Nuvera Communications, Inc. - Quarter Report: 2016 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_________________

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

 

 

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

 

For the transition period from_____to_____.

 

Commission File Number  0-3024

 

NEW ULM TELECOM, INC.

(Exact name of Registrant as specified in its charter)

 

 

27 North Minnesota Street

New Ulm, Minnesota  56073

(Address of principal executive offices)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes S  No  £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes S No  £                 

 

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

 

£ Large accelerated filer  £ Accelerated filer  £ Non-accelerated filer  S Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £  No S

 

The total number of shares of the registrant’s common stock outstanding as of November 14, 2016: 5,139,375.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

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

 

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

 

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

 

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

 

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NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

       YEAR ENDED DECEMBER 31, 2015 AND
      NINE MONTHS ENDED SEPTEMBER 30, 2016

 

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

 

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NEW ULM TELECOM, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016 (Unaudited)

 

Note 1 – Basis of Presentation and Consolidation

 

The accompanying unaudited condensed consolidated financial statements of New Ulm Telecom, Inc. and its subsidiaries (NU Telecom) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

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

 

Our consolidated financial statements 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.

 

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 networks, digital and commercial television (TV) programming, Internet services (high-speed broadband), and hosted and managed services. Revenues for these services are billed based on set rates for monthly service or based on the amount of time the customer is utilizing our facilities. The revenue for these services is recognized when the service is rendered.

 

Revenues earned from interexchange carriers (IXC) 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 the National Exchange Carriers Association (NECA). The Federal Communications Commission (FCC) established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. 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 the IXC’s. We believe this trend will continue.

 

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New Ulm Telecom’s and Sleepy Eye Telephone Company’s settlements from the pools are based on their actual costs to provide service, while the settlements for NU Telecom subsidiaries – Western Telephone Company, Peoples Telephone Company and Hutchinson Telephone Company (HTC) are based on nationwide average schedules. Access revenues for New Ulm Telecom 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.

 

Cost of Services (excluding depreciation and amortization)

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

 

Selling, General and Administrative Expenses

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

 

Depreciation and Amortization Expense

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. Depreciation expense was $5,474,520 and $5,483,905 for the nine months ended September 30, 2016 and 2015. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.

 

Income Taxes

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Significant components of our deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax 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. The Company has identified no significant income tax uncertainties as of September 30, 2016 and December 31, 2015.

 

We are primarily subject to United States, Minnesota, Nebraska and Iowa income taxes. Tax years subsequent to 2012 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 September 30, 2016 and December 31, 2015 we had no interest or penalties accrued.  

 

Recent Accounting Developments

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU 2016-13), “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosures relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. NU Telecom is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted. We are evaluating the effects that adoption of ASU 2016-13 will have on our financial position, results of operations and disclosures.  

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. This change will result in an increase to recorded assets and liabilities on lessees’ financial statements, as well as changes in the categorization of rental costs, from rent expense to interest and depreciation expense. Other effects may occur depending on the types of leases and the specific terms of them utilized by particular lessees. The ASU is effective for the Company on January 1, 2019, and early application is permitted. Modified retrospective application is required. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.  

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes,” simplifying the balance sheet classification of deferred taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 removes the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. ASU 2015-17 is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We expect, upon adoption of this guidance, that our current financial statement classification of deferred tax assets and liabilities will all be classified as noncurrent on our condensed consolidated balance sheet.

 

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest,” simplifying the presentation of debt issuance costs. ASU 2015-03 requires that premiums, discounts, and loan fees and costs associated with long-term debt be reflected as a reduction of the outstanding debt balance. Previous guidance had treated such loan fees and costs as a deferred charge on the balance sheet. As a result of implementing ASU 2015-03, the Company reclassified $310,686 and $355,070 of unamortized loan fees and costs included in deferred charges and other assets as of September 30, 2016 and December 31, 2015 to long-term debt. $59,178 was allocated to current maturities of long-term debt as of September 30, 2016 and December 31, 2015. $251,508 and $295,892 were allocated to long-term debt as of September 30, 2016 and December 31, 2015. Total assets, as well as total liabilities and shareholders’ equity, were also reduced by $310,686 and $355,070 as of September 30, 2016 and December 31, 2015. There was no impact on the consolidated statements of income or cash flows.

 

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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” and has since amended the standard with ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.” These standards replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. The core principle of the revenue model is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and also requires enhanced disclosures. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption as of January 1, 2017 is permitted, however NU Telecom does not intend to adopt early. We are currently evaluating the guidance, developing our implementation plan, and evaluating the impact that ASU 2014-09, as amended, will have on our consolidated financial statements and related disclosures upon adoption.

 

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

 

Note 2 – 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 quote 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.

 

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We have entered into an interest rate swap agreement with our lender, CoBank, ACB (CoBank), to manage our cash flow exposure to fluctuations in interest rates. This instrument is designated as cash flow hedge and is 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 this derivative is accounted for as a component of accumulated other comprehensive income (loss) for as long as the hedge remains effective.

 

The fair value of our IRSA is discussed in Note 5 – “Interest Rate Swaps”. The fair value of our swap agreement was determined based on Level 2 inputs.

 

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, 2015. We believe the carrying value of our investments is not impaired.

 

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

 

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

 

Note 3 – Goodwill and Intangibles

 

We account for goodwill and other intangible assets under GAAP. Under GAAP, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. Our goodwill totaled $39,805,349 at September 30, 2016 and December 31, 2015.    

 

As required by GAAP, we do not amortize goodwill and other intangible assets with indefinite lives, but test for impairment on an annual basis or earlier if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. These circumstances include, but are not limited to (i) a significant adverse change in the business climate, (ii) unanticipated competition or (iii) an adverse action or assessment by a regulator. Determining impairment involves estimating the fair value of a reporting unit using a combination of (i) the income or discounted cash flows approach and (ii) the market approach that utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. We recognize impairment loss when the carrying amount of goodwill exceeds its implied fair value.

 

In 2015 and 2014, we engaged an independent valuation firm to complete our annual impairment testing for existing goodwill. For 2015 and 2014, the testing results indicated no impairment charge to goodwill as the determined fair value was sufficient to pass the first step of the impairment test.

 

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Our intangible assets subject to amortization consist of acquired customer relationships, regulatory rights and trade names. We amortize intangible assets with finite lives over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. In addition, we periodically reassess the carrying value, useful lives and classifications of our identifiable intangible assets.

 

The components of our identified intangible assets are as follows:

 

  

Amortization expense related to the definite-lived intangible assets was $1,851,985 and $1,853,425 for the nine months ended September 30, 2016 and 2015. Amortization expense for the remaining three months of 2016 and the five years subsequent to 2016 is estimated to be:

 

·	(October 1 – December 31)	$	617,271
·	2017 -	$	2,469,083
·	2018 -	$	2,355,083
·	2019 -	$	2,355,083
·	2020 -	$	2,355,083
·	2021 -	$	2,355,083

 

Note 4 – Secured Credit Facility

 

We have a credit facility with CoBank. Under the credit facility, we entered into Master Loan Agreements (MLAs) and a series of supplements to the respective MLAs.

 

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 as collateral. In addition, NU Telecom and its respective subsidiaries have guaranteed all the obligations under the credit facility. These mortgage notes are required to be paid in quarterly installments covering principal and interest, beginning in the year of issue and maturing on December 31, 2021.  

 

On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. There are two loans under the MLA, which include a $35 million term loan and a $9 million revolver loan. Also, under the MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million.

 

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As part of the Amended and Restated MLA with CoBank, NU Telecom needed to enter into interest rate protection agreements in form and substance reasonably satisfactory to CoBank so as to fix or limit interest rates payable by NU Telecom at all times to at least 40% of the outstanding principal balance of the $35 million term loan for an initial average weighted life of at least three years.

 

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 $2,100,000 in any year if our “Total Leverage Ratio,” that is, the ratio of our “Indebtedness” to “EBITDA” (earnings before interest, taxes, depreciation and amortization – as defined in the loan documents) is greater than 2.50 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.50 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. On March 31, 2016 our Total Leverage Ratio fell below 2.50, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio at September 30, 2016 is 2.17. 

 

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, fixed coverage ratio and maximum annual capital expenditures tests. At September 30, 2016 we were in compliance with all the stipulated financial ratios in our loan agreements.

 

There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. Also, 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 approval.  

 

As described in Note 5 – “Interest Rate Swaps”, we have entered into an IRSA that effectively fixed our interest rates and cover $14.0 million at a weighted average rate of 4.22%, as of September 30, 2016. The remaining debt of $25.3 million ($6.9 million available under the revolving credit facilities and $18.4 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 3.53%, as of September 30, 2016.   

 

Note 5 – Interest Rate Swaps

 

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

 

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

 

To meet this objective, on June 18, 2015 we entered into an IRSA with CoBank covering $14.0 million of our aggregate indebtedness to CoBank. This swap effectively locks in the interest rate on $14.0 million of variable-rate debt through June 2018. Under this IRSA, we have changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the IRSA, we pay a fixed contractual interest rate and (i) make an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment is above the contractual rate.

 

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

 

Our IRSA under our credit facilities qualifies as cash flow hedge for accounting purposes under GAAP. We reflect the effect of this hedging transaction in the financial statements. The unrealized gain/loss is reported in other comprehensive income. If we terminate our IRSA, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income, which is classified in stockholders’ equity, into earnings on the consolidated statements of income.

 

The fair value of the Company’s IRSA was determined based on valuations received from CoBank and are based on the present value of expected future cash flows using discount rates appropriate with the terms of the IRSA. The fair value indicates an estimated amount we would be required to pay if the contracts were canceled or transferred to other parties. At September 30, 2016, the fair value liability of the swap was $115,253, which has been recorded net of deferred tax benefit of $46,643, for the $68,610 in accumulated other comprehensive loss.

 

Note 6 – Other Investments  

 

We are a co-investor with other rural telephone companies in several partnerships and limited liability companies. These joint ventures make it possible to offer services to customers, including digital video services and fiber optic transport services that we would have difficulty offering on our own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. We recognize income and losses from these investments on the equity method of accounting. For a listing of our investments, see Note 9 – “Segment Information”.

 

Note 7 – Guarantees

 

NU Telecom has guaranteed a ten-year loan owed by FiberComm, LC, maturing on September 30, 2021. As of September 30, 2016, we have recorded a liability of $208,773 in connection with the guarantee on this loan. This guarantee may be exercised if FiberComm, LC does not make its required payments on this note.

 

Note 8 – Deferred Compensation

 

As of September 30, 2016 and December 31, 2015, we have recorded other deferred compensation relating to executive compensation payable to certain former executives of past acquisitions.  

 

Note 9 – Segment Information  

 

We operate in the Telecom Segment and have no other significant business segments. The Telecom Segment consists of voice, data and video communication services delivered to the customer over our local communications network. No single customer accounted for a material portion of our consolidated revenues.

 

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The Telecom Segment operates the following incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) and has investment ownership interests as follows:

 

Telecom Segment

 

●	ILECs:
	▪	New Ulm Telecom, Inc., the parent company;
	▪	Hutchinson Telephone Company, a wholly-owned subsidiary of NU Telecom;
	▪	Peoples Telephone Company, a wholly-owned subsidiary of NU Telecom;
	▪	Sleepy Eye Telephone Company, a wholly-owned subsidiary of NU Telecom;
	▪	Western Telephone Company, a wholly-owned subsidiary of NU Telecom.
●	CLECs:
	▪	NU Telecom, located in Redwood Falls, Minnesota;
	▪	Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield, Minnesota.
●	Our investments and interests in the following entities include some management responsibilities:
	▪	FiberComm, LC – 20.00% 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;
	▪	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;
	▪	SM Broadband, LLC – 12.50% subsidiary equity ownership interest. SM Broadband Services, LLC provides network connectivity for regional businesses.

Note 10 – Commitments and Contingencies

 

We are involved in certain contractual disputes in the ordinary course of business. We do not believe the ultimate resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows. We did not experience any changes to material contractual obligations in the first nine months of 2016. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for the discussion relating to commitments and contingencies.

 

Note 11 – Subsequent Events

 

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

 

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

 

Forward Looking Statements

 

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “targets”, “projects”, “will”, “may”, “continues”, and “should”, and variations of these words and similar expressions, are intended to identify these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from such statements.

 

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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-Q. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the 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.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations stated in this Form 10-Q, are based upon NU Telecom’s consolidated unaudited 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 contained in our Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated herein by reference.

 

Results of Operations

 

Overview

 

NU Telecom has a state-of-the-art; fiber-rich communications network and offers a diverse array of communications products and services. Our businesses provide local telephone service and network access to other telecommunications carriers for connections to our networks. In addition, we provide long distance service, broadband Internet access, video services, and managed and hosted solutions services.

 

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 require 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; pay dividends and provide for the carrying value of trade accounts receivable, some of which may take several months to collect in the normal course of business.

 

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Executive Summary

 

·      The Universal Service Fund (USF) was established as part of the Telecommunications Act of 1996 and provides subsidies to telecommunications providers as means of increasing the availability and affordability of advanced telecommunications services. In 2011, significant reform was introduced, including the creation of the Connect America Fund (CAF), to help modernize the USF and promote support of these telecom services in the nation’s high-cost areas. In 2016, the FCC announced additional reform to further transition the CAF from supporting the provision of voice services to the provision of broadband services. On March 30, 2016, the FCC issued a Report and Order (the “2016 Order”) that adopts the following changes to the USF for rate-of-return carriers:

 

o Establishes a voluntary cost model;

 

o Creates specific broadband deployment obligations;

 

o Provides a mechanism for support of broadband-only deployment;

 

o Gradually reduces the authorized rate-of-return from 11.25 percent to 9.75 percent;

 

o Eliminates support in those local areas served by unsubsidized competitors;

 

o Establishes “glide-path” transition periods for all the new changes; and

 

o Maintains the $2 billion budget established by the 2011 Transformation Order.

 

      While the 2011 USF/ICC Transformation Order established CAF Phase I and CAF Phase II as high-cost support mechanisms for the price-cap carriers (i.e., the larger, national local exchange carriers (LECs) such as Verizon and AT&T), it was not as specific about how subsidies would change for the rate-of-return carriers (i.e., the smaller LECs, including all rural LECs). In contrast, the 2016 Order focuses on the rate-of-return carriers, announces specific changes to existing funding mechanisms as well as a new funding mechanism, and provides rural telecommunications providers with greater certainty about future support.

 

      One of the major changes introduced by the 2016 Order is the creation of the Alternative Connect America Cost Model (A-CAM), a new CAF support mechanism for rate-of-return carriers. Utilization of the A-CAM is voluntary; and rate-of-return carriers may instead choose to continue relying on the legacy support mechanism know as interstate common line support, but now modified and renamed CAF Broadband Loop Support (CAF-BLS). Each carrier must decide which support mechanism to elect, and must choose one or the other, per state.

 

      On October 12, 2016, NU Telecom elected to move to the A-CAM model as its support mechanism for both its Minnesota and Iowa operations. The Company will receive A-CAM support for a period of ten years in exchange for meeting defined broadband build-out obligations. Final A-CAM model award numbers have yet to be determined by the FCC.

 

·      On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. There are two loans under the MLA, which include a $35 million term loan and a $9 million revolver loan. The term loan requires payments of $675,000 per quarter, beginning March 2015, with the final installment due December 31, 2021. NU Telecom may borrow from time to time under the revolver loan, which also matures on December 31, 2021. Also, under the MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million. See Note 4 – “Secured Credit Facility” for additional information.

 

·       On June 18, 2015 NU Telecom entered into an IRSA with CoBank covering $14.0 million of our aggregate indebtedness to CoBank effective June 18, 2015. This swap effectively locks in the interest rate on $14.0 million of variable-rate debt through June 2018. Under the IRSA, we have changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of this IRSA, we pay a fixed contractual interest rate and (i) make an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment is above the contractual rate. See Note 5 – “Interest Rate Swaps” for additional information.

 

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·      Net income for the third quarter of 2016 totaled $753,811, which was an $87,205 or 13.08% increase compared to the third quarter of 2015. This increase was primarily due to an increase in operating revenues, partially offset by an increase in operating expenses, a decrease in dividend income and an increase in income tax expense.

 

·      Consolidated revenue for the third quarter of 2016 totaled $10,772,771, which was a $403,933 or 3.90% increase compared to the third quarter of 2015. This increase was primarily due to increases in data, other revenues, network access, and video revenues, partially offset by a decrease in our local service revenue, all of which are described below.

 

Business Trends

 

Included below is a synopsis of business trends management believes will continue to affect our business in 2016. 

 

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 cable television providers (CATV), Voice over Internet Protocol (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 2,520 or 9.56% for the twelve months ended September 30, 2016 due to the reasons mentioned above. 

 

The expansion of our state-of-the-art; fiber-rich communications network, 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, and hosted and managed service solutions are expected to continue to offset the revenue declines from the access line trends discussed above.

 

To be competitive, 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 discounts. We believe that product bundles positively impact our customer retention, and the associated discounts provide our customers the best value for their communications and entertainment options. We have a state-of-the-art, fiber-rich broadband network, which, 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, wireless 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. 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 are included below:

 

 

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Revenue

 

Local Service – We receive recurring revenue for basic local services that enable 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 $1,558,608, which is $19,401 or 1.23% lower in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $4,620,157, which is $179,969 or 3.75% lower in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These decreases were primarily due to the decline in access lines.

 

The number of access lines we serve as a company have been decreasing, which is consistent with a general industry trend, as customers are increasingly utilizing other technologies, such as wireless phones and IP services. 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 traffic on our network. Additionally, we bill subscriber line charges (SLCs) to substantially all of our 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 the ILECs. Network access revenue was $2,994,837, which is $76,266 or 2.61% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.  This increase was primarily due to increased special access circuit revenue, partially offset by lower minutes of use on our network. Network access revenue was $8,701,706, which is $55,327 or 0.63% lower in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. This decrease was primarily due to lower minutes of use on our network.

 

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In recent years, IXCs and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to their network traffic. We believe that long distance and other communication providers will continue to challenge the applicability of access charges either before the FCC or directly with the LECs. We cannot predict the likelihood of future claims and cannot estimate the impact.

 

Video – We receive monthly recurring revenue from our 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 services and five communities with our CATV services. Video revenue was $2,353,013, which is $68,210 or 2.99% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $6,993,456, which is $236,081 or 3.49% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These increases were primarily due to a combination of rate increases introduced into several of our markets over the course of the last several years. Also contributing to the increase in video revenues was an increased demand for our high definition and digital video recording services.

 

Data – We provide high speed Internet to business and residential customers. Our revenue is earned based on the offering of 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 $2,678,796, which is $201,396 or 8.13% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $7,908,948, which is $503,027 or 6.79% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These increases were primarily due to an increase in data customers and increased managed services revenues. We expect continued growth in this area will be driven by expansion of service areas, our aggressively packaging service bundles and marketing managed service solutions to businesses.

 

Other Revenue – Our customers are billed for toll and 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. We also generate revenue from directory publishing, sales and service of customer premise equipment (CPE), bill processing and other customer services. Our directory publishing revenue 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 our wireless services, as well as revenue collected for the sales of wireless phones and accessories. Other revenue was $1,187,517, which is $77,462 or 6.98% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $3,407,436, which is $25,251 or 0.75% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These increases were primarily due to an increase in the leasing of our fiber and cable facilities, and an increase in the sales and installation of CPE.

 

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Cost of Services (excluding Depreciation and Amortization)

 

Cost of services (excluding depreciation and amortization) was $4,994,356, which is $76,834 or 1.56% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $15,041,444, which is $253,338 or 1.71% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These increases were primarily due to higher programming costs from video content providers, higher costs associated with increased maintenance and support agreements on our equipment and software, and higher cost of goods sold due to an increase in the sales of CPE.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $1,778,564, which is $76,056 or 4.47% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015. This increase was primarily due to increased spending on professional and consulting services in the third quarter of 2016. Selling, general and administrative expenses were $5,255,747, which is $195,019 or 3.58% lower in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Despite increased spending in the third quarter of 2016 on professional and consulting services, overall spending on professional and consulting services in the nine months ended September 30, 2016 is lower than the same period in 2015 and was the primary reason selling, general and administrative expenses were lower year-to-date.

 

Depreciation and Amortization

 

Depreciation and amortization was $2,444,064, which is $7,795 or 0.32% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015. This increase was due to increased depreciation associated with increases in our broadband property, plant and equipment, reflecting our continual investment in technology and infrastructure in order to meet our customers’ demands for products and services. Depreciation and amortization was $7,326,505, which is $10,825 or 0.15% lower in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. This decrease was primarily due to portions of our legacy telephone network becoming fully depreciated.      

 

Operating Income

 

Operating income was $1,555,787, which is $243,248 or 18.53% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Operating income was $4,008,007, which is $481,569 or 13.66% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Both these increases were primarily due to an increase in revenues, partially offset by an increase in expenses, all of which are described above.  

  

See Consolidated Statements of Income on Page 3 (for discussion below)

 

Interest Expenses and Other Income 

 

Interest expense was $350,545, which is $34,285 or 8.91% lower in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $1,078,833, which is $36,116 or 3.24% lower in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These decreases were primarily due to lower outstanding debt balances.

 

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Interest and dividend income was $16,641, which is $101,600 or 85.93% lower in the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Interest and dividend income was $91,624, which is $117,478 or 56.18% lower in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These decreases were primarily due to a decrease in dividend income earned on our investments.  

 

Other income for the nine months ended September 30, 2016 and 2015 included a patronage credit earned with CoBank as a result of our debt agreements with them. The patronage credit allocated and received in 2016 was $386,843, compared to $409,132 allocated and received in 2015. CoBank 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.

 

Other investment income was $74,456, which is $23,707 or 24.15% lower in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $405,817, which is $172,502 or 73.94% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.

 

Income Taxes

 

Income tax expense was $545,862, which is $63,147 or 13.08% higher in the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and was $1,608,108, which is $365,555 or 29.42% higher in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. These increases were primarily due to higher pre-tax net income in 2016 compared to 2015. In addition, in the second quarter of 2015, we recognized unrealized tax benefits associated with the Hector Communications Corporation Minnesota tax issue, which was resolved in April 2015 and lowered income tax expense in 2015. The effective income tax rates for the nine months ending September 30, 2016 and 2015 were approximately 42.00% and 37.93%. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.

 

Liquidity and Capital Resources

 

Capital Structure

 

NU Telecom’s total capital structure (long-term and short-term debt obligations, net of unamortized loan fees, plus stockholders’ equity) was $92,150,690 at September 30, 2016, reflecting 65.1% equity and 34.9% debt. This compares to a capital structure of $95,050,347 at December 31, 2015, reflecting 62.1% equity and 37.9% 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 2.17 times debt to EBITDA as defined in the loan documents, 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.

 

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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 stock and (v) potential acquisitions.

 

Our primary sources of liquidity for the nine months ended September 30, 2016 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At September 30, 2016 we had a working capital deficit of $504,420. However, at September 30, 2016, we also had approximately $6.9 million available under our revolving credit facility to fund any short-term working capital needs. The working capital deficit as of September 30, 2016 was primarily the result of the utilization of operating cash flows to fund operations and purchase capital equipment in lieu of using our revolving credit facility.

 

On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. There are two loans under the MLA, which include a $35 million term loan and a $9 million revolver loan. The term loan requires payments of $675,000 per quarter, beginning March 2015, with the final installment due December 31, 2021. NU Telecom may borrow from time to time under the revolver loan, which also matures on December 31, 2021. Also, under the MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million.

 

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 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 expanding our network or our markets through organic or internal investments or through strategic acquisitions. We believe 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:

 

 

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Cash Flows from Operating Activities

 

Cash generated by operations in the first nine months of 2016 was $9,549,148, compared to cash generated by operations of $6,841,812 in the first nine months of 2015. The increase in cash from operating activities in 2016 was primarily due to the timing of payments for accounts payable and inventories, receipt of accounts receivable and distributions from our equity investments.

 

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 September 30, 2016 was $469,410 compared to $551,824 at December 31, 2015.

 

Cash Flows Used in Investing Activities

 

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

 

Cash used in investing activities was $4,352,841 for the first nine months of 2016 compared to $4,477,728 for the first nine months of 2015. Capital expenditures relating to on-going operations were $4,249,841 for the first nine months ended September 30, 2016 compared to $4,318,878 for the first nine months ended September 30, 2015. We expect total plant additions to be approximately $6.5 million in 2016. Our investing expenditures are 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 remainder of this 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 September 30, 2016, we had approximately $6.9 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 nine months ended September 30, 2016 was $5,278,721 and included long-term debt repayments of $2,025,000, net payments on our revolving credit facility of $1,880,909 and the distribution of $1,372,812 of dividends to our stockholders. Cash used in financing activities for the nine months ended September 30, 2015 was $2,729,230 and included long-term debt repayments of $2,025,000, payment of loan origination costs of $22,826, draws on our revolving credit facility of $620,758 and the distribution of $1,302,162 of dividends to stockholders.

 

Working Capital

 

We had a working capital deficit (i.e. current assets minus current liabilities) of $504,420 as of September 30, 2016, with current assets of approximately $6.3 million and current liabilities of approximately $6.8 million, compared to a working capital deficit of $302,463 as of December 31, 2015. The ratio of current assets to current liabilities was 0.93 and 0.96 as of September 30, 2016 and December 31, 2015. The working capital deficit at September 30, 2016 was primarily the result of the utilization of operating cash flows to fund operations and purchase capital equipment in lieu of using our revolving credit facility.  

 

At September 30, 2016 and December 31, 2015 we were in compliance with all stipulated financial ratios in our loan agreements.

 

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Dividends and Restrictions

 

We declared a quarterly dividend of $.09 per share for both the second and third quarters of 2016 and $.0875 per share for the first quarter of 2016, which totaled $462,544 per quarter for the second and third quarters and $447,724 for the first quarter. We declared a quarterly dividend of $.0850 per share in each of the first, second and third quarters of 2015, which totaled $434,932 for the third quarter and $433,615 per quarter for the first and second quarters.

 

We expect to continue to pay quarterly dividends during 2016, but only if and to the extent declared by our Board of Directors on a quarterly basis and subject to various restrictions on our ability to do so (described below). Dividends on our common stock are not cumulative. 

 

There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. See below and Note 4 – “Secured Credit Facility” for additional information.

 

On December 31, 2014, we entered into an Amended and Restated MLA with CoBank. The MLA refinances and replaces the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. 

 

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 $2,100,000 in any year if our “Total Leverage Ratio,” that is, the ratio of our “Indebtedness” to “EBITDA” – as defined in the loan documents, is greater than 2.50 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.50 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. On March 31, 2016 our Total Leverage Ratio fell below 2.50, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio at September 30, 2016 is 2.17. 

 

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.

 

Long-Term Debt

 

See Note 4 – “Secured Credit Facility” for information pertaining to our long-term debt.

 

Recent Accounting Developments  

 

See Note 1 – “Basis of Presentation and Consolidation” for a discussion of recent accounting developments.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for a smaller reporting company.

 

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Item 4. Controls and Procedures

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) or Rule 15d-15(e), as of the end of the period subject to this Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

Changes in Internal Control over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

 

Not required for a smaller reporting company.

 

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

 

None.

 

Item 3.    Defaults Upon Senior Securities.

 

None.

 

Item 4.    Mine Safety Disclosures

 

Not Applicable.

 

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Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

           

Exhibit

Number           Description

 

31.1                 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

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

 

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

 

101.INS          XBRL Instance Document

 

101.SCH         XBRL Taxonomy Extension Schema Document

 

101.CAL         XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF         XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB         XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE          XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	NEW ULM TELECOM, INC.
Dated:  November 14, 2016	By	/s/ Bill D. Otis
		Bill D. Otis, President and Chief Executive Officer
Dated:  November 14, 2016	By	/s/ Curtis O. Kawlewski
		Curtis O. Kawlewski, Chief Financial Officer

 

 

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