Nuvera Communications, Inc. - Annual Report: 2013 (Form 10-K)

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FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. This 2013 Annual Report on Form 10-K and other documents filed by New Ulm Telecom, Inc. (“NU Telecom” or “the Company”) under the federal securities laws, including Form 10-Q and Form 8-K and amendments to those reports, and future verbal or written statements by NU Telecom and its management, 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 our actual results to differ materially from such statements. 

Because of these risks, uncertainties and assumptions and the fact that any forward-looking statements made by us and our 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, which is the filing date of this Form 10-K. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the Securities and Exchange Commission (SEC), we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

Website Access to SEC Reports

Our website at www.nutelecom.net provides information about our products and services, along with general information about NU Telecom and its management and financial results. Copies of our most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, can be obtained, free of charge, as soon as reasonably practical after these reports are electronically filed or furnished to the SEC. To obtain this information, visit our website noted above and select “About Us – Investors – Click here to view the NU-Telecom SEC filings,” or call (507) 354-4111. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding public companies, including NU Telecom. Any reports filed with the SEC may also be obtained from the SEC’s Reference Room at 100F Street, NE, Washington, DC 20549.

Code of Business Conduct and Ethics

Our Board of Directors has adopted a Code of Business Conduct and Ethics that is applicable to all directors, the chief executive officer, chief financial officer and to all other employees of NU Telecom. All employees of NU Telecom have undergone training on this Code of Business Conduct and Ethics. The information required by Item 406 of Regulation S−K is contained under “Code of Business Conduct” in the 2014 Proxy Statement and is incorporated by reference. Our Board of Directors has also adopted written charters for its committees that comply with the NASDAQ Global Select Market. Copies of the committee charters are available on our website above or by contacting us at (507) 354-4111. 

PART I

Item 1.   Business

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Our operations are currently conducted through the following subsidiaries:

Telecom Segment

    ●  ILECs:

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

       ▪  Hutchinson Telephone Company (HTC), a wholly-owned subsidiary of NU Telecom;

       ▪  Peoples Telephone Company (PTC), a wholly-owned subsidiary of NU Telecom;

       ▪  Sleepy Eye Telephone Company (SETC), a wholly-owned subsidiary of NU Telecom;

       ▪  Western Telephone Company (WTC), a wholly-owned subsidiary of NU Telecom;

●  CLECs:

    ▪  NU Telecom, located in Redwood Falls, Minnesota; 

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

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

    ▪  FiberComm, LC – 18.27% subsidiary equity ownership interest. FiberComm, LC is located in Sioux City, Iowa;

    ▪  Broadband Visions, LLC – 24.30% subsidiary equity ownership interest. Broadband Visions, LLC provides video headend and Internet services; and

    ▪  Independent Emergency Services, LLC – 14.29% subsidiary equity ownership interest. Independent Emergency Services, LLC is a provider of E-911 services to the State of Minnesota as well as a number of counties located in Minnesota.

We report the business operations of our five ILECs and two CLECs and their associated services as a single segment that we refer to as the Telecom Segment. 

The Telecom Segment operates five ILECs (New Ulm Telecom, Inc. (New Ulm), HTC, PTC, SETC and WTC) and two CLECs located in the cities of Redwood Falls and Litchfield, Minnesota. New Ulm, HTC, SETC and WTC are independent telephone companies that are regulated by the Minnesota Public Utilities Commission (MPUC), while PTC is an independent telephone company that is regulated by the Iowa Utilities Board (IUB). Our two CLECs are currently not under the same level of regulatory oversight as our ILECs. As of December 31, 2013 we served 28,683 access lines in the Minnesota communities of Bellechester, Courtland, Evan, Goodhue, Hanska, Hutchinson, Klossner, Litchfield, Mazeppa, New Ulm, Redwood Falls, Sanborn, Searles, Sleepy Eye, Springfield and White Rock, as well as the adjacent rural areas of Blue Earth, Brown, Goodhue, McLeod, Meeker, Nicollet, Redwood and Wabasha counties in south central Minnesota. We also serve the community of Aurelia, Iowa as well as the adjacent rural areas surrounding Aurelia. The Telecom Segment also operates multiple IPTV, digital TV and CATV systems in Minnesota (including the cities of Cologne, Courtland, Glencoe, Goodhue, Hanska, Hutchinson, Litchfield, Mayer, New Germany, New Ulm, Redwood Falls, Sanborn, Sleepy Eye and Springfield) and one CATV system in Aurelia, Iowa. These systems serve approximately 10,995 customers. 

The Telecom Segment derives its principal revenues from (i) local service charges to its residential and business subscribers, (ii) access charges to Interexchange Carriers (IXCs) for providing the carriers access to our local phone networks and (iii) the provisioning of video and data services. We also receive revenue from long distance carriers for providing the billing and collection of long distance toll calls to our subscribers.

Neither our ILECs nor CLECs are dependent upon any single customer or small group of customers. No single customer accounted for 10% or more of our consolidated revenues in any of the last two years.

We receive the majority of our revenues through the following revenue sources:

Local Service – We receive recurring revenue for basic local services that enable end-user customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local telephone services, our customers may choose from a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. 

Network Access – We provide access services to other telecommunications carriers for the use of our facilities to terminate or originate long distance calls on our network. Additionally, we bill subscriber line charges (SLC) to substantially all of our end-user customers for access to the public switched network. These monthly SLCs are regulated and approved by the Federal Communications Commission (FCC). In addition, network access revenue is derived from several federally administered pooling arrangements designed to provide support and distribute funding to the ILECs.  

Video – We provide a variety of enhanced data network services on a monthly recurring basis to our end-user customers. This includes the broadband access portion of traditional Telecom broadband service. We also receive monthly recurring revenue from our end-user subscribers for the provisioning of commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve seventeen communities with our IPTV/digital TV services and five communities with our CATV services.

Data – We provide Internet services, including dial-up and high-speed Internet to business and residential customers. Our revenue is received in various flat rate packages based on the level of service, data speeds and features. We also provide managed services, e-mail and web hosting services.

Long Distance – Our end-user customers are billed for toll or long distance services on either a per-call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. 

Other – We generate revenue from directory publishing, sales and service of customer premise equipment (CPE), bill processing and add/move/change services. Our directory publishing revenue is monthly recurring revenue from end-user subscribers for Yellow Page advertising in our telephone directories. We also provide retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services as TechTrends Wireless, our branded product. We receive both recurring revenue for the wireless product as well as revenue collected for the sale of wireless phones and accessories. 

Strategy

Our vision is to position ourselves as a “one-stop” communications solutions provider. We believe our customer base places a value on the fact that we are a local company whose goal is to meet our customers’ total communications needs. The success of this vision depends on the following strategies:

·      We believe that we have several advantages over our competition, including a state-of-the-art, fiber-rich communications network, competitive pricing and costs, outstanding service quality and a good reputation, a high level of commitment to the communities we serve and a direct billing relationship with a large majority of the customers we serve in our service territories. We offer a competitive, multi-service bundle of voice, high-speed Internet, IPTV and digital TV. We manage the potential decline in Telecom network access and local service revenues by offering value-added services such as higher Internet speeds, high definition IPTV, digital video recording services, managed services, customized communications solutions content, along with outstanding customer service as a competitive differentiator.

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·      We have and will continue to upgrade our networks and enhance our products and services to take advantage of the latest technology including advanced high-bandwidth capabilities and services, expansion of our network for wholesale and retail customers, Fiber-to-the-Tower services for wireless carriers and last mile fiber builds to residential and business customers. We intend to continue to introduce new services that draw upon our core competencies and we believe are attractive to our target customers. In considering new services, we look for market opportunities that we believe present growth opportunities.

·      We continue to seek ways to improve our internal processes and gain operational efficiencies. While focusing resources on revenue growth and market share gains, we continually challenge our management team and employees at all levels to seek efficiencies and enhance our customers’ experience. We continue to invest in our networks and train our employees to achieve customer service excellence.

·      Our current customer base provides a recurring revenue stream generating stable cash flow. Our focus remains on growing our services and supporting product lines so as to generate sufficient cash flow to fund our current operations, service our debt, fund our capital expenditure needs, pay dividends and expand our business. We have allocated resources to maintain and upgrade our network while focusing on optimizing returns by completing strategic capital outlays that will make our network more efficient and cost effective while providing the products and services that our customers desire in the markets we serve.

·      We intend to continue to pursue a disciplined process of evaluating acquisitions of businesses as well as organic growth opportunities of market expansion and/or products which are complementary to our business portfolio. 

Competition

We compete in a rapidly evolving and highly competitive industry, and expect competition will continue to intensify as consolidations and mergers occur within the industry. Regulatory developments and technological advances over the past several years have increased opportunities for alternative communications service providers, which in turn have increased competitive pressures on our business. These alternative providers often face fewer regulations and have lower cost structures than we do. In addition, several of our competitors have consolidated with other communication providers and as a result are generally larger, have more financial and business resources and have greater geographical reach to provide services. Our competitive advantages include: our strong commitment and presence in the communities we serve and knowledge of these markets, our experienced local service and support team and our ability to offer more flexible communications solutions than our larger competitors.

The long-range effect of competition on the delivery of communications services and equipment will depend on technological advances, regulatory actions at both the federal and the state levels, court decisions, and possible additional future federal and state legislation. Past federal and state legislation have tended to expand competition in the telecommunications industry. 

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

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In order to meet the competition present in our industry, our ILECs have deployed new technology to enable our local exchange networks to capture operating efficiencies and to provide additional new services to our new and existing customer base. These new technologies include the latest release of digital switching technology for all of our ILEC switches and the installation of a Common Channel Signaling System No. 7 (SS7) out-of-band system for all of our access lines. Our ILECs have also connected fiber rings (redundant route designs that allow traffic to be re-routed in the event of network problems) that protect our local networks and enable them to provide a reliable level of service to our customers. The value of our local network is also enhanced by the ability of our operating companies to offer access to high-speed Internet with broadband access to over 99% of our access lines. Broadband technology allows customer access to high-speed Internet and traditional voice connectivity over the same connection. In addition, our ILECs have further enhanced our networks to allow the offering of video services over the same facilities that provide our customers with voice and Internet access. This technology is available to approximately 92% of our access lines.

We compete as a CLEC in the cities of Redwood Falls and Litchfield, Minnesota. CenturyLink is the existing ILEC in these markets. Competition also exists in the other communities and areas served by our ILECs for traditional telephone service from wireless communications providers and we also expect competition to increase from service providers offering VoIP. We experience competition in the Minnesota communities of Glencoe, Hutchinson, Litchfield, New Ulm, Redwood Falls, Sleepy Eye and Springfield in the provisioning of video services. Comcast is the existing incumbent provider of video services in the New Ulm market. Mediacom is the existing incumbent provider of video services in the Hutchinson, Litchfield, Redwood Falls, Sleepy Eye and Springfield markets. Several other communications providers compete with us in our markets in providing Internet services. Our ILECs and CLECs have responded to these competitive pressures by creating active programs to market our products, bundle our services and enhance our infrastructure to create higher customer value.  

We are experiencing competition for some of our other services from IXCs, such as customer billing services, dedicated private lines and network switching. The provisioning of these services is contractual in nature and is primarily directed by the IXCs. Other services, such as directory advertising, operator services and cellular communications are open to competition, based primarily on service and customer experience.

Materials and Supplies

The materials and supplies that are necessary for the operation of our businesses are available from a variety of sources. We are not dependent on any particular supplier or group of affiliated suppliers for our equipment needs.

Regulation

The following summary provides a high-level overview, but may not include all present and proposed federal, state and local legislation and regulations affecting the telecommunications industry. Some legislation and other regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals that could change the manner in which this industry operates. At this time, we cannot predict the outcome of any of these developments or their potential impact on us. Regulation can change rapidly in the telecommunications industry and these changes could have an adverse effect on us in the future.

Overview

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

The services we offer are subject to varying levels of regulatory oversight. Federal and state regulatory agencies share responsibility for enforcing statutes and rules relative to the provision of communications services. Our interstate or international telecommunications services are subject to regulation by the FCC. Intrastate services are governed by the relevant state regulatory commission. The Telecommunications Act of 1996 (TA96) and the rules enacted under it also gave oversight of interconnection arrangements and access to network elements to the state commissions. Our digital TV services are governed by FCC rules and municipal franchise agreements. Internet access (dial-up or high speed) is unregulated at both the state and federal levels. There are also varying levels of regulatory oversight depending on the nature of the services offered or if the services are offered by an ILEC or CLEC.

Our CLEC businesses provide services with less regulatory oversight than our ILEC companies. A company must file for CLEC or interexchange authority to operate with the appropriate public utility commission in each state it serves. Our CLECs provide a variety of services to both residential and business customers in multiple jurisdictions.

Federal Regulatory Framework

All carriers must comply with the Federal Communications Act of 1934 (FCA34) as amended that requires, among other things, that our interstate services be provided at just and reasonable rates and on non-discriminatory terms and conditions. The TA96 amended the FCA34 and has had a dramatic effect on the competitive environment in the telecommunications industry. In addition to these laws, we are also subject to rules promulgated by the FCC and could be affected by any regulatory decisions or orders they issue.

Access Charges

Access charges refer to the compensation received by local exchange carriers for the use of their networks by an IXC. We provide two types of access services: special access and switched access. Special access is provided through dedicated circuits that connect other carriers to our network and is structured on a flat monthly fee basis. Switched access rates that are billed to other carriers are based on a per-minute of use fee basis. The FCC regulates prices that our ILECs and CLECs charge for interstate access charges. There has been a trend toward lowering the rates charged to carriers accessing local networks and the application of a SLC as a flat rate on end-user bills. Regulation, competition, carriers optimizing their network costs and lower demand for dedicated lines have resulted in lower access rates and overall lower minutes of use on our network, which has affected our network access revenues. 

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

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Each of our ILECs determines interstate access charges under rate of return regulation, whereby they earn a fixed return over and above operating costs. The specific process of setting interstate access rates is governed by FCC rules, which applies only to service providers with fewer than 50,000 lines. Three of our ILECs (HTC, PTC and WTC) utilize an average schedule process and the concept of pooling with other ILECs in NECA to arrive at rates and fair compensation. Our other two ILECs (New Ulm and SETC) arrive at their interstate rates through a study of their own individual interstate costs. Minnesota and Iowa utility commissions regulate the intrastate access rates for all five of our ILECs in their respective states.

Wireline Interstate

Our ILEC companies participate in the NECA common line pool where end-user common line funds collected are pooled. A portion of our ILEC revenue is based on settlements distributed from this pool. Our ILEC companies also participate in the NECA traffic-sensitive pool. These pool settlements are adjusted periodically.

Interstate access rates for CLECs were established according to an order issued by the FCC in 2001. Under that order, the switched access rates charged by a competitive carrier can be no higher than the rates charged by the ILEC with whom the CLEC competes, unless the CLEC qualifies for the Rural Exemption.

Intercarrier Compensation and Universal Service Fund (USF) Reform 

The FCC released the National Broadband Plan in April 2010 recommending significant changes to the Access Charge policy and processes. This was followed on November 18, 2011, by FCC Order 11-161 (the Transformation Order), with comprehensive rules reforming all forms of intercarrier compensation and implementing a new support mechanism for the deployment of broadband. Generally, the intercarrier compensation reform sets forth a path towards a “bill & keep” regime which eliminates compensation for termination of traffic received from another carrier. 

The FCC Transformation Order also confirmed the applicability of access charges on VoIP traffic and eliminated reciprocal compensation charges for termination of local wireless traffic. Despite these changes IXCs and others are still quite aggressive in disputing carrier access charges and/or the applicability of access charges to their traffic.

Due to the combination of rate reforms instituted by the FCC, competitive substitution by wireless and other carriers and decreased use of the switched network, the aggregate amount of interstate network access charges paid by long distance carriers to access providers such as our ILECs and CLECs, has decreased and we project that this decline will continue. For the year ended December 31, 2013, Telecom network access revenue represented approximately 32% of our operating revenue, down from approximately 33% for the year ended December 31, 2012.

Universal Service

The Federal Universal Service Fund (FUSF) was originally established to overcome geographic differences in costs of providing voice service and to enable all citizens to communicate over networks regardless of geographical location and/or personal income. The FCC established universal service policies at the national level under terms contained in the Telecommunications Act of 1934. The TA96 requires explicit FUSF mechanisms and enlarged the scope of universal service to include four distinct programs:

·         High-Cost program that supports local carriers operating in high-cost regions of the country to ensure reasonably based telephone rates. This program has the most direct impact on our operating companies;  

·         Low-Income Subscribers program that includes the Link Up and Lifeline programs that provide support for service initiation and monthly fees and have eligibility based on subscriber income;

·         Rural Health Care Providers program that supports telecommunication services used by rural health care providers and provides them with toll free access to an Internet service provider; and

·         Schools and Libraries program, also called the E-Rate program that provides support funding to schools and libraries for telecommunications services, Internet access and internal connections.

In its Transformation Order released November 18, 2011, the FCC adopted rules which dramatically reform the universal service program and intercarrier compensation regime. These rules eliminated the legacy Local Switching support, but also provide for a new Connect America Fund (CAF) support for rate of return carriers to make up some of their access revenue reductions and provide direct support to PriceCap carriers for broadband build outs. The new rules have caused rates for end users to increase as intercarrier compensation is reduced and the legacy mandate for ubiquitous voice service shifts toward broadband availability as a key outcome of the program. 

FUSF high-cost payments are distributed by NECA and are only available to carriers that have been designated as an eligible telecommunications carrier (ETC) by a state commission. Each of our ILECs has been designated as an ETC. CLECs are also eligible to be designated as ETCs if they meet the requirements of the program and meet a public interest standard as determined by the appropriate state regulatory agency. Our CLECs are currently not receiving FUSF support. All ETCs must certify annually to USAC or their appropriate state regulatory commission that the funds they receive from the FUSF are being used in the manner intended. The states must then certify to the FCC which carriers have met this standard. The Transformation Order expands the information that must be reported to the State Commissions to include information on broadband availability, plans for expansion to unserved and underserved areas, in addition to information about voice services. To some extent, these levels of scrutiny make the receipt of a consistent level of FUSF payments each year more difficult to predict.  

For the year ended December 31, 2013, we received an aggregate of $3,208,545 from FUSF, consisting of $235,029 for a combination of high cost loop support and local switching support, $1,629,720 of Federal common line support and $1,343,796 of CAF support. Our net USF in 2013 comprised 8.3% of our total revenue for the year. We receive no State USF. 

The TA96 and Local Competition

The primary goal of the TA96 and the FCC’s rules promulgated under it was to open local telecommunications markets to competition while enhancing universal service. To some extent, Congress pre-empted the local authority of states to oversee local telecommunications services.

The TA96 imposes a number of requirements on all local telecommunications providers including:

·         To interconnect directly or indirectly with other carriers; 

·         To allow others to resell services;

·         To provide for number portability to allow end-users to retain their telephone number when changing providers;

·         To ensure dialing parity;

·         To ensure that competitor customers have non-discriminatory access to telephone numbers, operator services, directory assistance and directory listing services; and

·         To allow competitors access to telephone poles, ducts, conduits and rights-of-way, and to establish reciprocal compensation arrangements for the transport and termination of telecommunications traffic.

Environmental Regulation

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

Employees

As of March 1, 2014 we had 141 full-time equivalent employees.

Intellectual Property

We have trademarks, trade names and licenses that we believe are necessary for the operation of our business as we currently conduct it. We do not consider our trademarks, trade names or licenses to be material to the operation of our business.

Executive Officers of the Registrant

The names and ages of all our executive officers and the positions held by them as of March 1, 2014, are as follows:

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Our executive officers are appointed annually and serve at the discretion of our Board of Directors. Mr. Otis, President and Chief Executive Officer; Ms. Bornhoft, Vice-President, Chief Operating Officer and Corporate Secretary; and Mr. Kawlewski, Chief Financial Officer and Treasurer have written employment contracts. There are no familial relationships between any director and executive officers.

Mr. Otis has been President and Chief Executive Officer since 1985. Prior to that time, he was the Office Manager/Controller from 1979 to 1985. Mr. Otis also served as a Director, Chairman of the Board of Directors and President of HCC, and is the Chairman of the Board for both Independent Emergency Services, LLC and Broadband Visions, LLC, all equity subsidiaries of ours. In addition, Mr. Otis sits on the Board of Governors of FiberComm, LC, also an equity subsidiary of ours.

Ms. Bornhoft has been Vice President, Chief Operating Officer and Corporate Secretary since 1998. Ms. Bornhoft has been employed with us since 1990. Ms. Bornhoft also served as a Board Director for HCC and is a current board director for Broadband Visions, LLC, in addition to serving as President for both Independent Emergency Services, LLC and Broadband Visions, LLC, all equity subsidiaries of ours.

Mr. Kawlewski has been Chief Financial Officer and Treasurer since 2009. Mr. Kawlewski also serves as the Treasurer for Independent Emergency Services, LLC and Broadband Visions, LLC, all equity subsidiaries of ours.

Item 1A.          Risk Factors.

Item 1B.  Unresolved Staff Comments

Item 2.   Properties

SETC’s host COE was installed in 1984 and consists of Nortel Networks DMS-10 (now Genband). SETC also has remote switching sites in two other locations: Hanska and Evan. The equipment at these remote switching sites is housed within specially designed COE buildings. Goodhue’s host COE was installed in 1981 and consists of Nortel Networks DMS-10 (now Genband). Goodhue also has remote switching sites in five other locations: Bellechester, Mazeppa, Ponderosa, Welch and White Rock. The equipment at these remote switching sites is housed within specially designed COE buildings.

WTC installed Nortel Networks remote COE in 1996. This remote switching equipment uses the host switch located in the city of New Ulm. WTC also has a remote switching site located in the city of Sanborn. The equipment located in Sanborn is housed within a specially designed COE building.

We believe our properties are suitable and adequate to provide modern and effective communications services within our service areas, including local dial-tone, long distance service, broadband, digital TV and dedicated and switched long-haul transport. We also believe our properties and equipment are adequately insured. See Note 5 – “Long-Term Debt” to the Consolidated Financial Statements of this Annual Report on Form 10-K for descriptions of the mortgages and collateral relating to the above and below referenced properties. See Note 1 – “Summary Of Significant Accounting Policies” and Note 2 – “Property, Plant and Equipment” to the Consolidated Financial Statements of this Annual Report on Form 10-K for a description of our depreciation policies and information relating to the above and below referenced properties and equipment and their respective depreciation.

Our principal property locations are the following:

(1)      HTC owns the following buildings: 1) one building located at 235 Franklin Street South West, Hutchinson, Minnesota. This building houses a business office and central office and contains approximately 22,616 square feet. 2) Three buildings located at 345 Michigan Street South East, Hutchinson, Minnesota. These buildings house HTC’s outside plant equipment and contain office space for customer service technicians. The three buildings have approximately 19,200 square feet. HTC also owns a tower located at 345 Michigan Street South East, Hutchinson, Minnesota.

(2)      HTI owns the following buildings and towers: 1) one building located at 421 South CSAH 34, Litchfield, Minnesota. This building houses HTI’s business office and COE, and contains approximately 6,100 square feet. 2) One tower and building located at 20877 County Road 9, Darwin, Minnesota. This building contains approximately 168 square feet. 3) A second tower located at 55106 County Road 38, Buffalo Lake, Minnesota. An attached building contains approximately 168 square feet. 4) A third tower is located at 22100 Minnesota Highway 15, Dassel, Minnesota. An attached building contains approximately 240 square feet.

(3)   New Ulm owns the following buildings, land and towers: 1) one building located at 2104 East 10th Street, Glencoe, Minnesota that houses a business office, COE and CATV head-end equipment and contains approximately 962 square feet. 2) One building located at 27 North Minnesota, New Ulm, Minnesota. This building contains approximately 14,000 square feet and is used primarily as a retail location housing customer support services and our corporate business offices. 3) One building located at 400 Second Street North, New Ulm, Minnesota. The building was originally constructed in 1918 and contains some of our back office functions and COE. The building also contains warehouse and garage space and contains approximately 23,700 square feet. 4) One building located at 137 East 2nd Street, Redwood Falls, Minnesota. This building contains business offices and COE and contains approximately 1,540 square feet. 5) Land located at the corner of 7th Street South and Valley Street in New Ulm, Minnesota. This lot is utilized as storage for poles and cable inventory and contains approximately 5,000 square feet of fenced-in storage area. 6) Two additional parcels within the city limits of New Ulm, Minnesota. The first parcel, legally described as Lot 3 - Block 1 and Lot 2 - Block 3, Airport Industrial Park contains a new remote and retail facility. This building contains approximately 2,400 square feet, with approximately 1,350 square feet used as retail space. The remaining space is used as a remote central office. The second parcel is legally described as Lot 3 - Block 1, Bridge Street Industrial Park First Addition is currently vacant and available for future use. 7) A warehouse located at 1201 North Front Street, New Ulm, Minnesota. The warehouse contains 13,680 square feet and is used primarily as a storage facility for trucks, generators, trailers, plows and inventory used in outside plant construction, and office space for customer service technicians. (8) Three towers and the land on which they are located. One tower is located east of the city of New Ulm, Minnesota along Highway 14 in Nicollet County. Another tower is located north of Saint George, Minnesota. The third tower is located at 400 Second Street North, New Ulm, Minnesota.

(4)      PTC owns the following buildings and land 1) one building located at 133 Main Street, Aurelia, Iowa and contains approximately 1,100 square feet of warehouse space and 525 square feet of office space. 2) One building adjacent to its main office building located at 217 Main Street, Aurelia, Iowa. This building has the capacity to expand the present main office building and contains approximately 1,875 square feet. 3) One building located at 221 Main Street, Aurelia, Iowa that houses a business office, COE and CATV head-end equipment and contains approximately 1,875 square feet. 4) A vacant lot located at 121 Main Street, Aurelia, Iowa. This lot is 25 feet by 100 feet.

(5)      SETC owns and leases the following buildings: 1) one building located at 111 2nd Street, Goodhue, Minnesota. This building houses the business office and contains approximately 3,628 square feet. 2) One building located at 207 S Broadway, Goodhue, Minnesota. This building houses the warehouse and contains approximately 1,200 square feet. 3) SETC leases a building located at 101 Ellsworth Street SW, Sleepy Eye, Minnesota. This building houses the warehouse and contains approximately 5,625 square feet. 4) One building located at 121 2nd Ave NW, Sleepy Eye, Minnesota. This building houses the business office and COE and contains approximately 13,000 square feet.

(6)      WTC owns the following towers and buildings: 1) one tower located in the city of Sanborn and leases the land on which the tower is located. 2) One building located at 22 South Marshall, Springfield, Minnesota. This building houses the business office and COE and contains approximately 2,100 square feet. 3) A warehouse and lot located at 22 South Marshall, Springfield, Minnesota. This building is used as a storage facility for vehicles, other work equipment and inventory used in outside plant construction and contains approximately 3,750 square feet.

In addition, New Ulm, HTC, PTC, SETC, WTC and HTI own the huts, buildings, lines, cables and associated outside physical plant for use in providing our services. We also own various communications equipment that we lease to subscribers and other similarly-used instruments.

Item 3.   Legal Proceedings

Item 4.   Mine Safety Disclosures

PART II

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

Per our Master Loan Agreements (MLA) with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intent to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of December 31, 2013. At December 31, 2012 we were in compliance with all the stipulated financial ratios in our loan agreements.

Our Board of Directors reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs. Should our Board of Directors determine a dividend will be declared, we expect we will have sufficient availability from our current cash flows from operations to fund our existing cash needs and the payment of our dividends. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any fluctuations in working capital and other cash needs.

Issuer Purchases of Common Stock

As part of the HCC spin-off, NU Telecom received 28,600 shares of NU Telecom stock that had been held by HCC. These shares have been retired for NU Telecom financial statement purposes.

At a meeting of the Board of Directors on November 26, 2013, the Board approved the purchase of 28,600 shares of NU Telecom stock that had been held by BCS Holdings. BCS Holdings was a former partner with NU Telecom in HCC and had received the stock as part of the HCC spin-off. The purchase was completed on December 18, 2013. These shares have been retired for NU Telecom financial statement purposes.

Item 6.   Selected Financial Data

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

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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 digital TV. 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.

Executive Summary

Highlights in 2013:

·      In 2013, NU Telecom continued to integrate the operations of SETC, which NU Telecom acquired in a spin-off agreement with HCC. NU Telecom originally acquired a one-third interest in HCC on November 3, 2006. HCC was equally owned by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments of HCC and incurred $3.3 million of additional debt to finance the spin-off. Additional information pertaining to this acquisition is available in Note 3 – “Acquisitions and Dispositions” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

·      Net income in 2013, totaled $2,854,115, which was a $320,799 or 10.1% decrease compared to 2012. The HCC spin-off was structured as a tax-free reorganization under Section 355 of the Internal Revenue Code. NU Telecom had $1,778,309 of deferred book taxes associated with the HCC equity subsidiary that was reversed in 2012 due to the HCC spin-off. This reversal eliminated our income tax expense for 2012 and allowed us to record an income tax benefit of $365,477 for 2012. Without the deferred income tax reversal, net income for 2012 would have been $1,396,605, compared to $2,854,115 for 2013.

·      Consolidated revenue for 2013 totaled $38,715,585, which was a $6,232,597 or 19.2% increase compared to 2012. Network access revenue increased $1,414,879 or 13.1% in 2013 compared to 2012 primarily due to the addition of the operating results of SETC, which we acquired through the HCC spin-off, partially offset by lower minutes of use and the implementation of the FCC Intercarrier Compensation and USF reform order regarding state access pricing levels that took effect on July 3, 2012. In addition, video and data revenues had increases of $1,357,421 or 22.7% and $1,980,004 or 35.6% in 2013 compared to 2012 primarily due to the addition of the operating results of SETC and video rate increases deployed into several of our markets over the course of 2013 and 2012.

·      The HCC spin-off added approximately 4,700 access lines, 1,100 video customers, 2,900 broadband customers, 100 dial-up internet customers and 2,400 long distance customers to our customer base as of December 31, 2012.

Business Trends

Included below is a synopsis of trends management believes will continue to affect our business in 2014.

Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the telecommunications industry from CATV providers, VoIP providers, wireless, other competitors and emerging technologies. As we experience access line losses, our switched 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 voice and switched access revenues. Voice and switched access revenues 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. Access line decreases totaled 1,569 or 5.2% in 2013 compared to 2012 due to the reasons mentioned above. 

Growth in broadband customer sales along with continued migration to higher connectivity speeds and the sales of Internet value-added services such as on-line data backup, along with hosted and managed service solutions are expected to continue to offset a portion of the revenue declines from the unfavorable access line trends discussed above.

To combat competitive pressures, we continue to emphasize the bundling of our products and services. Our customers have the option to bundle local phone, high-speed Internet, long distance and video services. These bundles provide our customers with one convenient location to obtain all of their communications and entertainment options, a convenient billing solution and bundle pricing discounts. We believe product bundles positively impact customer retention, and the associated discounts provide our customers the best value for their communications and entertainment needs. We have constructed a state-of-the-art, fiber-rich broadband network, along with the bundling of our voice, Internet and video services allows 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, IPTV and hosted and managed services.

We continue to evaluate our operating structure to identify opportunities for increased operational efficiencies and effectiveness. Among other things, this involves evaluating opportunities for task automation, network efficiency and the balancing of our workforce based on the current needs of our customers.

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Financial results for the Telecom Segment for the years ended December 31, 2013 and 2012 are included below:

Revenue

Local Service – We receive recurring revenue for basic local services that enable end-user customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local telephone services, our customers may choose from a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Local service revenue was $6,680,799, which is $898,581 or 15.5% higher in 2013 than in 2012. Local service revenue was higher in 2013 compared to 2012 primarily due to the addition of revenues associated with the HCC spin-off on December 31, 2012. Access lines decreased 1,569 or 5.2% in 2013 compared to 2012. Access lines associated with the HCC spin-off were included in the December 31, 2012 access lines, however, 2012 HCC revenues were included in HCC, which was a significant subsidiary, and was not consolidated, but rather was recorded as an equity subsidiary of NU Telecom using the equity method of accounting for the year 2012, prior to the spin-off of HCC. Our access lines are decreasing as customers are increasingly utilizing other technologies, such as wireless phones and IP services.

The number of access lines we serve as an ILEC and CLEC have 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 creates value for the customer and aids in the retention of our voice lines.

Network Access – We provide access services to other telecommunications carriers for the use of our facilities to terminate or originate long distance calls on our network. Additionally, we bill SLCs to substantially all of our end-user customers for access to the public switched network. These monthly SLCs are regulated and approved by the FCC. In addition, network access revenue is derived from several federally administered pooling arrangements designed to provide network support and distribute funding to ILECs. Network access revenue was $12,196,235, which is $1,414,879 or 13.1% higher in 2013 than in 2012 primarily due to additional revenues associated with the HCC spin-off on December 31, 2012. Network access revenues for 2013 were partially offset by lower minutes of use and the implementation of the FCC Intercarrier Compensation and USF reform order as it relates to state access pricing levels that took effect on July 3, 2012.

Video – We provide a variety of enhanced data network services on a monthly recurring basis to our end-user customers. This includes the broadband access portion of traditional Telecom broadband service. We also receive monthly recurring revenue from our end-user subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve seventeen communities with our IPTV/digital TV services and five communities with our CATV services. Video revenue was $7,327,031, which is $1,357,421 or 22.7% higher in 2013 than in 2012. This increase was primarily due to the addition of video customers and revenues associated with the HCC spin-off on December 31, 2012. A combination of rate increases introduced into several of our markets over the course of 2013 and 2012 also contributed to the increase in revenues.  

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Data – We provide Internet services, including dial-up and high speed Internet to business and residential customers. Our revenue is received in various flat rate packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data revenue was $7,548,004, which is $1,980,004 or 35.6% higher in 2013 than in 2012. This increase was primarily due to the addition of data customers and revenues associated with the HCC spin-off on December 31, 2012. We expect future growth in this area will be driven by expansion of service areas, our aggressively packaging and selling service bundles and offering managed service solutions to businesses.

Long Distance – Our end-user customers are billed for toll or long-distance services on either a per call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. Long distance revenue was $829,277, which is $221,375 or 36.4% higher in 2013 than in 2012. This increase was primarily due to the addition of long distance customers and revenues associated with the HCC spin-off on December 31, 2012.

Other Revenue – We generate revenue from directory publishing, sales and service of CPE, bill processing and add/move/change services. Our directory publishing revenue from end-user subscribers for Yellow Page advertising in our telephone directories recurs monthly. We also provide retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services as TechTrends Wireless, our branded product. We receive both recurring revenue for the wireless product, as well as revenue collected for the sale of wireless phones and accessories. Other revenue was $4,134,239, which is $360,337 or 9.5% higher in 2013 than in 2012. This increase was primarily due to additional revenues associated with the HCC spin-off on December 31, 2012 and increases in the sales of cellular phone and activation revenues, partially offset by a decrease in the sales of CPE and a reduction in billed management fees. 

Cost of Services (Excluding Depreciation and Amortization)

Cost of services (excluding depreciation and amortization) was $17,376,461, which is $3,066,431 or 21.4% higher in 2013 than in 2012. This increase was primarily due to higher expenses associated with the HCC spin-off on December 31, 2012, higher programming cost from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and software.   

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $6,836,978, which is $567,360 or 9.0% higher in 2013 than in 2012. This increase was primarily due to higher expenses and one-time costs associated with the HCC spin-off on December 31, 2012.

Depreciation and Amortization

Operating Income

Operating income was $5,346,452, which is $1,662,861 or 45.1% higher in 2013 than in 2012. This increase was due to an increase in revenue, offset by increases in cost of services, depreciation and amortization, and an increase in selling, general and administrative expenses, all of which are described above.

See Consolidated Statements of Income on Page 35 (for discussion below)

Other Income and Interest Expense 

Our equity portion of HCC’s net income was $770,539 for the year ended December 31, 2012. On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt. The operating results of SETC for 2013 are included in the operating results of NU Telecom.

Other income in 2013 and 2012 included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in 2013 was $521,796, compared to $449,878 allocated and received in 2012. 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.

Interest income increased $73,496 in 2013 compared to 2012. This increase was primarily due to interest received from the MCI/WorldCom bankruptcy settlements with Deutsche Bank in 2013.

Interest expense decreased $845,551 in 2013 compared to 2012. This decrease was primarily due to lower outstanding debt balances and the maturing of several of our swap agreements with CoBank, ACB during 2013 as the variable rate we now pay on that debt portion is lower than the fixed rate we were previously paying.

Other investment income increased $38,164 in 2013 compared to 2012. Other investment income includes our equity ownerships in several partnerships and limited liability corporations. We recorded $172,033 of income from equity investments in 2013 and $158,582 of income in 2012. 

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Income Taxes

Income tax expense increased by $2,345,916 in 2013 compared to 2012 as we recorded income tax expense of $1,980,439 in 2013 and recognized an income tax benefit of $365,477 in 2012. The effective income tax rate was 41.0% and (13.0%) for 2013 and 2012. The effective income tax rate in 2013 was higher than 2012 primarily due to changes in deferred taxes as a result of the HCC spin-off in 2012. The difference between the effective tax rate and the federal statutory tax rate are reconciled in Note 7 – “Income Taxes” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

Inflation 

It is the opinion of our management that the effects of inflation on operating revenue and expenses over the past two years have been immaterial. Our management anticipates that this trend will continue in the near future.

Off Balance Sheet Arrangements

The Company has no significant Off Balance Sheet Arrangements (as defined in Item 303 (a)(4) of Regulation S-K).

Liquidity and Capital Resources

Capital Structure

NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was $97,661,439 at December 31, 2013, reflecting 58.3% equity and 41.7% debt. This compares to a capital structure of $102,338,011 at December 31, 2012, reflecting 54.5% equity and 45.5% debt. In the telecommunications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 2.87 times debt to EBITDA (earnings before interest, taxes, depreciation and amortization) as defined in our credit agreements, which is well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand and revolving credit facility, are available to finance ongoing operating requirements, including capital expenditures, business development, debt service, temporary financing of trade accounts receivable and dividends.

Liquidity Outlook

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 year ended December 31, 2013 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At December 31, 2013 we had a working capital deficit of $38,447,515. Per our MLAs with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intent to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of December 31, 2013.  

In addition, at December 31, 2013 we also had approximately $5.6 million available under our revolving credit facility to fund any short-term working capital needs.

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We have not conducted a public equity offering. We operate with original equity capital, retained earnings and additions to indebtedness in the form of senior debt and bank lines of credit.

Cash Flows

We expect our liquidity needs to include capital expenditures, payment of interest and principal on our indebtedness, income taxes and dividends. We use our cash inflow to manage the temporary increases in cash demand and utilize our revolving credit facility to manage more significant fluctuations in liquidity caused by growth initiatives.

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 requirements primarily through our operating cash flows, and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.

We periodically seek to add growth initiatives by either expanding our network or our markets through organic or internal investments or through strategic acquisitions. We feel we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing. At this time, we do not anticipate our capital structure will limit our growth initiatives over the next twelve months.

The following table summarizes our cash flow:

Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash at December 31, 2013 was $964,404, compared to $2,749,850 at December 31, 2012. Cash at December 31, 2012 included a significant portion of the loan proceeds used to finance the HCC spin-off. We subsequently paid down debt with those loan proceeds during 2013.

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 $5,448,847 for the year ended December 31, 2013, compared to $7,020,595 used in investing activities in 2012. Capital expenditures relating to on-going operations were $5,367,289 in 2013 and $7,014,135 in 2012. Our investing expenditures have been financed with cash flows from our current operations and advances on our line of credit. We believe that our current operations will provide adequate cash flows to fund our plant additions for the upcoming year; however, funding from our revolving credit facility is available if the timing of our cash flows from operations does not match our cash flow requirements. As of December 31, 2013, we had approximately $5.6 million available under our existing credit facility to fund capital expenditures and other operating needs.

Cash Flows Used In Financing Activities

Cash used in financing activities for the year ended December 31, 2013 was $7,802,400. This included long-term debt repayments of $4,113,000, a $1,786,655 payoff of on our revolving credit facility, and the distribution of $1,722,565 of dividends to stockholders. We also repurchased $180,180 of our common stock in 2013. Cash used in financing activities for the year ended December 31, 2012 was $1,901,285. This included long-term debt repayments of $3,698,883 and the distribution of $1,692,329 of dividends to stockholders, offset by a $1,191,713 increase in debt due to the new loan associated with the HCC spin-off and a $2,298,214 increase in debt due to the use of our revolving credit facility.   

Working Capital

We had a working capital deficit (i.e. current assets minus current liabilities) of $38,447,515 as of December 31, 2013, with current assets of approximately $6.5 million and current liabilities of approximately $44.9 million, compared to a working capital deficit of $4,947 as of December 31, 2012. The ratio of current assets to current liabilities was 0.14 and 1.00 as of December 31, 2013 and 2012. Per our MLAs with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intent to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of December 31, 2013. At December 31, 2012 we were in compliance with all the stipulated financial ratios in our loan agreements. 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.

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Long-Term Debt and Revolving Credit Facilities

Our long-term debt obligations as of December 31, 2013, were $0, excluding current debt maturities of $40,707,730. As previously stated, our current outstanding debt with CoBank, ACB has a balloon maturity date of December 31, 2014. We have notified CoBank, ACB of our intent to refinance our credit facilities prior to the December 31, 2014 maturity date. Long-term debt obligations as of December 31, 2012, were $42,494,385, excluding current debt maturities of $4,113,000.

We have a credit facility with CoBank, ACB. Under the credit facility, we entered into separate MLAs and a series of supplements to the respective MLAs. Under the terms of the two MLAs and the supplements, we initially borrowed $59,700,000 and borrowed an additional $4,500,000 on December 19, 2012 and entered into promissory notes on the following terms:

           MLA RX0583

RX0583-T1 and RX0583-T2 initially bear interest at a “LIBOR Margin” rate equal to 2.50 percent over the applicable LIBOR rate. RX0583-T3 initially bears interest at a “LIBOR Margin” rate equal to 3.00 percent over the applicable LIBOR rate. The LIBOR Margin decreases as our “Leverage Ratio” decreases.

MLA RX0584

Each note above initially bears interest at a “LIBOR Margin” rate equal to 2.75 percent over the applicable LIBOR rate. The LIBOR Margin decreases as our “Leverage Ratio” decreases.

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

Our credit facility requires us to comply with specified financial ratios and tests. These financial ratios and tests include total leverage ratio, debt service coverage ratio, equity to total assets ratio and maximum annual capital expenditures tests.

Per our MLAs with CoBank, ACB, our current outstanding debt has a balloon maturity date on December 31, 2014. At December 31, 2013, all of our outstanding debt became current. Due to the balloon maturity, we notified CoBank that we would be in violation of our debt service coverage ratio in our loan covenants and also notified them that it is our intent to refinance the debt prior to December 31, 2014. Due to these circumstances, CoBank, ACB provided a waiver letter of the debt service coverage ratio in our loan covenants effective December 31, 2013. With this waiver letter, we are in compliance with all the stipulated financial ratios in our loan agreements as of December 31, 2013.

At December 31, 2012, we were in compliance with all financial ratios in the loan agreements.  

Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. 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 our “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 we are not in default or potential default under our loan agreements. Since September 30, 2012, our Total Leverage Ratio has been below the 3.50 to 1.00 ratio, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders.  

Our credit facility contains restrictions that, among other things, limits or restricts our ability to enter into guarantees and contingent liabilities, incur additional debt, issue stock, transact asset sales, transfers or dispositions, and engage in mergers and acquisitions, without CoBank, ACB approval.

See Note 5 – “Long-Term Debt” to the Consolidated Financial Statements of this Annual Report on Form 10-K for information pertaining to our long-term debt and current effective interest rates.  

Guarantees

We have guaranteed the obligations of our New Ulm subsidiary joint venture investment in FiberComm, LC. See Note 12 – “Guarantees” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations stated in this 2013 Annual Report on Form 10-K are based upon NU Telecom’s consolidated financial statements that have been prepared in accordance with GAAP and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate. The preparation of our financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. For a summary of our significant accounting policies, see Note 1 – “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of this Annual Report on Form 10-K. There were no significant changes to these accounting policies during the year ended December 31, 2013.

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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, digital and commercial television programming, and Internet services (both dial-up and high-speed broadband). 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 IXCs accessing our network are based on the utilization of our network by these carriers as measured by minutes of use on the network or special access to 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.

Interstate access rates are established by a nationwide pooling of companies known as NECA. The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. New Ulm’s and SETC’s settlements from the pools are based on its actual costs to provide service, while the settlements for NU Telecom subsidiaries – WTC, PTC and HTC are based on nationwide average schedules. Access revenues for New Ulm and SETC 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 GAAP, 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.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes in customer relationships, credit worthiness and concentrations of credit risk. Specific accounts receivable are written off once a determination is made that the account is uncollectible. Additional allowances may be required if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments. Our allowance for doubtful accounts was $120,000 and $175,705 as of December 31, 2013 and 2012.  

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Financial Derivative Instruments and Fair Value Measurements

We have adopted the rules prescribed under GAAP for our financial assets and liabilities. GAAP 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 where one or more significant inputs or value drivers are unobservable.

We have used financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We accounted for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.

We had 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 is discussed in Note 6 – “Interest Rate Swaps” to the Consolidated Financial Statements of this Annual Report on Form 10-K. The fair value of our swap agreements were determined based on Level 2 inputs.

Valuation of Goodwill

We have goodwill on our books related to prior acquisitions of telephone properties. As discussed more fully in Note 4 – “Goodwill and Intangibles” to the Consolidated Financial Statements of this Annual Report on Form 10-K, and in accordance with GAAP, goodwill is reviewed for impairment annually or more frequently if an event occurs or circumstances change that would reduce the fair value below its carrying value. We perform our annual fair value evaluation in the fourth quarter of each year.      

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The impairment test for goodwill involves a two-step process: step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss.

In 2013 and 2012, we engaged an independent valuation firm to complete an annual impairment test for existing goodwill acquired. For 2013 and 2012, the testing resulted in no impairment to goodwill as the determined fair value was sufficient to pass the first step of the impairment test. Our independent valuation firm used a combination of Income (Discounted Cash Flow Method or DCF Method) and Market Approaches  to estimate the fair value of the goodwill on our books related to prior acquisitions of telephone properties. The assumptions used in the estimates of fair value were based on projections provided by our management and a rate of return based on market information observed in debt and traded equity securities. Their Market Approaches considered market multiples observed in companies comparable to ours, traded on public exchange or over-the-counter, or transacted in a merger or acquisition transaction. 

Assumptions used in our 2013 DCF model include the following:

·       A 10.00% weighted average cost of capital based on an industry weighted average cost of capital; and

·       A 1.50% terminal revenue growth rate.

The most significant amount of goodwill recorded on our books was due to the acquisition of HTC and the addition of goodwill obtained through the HCC spin-off. The carrying value of the goodwill was $39,805,349 as of December 31, 2013 and $39,975,906 as of December 31, 2012. The decrease of $170,557 in goodwill in 2013 compared to 2012 was due to the true-up of goodwill obtained through the HCC spin-off on December 31, 2012.

In 2013, we tested the HTC goodwill. Based on the DCF models, and income and market-based approaches we used, we determined the estimated enterprise fair value of our reporting unit exceeded the carrying amount of that reporting unit by approximately $4.2 million, which indicated that we had no impairment as of December 31, 2013. In addition, in 2013, we tested the SETC goodwill. Based on the DCF models, and income and market-based approaches we used, we determined the estimated enterprise fair value of our reporting unit exceeded the carrying amount of that reporting unit by approximately $2.1 million, which indicated that we had no impairment as of December 31, 2013. The market-based approaches used in our evaluations are subject to change as a result of changing economic and competitive conditions. Future negative changes relating to our financial operations could result in a potential impairment of goodwill. 

Income Taxes

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Significant components of 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 basis. Our effective income tax rate is normally higher than the United States tax rate due to state income taxes and permanent differences.

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We account for income taxes in accordance with GAAP. As required by GAAP, 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.

In accordance with GAAP, we record net unrecognized tax benefits that, if recognized, would affect the income tax provision when recorded. See Note 7 – “Income Taxes” to the Consolidated Financial Statements of this Annual Report Form 10-K.  

As of December 31, 2013 and 2012 we had $259,739 and $143,866 of unrecognized tax benefits net of a federal tax benefit of $88,311 and $48,914, which if recognized would affect the effective tax rate. Currently, a petition related to HCC’s 2006 Minnesota tax return has been filed in Minnesota Tax Court. It is unknown when this matter will be resolved.

We are primarily subject to United States, Minnesota, Nebraska and Iowa income taxes. Tax years subsequent to 2009 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. As of December 31, 2013 and 2012 we had $68,286 and $19,136 of accrued interest that related to income tax matters.

Property, Plant and Equipment

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

We use the group life method (mass asset accounting) to depreciate the assets of our telephone companies. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. We have not made any significant changes to the lives of assets in the two-year period ended December 31, 2013.

Equity Method Investment

Incentive Compensation

We engaged an outside consultant in 2005 to advise us in our development of an Employee Incentive Plan for employees other than executive officers and a Management Incentive Plan for our executive officers.  Both plans were implemented in 2006. Both of these plans are cash-based incentive plans. Payments on each plan are based on an achievement of objectives of measurable corporate performance, with financial and customer related targets. The financial targets are based on an achievement of specified operating revenues and operating income before interest, taxes, depreciation and amortization (OIBITDA), based on our budget, while the customer service targets are based on several other customer service key performance indicators.

We accrue an estimated liability each year for these potential payouts and reverse that accrual if the incentive payout targets are not met and paid out. Incentive payouts, if earned, are typically paid in late March or early April of the year following the target year and after the filing of our Annual Report on Form 10-K.  

Recent Accounting Developments

See Note 1 – “Summary of Significant Accounting Policies” to the Consolidated Financial Statements of this Annual Report on Form 10-K, for a discussion of recent accounting developments.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of New Ulm Telecom, Inc. and subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Olsen Thielen & Co., Ltd.

St. Paul, Minnesota

March 14, 2014

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our accounting policies conform with GAAP and, where applicable, to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate in preparing general purpose financial statements for most public utilities. In general, the type of regulation covered by this statement permits rates (prices) for some services to be set at levels intended to recover the estimated costs of providing regulated services or products, including the cost of capital (interest costs and a provision for earnings on stockholders’ investments).

Principles of Consolidation

Our consolidated financial statements report the financial condition and results of operations for NU Telecom and its subsidiaries in one business segment: the Telecom Segment. Inter-company transactions have been eliminated from the consolidated financial statements.

Classification of Costs and Expenses

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 transportation costs.

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.

Use of Estimates

Preparing consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. The estimates and assumption used in the accompanying consolidated financial statements are based on our management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from those estimates and assumptions.

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, digital and commercial television programming, and Internet services (both dial-up and high-speed broadband). 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 IXCs accessing our network are based on the utilization of our network by these carriers as measured by minutes of use on the network or special access to 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.

Interstate access rates are established by a nationwide pooling of companies known as NECA. The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. New Ulm’s and SETC’s settlements from the pools are based on its actual costs to provide service, while the settlements for NU Telecom subsidiaries – WTC, PTC and HTC are based on nationwide average schedules. Access revenues for New Ulm and SETC 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 the sale, installation and servicing of communication systems. In accordance with GAAP, 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.

Receivables

As of December 31, 2013 and 2012, our consolidated receivables totaled $1,458,627 and $1,996,996, net of the allowance for doubtful accounts. We believe our receivables as of December 31, 2013 and 2012 are recorded at their fair value. As there may be exposure or risk with receivables, we routinely monitor our receivables and adjust the allowance for doubtful accounts when events occur that may potentially affect the collection of our receivables.  

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. To estimate the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes in customer financial condition and credit worthiness, and concentrations of credit risk. Specific receivables are written off once we determine the account is uncollectible.   

The activity in our allowance for doubtful accounts include the following:

We value inventory using the lower of cost or market method. Similar to our allowance for doubtful accounts, we make estimates related to the valuation of inventory. As of December 31, 2013 and 2012, we had no inventory reserve. We adjust our inventory carrying value for estimated obsolescence or unmarketable inventory to the estimated market value based upon assumptions about future demand and market conditions. As market and other conditions change, we may establish additional inventory reserves at a time when the facts that give rise to a lower value are warranted. We use the first-in, first-out (FIFO) method of inventory costing for our non-retail inventory. We use the average cost method of inventory costing for our retail inventory.

Fair Value Measurements

We have adopted the rules prescribed under GAAP for our financial assets and liabilities. GAAP 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 where one or more significant inputs or value drivers are unobservable.

We have used financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We accounted for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.

We had 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 is discussed in Note 6 – “Interest Rate Swaps” to the Consolidated Financial Statements of this Annual Report on Form 10-K. The fair value of our swap agreements were determined based on Level 2 inputs.

We use the group life method (mass asset accounting) to depreciate the assets of our telephone companies. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. We have not made any significant changes to the lives of these assets in the two year period ended December 31, 2013.

Goodwill and Intangible Assets

We amortize our definite-lived intangible assets over their estimated useful lives. Customer lists are amortized over fourteen to fifteen years, regulatory rights are amortized over fifteen years and non-competition agreements are amortized over five years. In addition, we determined that our HTC trade name intangible asset no longer had an indefinite life due to our re-branding initiatives. We determined that the HTC trade name would be amortized over three years, beginning in 2010, as the re-branding initiatives are completed. Intangible assets with finite lives are amortized over their respective estimated useful lives. In accordance with GAAP, goodwill and intangible assets with indefinite useful lives are not amortized, but tested for impairment at least annually. See Note 4 – “Goodwill and Intangibles” to the Consolidated Financial Statements of this Annual Report on Form 10-K for a more detailed discussion of the intangible assets and goodwill. Our goodwill balance was $39,805,349 as of December 31, 2013 and $39,975,906 as of December 31, 2012. The decrease in goodwill in 2013 compared to 2012 is due to the true-up of goodwill obtained through the HCC spin-off on December 31, 2012. In the fourth quarter of 2013 and 2012 we completed our annual impairment tests for existing acquired goodwill. This testing resulted in no impairment charges to goodwill at December 31, 2013 and 2012. 

Investments and Other Assets

We are an investor in several partnerships and limited liability corporations. We use the equity method of accounting for these investments that reflects original cost and recognition of our share of the net income or losses from the respective operations.    

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

Other Financial Instruments

Other Investments – It is difficult to estimate a fair value for equity investments in companies carried on the equity or cost basis due to a lack of quoted market prices. We conducted an evaluation of our investments in all of our companies in connection with the preparation of our audited financial statements at December 31, 2013. We believe the carrying value of our investments is not impaired.