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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 



(Mark One)

 

 

x

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

 

For the quarterly period ended September 30, 2012

 

OR

 

 

o

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

 

For the transition period from     to     .


 

Commission File Number 0-3024

 


 

NEW ULM TELECOM, INC.

(Exact name of Registrant as specified in its charter)


 

 

 

Minnesota

 

41-0440990

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)


 

27 North Minnesota Street

New Ulm, Minnesota 56073

(Address of principal executive offices and zip code)

 

(507) 354-4111

(Registrant’s telephone number, including area code)



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

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

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

o Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company

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

The total number of shares of the Registrant’s common stock outstanding as of November 9, 2012: 5,132,518.

1




TABLE OF CONTENTS

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

 

3-8

 

 

 

 

 

Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011

 

3

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011

 

4

 

 

 

 

 

Consolidated Balance Sheets (unaudited) as of September 30, 2012 and December 31, 2011

 

5-6

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2012 and 2011

 

7

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Year Ended December 31, 2011 and for the Nine Months ended September 30, 2012

 

8

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements (unaudited)

 

9-18

 

 

 

 

Item 2

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

 

18-30

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

Item 4

Controls and Procedures

 

30-31

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

 

31

 

 

 

 

Item 1A

Risk Factors

 

31

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

31

 

 

 

 

Item 4

Mine Safety Disclosures

 

31

 

 

 

 

Item 5

Other Information

 

31

 

 

 

 

Item 6

Exhibits Listing

 

32

 

 

 

 

 

Signatures

 

33

 

 

 

 

 

Exhibits

 

34-37

2


Table of Contents


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

 

$

1,448,759

 

$

1,489,581

 

$

4,364,582

 

$

4,459,707

 

Network Access

 

 

2,563,335

 

 

3,035,447

 

 

8,123,960

 

 

9,104,649

 

Video

 

 

1,494,017

 

 

1,449,038

 

 

4,420,306

 

 

4,221,963

 

Data

 

 

1,386,433

 

 

1,318,277

 

 

4,128,579

 

 

3,898,769

 

Long Distance

 

 

155,715

 

 

163,809

 

 

461,078

 

 

485,016

 

Other Non-Regulated

 

 

979,088

 

 

974,577

 

 

2,859,877

 

 

2,908,214

 

Total Operating Revenues

 

 

8,027,347

 

 

8,430,729

 

 

24,358,382

 

 

25,078,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Plant Operations (Excluding Depreciation and Amortization)

 

 

1,497,170

 

 

1,500,362

 

 

4,828,741

 

 

4,657,190

 

Cost of Video

 

 

1,283,744

 

 

1,132,272

 

 

3,785,252

 

 

3,394,769

 

Cost of Data

 

 

210,238

 

 

198,870

 

 

744,233

 

 

647,989

 

Cost of Other Nonregulated Services

 

 

417,227

 

 

392,250

 

 

1,215,876

 

 

1,173,707

 

Depreciation and Amortization

 

 

2,055,708

 

 

2,013,785

 

 

6,092,798

 

 

6,841,531

 

Selling, General and Administrative

 

 

1,339,482

 

 

1,711,415

 

 

4,573,112

 

 

4,920,838

 

Total Operating Expenses

 

 

6,803,569

 

 

6,948,954

 

 

21,240,012

 

 

21,636,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

1,223,778

 

 

1,481,775

 

 

3,118,370

 

 

3,442,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(556,562

)

 

(568,555

)

 

(1,665,981

)

 

(1,849,319

)

Interest Income

 

 

808

 

 

3,493

 

 

81,276

 

 

86,837

 

Interest During Construction

 

 

6,217

 

 

9,914

 

 

16,922

 

 

34,753

 

Gain on Disposal of Assets

 

 

 

 

 

 

 

 

4,282

 

Equity in Earnings of Hector Investment

 

 

218,372

 

 

217,754

 

 

711,073

 

 

479,260

 

CoBank Patronage Dividends

 

 

 

 

 

 

449,878

 

 

485,812

 

Other Investment Income

 

 

43,422

 

 

73,426

 

 

132,364

 

 

172,210

 

Total Other Income (Expense)

 

 

(287,743

)

 

(263,968

)

 

(274,468

)

 

(586,165

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

936,035

 

 

1,217,807

 

 

2,843,902

 

 

2,856,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAXES

 

 

392,910

 

 

511,479

 

 

1,193,816

 

 

1,170,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

543,125

 

$

706,328

 

$

1,650,086

 

$

1,685,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE

 

$

0.11

 

$

0.14

 

$

0.32

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.0825

 

$

0.0825

 

$

0.2475

 

$

0.2450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

5,132,518

 

 

5,115,435

 

 

5,123,027

 

 

5,115,435

 

Certain historical numbers have been changed to conform to the current year’s presentation.

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

3


Table of Contents


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
Septmber 30,

 

Nine Months Ended
Septmber 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

Net Income

 

$

543,125

 

$

706,328

 

$

1,650,086

 

$

1,685,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gain (Loss) of Equity Method Investee

 

 

2,300

 

 

83,456

 

 

(14,702

)

 

296,509

 

Unrealized Gains on Interest Rate Swaps

 

 

237,364

 

 

224,637

 

 

664,414

 

 

562,546

 

Income Tax Expense Related to Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on Interest Rate Swaps

 

 

(96,062

)

 

(90,911

)

 

(268,888

)

 

(227,662

)

Other Comprehensive Income

 

 

143,602

 

 

217,182

 

 

380,824

 

 

631,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

$

686,727

 

$

923,510

 

$

2,030,910

 

$

2,316,906

 

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

4


Table of Contents


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

ASSETS

 

 

 

 

 

 

 

 

 

 

September 30,
2012

 

December 31,
2011

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

590,415

 

$

1,221,717

 

Receivables, Net of Allowance for Doubtful Accounts of $190,000 and $300,000

 

 

1,836,396

 

 

2,430,589

 

Income Taxes Receivable

 

 

504,060

 

 

167,855

 

Materials, Supplies, and Inventories

 

 

2,687,074

 

 

1,946,831

 

Deferred Income Taxes

 

 

861,358

 

 

907,352

 

Prepaid Expenses

 

 

409,358

 

 

454,124

 

Total Current Assets

 

 

6,888,661

 

 

7,128,468

 

 

 

 

 

 

 

 

 

INVESTMENTS & OTHER ASSETS:

 

 

 

 

 

 

 

Goodwill

 

 

29,707,100

 

 

29,707,100

 

Intangibles

 

 

18,658,397

 

 

20,215,961

 

Hector Investment

 

 

21,980,827

 

 

21,284,456

 

Other Investments

 

 

4,346,307

 

 

4,359,226

 

Other Assets

 

 

87,162

 

 

116,214

 

Total Investments and Other Assets

 

 

74,779,793

 

 

75,682,957

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT:

 

 

 

 

 

 

 

Telecommunications Plant

 

 

96,854,967

 

 

93,981,635

 

Other Property & Equipment

 

 

7,953,592

 

 

6,769,814

 

Video Plant

 

 

8,970,845

 

 

8,606,189

 

Total Property, Plant and Equipment

 

 

113,779,404

 

 

109,357,638

 

Less Accumulated Depreciation

 

 

78,866,649

 

 

74,478,555

 

Net Property, Plant & Equipment

 

 

34,912,755

 

 

34,879,083

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

116,581,209

 

$

117,690,508

 

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

5


Table of Contents


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

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

September 30,
2012

 

December 31,
2011

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current Portion of Long-Term Debt

 

$

3,688,000

 

$

3,698,883

 

Accounts Payable

 

 

1,196,693

 

 

1,186,665

 

Checks Written in Excess of Cash Balance

 

 

720,027

 

 

 

Other Accrued Taxes

 

 

225,046

 

 

204,140

 

Financial Derivative Instruments

 

 

578,769

 

 

 

Deferred Compensation

 

 

76,124

 

 

195,375

 

Accrued Compensation

 

 

123,932

 

 

679,158

 

Other Accrued Liabilities

 

 

1,313,371

 

 

1,396,494

 

Total Current Liabilities

 

 

7,921,962

 

 

7,360,715

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT, Less Current Portion

 

 

38,085,050

 

 

39,809,171

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

Loan Guarantees

 

 

310,642

 

 

453,329

 

Deferred Income Taxes

 

 

14,685,359

 

 

14,142,484

 

Other Accrued Liabilities

 

 

156,655

 

 

64,217

 

Financial Derivative Instruments

 

 

 

 

1,243,183

 

Deferred Compensation

 

 

874,805

 

 

933,488

 

Total Noncurrent Liabilities

 

 

16,027,461

 

 

16,836,701

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Preferred Stock - $1.66 Par Value, 10,000,000 Shares Authorized, None Issued

 

 

 

 

 

Common Stock - $1.66 Par Value, 90,000,000 Shares Authorized, 5,132,518 and 5,115,435 Shares Issued and Outstanding

 

 

8,554,197

 

 

8,525,725

 

Accumulated Other Comprehensive Income (Loss)

 

 

(433,410

)

 

(814,234

)

Retained Earnings

 

 

46,425,949

 

 

45,972,430

 

Total Stockholders’ Equity

 

 

54,546,736

 

 

53,683,921

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

116,581,209

 

$

117,690,508

 

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

6


Table of Contents


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

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,
2012

 

September 30,
2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net Income

 

$

1,650,086

 

$

1,685,513

 

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

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

6,121,850

 

 

6,870,838

 

Gain on Disposal of Assets

 

 

 

 

(4,282

)

Undistributed Earnings of Hector Investment

 

 

(711,073

)

 

(479,260

)

Undistributed Earnings of Other Equity Investments

 

 

(130,927

)

 

(162,384

)

Noncash Patronage Refund

 

 

(157,457

)

 

(179,057

)

Distributions from Equity Investments

 

 

200,000

 

 

200,000

 

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

Receivables

 

 

594,193

 

 

(310,515

)

Income Taxes Receivable

 

 

(336,205

)

 

85,218

 

Inventories

 

 

(740,243

)

 

(537,471

)

Prepaid Expenses

 

 

145,566

 

 

28,085

 

Accounts Payable

 

 

566,867

 

 

(18,779

)

Checks Written in Excess of Cash Balance

 

 

720,027

 

 

 

Accrued Income Taxes

 

 

 

 

103,693

 

Other Accrued Taxes

 

 

20,906

 

 

(52,705

)

Other Accrued Liabilities

 

 

(545,911

)

 

(110,101

)

Deferred Income Tax

 

 

319,981

 

 

186,706

 

Deferred Compensation

 

 

(177,934

)

 

(542,464

)

Net Cash Provided by Operating Activities

 

 

7,539,726

 

 

6,763,035

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Additions to Property, Plant, and Equipment, Net

 

 

(5,125,745

)

 

(4,127,719

)

Proceeds from Disposal of Assets

 

 

 

 

4,282

 

Other, Net

 

 

(41,384

)

 

(42,000

)

Net Cash Used in Investing Activities

 

 

(5,167,129

)

 

(4,165,437

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Principal Payments of Long-Term Debt

 

 

(2,589,383

)

 

(2,599,476

)

Changes in Revolving Credit Facility

 

 

854,379

 

 

(90,571

)

Dividends Paid

 

 

(1,268,895

)

 

(1,253,285

)

Net Cash Used in Financing Activities

 

 

(3,003,899

)

 

(3,943,332

)

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(631,302

)

 

(1,345,734

)

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS at Beginning of Period

 

 

1,221,717

 

 

2,394,703

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS at End of Period

 

$

590,415

 

$

1,048,969

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,643,596

 

$

1,856,340

 

Net cash paid for income taxes

 

$

1,210,000

 

$

795,000

 

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

7


Table of Contents


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

YEAR ENDED DECEMBER 31, 2011, AND
NINE MONTHS ENDED SEPTEMBER 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

 

Retained
Earnings

 

Total
Equity

 

 

 

Common Stock

 

 

 

 

 

 

Shares

 

Amount

 

 

 

 

BALANCE on December 31, 2010

 

 

5,115,435

 

$

8,525,725

 

$

(1,700,173

)

$

45,620,217

 

$

52,445,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

2,027,523

 

 

2,027,523

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,675,310

)

 

(1,675,310

)

Unrealized Gains of Equity Method Investee

 

 

 

 

 

 

 

 

357,316

 

 

 

 

 

357,316

 

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

 

 

 

 

 

 

 

 

528,623

 

 

 

 

 

528,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2011

 

 

5,115,435

 

 

8,525,725

 

 

(814,234

)

 

45,972,430

 

 

53,683,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Director’s Stock Plan Stock Issuance

 

 

17,083

 

 

28,472

 

 

 

 

 

72,328

 

 

100,800

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

1,650,086

 

 

1,650,086

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,268,895

)

 

(1,268,895

)

Unrealized Losses of Equity Method Investee

 

 

 

 

 

 

 

 

(14,702

)

 

 

 

 

(14,702

)

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

 

 

 

 

 

 

 

 

395,526

 

 

 

 

 

395,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on September 30, 2012

 

 

5,132,518

 

$

8,554,197

 

$

(433,410

)

$

46,425,949

 

$

54,546,736

 

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, 2012 (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 (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, 2011.

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

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

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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. New Ulm Telecom’s settlements from the pools are based on its actual costs to provide service, while the settlements for NU Telecom subsidiaries – Western Telephone Company, Peoples Telephone Company and Hutchinson Telephone Company (HTC) are based on nationwide average schedules. Access revenues for New Ulm Telecom include an estimate of a cost study each year that is trued-up subsequent to the end of any given year. Our management believes the estimates included in our preliminary cost study are reasonable. We cannot predict the future impact that industry or regulatory changes will have on interstate access revenues.

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

We derive revenues from system sales and services through the sale, installation and servicing of communication systems. In accordance with 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 $4,535,234 and $5,283,967 for the nine months ended September 30, 2012 and 2011. 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 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.

We had no net unrecognized tax benefits at September 30, 2012 that, if recognized, would affect the income tax provision when recorded.

We are primarily subject to United States, Minnesota and Iowa income taxes. Tax years subsequent to 2008 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, 2012 and December 31, 2011 we had no interest or penalties accrued that were related to income tax matters.

Recent Accounting Developments

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

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 quoted prices that are observable, and market-corroborated inputs that are derived principally from or corroborated by observable market data.

 

Level 3:

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

We use financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We account 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 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 5 – “Interest Rate Swaps”. Our swap agreements’ fair values were 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, 2011. 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 for which the current carrying amounts approximate fair market value.

Note 3 – Goodwill and Other Intangible Assets

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 $29,707,100 at September 30, 2012 and December 31, 2011.

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, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. We recognize impairment loss when the carrying amount of goodwill exceeds its implied fair value.

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In 2011, 2010 and 2009, we engaged an independent valuation firm to complete our annual impairment testing for goodwill. For 2011, 2010 and 2009, the testing resulted in no impairment charge to goodwill as the determined fair value was sufficient to pass the first step of the impairment test.

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

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Useful
Lives

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

 

 

Definite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers Relationships

 

 

14-15 yrs

 

$

19,378,445

 

$

6,560,072

 

$

19,378,445

 

$

5,522,504

 

Regulatory Rights

 

 

15 yrs

 

 

4,000,000

 

 

1,266,657

 

 

4,000,000

 

 

1,066,659

 

Non-Competition Agreement

 

 

5 yrs

 

 

800,000

 

 

759,985

 

 

800,000

 

 

639,988

 

Trade Name

 

 

3 yrs

 

 

800,000

 

 

733,334

 

 

800,000

 

 

533,333

 

Indefinitely-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Video Franchise

 

 

 

 

 

3,000,000

 

 

0

 

 

3,000,000

 

 

0

 

Total

 

 

 

 

$

27,978,445

 

$

9,320,048

 

$

27,978,445

 

$

7,762,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Identified Intangible Assets

 

 

 

 

 

 

 

$

18,658,397

 

 

 

 

$

20,215,961

 

Amortization expense related to the definite-lived intangible assets was $1,557,564 and $1,557,564 for the nine months ended September 30, 2012 and 2011.

Amortization expense for the remaining three months of 2012 and the five years subsequent to 2012 is estimated to be:

 

 

 

(October 1 – December 31) - $519,094

2013 - $1,649,992

2014 - $1,649,992

2015 - $1,649,992

2016 - $1,648,605

2017 - $1,647,939

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Note 4 – Secured Credit Facility

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

NU Telecom and its respective subsidiaries also have entered into security agreements under which substantially all of 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 obligations under the credit facility.

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. As of September 30, 2012, our Total Leverage Ratio fell below the 3:50 to 1:00 ratio, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders.

As of September 30, 2012, we were in compliance with the financial ratios in our loan agreements.

As described in Note 5 – “Interest Rate Swaps,” we have entered into interest rate swaps that effectively fix our interest rates and cover $36.0 million at a weighted average rate of 5.52%, as of September 30, 2012. The additional $11.0 million of outstanding debt ($5.2 million available under the credit facilities and $5.8 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 2.24%, as of September 30, 2012.

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 facilities with CoBank, ACB 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, we entered into Interest Rate Swap Agreements with CoBank, ACB. Under these Interest Rate Swap Agreements and subsequent swaps that each covers a specified notional dollar amount, we have changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of these interest rate swaps, 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.

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

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

On January 1, 2011, we entered into a cash management agreement with CoBank, ACB. This agreement reduces our borrowing expense in the form of lower interest expense by ensuring there are no idle funds in our bank accounts as those excess funds are used to reduce our debt. When we have excess cash in our bank accounts, our surplus cash is automatically applied to our outstanding loan balances in our revolver debt facilities and when we have a cash deficit position in our bank accounts, CoBank, ACB advances funds on our revolver debt facilities to fund the deficit position. Over time, our interest expense is reduced as we are in a cash surplus position more often than a deficit position.

On March 31, 2011, $5,000,000 of our swaps matured on Loan RX0583-T1 ($1,000,000) and Loan RX0584-T1 ($4,000,000). No gain or loss was recognized on these swaps as they had reached their full maturities.

On June 30, 2011, an additional $3,000,000 of our swaps matured on Loan RX0583-T2. No gain or loss was recognized on this swap as it had reached its full maturity.

As of September 30, 2012 we had the following interest rate swaps in effect.

 

 

 

 

 

 

 

 

 

Loan #

 

Maturity Date

 

Notional Amount

 

Current Effective Interest Rate (1)

 

 

 

 

 

 

 

 

 

 

RX0583-T1

 

03/31/2013

 

$

11,250,000

 

5.26% (LIBOR Rate of 3.26% plus
2.00% LIBOR Margin)

 

 

 

 

 

 

 

 

 

 

RX0583-T2

 

06/30/2013

 

$

3,000,000

 

6.54% (LIBOR Rate of 4.54% plus
2.00% LIBOR Margin)

 

 

 

 

 

 

 

 

 

 

RX0584-T1

 

03/31/2013

 

$

21,750,000

 

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

 

(1) As described in Note 4 – “Secured Credit Facility,” each note initially bears interest at a LIBOR rate determined by the maturity of the note, plus a “LIBOR Margin” rate equal to either 2.00% or 2.25% according to the individual secured credit facility. The LIBOR Margin decreases as the borrower’s “Leverage Ratio” decreases. The “Current Effective Interest Rate” in the table reflects the rate we pay giving effect to the swaps.

These interest rate swaps qualify as cash flow hedges for accounting purposes under GAAP. We have reflected the effect of these hedging transactions in the financial statements. The unrealized gains were reported in other comprehensive income (loss). If we were to terminate our interest rate swap agreements, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income (loss), which is classified in stockholders’ equity, into earnings on the consolidated statements of income.

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The fair value of the Company’s interest rate swap agreements is determined based on valuations received from CoBank, ACB and are based on the present value of expected future cash flows using discount rates appropriate with the terms of the swap agreements. The fair value indicates an estimated amount we would have to pay if the contracts were canceled or transferred to other parties.

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

On September 30, 2011, Fibercomm, LC refinanced two existing loans with American State Bank with a new ten-year loan, maturing on September 30, 2021. As of September 30, 2012, we have recorded a liability of $310,642 in connection with the guarantee on this new loan. This guarantee may be exercised if FiberComm, LC does not make its required payments on this note.

Note 8 – Deferred Compensation

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

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. 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;

 

 

§

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

 

 

§

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

 

CLECs:

 

 

§

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

 

 

§

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

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Table of Contents


 

 

 

 

 

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

 

 

§

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

 

 

§

FiberComm, LC – 18.27% ownership interest;

 

 

§

Broadband Visions, LLC – 16.21% ownership interest; and

 

 

§

Independent Emergency Services, LLC – 14.29% ownership interest.

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 2012. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for the discussion relating to commitments and contingencies.

Note 11 – Hector Communications Corporation

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

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

The following table summarizes financial information of HCC for the periods ended September 30, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Operating Revenues

 

$

6,734,525

 

$

7,009,738

 

$

20,094,730

 

$

20,313,870

 

Operating Income

 

 

1,171,484

 

 

1,617,257

 

 

3,679,295

 

 

4,150,419

 

Net Income

 

 

655,118

 

 

653,262

 

 

2,133,220

 

 

1,437,780

 

Note 12 – Subsequent Events

On November 5, 2012 HCC and its owners/shareholders: Blue Earth Valley Communications, Inc., Arvig Enterprises, Inc. and NU Telecom submitted a Joint Petition to the Minnesota Public Utilities Commission (MPUC) pursuant to Minnesota Statute §237.23 to enter into a Spin-Off Agreement, the purpose of which, among other things, is to distribute the Independent Local Exchange Company subsidiary holdings of Hector, for the continued and uninterrupted operations and service to all customers.

The three owners/shareholders are negotiating the terms of the potential Spin-Off of Hector, but have not yet entered into finalizing the negotiations or entered into a material agreement. The Company intends to file a Current Report on Form 8-K when the terms of the Spin-Off are finalized and the parties enter into a definitive agreement.

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The Company has filed a Current Report on Form 8-K because the Joint Petition filed with the MPUC is a publically available document.

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. Factors that might cause differences include, but are not limited to, those contained in Item 1A of Part II, “Risk Factors,” and Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated herein by reference.

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. 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 obligations to update any forward-looking information, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

Preparing consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. The estimates and assumptions 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. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. A description of the accounting policies that we consider particularly important for the portrayal of our results of operations and financial position, and which may require a higher level of judgment by our management, is contained under the caption, “Critical Accounting Policies and Estimates,” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011.

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Results of Operations

Overview

NU Telecom offers a diverse array of communications products and services. Our ILEC businesses provide local telephone service and network access to other telecommunications carriers for calls originated or terminated on our network. In addition, we provide long distance service, dial-up and broadband Internet access, and video services. In 2010, we acquired the assets of the cable television (CATV) system located in and around Glencoe, Minnesota, continuing the expansion of our service area. We also sell and service other communications products.

Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our networks, which consists of switches and cable, data, Internet protocol (IP) and 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.

Trends

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, 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 losses totaled 1,081 or 4.0% for the twelve months ended September 30, 2012.

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 are expected to continue to offset some 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 can 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 needs, 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 needs. We have built a state-of-the-art 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, private line, VoIP, digital video, Internet Protocol Television (IPTV) and managed services.

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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.

Financial results for the Telecom Segment are included below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telecom Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

 

$

1,448,759

 

$

1,489,581

 

$

4,364,582

 

$

4,459,707

 

Network Access

 

 

2,563,335

 

 

3,035,447

 

 

8,123,960

 

 

9,104,649

 

Video

 

 

1,494,017

 

 

1,449,038

 

 

4,420,306

 

 

4,221,963

 

Data

 

 

1,386,433

 

 

1,318,277

 

 

4,128,579

 

 

3,898,769

 

Long Distance

 

 

155,715

 

 

163,809

 

 

461,078

 

 

485,016

 

Other

 

 

979,088

 

 

974,577

 

 

2,859,877

 

 

2,908,214

 

Total Operating Revenues

 

 

8,027,347

 

 

8,430,729

 

 

24,358,382

 

 

25,078,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Services, Excluding Depreciation and Amortization

 

 

3,408,379

 

 

3,223,754

 

 

10,574,102

 

 

9,873,655

 

Selling, General and Administrative

 

 

1,339,482

 

 

1,711,415

 

 

4,573,112

 

 

4,920,838

 

Depreciation and Amortization Expenses

 

 

2,055,708

 

 

2,013,785

 

 

6,092,798

 

 

6,841,531

 

Total Operating Expenses

 

 

6,803,569

 

 

6,948,954

 

 

21,240,012

 

 

21,636,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

1,223,778

 

$

1,481,775

 

$

3,118,370

 

$

3,442,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

543,125

 

$

706,328

 

$

1,650,086

 

$

1,685,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

$

1,658,374

 

$

1,263,261

 

$

5,125,745

 

$

4,127,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

 

Key metrics

 

 

 

 

2012

 

2011

 

 

 

 

Access Lines

 

 

 

 

 

25,717

 

 

26,798

 

 

 

 

Video Customers

 

 

 

 

 

10,034

 

 

10,324

 

 

 

 

Broadband Customers

 

 

 

 

 

10,623

 

 

10,162

 

 

 

 

Dial Up Internet Customers

 

 

 

 

 

443

 

 

711

 

 

 

 

Long Distance Customers

 

 

 

 

 

13,192

 

 

13,431

 

 

 

 

Certain historical numbers have been changed to conform to the current year’s presentation.

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 $1,448,759, which is $40,822 or 2.7% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $4,364,582, which is $95,125 or 2.1% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases were primarily due to the loss of 1,081 or 4.0% of our customer base at September 30, 2012 compared to September 30, 2011. The decreases were partially offset by increases in local private line and other optional services. Our access lines are decreasing as customers are increasingly utilizing other technologies, such as wireless phones and IP services, as well as customers eliminating second phone lines when they move their Internet service from a dial-up platform to a broadband platform. 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 helps create value for the customer and aids in the retention of our voice lines.

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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 (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 the ILECs. Network access revenue was $2,563,335, which is $472,112 or 15.6% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $8,123,960, which is $980,689 or 10.8% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases in network access revenues were primarily due to lower minutes of use and the implementation of the FCC Intercarrier Compensation and Universal Service Fund reform order in regards to state access pricing levels that took effect on July 3, 2012.

Video – We 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 eleven communities with our digital TV services and five communities with our CATV services. Video revenue was $1,494,017, which is $44,979 or 3.1% higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $4,420,306, which is $198,343 or 4.7% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. A combination of rate increases introduced into several of our markets over the course of 2011 and 2012; and the launching of IPTV services in New Ulm, Courtland, Redwood Falls, Springfield, Sanborn, Hutchinson and Litchfield, Minnesota and Aurelia, Iowa resulted in the increased revenues. This new enhanced service offering provides our customers with desired features and options, such as digital video recording. We also recognize increased revenues from these additional features and options.

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 $1,386,433, which is $68,156 or 5.2% higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $4,128,579, which is $229,810 or 5.9% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. These increases were primarily due to a 461 or 4.5% increase in our broadband customers. We expect future growth in this area will be driven by customer migration from dial-up Internet to broadband products, such as our broadband services, expansion of service areas and our aggressively packaging and selling service bundles.

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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 $155,715, which is $8,094 or 4.9% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $461,078, which is $23,938 or 4.9% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. These decreases were primarily the result of a 239 or 1.8% decrease in our long distance customer base at September 30, 2012 compared to September 30, 2011. Our long distance customer base continues to decline as our customers utilize other technologies such as wireless and IP services to satisfy their long distance communication needs.

Other Revenue – 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 from end-user subscribers for Yellow Page advertising in our telephone directories recurs monthly. We also provide the 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 $979,088, which is $4,511 or 0.5% higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. This increase was primarily due to increases in the sales of cellular phone and activation revenues, partially offset by a decrease in the sales of CPE revenues. Other revenue was $2,859,877, which is $48,337 or 1.7% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This decrease was primarily due to a decrease in the sales of CPE and a decrease in leased CPE revenues. These decreases were partially offset by increases in the sales of cellular phones and activation revenues.

Cost of Services (excluding Depreciation and Amortization)

Cost of services (excluding depreciation and amortization) was $3,408,379, which is $184,625 or 5.7% higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $10,574,102, which is $700,447 or 7.1% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increases were primarily due to higher programming cost from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and software, partially offset by lower employee benefit costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,339,482, which is $371,933 or 21.7% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and were $4,573,112, which is $347,726 or 7.1% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases were primarily due to lower employee benefit costs, partially offset by increased expenses associated with complying with new SEC financial reporting requirements.

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Depreciation and Amortization

Depreciation and amortization was $2,055,708, which is $41,923 or 2.1% higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. This increase is primarily due to an increase in our plant and broadband network. Depreciation and amortization was $6,092,798, which is $748,733 or 10.9% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This decrease was primarily due to portions of our legacy telephone network becoming fully depreciated during 2011 as we migrate to a new broadband network.

Operating Income

Operating income was $1,223,778, which is $257,997 or 17.4% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. This decrease was primarily due to a decrease in revenues combined with an increase in cost of services and depreciation and amortization, partially offset by a decrease in selling, general and administrative expenses, all of which are described above. Operating income was $3,118,370, which is $323,924 or 9.4% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This decrease was primarily due to a decrease in revenues combined with increases in cost of services, partially offset by a decrease in selling, general and administrative expenses, and depreciation and amortization, all of which are described above.

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

Other Income and Interest Expense

Interest expense was $556,562, which is $11,993 or 2.1% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $1,665,981, which is $183,338 or 9.9% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases were primarily due to lower outstanding debt balances and the maturing of several of our swap agreements with CoBank, ACB during 2011. The variable rate we now pay on the portion of debt that had been previously swapped is lower than the fixed rate we had been paying.

Interest income was $808, which is $2,685 or 76.9% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $81,276, which is $5,561 or 6.4% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a result of servicing our debt, excess cash available to purchase investments was lower, and combined with lower interest rates offered by banks and other investment institutions, our interest income has declined.

Our equity portion of HCC’s net income was $218,372, which is $618 or 0.3% higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $711,073, which is $231,813 or 48.4% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. HCC’s total net income was $655,118, which was $1,856 higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $2,133,220, which was $695,440 higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. These increases were primarily the result of lower interest expense paid by Hector for their outstanding debt.

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Other income for the nine months ended September 30, 2012 and 2011, included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in 2012 amounted to $449,878, compared to $485,812 allocated and received in 2011. 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.

Other investment income was $43,422, which is $30,004 or 40.9% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $132,364, which is $39,846 or 23.1% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Other investment income includes our equity ownerships in several partnerships and limited liability companies.

Income Taxes

Income tax expense was $392,910, which is $118,569 or 23.2% lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $1,193,816, which is $23,200 or 2.0% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The effective income tax rates for the nine months ending September 30, 2012 and 2011 were approximately 42.0% and 41.0%. The increase in the effective tax rate for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was primarily due to the recognition of approximately $29,000 in net tax benefits in the nine months ended September 30, 2011. This amount was originally reserved for the 2006 tax year, which was no longer open for examination by federal and state tax authorities. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.

Hector Communications Corporation Investment

In accordance with GAAP, we currently report our one-third ownership of HCC on the equity method. Under this method, we report our pro-rata share of net income or net loss each period from HCC’s operations. For the three months ended September 30, 2012 and 2011, we reported net income of $218,372 and $217,754. For the nine months ended September 30, 2012 and 2011, we reported net income of $711,073 and $479,260. All reported net income amounts reflect our one-third ownership. As set forth in Note 11 – “Hector Communications Corporation,” in the first nine months of 2012 and 2011, HCC had revenues of approximately $20.1 million and $20.3 million that are not reflected in our financial statements.

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

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Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Proportionate Method:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

2,244,841

 

$

2,336,579

 

$

6,698,243

 

$

6,771,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses, Excluding
Depreciation and Amortization

 

 

1,108,417

 

 

1,069,237

 

 

3,255,065

 

 

3,182,257

 

Depreciation and Amortization

 

 

745,930

 

 

728,257

 

 

2,216,747

 

 

2,205,560

 

Total Operating Expenses

 

 

1,854,347

 

 

1,797,494

 

 

5,471,812

 

 

5,387,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

390,494

 

 

539,085

 

 

1,226,431

 

 

1,383,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

218,372

 

$

217,754

 

$

711,073

 

$

479,260

 

If we included our proportionate share of HCC’s OIBITDA in the OIBITDA of NU Telecom, our combined OIBITDA would have increased from $3,279,486 and $3,495,560 for NU Telecom alone, to $4,415,910 and $4,762,902 for the three months ended September 30, 2012 and 2011, and would have increased from $9,211,168 and $10,283,825 for NU Telecom alone, to $12,654,346 and $13,872,858 for the nine months ended September 30, 2012 and 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NU Telecom Operating Income

 

$

1,223,778

 

$

1,481,775

 

$

3,118,370

 

$

3,442,294

 

NU Telecom Depreciation and Amortization

 

 

2,055,708

 

 

2,013,785

 

 

6,092,798

 

 

6,841,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NU Telecom OIBITDA

 

$

3,279,486

 

$

3,495,560

 

$

9,211,168

 

$

10,283,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HCC Proportionate Operating Income

 

$

390,494

 

$

539,085

 

$

1,226,431

 

$

1,383,473

 

HCC Proportionate Depreciation and Amort

 

 

745,930

 

 

728,257

 

 

2,216,747

 

 

2,205,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HCC Proportionate OIBITDA

 

$

1,136,424

 

$

1,267,342

 

$

3,443,178

 

$

3,589,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined OIBITDA

 

$

4,415,910

 

$

4,762,902

 

$

12,654,346

 

$

13,872,858

 

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

Liquidity and Capital Resources

Capital Structure

NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was $96,319,786 at September 30, 2012, reflecting 56.6% equity and 43.4% debt. This compares to a capital structure of $97,191,975 at December 31, 2011, reflecting 55.2% equity and 44.8% 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 3.44 times debt to EBITDA (earnings before interest, taxes, depreciation and amortization) as defined in our credit agreements, 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 and temporary financing of trade accounts receivable.

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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 common stock and (v) potential acquisitions.

Our primary sources of liquidity for the nine months ended September 30, 2012 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. In addition, we currently have approximately $5.2 million available under our revolving credit facility to fund any short-term working capital needs.

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. We were in full compliance with our debt covenants as of September 30, 2012, and anticipate that we will be able to plan for and match future liquidity needs with future internal and available resources.

While we periodically seek to add growth initiatives by either expanding our network or our markets through organic/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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Change

 

%

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

7,539,726

 

$

6,763,035

 

$

776,691

 

 

11.48

%

Investing activities

 

 

(5,167,129

)

 

(4,165,437

)

 

(1,001,692

)

 

-24.05

%

Financing activities

 

 

(3,003,899

)

 

(3,943,332

)

 

939,433

 

 

23.82

%

Increase (Decrease) in cash and cash equivalents

 

$

(631,302

)

$

(1,345,734

)

$

714,432

 

 

53.09

%

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Cash Flows from Operating Activities

The increase in cash flows provided by operations for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was primarily due to a decrease in receivables due to the collection of a large amount of outstanding receivables, an increase in accounts payable and the other liabilities, partially offset by the increase in income taxes receivable and inventories, and a decrease in other accrued liabilities.

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 and cash equivalents at September 30, 2012 were $590,415, compared to $1,221,717 at December 31, 2011.

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 higher in the first nine months of 2012 compared to the first nine months of 2011 primarily due to higher capital expenditures in 2012 related to current operations. Capital expenditures relating to on-going operations were $5,125,745 for the nine months ended September 30, 2012, compared to $4,127,719 for the nine months ended September 30, 2011. We expect total plant additions to be approximately $6,500,000 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 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. We currently have approximately $5.2 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, 2012 included long-term debt repayments of $2,589,383 and the distribution of $1,268,895 of dividends to stockholders, offset by a $854,379 increase in debt due the use of our revolving credit facility.

Working Capital

We had working capital deficit (i.e. current assets minus current liabilities) of $1,033,301 as of September 30, 2012, with current assets of approximately $6.9 million and current liabilities of approximately $7.9 million, compared to a working capital deficit of $232,247 as of December 31, 2011. The ratio of current assets to current liabilities was 0.87 and 0.97 as of September 30, 2012 and December 31, 2011. The decrease in the working capital was primarily due to a portion of our long-term swaps becoming short-term in 2012, an increase in checks written in excess of cash balances and decreases in cash and cash equivalents and receivables, partially offset by an increase in inventories.

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Dividends and Restrictions

We declared a quarterly dividend of $.0825 per share for the first, second and third quarters of 2012, which totaled $422,025 for the first quarter and $423,435 per quarter for the second and third quarters. We declared a quarterly dividend of $.08 per share for the first quarter of 2011, which totaled $409,235 and a quarterly dividend of $.0825 per share for the second and third quarters of 2011, which totaled $422,025 per quarter. Our Board of Directors reviews quarterly dividend declarations based on 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.

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 were not in default or potential default under the loan agreements. If we fail to comply with these covenants, our ability to pay dividends would be limited. As of September 30, 2012, our Total Leverage Ratio fell below the 3:50 to 1:00 ratio, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. At September 30, 2012, we were in compliance with all the stipulated financial ratios in our loan agreements.

Obligations and Commitments

We have a credit facility with CoBank, ACB. Information about our contractual obligations, including obligations under the credit facility, and along with the cash principal payments due each period on our unsecured note payable and long-term debt is set forth in the following table. For additional information about our contractual obligations as of September 30, 2012 see Note 4 – “Secured Credit Facility”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Total

 

October 1 -
December 31
2012

 

2013-2014

 

2015-2016

 

Thereafter

 

Deferred Compensation

 

$

950,929

 

$

17,441

 

$

133,137

 

$

124,766

 

$

675,585

 

Long-term Debt

 

 

41,773,050

 

 

1,109,500

 

 

40,663,550

 

 

0

 

 

0

 

Interest on Long-term Debt (A)

 

 

2,414,130

 

 

539,188

 

 

1,874,942

 

 

0

 

 

0

 

Loan Guarantees

 

 

310,642

 

 

7,013

 

 

59,285

 

 

64,830

 

 

179,514

 

Operating Lease

 

 

93,030

 

 

6,645

 

 

53,160

 

 

33,225

 

 

0

 

Purchase Obligations (B)

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

Total Contractual Cash Obligations

 

$

45,541,781

 

$

1,679,787

 

$

42,784,074

 

$

222,821

 

$

855,099

 


 

 

 

 

A.

Interest on long-term debt is estimated using rates in effect as of September 30, 2012. We use interest rate swap agreements to manage our cash flow exposure to interest rate movements on a portion of our variable rate debt obligations (see Note 5 – “Interest Rate Swaps”).

 

 

 

 

B.

There were no purchase obligations outstanding as of September 30, 2012.

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Long-Term Debt

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

Federal Regulation and Legislation

Intercarrier Compensation and Universal Service Fund (USF) Reform

On November 18, 2011 the FCC released an order (the Order) which established a framework for reform of the intercarrier compensation system and the federal USF. The Order included two major provisions:

 

 

 

 

the elimination of terminating switched access rates and other per-minute terminating charges between service providers by 2018, through annual reductions in rates; and

 

 

 

 

the provision of USF support for voice and broadband services.

In reforming the USF, the Order established a short-term (Phase 1) and a longer-term (Phase 2) framework for a new fund, the Connect America Fund (CAF). Under Phase 1 of the CAF, the Order provides for continued legacy USF funding frozen at 2011 levels as well as the opportunity for incremental broadband funding to a number of unserved locations equal to the amount of incremental support accepted divided by $775.

For Phase 2 of CAF, the FCC is working to establish rules for CAF funding based on a forward-looking cost model to further extend broadband to high-cost areas. If the FCC does not complete Phase 2 of CAF by the end of 2012, our USF funding will continue to be frozen at 2011 levels until completion of Phase 2 of CAF, but we will be required to use one-third of the frozen legacy support to operate and build broadband networks beginning in 2013. In 2014, this condition will increase from one-third to two-thirds, and in 2015 will increase to 100 percent. Based on current expenditures, we do not foresee any concerns complying with these additional funding conditions for all periods. The FCC is currently conducting the CAF Phase 2 rule-making proceeding, and we do not expect this proceeding to be complete by the end of 2012.

As part of the Order’s reform of intercarrier compensation, the FCC established two recovery mechanisms that mitigate the revenue reductions resulting from the reductions and ultimate elimination of terminating access rates. First, the FCC established a monthly charge that may be assessed to our retail consumers (Access Recovery Charge or ARC) subject to certain rate caps. Second, revenue reductions not recovered from the assessment of the ARC are eligible for recovery through additional universal service support through an access recovery mechanism.

On April 25, 2012 the FCC decided that on July 1, 2014 originating access charges for intrastate long distance traffic exchanged between an IP network and the traditional telecommunications network will be subject to no higher than interstate originating access rates. We continue to assess the impacts of the FCC’s intercarrier compensation reform on our business activities.

Additional implications of the Order will likely result in future additional rule making and require significant interpretation, management judgment and collaboration with other telecommunications carriers. We believe the steps we have taken to diversify our revenue streams and focus on growth opportunities will help us navigate through this transition without significant adverse effects.

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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

We do not have operations subject to risks of foreign currency fluctuations. We do, however, use derivative financial instruments that qualify as cash-flow hedges to manage our exposure to interest rate fluctuations on a portion of our variable-interest rate debt. Our objectives for holding derivatives are to minimize interest rate risks using the most effective methods to eliminate or reduce the impact of these exposures. Variable rate debt instruments are subject to interest rate risk. On March 19, 2008, we executed interest-rate swap agreements, effectively locking in the interest rate on $6.0 million of our variable-rate debt through March 2011, and $33.0 million of our variable-rate debt through March 2013. On June 23, 2008, we executed interest-rate swap agreements, effectively locking in the interest rate on $3.0 million of our variable-rate debt through June 2011, and $3.0 million of variable-rate debt through June 2013. A summary of these agreements is contained in Note 5 – “Interest Rate Swaps”.

We report the cumulative gain or loss on current derivative instruments as a component of accumulated other comprehensive income (loss) in stockholders’ equity. If the protection agreement is concluded prior to reaching full maturity, the cumulative gain or loss is recognized in earnings. At the conclusion of the full term maturity of the protection agreement, no gain or loss is recognized. For any portion of our debt not covered with interest rate swap agreements, our earnings are affected by changes in interest rates as a portion of our long-term debt has variable interest rates based on LIBOR. If interest rates for the portion of our long-term debt based on variable rates had averaged 10% more for the nine months ended September 30, 2012, our interest expense would have increased approximately $11,300.

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.

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Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2012 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.

From time to time we are involved in legal proceedings arising in the ordinary course of our business. There is no litigation pending that could have a material adverse effect on our results of operations and financial condition.

Item 1A. Risk Factors.

There have not been any material changes to the risk factors previously disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information.

None.

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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 File

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema File

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase File

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase File

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase File

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase File

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SIGNATURES

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

 

 

 

 

 

 

NEW ULM TELECOM, INC.

 

 

 

 

 

 

 

Dated: 

November 9, 2012

By

/s/ Bill D. Otis

 

 

 

Bill D. Otis, President and Chief Executive Officer

 

 

 

 

Dated: 

November 9, 2012

By

/s/ Curtis O. Kawlewski

 

 

 

Curtis O. Kawlewski, Chief Financial Officer

33