (Expense)

 

 

(508,722

)

 

(430,995

)

 

(413,958

)

 

(333,645

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

77,450

 

 

531,351

 

 

1,297,551

 

 

1,815,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAXES

 

 

(65,684

)

 

217,495

 

 

482,722

 

 

787,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

143,134

 

$

313,856

 

$

814,829

 

$

1,027,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME PER SHARE

 

$

0.03

 

$

0.06

 

$

0.16

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.08

 

$

0.10

 

$

0.16

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

5,115,435

 

 

5,115,435

 

 

5,115,435

 

 

5,115,435

 

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

3


Table of Contents


NEW ULM TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS

 

 

 

 

 

 

 

 

 

 

June 30,
2010

 

December 31,
2009

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

2,145,012

 

$

2,526,490

 

Receivables, Net of Allowance for Doubtful Accounts of $703,053 and $549,500

 

 

1,192,019

 

 

1,696,270

 

Income Taxes Receivable

 

 

1,057,803

 

 

2,355,672

 

Materials, Supplies, and Inventories

 

 

1,458,928

 

 

1,295,638

 

Deferred Income Taxes

 

 

951,513

 

 

953,968

 

Prepaid Expenses

 

 

497,460

 

 

255,698

 

Total Current Assets

 

 

7,302,735

 

 

9,083,736

 

 

 

 

 

 

 

 

 

INVESTMENTS & OTHER ASSETS:

 

 

 

 

 

 

 

Goodwill

 

 

29,992,294

 

 

29,516,324

 

Intangibles

 

 

23,183,431

 

 

24,216,886

 

Hector Investment

 

 

19,733,212

 

 

19,392,310

 

Other Investments

 

 

3,983,887

 

 

3,904,188

 

Other Assets

 

 

266,900

 

 

354,662

 

Total Investments and Other Assets

 

 

77,159,724

 

 

77,384,370

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT:

 

 

 

 

 

 

 

Telecommunications Plant

 

 

91,503,861

 

 

88,548,209

 

Other Property & Equipment

 

 

4,850,202

 

 

4,669,052

 

Video Plant

 

 

5,614,635

 

 

5,580,260

 

Total Property, Plant and Equipment

 

 

101,968,698

 

 

98,797,521

 

Less Accumulated Depreciation

 

 

64,769,817

 

 

61,030,271

 

Net Property, Plant & Equipment

 

 

37,198,881

 

 

37,767,250

 

 

TOTAL ASSETS

 

$

121,661,340

 

$

124,235,356

 

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

4


Table of Contents


NEW ULM TELECOM, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

June 30,
2010

 

December 31,
2009

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current Portion of Long-Term Debt

 

$

3,207,965

 

$

2,957,965

 

Accounts Payable

 

 

1,292,744

 

 

1,924,806

 

Other Accrued Taxes

 

 

185,174

 

 

187,932

 

Deferred Compensation

 

 

682,844

 

 

694,511

 

Other Accrued Liabilities

 

 

1,679,656

 

 

1,626,950

 

Total Current Liabilities

 

 

7,048,383

 

 

7,392,164

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, Less Current Portion

 

 

45,054,894

 

 

46,793,859

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

Loan Guarantees

 

 

498,234

 

 

514,666

 

Deferred Income Taxes

 

 

13,382,925

 

 

13,709,382

 

Other Accrued Liabilities

 

 

98,297

 

 

109,657

 

Financial Derivative Instruments

 

 

2,682,668

 

 

2,036,361

 

Deferred Compensation

 

 

1,347,513

 

 

1,798,726

 

Total Noncurrent Liabilities

 

 

18,009,637

 

 

18,168,792

 

 

 

 

 

 

 

 

 

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)

 

 

(2,180,209

)

 

(1,851,735

)

Retained Earnings

 

 

45,202,910

 

 

45,206,551

 

Total Stockholders’ Equity

 

 

51,548,426

 

 

51,880,541

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

121,661,340

 

$

124,235,356

 

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

5


Table of Contents


NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,
2010

 

June 30,
2009

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net Income

 

$

814,829

 

$

1,027,383

 

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

4,958,537

 

 

4,741,949

 

Undistributed Earnings of Hector Investment

 

 

(284,629

)

 

(372,730

)

Noncash Patronage Refund

 

 

(179,703

)

 

(194,711

)

Distributions from Equity Investments

 

 

 

 

35,251

 

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

Receivables

 

 

506,124

 

 

301,156

 

Income Taxes Receivable

 

 

1,297,869

 

 

(1,266,149

)

Inventories

 

 

(163,290

)

 

6,782

 

Prepaid Expenses

 

 

(241,762

)

 

5,179

 

Deferred Charges

 

 

 

 

20,222

 

Accounts Payable

 

 

(462,984

)

 

274,075

 

Accrued Income Taxes

 

 

 

 

(1,570,860

)

Other Accrued Taxes

 

 

(2,758

)

 

(5,961

)

Other Accrued Liabilities

 

 

41,346

 

 

(598,548

)

Deferred Income Tax

 

 

3,910

 

 

265,688

 

Deferred Compensation

 

 

(462,880

)

 

(551,836

)

Net Cash Provided by Operating Activities

 

 

5,824,609

 

 

2,116,890

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Additions to Property, Plant, and Equipment, Net

 

 

(2,382,224

)

 

(2,719,029

)

Acquisition of Glencoe CATV System

 

 

(1,600,000

)

 

 

Other, Net

 

 

83,572

 

 

(188,472

)

Net Cash Used in Investing Activities

 

 

(3,898,652

)

 

(2,907,501

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Principal Payments of Long-Term Debt

 

 

(1,488,965

)

 

(269,004

)

Issuance of Long-Term Debt

 

 

 

 

400,000

 

Dividends Paid

 

 

(818,470

)

 

(1,023,087

)

Net Cash Used in Financing Activities

 

 

(2,307,435

)

 

(892,091

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(381,478

)

 

(1,682,702

)

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS at Beginning of Period

 

 

2,526,490

 

 

3,320,510

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS at End of Period

 

$

2,145,012

 

$

1,637,808

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,378,252

 

$

1,545,757

 

Net cash (received) paid for income taxes

 

$

(842,000

)

$

3,368,336

 

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

6


Table of Contents


NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

YEAR ENDED DECEMBER 31, 2009, AND
SIX MONTHS ENDED JUNE 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained
Earnings

 

Total
Equity

 

 

 

Common Stock

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2008

 

 

5,115,435

 

$

8,525,725

 

$

(2,229,103

)

$

45,405,280

 

$

51,701,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,642,828

 

 

1,642,828

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,841,557

)

 

(1,841,557

)

Unrealized Gains of Equity Method Investee

 

 

 

 

 

 

 

 

175,900

 

 

 

 

 

175,900

 

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

 

 

 

 

 

 

 

 

201,468

 

 

 

 

 

201,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2009

 

 

5,115,435

 

 

8,525,725

 

 

(1,851,735

)

 

45,206,551

 

 

51,880,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

814,829

 

 

814,829

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(818,470

)

 

(818,470

)

Unrealized Gains of Equity Method Investee

 

 

 

 

 

 

 

 

56,272

 

 

 

 

 

56,272

 

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

 

 

 

 

 

 

 

 

(384,746

)

 

 

 

 

(384,746

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on June 30, 2010

 

 

5,115,435

 

$

8,525,725

 

$

(2,180,209

)

$

45,202,910

 

$

51,548,426

 

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

7


Table of Contents


NEW ULM TELECOM, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010 (Unaudited)

Note 1 – Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements of New Ulm Telecom, Inc. (NU Telecom) and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to these rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements and notes thereto, should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.

Our consolidated financial statements include NU Telecom and its subsidiaries. All inter-company transactions have been eliminated from the consolidated financial statements.

Revenue Recognition
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or a service has been provided, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.

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

Revenues earned from interexchange carriers (IXCs) accessing our network are based on the utilization of our network by these carriers as measured by minutes of use on the network by the individual carriers. Revenues are billed at tariffed access rates for both interstate and intrastate calls. Revenues for these services are recognized based on the period the access is provided.

8


Table of Contents


Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The Federal Communications Commission (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 a company’s actual or average costs. NU Telecom settlements from the pools are based on its actual costs to provide service, while the settlements for NU Telecom subsidiaries – Western Telephone Company, Peoples Telephone Company, and Hutchinson Telephone Company (HTC) are based on nationwide average schedules. Access revenues for NU Telecom include an estimate of a cost study each year that is trued-up subsequent to the end of any given year. Our management believes the estimates included in our preliminary cost study are reasonable. We cannot predict the future impact that industry or regulatory changes will have on interstate access revenues.

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

We derive revenues from system sales and services through the sale, installation and servicing of communication systems. In accordance with Accounting Standards Codification (ASC) Topic 605 – Revenue Recognition, these deliverables are accounted for separately. We recognize revenue from customer contracts for sales and installations using the completed-contract method, which recognizes income when the contract is substantially complete. We recognize rental revenues over the rental period.

Cost of Services (excluding depreciation and amortization)
Cost of services includes all costs related to delivery of communication services and products. These operating costs include all costs of performing services and providing related products including engineering, network monitoring, and transport cost.

Selling, General and Administrative Expenses
Selling, general and administrative expenses include direct and indirect selling expenses, customer service, billing and collections, advertising and all other general and administrative costs associated with the operations of the business.

Depreciation and Amortization Expense
Depreciation expense is computed using principally the straight-line method based on estimated service or remaining useful lives of the various classes of depreciable assets. Amortization expense is computed using the straight-line method based on the lives of identified finite-lived intangible assets.

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 bases. Significant components of our 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. Our effective income tax rate is normally higher than the United States tax rate due to state income taxes and permanent differences.

9


Table of Contents


We account for income taxes in accordance with ASC Topic 740 – Income Taxes. As required by ASC Topic 740, we recognize 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. On April 29, 2010, the Minnesota Department of Revenue completed its audit of our state tax returns for the years 2006, 2007 and 2008. Following the completion of that audit, we recognized approximately $124,000 in net tax benefits in April 2010 to eliminate accrued income taxes related to gains on our Midwest Wireless holdings sold in 2006. The above mentioned tax examination also resulted in an additional state tax liability plus interest of $8,236, $13,485 and $1,223 for 2006, 2007 and 2008, respectively.

Per ASC Topic 740, we had approximately $36,300 of unrecognized tax benefits at June 30, 2010 that, if recognized, would favorably affect the income tax provision when recorded.

We are primarily subject to United States, Minnesota and Iowa income taxes. Tax years subsequent to 2005 remain open to examination by federal and state tax authorities. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. At December 31, 2009 we had $32,804 accrued for interest or penalties related to income tax matters and at June 30, 2010, we had $6,567 accrued for interest or penalties related to income tax matters.

Recent Accounting Developments

Effective February 10, 2010, we adopted ASU Update 2010-09 – Subsequent Events, which provides amendments to ASC Topic 855 removing the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. The adoption of ASU Update 2010-09 did not have a significant impact on our disclosures.

Issued in January, 2010, ASU Update 2010-06 – Fair Value Measures and Disclosures, provides amendments to ASC Topic 820 that will provide more robust disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in level 3 fair value measurement and (iv) the transfers between levels 1, 2 and 3. ASC Update 2010-06 is effective for fiscal years beginning after December 15, 2010. We do not expect the adoption of ASU Update 2010-06 to have a material effect on our financial statements or our disclosures.

We reviewed all other significant newly issued accounting pronouncements and determined they are either not applicable to our business or that no material effect is expected on our financial position and results of operations.

Note 2 – Noncash Investing Activities

Noncash investing activities included $174,249 and $621,434 for the periods ended June 30, 2010 and 2009, respectively. These activities related to plant and equipment additions placed in service during the first six months of 2010 and 2009, respectively, and are recorded in our accounts payable at June 30, 2010 and 2009, respectively.

10


Table of Contents


Note 3 – Fair Value Measurements

We have adopted the rules prescribed under ASC Topic 820 – Fair Value Measurements and Disclosures, for our financial assets and liabilities. Our adoption of ASC Topic 820 did not affect our financial position, results of operations, liquidity or disclosures, as we did not have any financial assets or liabilities that were measured at fair value on a recurring basis as of January 1, 2008. In accordance with ASC Topic 820, we elected to defer the adoption for all non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis until January 1, 2009. This includes goodwill and non-financial long-lived assets that are measured at fair value in impairment testing. ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we consider (i) the principal or most advantageous market in which we would transact business related to those assets and liabilities, and (ii) the market-based risk measurements or assumptions, such as inherent risk, transfer restrictions and credit risk that market participants would use in pricing the asset or liability.

ASC Topic 820 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 that 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, we entered into interest rate swaps with our lender CoBank, ACB to manage our 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. 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 (loss) for as long as the hedge remains effective.

The fair value of our interest rate swap agreements was determined based on Level 2 inputs.

Other Financial Instruments

Equity Investments - It is not practicable to estimate fair value for investments in companies carried on the cost basis due to a lack of quoted market prices. We did, however, evaluate the fair value of our investments in our companies at December 31, 2009 using a combination of a discounted cash flow model and a market-based approach. The assumptions used in the estimates of fair value are based on a combination of historical results and trends, new industry developments, future cash flow projections as well as relevant comparable company earnings multiples for the market-based approach. It is our opinion that the carrying value of our investments in our companies approximates the fair market value.

11


Table of Contents


Debt – We estimate the fair value of our long-term debt based on the discounted value of the future cash flows. We expect to be paid using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value.

Other Financial Instruments - Our financial instruments also include cash equivalents, trade accounts receivable and accounts payable where the current carrying amounts approximate fair market value.

Note 4 – Goodwill and Intangible Assets

We account for goodwill and other intangible assets under ASC Topic 350 – Intangibles – Goodwill and Other. Under the provisions of this accounting standard, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value.

As required by ASC Topic 350, we do not amortize goodwill and other intangible assets with indefinite lives, but test 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. These circumstances include, but are not limited to, (i) a significant adverse change in the business climate, (ii) unanticipated competition or (iii) an adverse action or assessment by a regulator. Determining impairment involves estimating the fair value of a reporting unit using a combination of (i) the income or discounted cash flows approach and (ii) the market approach that 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. We recognize impairment loss when the carrying amount of goodwill exceeds its implied fair value. We completed our annual impairment test for acquired goodwill in the fourth quarter of 2009, which resulted in no impairment charges to goodwill.

Our intangible assets subject to amortization consist of acquired customer relationships, regulatory rights and a noncompetition agreement. As of December 31, 2009, our management determined that our trade name intangible was no longer an indefinite-lived intangible asset due to the rebranding of HTC’s products and services. Our management anticipates that this rebranding process will take approximately three years to complete. We anticipate an additional charge to amortization expense of $266,667 per year, over the three years beginning in 2010, due to this rebranding process.

12


Table of Contents


We amortize intangible assets with definite lives over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. The components of our identified intangible assets are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Useful
Lives

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Definite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers Relationships

 

 

14-15 yrs

 

$

19,230,785

 

$

3,447,364

 

$

19,230,785

 

$

2,760,566

 

Regulatory Rights

 

 

15 yrs

 

 

4,000,000

 

 

666,663

 

 

4,000,000

 

 

533,333

 

Non-Competition Agreement

 

 

5 yrs

 

 

800,000

 

 

399,994

 

 

800,000

 

 

320,000

 

Trade Name

 

 

3 yrs

 

 

800,000

 

 

133,333

 

 

800,000

 

 

 

Indefinitely-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Video Franchise

 

 

 

 

 

3,000,000

 

 

 

 

3,000,000

 

 

 

Total

 

 

 

 

$

27,830,785

 

$

4,647,354

 

$

27,830,785

 

$

3,613,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Identified Intangible Assets

 

 

 

 

 

 

 

$

23,183,431

 

 

 

 

$

24,216,886

 

We periodically reassess the carrying value, useful lives and classifications of identifiable assets. Amortization expense related to the definite-lived intangible assets was $1,033,454 and $900,121 for the six months ended June 30, 2010 and 2009, respectively.

Our total estimated amortization expense for the remaining six months of 2010 and the five years subsequent to 2010 is as follows:

 

 

 

 

(July 1 – December 31) - $1,033,360

 

2011 - $2,066,814

 

2012 - $2,066,814

 

2013 - $1,640,147

 

2014 - $1,640,147

 

2015 - $1,640,147

Note 5 – Secured Credit Facility

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

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

13


Table of Contents


The loan agreements also put restrictions on the ability of NU Telecom to pay cash dividends to its shareholders. NU Telecom is allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if NU Telecom’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 NU Telecom is not in default or potential default under the loan agreements.

As of June 30, 2010, we were in compliance with the financial ratios in the loan agreements.

As described in Note 6 – “Interest Rate Swaps” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, we entered into interest rate swaps that effectively fix our interest rates and cover $45.0 million at a weighted average rate of 5.72%, as of June 30, 2010. The additional $10.0 million available under the credit facility remains subject to variable interest rates, with a current outstanding balance of $3.2 million at an effective weighted average interest rate of 2.8%, as of June 30, 2010.

Note 6 – Interest Rate Swaps

We assess 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.

We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank, ACB, including the MLAs with NU Telecom and HTC and the respective supplements for the two companies, require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.

To meet this objective, NU Telecom and HTC each 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, NU Telecom 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, NU Telecom and/or HTC pays a fixed contractual interest rate and (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.

Each month, we make interest payments to CoBank, ACB under its loan agreements based on the current applicable LIBOR Rate plus the contractual LIBOR margin then in effect with respect to each applicable loan, without reflecting any interest rate swaps. At the end of each calendar quarter, CoBank, ACB adjusts our aggregate interest payments based upon the difference, if any, between the amounts paid by us during the quarter and the current effective interest rate set forth in the table below. All net interest payments made by us are reported in our consolidated income statement as interest expense.

Pursuant to these interest rate swap agreements, we entered into interest rate swaps covering (i) $39.0 million of our aggregate indebtedness to CoBank, ACB effective March 19, 2008 and (ii) an additional $6.0 million of our 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.

14


Table of Contents


As of June 30, 2010, we had the following interest rate swaps in effect.

 

 

 

 

 

 

 

 

Borrower

 

Maturity Date

 

Notional Amount

 

Current 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 we pay giving effect to the swaps.

These interest rate swaps qualify as cash flow hedges for accounting purposes under ASC Topic 815 – Derivatives and Hedging. We have reflected the effect of these hedging transactions in the financial statements. We recognized an unrealized loss, net of tax, of $384,746 for the six months ended June 30, 2010 and an unrealized gain, net of tax, of $402,470 for the six months ended June 30, 2009. The unrealized loss and gain were reported in other comprehensive income (loss). If we were to terminate our interest rate swap agreements, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income (loss), which is classified in shareholders’ equity, into earnings on the consolidated statements of income.

We determined the fair value of our interest rate swap agreements at June 30, 2010 based on valuations received from CoBank, ACB. The fair value indicates an estimated amount we would receive or pay if the contracts were canceled or transferred to other parties.

15


Table of Contents


The activity on the interest rate swap agreements were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Gain (Loss) on Derivative Instruments

 

$

(311,673

)

$

875,615

 

$

(646,307

)

$

676,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Income Tax

 

 

122,160

 

 

(354,361

)

 

261,561

 

 

(273,610

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Reported in Accumulated Other Comprehensive Income (Loss)

 

$

(189,513

)

$

521,254

 

$

(384,746

)

$

402,470

 

Note 7 – Other Investments

We are a co-investor with other rural telephone companies in several partnerships and limited liability companies. These joint ventures make it possible to offer services to customers, including digital video services and fiber optic transport services, that we would have difficulty offering on our own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. We recognize income and losses from these investments on the equity method of accounting. For a listing of our investments, see Note 10 – “Segment Information” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

On June 30, 2009, NU Telecom entered into an Equity Securities Purchase Agreement with Iowa Telecom where we agreed to sell our ownership interests in SHAL Networks, Inc.; SHAL, LLC; Direct Communications, LLC and En-Tel Communications, LLC to Iowa Telecom. On September 24, 2009, NU Telecom completed the sale of its ownership interests for approximately $1.9 million in cash and fiber facilities valued at $67,500, including specified customary adjustments. The sale of these equity investments resulted in a gain of $1,045,599 in the third quarter of 2009. The sale of these minority-owned investments allowed NU Telecom to monetize non-core investments. In addition, this transaction released NU Telecom from approximately $5.7 million in loan guarantees to Rural Telephone Finance Cooperative for loans to SHAL, LLC and En-Tel Communications, LLC. See Note 8 – “Guarantees” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q for more information regarding our guarantees.

Note 8 – Guarantees

On January 30, 2004, we guaranteed a portion of the indebtedness of FiberComm, LC in connection with the refinancing of a fifteen-year loan, maturing in January, 2019, made by American State Bank to FiberComm, LC. As of June 30, 2010, we had recorded a liability of $345,290 in connection with this guarantee.

In 2009, we guaranteed additional indebtedness of FiberComm, LC in connection with an additional loan entered into on March 23, 2009, maturing January 1, 2015, made by American State Bank to FiberComm, LC. As of June 30, 2010, we have recorded an additional liability of $152,944 in connection with the guarantee on this loan. As a result of these two guarantees, we have guaranteed a total of $498,234 of indebtedness of FiberComm, LC as of June 30, 2010. Either of these two guarantees may be exercised if FiberComm, LC does not make its required payments on these notes.

16


Table of Contents


Note 9 – Deferred Compensation

As part of the acquisition of HTC, we have recorded other deferred compensation relating to the estimated present value of executive compensation payable to certain former executives of HTC.

Compensation over the next five years includes deferred wages totaling $1,189,833 and continuation of employee benefits. The difference between the recorded deferred compensation on the balance sheet and compensation to be paid over the next five years is due to life-time employee benefits.

Note 10 – Segment Information

We operate in the Telecom Segment and have no other significant business segments. The Telecom Segment consists of voice, data and video communication services delivered to the customer over our local communications network. The Telecom Segment operates the following incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) and has investment ownership interests as follows:

Telecom Segment Businesses

 

 

 

 

 

ILECs:

 

 

§

New Ulm Telecom, Inc., the parent company;

 

 

§

Hutchinson Telephone Company, a wholly-owned subsidiary of NU Telecom;

 

 

§

Western Telephone Company, a wholly-owned subsidiary of NU Telecom; and

 

 

§

Peoples Telephone Company, a wholly-owned subsidiary of NU Telecom;

 

CLECs:

 

 

§

New Ulm Telecom, Inc. located in Redwood Falls, Minnesota; and

 

 

§

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

 

Our investments and interests in the following entities include some management responsibilities:

 

 

§

Hector Communications Corporation (HCC) – 33.33% ownership interest;

 

 

§

FiberComm, LC – 25.18% ownership interest;

 

 

§

Broadband Visions, LLC – 16.26% ownership interest; and

 

 

§

Independent Emergency Services, LLC – 14.29% ownership interest.

No single customer accounted for a material portion of our consolidated revenues.

Note 11 – Comprehensive Income

Our comprehensive income includes two items in addition to net income. The first is an unrealized gain (loss) resulting from our one-third ownership share of HCC’s accumulated other comprehensive income (loss). HCC’s accumulated comprehensive income (loss) differs from the “HCC investment income” reported on our 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 that we have entered into with CoBank, ACB. These interest rate swap agreements cover $45.0 million of our indebtedness to CoBank, ACB, and are described in Note 6 – “Interest Rate Swaps” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

17


Table of Contents


Components of our comprehensive income consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net Income

 

$

143,134

 

$

313,856

 

$

814,829

 

$

1,027,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gain of Equity Method Investee

 

 

54,305

 

 

143,649

 

 

56,272

 

 

136,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains (Losses) of Interest Rate Swap Agreements, Net of Deferred Income Taxes

 

 

(189,513

)

 

521,254

 

 

(384,746

)

 

402,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

$

7,926

 

$

978,759

 

$

486,355

 

$

1,565,936

 

Note 12 – Hector Communications Corporation

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

Our President and Chief Executive Officer, Mr. Bill D. Otis, has been named Chairman of the Board of Directors and President of HCC. Ms. Barbara A.J. Bornhoft, our Vice-President and Chief Operating Officer, also serves on the Board of Directors of HCC.

The following table summarizes financial information of HCC for the periods ended June 30, 2010 and 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

$

6,729,580

 

$

7,051,302

 

$

13,657,795

 

$

14,138,796

 

Operating Income

 

 

1,270,604

 

 

1,530,940

 

 

2,869,287

 

 

3,402,764

 

Net Income

 

 

327,268

 

 

482,337

 

 

853,888

 

 

1,118,191

 

Note 13 – Acquisition of Cable Television Assets (CATV)

On June 14, 2010, NU Telecom completed the acquisition of all of the assets of the CATV system located in and around Glencoe, Minnesota from Midcontinent Communications (MIDCO) for approximately $1.6 million pursuant to the Asset Purchase Agreement dated March 30, 2010. NU Telecom funded the purchase with current cash reserves. The acquisition resulted in the addition of approximately 1,200 connections to our video and Internet services.

The allocation of the purchase price for the CATV assets has been based on preliminary estimates of the asset’s fair values and further analysis and changes to those fair values may occur. ASC Topic 805 – Business Combinations, establishes criteria for determining whether intangible assets should be recognized separately from goodwill. ASC Topic 350 – Intangibles – Goodwill and Other, provides that goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment on at least an annual basis.

18


Table of Contents


The preliminary allocation of the net purchase price of the CATV assets is shown below:

 

 

 

 

 

 

 

Property, plant and equipment

 

$

1,124,010

 

 

Excess cost over net assets acquired (Goodwill)

 

 

475,970

 

 

Cash paid for acquisition

 

$

1,600,000

 

This acquisition was accounted for using the acquisition method of accounting for business combinations, and accordingly, the acquired assets were recorded at estimated fair values as of the date of the acquisition.

Note 14 – Subsequent Events

We have evaluated all subsequent events through the filing date of this Quarterly Report on Form 10-Q.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “targets,” “projects,” “will,” “may,” “continues,” and “should,” and variations of these words and similar expressions, are intended to identify these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause NU Telecom’s actual results to differ materially from such statements. Factors that might cause differences include, but are not limited to, those contained in Item 1A of Part II, “Risk Factors” of this quarterly report on Form 10-Q, and Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2009, which is incorporated herein by reference.

Because of these risks, uncertainties, and assumptions and the fact that any forward-looking statements made by NU Telecom and its management are based on estimates, projections, beliefs and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. In addition, forward-looking statements speak only as of the date they are made. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligations to update any forward-looking information, whether as a result of new information, future events or otherwise.

19


Table of Contents


Critical Accounting Policies

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. A description of the accounting policies that we consider particularly important for the portrayal of our results of operations and financial position, and that may require a higher level of judgment by our management, is contained under the caption, “Critical Accounting Policies,” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Overview

NU Telecom offers a diverse array of communications products and services. Our ILEC businesses provide local telephone service and network access to other telecommunications carriers for calls originated or terminated on our network. In addition, we provide long distance service, dial-up and broadband Internet access, and video services. In 2002, we expanded our geographic service area by competitively providing service as a CLEC in the city of Redwood Falls, Minnesota. This CLEC provides local telephone service, long distance service, dial-up and broadband Internet access, and video services using our facilities. In 2008, we completed our acquisition of HTC, adding both an ILEC and a CLEC to our portfolio of operations. On June 14, 2010, we completed the acquisition of the assets of the CATV system operating in and around Glencoe, Minnesota, continuing the expansion of our service area. We also sell and service other communications products.

Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our networks, which consists of switches and cable, data, Internet protocol (IP) and commercial television programming. We also need capital to maintain our networks and infrastructure; fund the payroll costs of our highly skilled labor force; maintain inventory to service capital projects, our network and our telephone equipment customers; and to provide for the carrying value of trade accounts receivable, some of which may take several months to collect in the normal course of business.

Trends

In the first six months of 2010, we continue to be affected by both increasing competition and the effects of the current United States economic decline. Despite the challenging economic times, we have continued to expand our services and product offerings. By offering customers outstanding customer service and the products and services they desire, we believe that we have positioned ourselves to take advantage of an improving economic climate in which consumers enhance their utilization of communication services.

As the quantity and type of competitors within the telecommunications industry continue to grow, competition will remain intense. We have continued to experience competition from CATV providers, voice over internet protocol (VoIP) providers, wireless and other competitors during the past several years. Competition, combined with consumers substituting other methods for traditional voice services, has and will continue to negatively affect our current and future local and network access revenue streams. Over a one year period and as measured on June 30, 2010, access lines had decreased 613 or 2.1%, compared to access lines as of June 30, 2009. It should be noted that the 2.1% decline in access lines is below the industry average.

20


Table of Contents


As we experience access line losses, our network access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs and lower demand for dedicated lines may affect our future network access revenue. Network access revenue may also be significantly affected by potential changes in rate regulation at the state and federal levels. We continue to monitor regulatory changes as we believe that rate regulation will continue to be scrutinized and may be subject to change.

We have built a state-of-the-art broadband network and continue to increase connectivity speeds to customers, along with the bundling of our voice, Internet and video services, allowing us to meet customer demands for products and services. We continue to focus on the research and deployment of advanced technological products that include broadband services, private line, VoIP, digital video and Internet protocol television services (IPTV).

21


Table of Contents


Financial results for the Telecom Segment are included below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecom Segment

 

Three Months Ended June 30

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

 

$

1,682,748

 

$

1,752,753

 

$

3,327,219

 

$

3,572,979

 

Network Access

 

 

3,165,919

 

 

3,515,851

 

 

6,631,264

 

 

6,913,427

 

Video

 

 

1,126,967

 

 

1,059,382

 

 

2,205,186

 

 

2,124,645

 

Data

 

 

593,708

 

 

609,651

 

 

1,176,340

 

 

1,216,075

 

Long Distance

 

 

141,106

 

 

185,477

 

 

340,108

 

 

395,804

 

Bill Processing

 

 

5,749

 

 

8,572

 

 

7,848

 

 

14,832

 

Cellular

 

 

12,392

 

 

150,598

 

 

26,523

 

 

321,915

 

Other

 

 

848,044

 

 

992,958

 

 

1,744,018

 

 

2,161,381

 

Total Operating Revenues

 

 

7,576,633

 

 

8,275,242

 

 

15,458,506

 

 

16,721,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Services, Excluding Depreciation and Amortization

 

 

2,929,659

 

 

3,141,402

 

 

5,656,819

 

 

6,359,866

 

Selling, General and Administrative

 

 

1,583,418

 

 

1,797,115

 

 

3,151,179

 

 

3,490,283

 

Depreciation and Amortization Expenses

 

 

2,477,384

 

 

2,374,379

 

 

4,938,999

 

 

4,722,257

 

Total Operating Expenses

 

 

6,990,461

 

 

7,312,896

 

 

13,746,997

 

 

14,572,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

586,172

 

$

962,346

 

$

1,711,509

 

$

2,148,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

143,134

 

$

313,856

 

$

814,829

 

$

1,027,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

1,046,756

 

$

1,341,343

 

$

2,382,224

 

$

2,719,029

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Key metrics

 

 

 

 

2010

 

2009

 

Access Lines

 

 

 

 

 

28,655

 

 

29,268

 

Video Customers

 

 

 

 

 

10,293

 

 

9,500

 

Broadband Customers

 

 

 

 

 

9,631

 

 

9,010

 

Dial Up Internet Customers

 

 

 

 

 

1,231

 

 

1,817

 

Long Distance Customers

 

 

 

 

 

14,044

 

 

14,436

 

Revenue

Local Service – This recurring revenue is generated primarily through the sales of basic voice telephone services, enhanced calling features, local private lines and circuits, reciprocal compensation from wireless carriers and other miscellaneous local services. Local service revenue was $1,682,748, which is $70,005, or 4.0% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $3,327,219, which is $245,760, or 6.9% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decreases were primarily due to a decrease in access lines of 613 or 2.1% from June 30, 2010 compared to June 30, 2009. Our access lines are decreasing as customers are increasingly utilizing other technologies, such as wireless phones and IP services, as well as customers eliminating second phone lines when they move their Internet service from a dial-up platform to a broadband platform.

22


Table of Contents


The number of access lines we serve as an ILEC has been decreasing, which is consistent with a general industry trend. To help offset declines in local service revenue, we implemented an overall strategy that continues to focus on selling a competitive bundle of services. Our focus on marketing competitive service bundles to our customers helps create value for the customer and aids in the retention of our voice lines.

Network Access – We receive a variety of fees and settlements to compensate us for the origination, transport and termination of calls and traffic on our network. These include fees assessed to IXCs, subscriber line charges imposed on end-users and settlements from nationally administered revenue pools. Network access revenue was $3,165,919, which is $349,932, or 10.0% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $6,631,264, which is $282,163 or 4.1% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. A decrease in access lines, which has resulted in lowering our overall minutes of use and IXCs optimizing their networks, thus lowering the demand for special access circuits, have all contributed to to the decline in the utilization of our network and the corresponding decrease in our revenues. In addition, our revenues were decreased by approximately $156,000 in the second quarter of 2010 due to NECA settlement true-ups and the settlement of a dispute with an IXC.

Video – We receive monthly recurring revenue from end-user subscribers for providing commercial television programming. Video revenue was $1,126,967, which is $67,585, or 6.4% higher in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $2,205,186, which is $80,541 or 3.8% higher in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This increase was primarily due to a rate increase that we implemented in March 2010 and the addition of the Glencoe CATV system in June 2010. In addition, in 2010, we launched IPTV services in New Ulm, Courtland and Redwood Falls, Minnesota and Aurelia, Iowa. This new enhanced service offering provides customers with desired features and options, such as digital video recording.

Data – We receive monthly recurring revenue by providing dial-up and high speed Internet access to residential and business customers. Internet revenue was $593,708, which is $15,943, or 2.6% lower, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $1,176,340, which is $39,735 or 3.3% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This decrease was primarily the result of a decrease in dial-up Internet customers. Despite the decline in data revenues and dial-up Internet customers, data operating margins have increased due to the increase in higher margin broadband customers. We expect future growth in this area will be driven by customer migration from dial-up Internet to broadband products, such as our broadband services; expansion of service areas, including Glencoe, Minnesota, and our aggressively packaging and selling service bundles.

Long Distance – Our end-user customers are billed for toll or long-distance services on either a per-call or flat-rate basis. This includes the provision of directory assistance and operator services. Long distance revenue was $141,106, which is $44,371, or 23.9% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $340,108, which is $55,696 or 14.1% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease in revenue was primarily the result of the loss of 2.7% of our customer base from June 30, 2010 compared to June 30, 2009 as customers are utilizing other technologies such as wireless and IP services to satisfy their long distance communication needs.

23


Table of Contents


Bill Processing – We provide bill processing and collection as a service to other telephone service providers. We receive a fee for providing this service. The revenue received for these services has been declining as more providers are directly billing their customers and as we limit other telephone and enhanced service providers access to our billing services.

Cellular – Prior to September 1, 2009, we were an authorized agent for Alltel. As an authorized agent, we earned revenue through the sales and service of cellular phone and accessories. In addition, we received commissions for selling Alltel services. In the fourth quarter of 2009, we began offering a Company-branded service (Tech Trends Wireless) and agency sales for Unicel. Due to these changes in our cellular revenue structure starting in 2009, our cellular revenue was $12,392, which is $138,206, or 91.8% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $26,523, which is $295,392, or 91.8% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

Other Revenue – Other revenue consists primarily of sales of customer premise equipment (CPE), transport services, maintenance and adds/moves/change revenue. Other revenue was $848,044, which is $144,914, or 14.6% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $1,744,018, which is $417,363, or 19.3% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This decrease was primarily the result of a decrease in CPE revenue due to the current United States economic downturn as customers are delaying the replacement and upgrades of their equipment.

Cost of Services (excluding Depreciation and Amortization)

Cost of services (excluding depreciation and amortization) was $2,929,659, which is $211,743, or 6.7% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $5,656,819, which is $703,047, or 11.1% lower in the six months ended June 30, 2010 compared to June 30, 2009. The decrease was primarily due to lower costs associated with lower revenues and management efforts to contain costs in the current economic climate.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,583,418, which is $213,697, or 11.9% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $3,151,179, which is $339,104, or 9.7% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily due to management efforts to contain costs in the current economic climate.

Depreciation and Amortization

Depreciation and amortization was $2,477,384, which is $103,005, or 4.3% higher in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $4,938,999, which is $216,742, or 4.6% higher in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase was primarily due to $66,667 for the three months ended June 30, 2010 and $133,333 for the six months ended June 30, 2010 in additional amortization recognized as a result of management’s determination that our trade name intangible asset acquired with the purchase of HTC had become a definite-lived intangible asset as of December 31, 2009.

24


Table of Contents


Operating Income

Operating income was $586,172, which is $376,174, or 39.1% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $1,711,509, which is $437,143, or 20.3% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The year-to-date decrease was primarily due to a 7.6% decrease in operating revenues, which was offset by a 5.7% decrease in operating expenses, all of which are described above.

Other Income and Interest Expense

Interest expense was $696,133, which is $17,265, or 2.4% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $1,387,740, which is $84,097, or 5.7% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was primarily the result of lower outstanding debt balances.

Interest income was $12,799, which is $5,623, or 30.5% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $84,408, which is $14,743, or 14.9% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. As a result of servicing our debt, excess cash available to purchase investments was lower, and combined with lower interest rates offered by banks and other investment institutions, our interest income has declined.

HCC investment income was $109,089, which is $51,690, or 32.1% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $284,629, which is $88,101, or 23.6% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease reflects our equity portion of HCC net income. HCC net income was $327,268, which is $155,069, or 32.1% lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and was $853,888, which is $264,303, or 23.6% lower in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decreases were a result of declining revenues and decreased profitability.

Other investment income increased $52,058 in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and increased $67,052 in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Other investment income includes our equity ownerships in several partnerships and limited liability companies. We recorded $55,720 in income from equity investments for the three months ended June 30, 2010 compared to $3,662 in income for the three month ended June 30, 2009 and recorded $77,505 in income from equity investments for the six months ended June 30, 2010 compared to $10,453 in income for the six months ended June 30, 2009.

Other income for the six months ended June 30, 2010 and 2009 included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in 2010 totaled $513,436 compared to $556,318 allocated and received in 2009. CoBank, ACB determines and pays the patronage credit annually, generally in the first quarter of the calendar year based on its results from the prior year. We record these patronage credits as income when they are received.

25


Table of Contents


Income Taxes

NU Telecom recognized a tax benefit of $65,684 for the three months ended June 30, 2010 and income tax expense was $283,179 lower in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Income tax expense decreased $304,902 to $482,722 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The effective tax rates for the six months ending June 30, 2010 and 2009 were 37.2% and 43.4%, respectively. The June 30, 2010 effective tax rate was lower due to the recognition of approximately $124,000 in net tax benefits, see Note 1 – “Basis of Presentation and Consolidation” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. Excluding the impact of the recognition of the tax benefit, the June 30, 2010 effective income tax rate would have been approximately 46.8%. The effective tax rate differs from the federal statutory tax rate primarily due to state income taxes and other permanent differences.

Hector Communications Corporation Investment

In accordance with GAAP, we currently report our one-third ownership of HCC on the equity method. Under this method, we report net income or net loss each period from HCC’s operations. For the three months ended June 30, 2010 and 2009, respectively, we reported net income of $109,089 and $160,779, respectively. For the six months ended June 30, 2010 and 2009, respectively, we reported net income of $284,629 and $372,730, respectively. All reported net income amounts reflected our one-third ownership. As set forth in Note 12 – “Hector Communications Corporation” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q, however, in the first six months of 2010 and 2009, respectively, HCC had revenues of $13.7 million and $14.1 million, respectively, that are not reflected in our financial statements.

The pro forma information for our investment in HCC is shown in the following table using the proportionate consolidation method. We are providing this pro forma information to show the effect that our HCC investment has on our net income and would have on our operating income before interest, taxes, depreciation and amortization (OIBITDA) if we included these earnings in our operating income.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

2,243,193

 

$

2,350,434

 

$

4,552,598

 

$

4,712,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

1,028,566

 

 

1,081,879

 

 

2,004,168

 

 

2,072,143

 

Depreciation and Amortization

 

 

791,092

 

 

758,241

 

 

1,592,001

 

 

1,506,534

 

Total Operating Expenses

 

 

1,819,658

 

 

1,840,120

 

 

3,596,169

 

 

3,578,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

423,535

 

 

510,314

 

 

956,429

 

 

1,134,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

109,089

 

$

160,779

 

$

284,629

 

$

372,730

 

26


Table of Contents


NU Telecom OIBITDA was $3,063,556 and $3,336,725 for the three months ended June 30, 2010 and 2009, respectively and was $6,650,508 and $6,870,909 for the six months ended June 30, 2010 and 2009, respectively. If we included our proportionate share of HCC’s OIBITDA, NU Telecom OIBITDA would have increased to $4,278,183 and $4,605,280 for the three months ended June 30, 2010 and 2009, respectively and $9,198,938 and $9,511,698 for the six months ended June 30, 2010 and 2009, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

NU Telecom Operating Income

 

$

586,172

 

$

962,346

 

$

1,711,509

 

$

2,148,652

 

NU Telecom Depreciation and Amortization

 

 

2,477,384

 

 

2,374,379

 

 

4,938,999

 

 

4,722,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NU Telecom OIBITDA

 

$

3,063,556

 

$

3,336,725

 

$

6,650,508

 

$

6,870,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HCC Proportionate Operating Income

 

$

423,535

 

$

510,314

 

$

956,429

 

$

1,134,255

 

HCC Proportionate Depreciation and Amort

 

 

791,092

 

 

758,241

 

 

1,592,001

 

 

1,506,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HCC Proportionate OIBITDA

 

$

1,214,627

 

$

1,268,555

 

$

2,548,430

 

$

2,640,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined OIBITDA

 

$

4,278,183

 

$

4,605,280

 

$

9,198,938

 

$

9,511,698

 

Adjusted OIBITDA is a common measure of operating performance in the telecommunications industry. The presentation of OIBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as a substitute for consolidated net income (loss) as a measure of performance and may not be comparable to similarly titled measures used by other companies.

A recap of our net income, using the equity method to record earnings on our investment in HCC is contained in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues:

 

$

7,576,633

 

$

8,275,242

 

$

15,458,506

 

$

16,721,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses, Excluding Depreciation and Amortization

 

 

4,513,077

 

 

4,938,517

 

 

8,807,998

 

 

9,850,149

 

Depreciation and Amortization Expenses

 

 

2,477,384

 

 

2,374,379

 

 

4,938,999

 

 

4,722,257

 

Operating Expenses

 

 

6,990,461

 

 

7,312,896

 

 

13,746,997

 

 

14,572,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

586,172

 

 

962,346

 

 

1,711,509

 

 

2,148,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(696,133

)

 

(713,398

)

 

(1,387,740

)

 

(1,471,837

)

Interest Income

 

 

12,799

 

 

18,422

 

 

84,408

 

 

99,151

 

HCC Investment Income

 

 

109,089

 

 

160,779

 

 

284,629

 

 

372,730

 

CoBank Patronage

 

 

0

 

 

0

 

 

513,436

 

 

556,318

 

Other Income (Expense)

 

 

65,523

 

 

103,202

 

 

91,309

 

 

109,993

 

Income (Taxes) Benefit

 

 

65,684

 

 

(217,495

)

 

(482,722

)

 

(787,624

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

143,134

 

$

313,856

 

$

814,829

 

$

1,027,383

 

27


Table of Contents


Liquidity and Capital Resources

Capital Structure

NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was $99,811,285 at June 30, 2010, reflecting 51.6% equity and 48.4% debt. This compares to a capital structure of $101,632,365 at December 31, 2009, reflecting 51.0% equity and 49.0% debt. Management believes adequate operating cash flows and other internal and external resources are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and temporary financing of trade accounts receivable.

Cash Flows

Our short-term and long-term liquidity needs arise primarily from: (i) capital expenditures; (ii) working capital requirements needed to support the growth of our business; (iii) debt service, (iv) dividend payments on our common stock and (v) potential acquisitions.

Our primary sources of liquidity for the six months ended June 30, 2010 were proceeds from cash generated from operations and cash reserves held at the beginning of the period.

While it is often difficult for us to predict the impact of general economic conditions on our business, we believe that we will be able to meet our current and long-term cash commitments through our operating cash flows. We were in full compliance with our debt covenants as of June 30, 2010 and anticipate that we will be able to plan for and match future liquidity needs with future internal and external resources.

Cash Flows from Operations

Cash generated by operations for the six months ended June 30, 2010 was $5,824,609, compared to cash generated by operations of $2,116,890 for the six months ended June 30, 2009. The increase in cash flows provided by operations for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 was primarily due to changes in income taxes receivable and accrued income taxes.

Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to shareholders. Cash and cash equivalents at June 30, 2010 were $2,145,012, compared to $2,526,490 at December 31, 2009.

Cash Flows used in Investing Activities

We operate in a capital intensive business. We continue to upgrade our local networks for changes in technology in order to provide advanced services to our customers.

Cash flows used in investing activities were $3,898,652 for the six months ended June 30, 2010, compared to $2,907,501 used in investing activities for the six months ended June 30, 2009. On June 14, 2010 we completed the acquisition of the CATV system in and around Glencoe, Minnesota for $1,600,000. Capital expenditures relating to on-going operations were $2,382,224 for the six months ended June 30, 2010 and $2,719,029 for the six months ended June 30, 2009. We expect total plant additions of approximately $5,000,000 in 2010. We will finance these upgrades through our existing working capital and cash flow from operations.

28


Table of Contents


Cash Flows used in Financing Activities

Cash used in financing activities was $2,307,435 for the six months ended June 30, 2010. This included long-term debt repayments of $1,488,965 and dividends paid to shareholders of $818,470. Cash used in financing activities was $892,091 for the six months ended June 30, 2009, which was the result of long-term debt repayments of $269,004 and dividends paid to shareholders of $1,023,087, offset by the issuance of long-term debt of $400,000.

Working Capital

Working capital (i.e. current assets minus current liabilities) was $254,352 as of June 30, 2010 compared to working capital of $1,691,572 as of December 31, 2009. The ratio of current assets to current liabilities was 1.0 and 1.2 as of June 30, 2010 and December 31, 2009, respectively. In addition, if it becomes necessary, we will have sufficient availability under our revolving credit facility to fund any fluctuations in working capital and other cash needs.

Dividends

We declared a quarterly dividend of $.08 per share for both the first and second quarters of 2010, which totaled $409,235 each quarter. We declared a quarterly dividend of $.10 per share for both the first and second quarters of 2009, which totaled $511,543 each quarter. Our Board of Directors reviews quarterly dividend declarations based on anticipated earnings, capital requirements and our operating and financial condition. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs, both of which we expect to be funded with cash flow from operations.

Our loan agreements have put restrictions on our ability to pay cash dividends to our shareholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if NU Telecom’s “Total Leverage Ratio,” that is, the ratio of our “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 NU Telecom is not in default or potential default under the loan agreements. If we fail to comply with these covenants, our ability to pay dividends would be limited. At June 30, 2010, we were in compliance with the financial ratios in our loan agreements.

Obligations and Commitments

As of June 30, 2010, we had an unsecured loan in the amount of $31,859 with the City of Redwood Falls, Minnesota that bears interest at 5% and matures on January 1, 2012.

In connection with our acquisition of HTC in 2008, NU Telecom and HTC, as NU Telecom’s new subsidiary, entered into a credit facility with CoBank, ACB. Information about our contractual obligations, including obligations under the credit facility, and along with the cash principal payments due each period on our unsecured note payable and long-term debt is set forth in the following table. For additional information about our contractual obligations as of June 30, 2010, see Note 5 – “Secured Credit Facility” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

29


Table of Contents



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Total

 

July-December
2010

 

2011-2012

2013-2014

 

Thereafter

 

Deferred Compensation

 

$

2,030,357

 

$

230,961

 

$

865,908

 

$

133,137

 

$

800,351

 

Long-term Debt

 

 

48,262,859

 

 

1,469,000

 

 

6,907,859

 

 

39,886,000

 

 

 

Interest on Long-term Debt (A)

 

 

10,798,796

 

 

1,331,158

 

 

5,101,333

 

 

4,366,305

 

 

 

Loan Guarantees

 

 

498,234

 

 

17,698

 

 

74,415

 

 

251,463

 

 

154,658

 

Operating Lease

 

 

44,010

 

 

14,670

 

 

29,340

 

 

 

 

 

Purchase Obligations (B)

 

 

 

 

 

 

 

 

 

 

 

Total Contractual Cash Obligations

 

$

61,634,256

 

$

3,063,487

 

$

12,978,855

 

$

44,636,905

 

$

955,009

 


 

 

 

 

A.

Interest on long-term debt is estimated using rates in effect as of June 30, 2010. We use 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 6 – “Interest Rate Swaps” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q).

 

 

 

 

B.

Purchase obligations consist primarily of commitments incurred for capital improvements. There were no purchase obligations outstanding as of June 30, 2010.

Long-Term Debt

See Note 5 – “Secured Credit Facility” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q for information pertaining to our long-term debt.

Regulation

In March 2010, the FCC released the National Broadband Plan which contemplates significant changes to overall telecommunications policy in relation to access charges and underlying support. At this time, we cannot predict the outcome, timing or potential impact of these recommended changes.

New Accounting Developments

See Note 1 – “Basis of Presentation and Consolidation” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a discussion of new accounting developments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not have operations subject to risks of foreign currency fluctuations. We do, however, use derivative financial instruments to manage cash flow exposure to interest rate fluctuations. Our 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, we executed interest-rate swap agreements, effectively locking in the interest rate on $6.0 million of our variable-rate debt through March 2011 and $33.0 million of our variable-rate debt through March 2013. On June 23, 2008, we executed interest-rate swap agreements, effectively locking in the interest rate on $3.0 million of our variable-rate debt through June 2011 and $3.0 million of variable-rate debt through June 2013. A summary of these agreements is contained in Note 6 – “Interest Rate Swaps” to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

30


Table of Contents


We report the cumulative gain or loss on current derivative instruments as a component of accumulated other comprehensive income (loss) in shareholders’ equity. If the protection agreement is concluded prior to reaching full maturity, the cumulative gain or loss is recognized in earnings. At the conclusion of the full term maturity of the protection agreement, no gain or loss is recognized. Our 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 six months ended June 30, 2010, interest expense would have increased approximately $6,000.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

During our most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Other than routine litigation incidental to our business there are no pending material legal proceedings to which we are a party or to which any of our property is subject.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors previously disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

31


Table of Contents


Item 4. Removed and Reserved.

Item 5. Other Information.

None.

Item 6. Exhibits.

See “Index to Exhibits” on page 34 of this Form 10-Q.

32


Table of Contents


SIGNATURES

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

 

 

 

 

 

NEW ULM TELECOM, INC.

 

Dated: August 12, 2010

By

/s/ Bill D. Otis

 

 

Bill D. Otis, President and Chief Executive Officer

 

 

 

 

Dated: August 12, 2010

By

/s/ Curtis O. Kawlewski

 

 

Curtis O. Kawlewski, Chief Financial Officer

33


Table of Contents


INDEX TO EXHIBITS

 

 

 

 

Exhibit
Number

 

Description

 

 

 

 

31.1

 

Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

34