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EX-3 - EXHIBIT 3.2 - Nuvera Communications, Inc.exhibit3_2.htm
EX-32 - EXHIBIT 32.1 - Nuvera Communications, Inc.exhibit32_1.htm
EX-31 - EXHIBIT 31.2 - Nuvera Communications, Inc.exhibit31_2.htm
EX-32 - EXHIBIT 32.2 - Nuvera Communications, Inc.exhibit32_2.htm
EX-31 - EXHIBIT 31.1 - Nuvera Communications, Inc.exhibit31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - Nuvera Communications, Inc.Financial_Report.xls
 

 



 

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, 2013

 

 

 

OR

 

 

 

¨

 

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   No  £ 

 

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

 

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

 

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

 

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

 

The total number of shares of the Registrant’s common stock outstanding as of November 12, 2013: 5,118,134.

 

 

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, 2013 and 2012

3

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012

   4

 

 

 

 

 

Consolidated Balance Sheets (unaudited) as of September 30, 2013 and December 31, 2012

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2013 and 2012

   7

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Year Ended December 31, 2012 and for the Nine Months ended September 30, 2013  

8

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements (unaudited)

 

9-20

 

 

 

 

Item 2

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

 

21-30

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

Item 4  

Controls and Procedures

 

30

 

 

 

 

 

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

 

31

 

 

 

 

 

Signatures

 

32

 

 

 

 

 

Exhibits

 

 

 

2


 
 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

 

$

1,675,238

 

$

1,448,759

 

$

5,022,386

 

$

4,364,582

Network Access

 

 

3,206,275

 

 

2,563,335

 

 

9,198,096

 

 

8,123,960

Video

 

 

1,865,303

 

 

1,494,017

 

 

5,410,824

 

 

4,420,306

Data

 

 

1,906,897

 

 

1,386,433

 

 

5,616,416

 

 

4,128,579

Long Distance

 

 

206,438

 

 

155,715

 

 

626,837

 

 

461,078

Other Non-Regulated

 

 

1,068,740

 

 

979,088

 

 

3,063,750

 

 

2,859,877

Total Operating Revenues

 

 

9,928,891

 

 

8,027,347

 

 

28,938,309

 

 

24,358,382

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plant Operations (Excluding Depreciation and Amortization)

 

1,851,248

 

 

1,497,170

 

 

5,730,487

 

 

4,828,741

Cost of Video

 

 

1,627,853

 

 

1,283,744

 

 

4,777,795

 

 

3,785,252

Cost of Data

 

 

341,112

 

 

210,238

 

 

866,718

 

 

744,233

Cost of Other Nonregulated Services

 

 

575,995

 

 

417,227

 

 

1,566,774

 

 

1,215,876

Depreciation and Amortization

 

 

2,221,458

 

 

2,055,708

 

 

6,656,115

 

 

6,092,798

Selling, General and Administrative

 

 

1,583,172

 

 

1,339,482

 

 

5,056,095

 

 

4,573,112

Total Operating Expenses

 

 

8,200,838

 

 

6,803,569

 

 

24,653,984

 

 

21,240,012

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

1,728,053

 

 

1,223,778

 

 

4,284,325

 

 

3,118,370

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(256,114)

 

 

(556,562)

 

 

(1,138,010)

 

 

(1,665,981)

Interest Income

 

 

26,197

 

 

808

 

 

122,390

 

 

81,276

Interest During Construction

 

 

3,656

 

 

6,217

 

 

9,026

 

 

16,922

Equity in Earnings of Hector Investment

 

 

-

 

 

218,372

 

 

-

 

 

711,073

CoBank Patronage Dividends

 

 

-

 

 

-

 

 

521,796

 

 

449,878

Other Investment Income

 

 

52,437

 

 

43,422

 

 

119,671

 

 

132,364

Total Other Income (Expense)

 

 

(173,824)

 

 

(287,743)

 

 

(365,127)

 

 

(274,468)

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

1,554,229

 

 

936,035

 

 

3,919,198

 

 

2,843,902

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAXES

 

 

652,778

 

 

392,910

 

 

1,646,065

 

 

1,193,816

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

901,451

 

$

543,125

 

$

2,273,133

 

$

1,650,086

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE

 

$

0.18

 

$

0.11

 

$

0.44

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.0850

 

$

0.0825

 

$

0.2525

 

$

0.2475

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

5,118,134

 

 

5,132,518

 

 

5,111,816

 

 

5,123,027

 

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

3


 

 
Table of Content 

 

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

$

901,451

 

$

543,125

 

$

2,273,133

 

$

1,650,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gain (Loss) of Equity Method Investee

 

 

 

-

 

 

2,300

 

 

-

 

 

(14,702)

Unrealized Gains on Interest Rate Swaps

 

 

 

-

 

 

237,364

 

 

303,851

 

 

664,414

Income Tax Expense Related to Unrealized Gains on Interest Rate Swaps

 

 

 

-

 

 

(96,062)

 

 

(124,538)

 

 

(268,888)

Other Comprehensive Income

 

 

 

-

 

 

143,602

 

 

179,313

 

 

380,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

$

901,451

 

$

686,727

 

$

2,452,446

 

$

2,030,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

4


 
 
Table of Content 

 

NEW ULM TELECOM, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

      

 

 

      

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

CURRENT ASSETS:

 

 

 

 

 

 

Cash

 

$

1,735,505

 

$

2,749,850

Receivables, Net of Allowance for

 

 

 

 

 

 

Doubtful Accounts of $137,000 and $175,705

 

 

2,346,971

 

 

1,996,996

Income Taxes Receivable

 

 

149,526

 

 

201,270

Materials, Supplies, and Inventories

 

 

3,052,483

 

 

2,276,368

Deferred Income Taxes

 

 

796,667

 

 

795,375

Prepaid Expenses

 

 

566,049

 

 

610,265

Total Current Assets

 

 

8,647,201

 

 

8,630,124

 

 

 

 

 

 

 

INVESTMENTS & OTHER ASSETS:

 

 

 

 

 

 

Goodwill

 

 

39,975,906

 

 

39,975,906

Intangibles

 

 

26,755,769

 

 

28,609,193

Other Investments

 

 

6,661,186

 

 

6,491,513

Other Assets

 

 

126,353

 

 

77,478

Total Investments and Other Assets

 

 

73,519,214

 

 

75,154,090

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT:

 

 

 

 

 

 

Telecommunications Plant

 

 

107,881,564

 

 

105,707,925

Other Property & Equipment

 

 

10,980,763

 

 

10,221,493

Video Plant

 

 

9,522,922

 

 

9,361,510

Total Property, Plant and Equipment

 

 

128,385,249

 

 

125,290,928

Less Accumulated Depreciation

 

 

84,658,508

 

 

80,466,903

Net Property, Plant & Equipment

 

 

43,726,741

 

 

44,824,025

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

125,893,156

 

$

128,608,239

 

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

5


 
 

NEW ULM TELECOM, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited)

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

      

 

 

      

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

CURRENT LIABILITIES:

 

 

 

 

 

 

Current Portion of Long-Term Debt

 

$

4,338,000

 

$

4,113,000

Accounts Payable

 

 

1,659,044

 

 

1,988,390

Other Accrued Taxes

 

 

236,793

 

 

193,746

Financial Derivative Instruments

 

 

-

 

 

303,851

Deferred Compensation

 

 

65,206

 

 

67,614

Accrued Compensation

 

 

329,938

 

 

569,028

Other Accrued Liabilities

 

 

1,438,789

 

 

1,399,442

Total Current Liabilities

 

 

8,067,770

 

 

8,635,071

 

 

 

 

 

 

 

LONG-TERM DEBT, Less Current Portion

 

 

39,075,492

 

 

42,494,385

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

Loan Guarantees

 

 

281,998

 

 

303,627

Deferred Income Taxes

 

 

20,339,825

 

 

20,215,563

Unrecognized Tax Benefit

 

 

94,952

 

 

94,952

Other Accrued Liabilities

 

 

106,376

 

 

136,146

Deferred Compensation

 

 

941,224

 

 

997,869

Total Noncurrent Liabilities

 

 

21,764,375

 

 

21,748,157

 

 

 

 

 

 

 

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, 5,118,134 and 5,103,918 Shares Issued and Outstanding

 

 

8,530,223

 

 

8,506,530

Accumulated Other Comprehensive Income (Loss)

 

 

-

 

 

(179,313)

Retained Earnings

 

 

48,455,296

 

 

47,403,409

Total Stockholders' Equity

 

 

56,985,519

 

 

55,730,626

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

125,893,156

 

$

128,608,239

             

 

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

6


 
 
 
 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

      

 

 

      

 

 

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net Income

 

$

2,273,133

 

$

1,650,086

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

 

 

 

 

 

 

Depreciation and Amortization

 

 

6,685,167

 

 

6,121,850

Undistributed Earnings of Hector Investment

 

 

-

 

 

(711,073)

Undistributed Earnings of Other Equity Investments

 

 

(97,139)

 

 

(130,927)

Noncash Patronage Refund

 

 

(130,449)

 

 

(157,457)

Distributions from Equity Investments

 

 

14,616

 

 

200,000

Stock Issued in Lieu of Cash Payment

 

 

74,200

 

 

39,200

Changes in Assets and Liabilities:

 

 

 

 

 

 

Receivables

 

 

(427,903)

 

 

594,193

Income Taxes Receivable

 

 

51,744

 

 

(336,205)

Inventories

 

 

(776,115)

 

 

(740,243)

Prepaid Expenses

 

 

62,416

 

 

106,366

Accounts Payable

 

 

(105,449)

 

 

566,867

Checks Writeen in Excess of Cash Balance

 

 

-

 

 

720,027

Other Accrued Taxes

 

 

43,047

 

 

20,906

Other Accrued Liabilities

 

 

(229,513)

 

 

(545,911)

Deferred Income Tax

 

 

(1,569)

 

 

319,981

Deferred Compensation

 

 

(59,053)

 

 

(177,934)

Net Cash Provided by Operating Activities

 

 

7,377,133

 

 

7,539,726

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Additions to Property, Plant, and Equipment, Net

 

 

(3,929,302)

 

 

(5,125,745)

Other, Net

 

 

21,670

 

 

(41,384)

Net Cash Used in Investing Activities

 

 

(3,907,632)

 

 

(5,167,129)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Principal Payments of Long-Term Debt

 

 

(3,028,500)

 

 

(2,589,383)

Changes in Revolving Credit Facility

 

 

(165,393)

 

 

854,379

Dividends Paid

 

 

(1,289,953)

 

 

(1,268,895)

Net Cash Used in Financing Activities

 

 

(4,483,846)

 

 

(3,003,899)

 

 

 

 

 

 

 

NET DECREASE IN CASH

 

 

(1,014,345)

 

 

(631,302)

 

 

 

 

 

 

 

CASH at Beginning of Period

 

 

2,749,850

 

 

1,221,717

 

 

 

 

 

 

 

CASH at End of Period

 

$

1,735,505

 

$

590,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

1,123,358

 

$

1,643,596

Net cash paid for income taxes

 

$

1,595,000

 

$

1,210,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

7


 

 

 

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

                   

YEAR ENDED DECEMBER 31, 2012 AND

NINE MONTHS ENDED SEPTEMBER 30, 2013

                   
       

 

 Accumulated        
       

 

 Other        
 

Common Stock

 

Comprehensive

 

Retained

 

Total

 

Shares

 

Amount

 

 Income (Loss)  

Earnings

 

Equity

                   

BALANCE on December 31, 2011

5,115,435

$

8,525,725

$

(814,234)

$

45,972,430

$

53,683,921

                   

Director's Stock Plan

17,083

 

28,472

     

72,328

 

100,800

Retirement of Stock from HCC Spin-Off

(28,600)

 

(47,667)

     

(123,934)

 

(171,601)

Net Income

           

3,174,914

 

3,174,914

Dividends

           

(1,692,329)

 

(1,692,329)

Other Comprehensive Income

       

634,921

     

634,921

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2012

5,103,918

 

8,506,530

 

(179,313)

 

47,403,409

 

55,730,626

                   

Director's Stock Plan

14,216

 

23,693

     

68,707

 

92,400

Net Income

           

2,273,133

 

2,273,133

Dividends

           

(1,289,953)

 

(1,289,953)

Other Comprehensive Income

       

179,313

     

179,313

 

 

 

 

 

 

 

 

 

 

BALANCE on September 30, 2013

5,118,134

$

8,530,223

$

-

$

48,455,296

$

56,985,519

 

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

8


 
 

 

 

NEW ULM TELECOM, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 (Unaudited)

 

Note 1 – Basis of Presentation and Consolidation

 

The accompanying unaudited condensed consolidated financial statements of New Ulm Telecom, Inc. and its subsidiaries (NU Telecom) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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 may differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.

 

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

 

Revenue Recognition

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

 

Revenues are earned from our customers primarily through the connection to our 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.

9


 
 

 

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 and Sleepy Eye Telephone Company’s (SETC) 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 and SETC include an estimate of a cost study each year that is trued-up subsequent to the end of any given year. Our management believes the estimates included in our preliminary cost study are reasonable. We cannot predict the future impact that industry or regulatory changes will have on interstate access revenues.

 

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

 

We derive revenues from system sales and services through the sale, installation and servicing of communication systems. In accordance with GAAP, these deliverables are accounted for separately. We recognize revenue from customer contracts for sales and installations using the completed-contract method, which recognizes income when the contract is substantially complete. We recognize rental revenues over the rental period.

 

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 $4,802,690 and $4,535,234 for the nine months ended September 30, 2013 and 2012. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.

 

10


 
 


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.

 

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.

 

As of September 30, 2013 we had $143,866 of unrecognized tax benefits net of a federal tax benefit of $48,914, which if recognized would affect the effective tax rate. Currently, the State of Minnesota is examining Hector Communications Corporation’s (HCC) 2006 state tax return. The examination of this return is expected to be completed in 2013. As of September 30, 2012 we had no unrecognized tax benefits that, if recognized, would affect the effective tax rate.

 

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

 

Recent Accounting Developments

 

In the first quarter of 2013, the Financial Accounting Standards Board issued ASU 2013-02 to improve the disclosure of reclassifications out of accumulated other comprehensive income. The Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Also, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income (only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period) either on the face of the statement where net income is presented or in the notes. The adoption of this guidance did not have a material impact on our disclosures or consolidated financial statements.

 

We reviewed all significant recently 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.

 

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Note 2 – Acquisitions and Dispositions

 

Hector Communications Corporation Spin-Off Agreement

 

On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. HCC was equally owned by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt.

 

The preliminary allocation of the spin-off value of HCC is shown below:

 

 

Current Assets

 

$

439,664

Property, plant and equipment

   

9,847,787

Investments

   

2,412,938

Customer relationship intangible

   

9,900,000

Trade name intangible

   

570,000

Excess cost over net assets acquired (Goodwill)

   

10,268,806

Current liabilities

   

(300,621)

Deferred liabilities

 

 

(7,675,522)

Total price allocation

   

25,463,052

Less Cash Acquired

 

 

(18,150)

Total Consideration For Acquisition, Net

 

$

25,444,902

       

 

 

This spin-off was accounted for using the acquisition method of accounting for business combinations, and accordingly, the acquired assets were recorded at estimated fair values as of the date of acquisition. Based upon our preliminary spin-off value allocation, the excess of the purchase price and acquisition costs over the fair value of the net identifiable tangible assets acquired was $20,738,806, which is not deductible for income tax purposes. The Company recorded an intangible asset related to the acquired company’s customer relationships of $9,900,000 and trade name intangible of $570,000. The estimated useful life of the customer relationship intangible is 14 years and trade name intangible is 5 years.

 

The preliminary valuation allocation is subject to change based on pending operational true-ups related to accounts receivable and accounts payable.

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Pro Forma Financial Information

 

Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments. The following pro forma results presented are for three and nine months ended September 30, 2012 as if the spin-off had been completed on January 1, 2012. The Company provided these pro forma condensed Statements of Income to facilitate analysis of the 2012 Statement of Income.

 

   

THREE MONTHS ENDED SEPTEMBER 30, 2012

                       

New Ulm

     

Actual

   

Actual

         

Telecom, Inc.

     

New Ulm

   

Sleepy Eye

   

Pro Forma

   

Pro Forma

   

 

Telecom, Inc.

 

 

Telephone Co.

 

 

Adjustments

 

 

Combined

REVENUES

 

$

8,027,347

 

$

1,353,183

 

$

(89,859)

 

$

9,290,671

                         

NET INCOME

 

$

543,125

 

$

275,389

 

$

(369,445)

*

$

449,069

                         

BASIC AND DILUTED NET INCOME

                       

PER SHARE

 

$

0.11

 

$

0.05

 

$

(0.07)

 

$

0.09

                         

* These adjustments include depreciation, amortization, management services,
 equity income and interest expense, net of the related tax benefit.

 

 

   

NINE MONTHS ENDED SEPTEMBER 30, 2012

                       

New Ulm

     

Actual

   

Actual

         

Telecom, Inc.

     

New Ulm

   

Sleepy Eye

   

Pro Forma

   

Pro Forma

   

 

Telecom, Inc.

 

 

Telephone Co.

 

 

Adjustments

 

 

Combined

REVENUES

 

$

24,358,382

 

$

4,091,927

 

$

(269,579)

 

$

28,180,730

                         

NET INCOME

 

$

1,650,086

 

$

925,223

 

$

(1,108,334)

*

$

1,466,975

                         

BASIC AND DILUTED NET INCOME

                       

PER SHARE

 

$

0.32

 

$

0.18

 

$

(0.21)

 

$

0.29

                         

* These adjustments include depreciation, amortization, management services,
equity income and interest expense, net of the related tax benefit.

 

The operating results for SETC are included in the September 30, 2013 operating results of NU Telecom, but are not included in the operating results of NU Telecom as of September 30, 2012.

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Table of Content 

Note 3 – 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 have used financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We accounted for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.

 

We had entered into interest rate swaps with our lender, CoBank, ACB, to manage our cash flow exposure to fluctuations in interest rates. These instruments were designated as cash flow hedges and were effective at mitigating the risk of fluctuations on interest rates in the market place. Any gains or losses related to changes in the fair value of these derivatives are accounted for as a component of accumulated other comprehensive income (loss) for as long as the hedge remains effective.

 

The fair value of our interest rate swap agreements is discussed in Note 6 – “Interest Rate Swaps”. The fair value of our swap agreements 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, 2012. We believe the carrying value of our investments is not impaired.

 

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

 

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

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Note 4 – Goodwill and Intangibles

 

We account for goodwill and other intangible assets under GAAP. Under GAAP, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. Our goodwill totaled $39,975,906 at September 30, 2013 and December 31, 2012.   

 

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.

 

In 2012 and 2011, we engaged an independent valuation firm to complete our annual impairment testing for goodwill. For 2012 and 2011, 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 anticipated that this rebranding process would take approximately three years to complete and would result in additional amortization expense of $266,667 per year, over the three years which began in 2010 and ended in 2012, due to this rebranding process. 

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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, 2013

   

December 31, 2012

         

Gross

         

Gross

     
   

Useful

   

Carrying

   

Accumulated

   

Carrying

   

Accumulated

   

Lives

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amortization

Definite-Lived Intangible Assets

                           

Customers Relationships

 

14-15 yrs

 

$

29,278,445

 

$

8,473,855

 

$

29,278,445

 

$

6,905,929

Regulatory Rights

 

15 yrs

   

4,000,000

   

1,533,321

   

4,000,000

   

1,333,323

Non-Competition Agreement

 

5 yrs

   

800,000

   

800,000

   

800,000

   

800,000

Trade Name

 

3-5 yrs

   

1,370,000

   

885,500

   

1,370,000

   

800,000

Indefinitely-Lived Intangible Assets

                           

Video Franchise

     

 

3,000,000

 

 

-

 

 

3,000,000

 

 

-

Total

     

$

38,448,445

 

$

11,692,676

 

$

38,448,445

 

$

9,839,252

             

 

 

       

 

 

Net Identified Intangible Assets

           

$

26,755,769

       

$

28,609,193

 

 

 

Amortization expense related to the definite-lived intangible assets was $1,853,425 and $1,557,564 for the nine months ended September 30, 2013 and 2012. 

 

Amortization expense for the remaining three months of 2013 and the five years subsequent to 2013 is estimated to be:

 

  • (October 1 – December 31) - $617,808
  • 2014 - $2,471,233
  • 2015 - $2,471,233
  • 2016 - $2,469,256
  • 2017 - $2,469,083
  • 2018 - $2,355,083

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Note 5 – 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 the 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. Since September 30, 2012, our Total Leverage Ratio has been below the 3:50 to 1:00 ratio, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. 

 

At September 30, 2013 and 2012, we were in compliance with all the stipulated financial ratios in our loan agreements.

 

As described in Note – “Interest Rate Swaps”,  we had entered into interest rate swaps that effectively fixed  our interest rates. As of June 30, 2013 the remaining swap matured and we currently have no interest rate swaps in effect. The remaining debt of $47.4 million ($4.0 million available under the revolving credit  facilities and $43.4 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 2.12%, as of September 30, 2013

 

Note 6 – Interest Rate Swaps

 

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

 

We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facilities with CoBank, ACB required 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 had entered into Interest Rate Swap Agreements with CoBank, ACB. Under these Interest Rate Swap Agreements and subsequent swaps that each covered  a specified notional dollar amount, we ha changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of those  interest rate swaps, we paid a fixed contractual interest rate and (i) made  an additional payment if the LIBOR variable rate payment was below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment was above the contractual rate.

 

As previously stated, our last remaining swap matured as of June 30, 2013 and we currently have no interest rate swaps in effect.

 

Each month, we made interest payments to CoBank, ACB under its loan agreements based on the current applicable LIBOR Rateplus 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 adjusted 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. Net interest payments 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 March 31, 2013, $33,000,000 of our swaps matured on Loan RX0583-T1 ($11,250,000) and Loan RX0584-T1 ($21,750,000). No gain or loss was recognized on these swaps as they had reached their full maturities.

 

On June 30, 2013, $3,000,000 of our swaps matured on Loan RX0583-T2 ($3,000,000). No gain or loss was recognized on this swap as it had reached its full maturity.

 

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

 

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

 

Note 7 – Other Investments 

 

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

 

Note 8 – 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, 2013, we have recorded a liability of $281,998 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.

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Note 9 – Deferred Compensation
 

As of September 30, 2013 and 2012, we have recorded other deferred compensation relating to executive compensation payable to certain former executives of past acquisitions.  

 

Note 10 – Segment Information 

 

We operate in the Telecom Segment and have no other significant business segments. The Telecom Segment consists of voice, data and video communication services delivered to the customer over our local communications network. 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:

       ▪  NU Telecom, the parent company;

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

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

       ▪  Sleepy Eye Telephone Company, a wholly-owned subsidiary of NU Telecom; and

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

● CLECs:

    ▪  NU Telecom, located in Redwood Falls, Minnesota; and 

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

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

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

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

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

 

Note 11  – 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 2013. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for the discussion relating to commitments and contingencies.

19


 
 


Note 12 – Hector Communications Corporation

 

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

 

On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt.

 

Our President and Chief Executive Officer, Mr. Bill D. Otis, ha 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 serve on the Board of Directors of HCC.

 

HCC had operating revenues of $6,734,525, operating income of $1,171,484 and net income of $655,118 for the three months ended September 30, 2012 and operating revenues of $20,094,730, operating income of $3,679,295 and net income of $2,133,220 for the nine months ended September 30, 2012.

 

Note 13 – Subsequent Events

 

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

20


 
 
 

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.

 

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

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations stated in this Form 10-Q, are based upon NU Telecom’s consolidated unaudited financial statements that have been prepared in accordance with GAAP and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate. The preparation of our financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. For a summary of our significant accounting policies, see Note 1 – “Summary of Significant Accounting Policies” to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2012, which is incorporated herein by reference.

 

Results of Operations

 
Overview

 

NU Telecom offers a diverse array of communications products and services. Our ILEC and CLEC 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. On December 31, 2012 NU Telecom completed a spin-off agreement with HCC, continuing the expansion of our service area into the Minnesota communities and surrounding areas of Bellechester, Goodhue, Hanska, Mazzepa, Sleepy Eye and White Rock. 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.

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Executive Summary

 

·      On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. HCC was equally owned by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments of HCC and incurred $3.3 million of additional debt to finance the spin-off. Additional information pertaining to this acquisition is available in Note 2 – “Acquisitions and Dispositions.”

 

·      Net income in the third quarter of 2013 totaled $901,451, which is a 66.0% increase compared to the third quarter of 2012. This increase was primarily due to the synergies recognized from the addition of the operating results of SETC, which we acquired through the HCC spin-off.

 

·      Consolidated revenue for the third quarter of 2013 totaled $9,928,891, which is a 23.7% increase compared to the third quarter of 2012. This increase was primarily due to the addition of the operating results of SETC, which we acquired through the HCC spin-off.

 

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

 

 

Trends

 

Included below is a synopsis of trends management believes will continue to affect our business in 2013. 

 

Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the telecommunications industry from cable television providers (CATV), voice over Internet protocol (VoIP) providers, wireless, other competitors and emerging technologies. As we experience access line losses, our switched access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs and lower demand for dedicated lines may affect our future voice and switched access revenues. Voice and switched access revenues may also be significantly affected by potential changes in rate regulation at the state and federal levels. We continue to monitor regulatory changes as we believe that rate regulation will continue to be scrutinized and may be subject to change. Access lines increased 3,491 or 13.6% for the twelve months ended September 30, 2013 due to the addition of SETC.

 

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 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.

 

In November, 2011 the FCC released proposed rulemaking which comprehensively reforms and begins a new era in universal service and intercarrier compensation. This reform order impacts numerous support mechanisms and network access revenue streams that we have received in the past. While these rules may be altered based on ongoing petitions for reconsideration and are being challenged through appeals, we are evaluating them. We cannot predict the entire impact these regulatory changes will have on our future revenue and costs, but the changes have had a negative effect on our current regulated revenues and we believe they will continue to increase the historical decline in our regulated revenues.

 

Financial results for the Telecom Segment are included below:

 

Telecom Segment

                     
   

Three Months Ended September 30,

     
   

 

2013

 

 

2012

 

Increase (Decrease)

Operating Revenues

                     

Local Service

 

$

1,675,238

   

1,448,759

   

226,479

 

15.6%

Network Access

   

3,206,275

   

2,563,335

   

642,940

 

25.1%

Video

   

1,865,303

   

1,494,017

   

371,286

 

24.9%

Data

   

1,906,897

   

1,386,433

   

520,464

 

37.5%

Long Distance

   

206,438

   

155,715

   

50,723

 

32.6%

Other

 

 

1,068,740

 

 

979,088

 

 

89,652

 

9.2%

Total Operating Revenues

 

 

9,928,891

 

 

8,027,347

 

 

1,901,544

 

23.7%

                       

Cost of Services, Excluding Depreciation and Amortization

   

4,396,208

   

3,408,379

   

987,829

 

29.0%

Selling, General and Administrative

   

1,583,172

   

1,339,482

   

243,690

 

18.2%

Depreciation and Amortization Expenses

 

 

2,221,458

 

 

2,055,708

 

 

165,750

 

8.1%

Total Operating Expenses

 

 

8,200,838

 

 

6,803,569

 

 

1,397,269

 

20.5%

                       

Operating Income

 

$

1,728,053

 

$

1,223,778

 

$

504,275

 

41.2%

                       

Net Income

 

$

901,451

 

$

543,125

 

$

358,326

 

66.0%

                       

Capital Expenditures

 

$

1,240,468

 

$

1,658,374

 

$

(417,906)

 

-25.2%

 

 

 

Telecom Segment

                     
   

Nine Months Ended September 30,

     
   

 

2013

 

 

2012

 

Increase (Decrease)

Operating Revenues

                     

Local Service

 

$

5,022,386

 

$

4,364,582

 

$

657,804

 

15.1%

Network Access

   

9,198,096

   

8,123,960

   

1,074,136

 

13.2%

Video

   

5,410,824

   

4,420,306

   

990,518

 

22.4%

Data

   

5,616,416

   

4,128,579

   

1,487,837

 

36.0%

Long Distance

   

626,837

   

461,078

   

165,759

 

36.0%

Other

 

 

3,063,750

 

 

2,859,877

 

 

203,873

 

7.1%

Total Operating Revenues

 

 

28,938,309

 

 

24,358,382

 

 

4,579,927

 

18.8%

                       
                       

Cost of Services, Excluding Depreciation and Amortization

   

12,941,774

   

10,574,102

   

2,367,672

 

22.4%

Selling, General and Administrative

   

5,056,095

   

4,573,112

   

482,983

 

10.6%

Depreciation and Amortization Expenses

 

 

6,656,115

 

 

6,092,798

 

 

563,317

 

9.2%

Total Operating Expenses

 

 

24,653,984

 

 

21,240,012

 

 

3,413,972

 

16.1%

                       

Operating Income

 

$

4,284,325

 

$

3,118,370

 

$

1,165,955

 

37.4%

                       

Net Income

 

$

2,273,133

 

$

1,650,086

 

$

623,047

 

37.8%

                       

Capital Expenditures

 

$

3,929,302

 

$

5,125,745

 

$

(1,196,443)

 

-23.3%

                       
                 

Key metrics

                     

Access Lines

   

29,208

   

25,717

   

3,491

 

13.6%

Video Customers

   

10,936

   

10,034

   

902

 

9.0%

Broadband Customers

   

13,917

   

10,623

   

3,294

 

31.0%

Dial Up Internet Customers

   

321

   

443

   

(122)

 

-27.5%

Long Distance Customers

   

14,845

   

13,192

   

1,653

 

12.5%

23


 

 

 


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 $1,675,238, which is $226,479 or 15.6% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $5,022,386, which is $657,804 or 15.1% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to the addition of access lines and revenues associated with the HCC spin-off on December 31, 2012. 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. 

 

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 $3,206,275, which is $642,940 or 25.1% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $9,198,096, which is $1,074,136 or 13.2% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to additional revenues associated with the HCC spin-off on December 31, 2012, offset by lower minutes of use and the implementation of the Intercarrier Compensation and Universal Service Fund reform order as it relates to state access pricing levels that took effect on July 3, 2012.

 

Video – We provide a variety of enhanced data network services on a monthly recurring basis to our end-user customers. This includes the broadband access portion of traditional Telecom broadband service. We also receive monthly recurring revenue from our end-user subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve seventeen communities with our digital TV services and five communities with our CATV services. Video revenue was $1,865,303, which is $371,286 or 24.9% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $5,410,824, which is $990,518 or 22.4% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to the addition of video customers and revenues associated with the HCC spin-off on December 31, 2012 and a combination of rate increases introduced into several of our markets over the course of 2012 and 2013. 

 

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 $1,906,897, which is $520,464 or 37.5% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $5,616,416, which is $1,487,837 or 36.0% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to the addition of data customers and revenues associated with the HCC spin-off on December 31, 2012. We expect future growth in this area will be driven by 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.

 

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 $206,438, which is $50,723 or 32.6% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $626,837, which is $165,759 or 36.0% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to the addition of long distance customers and revenues associated with the HCC spin-off on December 31, 2012.

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Other Revenue
– We generate revenue from directory publishing, sales and service of customer premise equipment, bill processing and add/move/change services. Our directory publishing revenue 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 $1,068,740, which is $89,652 or 9.2% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $3,063,750, which is $203,873 or 7.1% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to additional revenues associated with the HCC spin-off on December 31, 2012 and increases in the sales of cellular phone and activation revenues.  

 

Cost of Services (excluding Depreciation and Amortization)

 

Cost of services (excluding depreciation and amortization) was $4,396,208, which is $987,829 or 29.0% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $12,941,774, which is $2,367,672 or 22.4% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to higher expenses associated with the HCC spin-off on December 31, 2012, higher programming cost from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and software.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $1,583,172, which is $243,690 or 18.2% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $5,056,095, which is $482,983 or 10.6% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to higher expenses and one-time costs associated with the HCC spin-off on December 31, 2012.

 

Depreciation and Amortization

 

Depreciation and amortization was $2,221,458, which is $165,750 or 8.1% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $6,656,115, which is $563,317 or 9.2% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to tangible and intangible asset additions received in the HCC spin-off and other increases in our plant and broadband network. The spin-off was accounted for using the acquisition method of accounting for business combinations, and accordingly, based upon our preliminary spin-off price allocation, the acquired assets were recorded at estimated fair values as of the date of acquisition. Details of the fair value recorded on the tangible and intangible assets acquired in the HCC spin-off are included in Note 2 – “Acquisitions and Dispositions”.  

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Operating Income

 

Operating income was $1,728,053, which is $504,275 or 41.2% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $4,284,325, which is $1,165,955 or 37.4% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to an increase in revenues, partially offset by an increase in expenses resulting from the acquisition of one-third of the net assets of HCC on December 31, 2012.

    

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

 

Other Income and Interest Expense 

 

Interest expense was $256,114, which is $300,448 or 54.0% lower in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $1,138,010, which is $527,971 or 31.7% lower in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These decreases were primarily due to lower interest rates due to the retirement of our remaining swaps in the first six months of 2013.  

 

Interest income was $26,197, which is $25,389 higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $122,390, which is $41,114 higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These increases were primarily due to interest received from the MCI/WorldCom bankruptcy settlements with Deutsche Bank in 2013.

 

Our equity portion of HCC’s net income was $218,372 for the three months ended September 30, 2012 and was $711,073 for the nine months ended September 30, 2012. On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt. The operating results of SETC for the first three quarters of 2013 are included in the operating results of NU Telecom.

  

Other income for the nine months ended September 30, 2013 and 2012, included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in 2013 was $521,796, compared to $449,878 allocated and received in 2012. CoBank, ACB determines and pays the patronage credit annually, generally in the first quarter of the year, based on its results from the prior year. We record these patronage credits as income when they are received.

 

Other investment income was $52,437, which is $9,015 or 20.8% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $119,671, which is $12,693 or 9.6% lower in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.

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Income Taxes

 

Income tax expense was $652,778, which is $259,868 or 66.1% higher in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 and was $1,646,065, which is $452,249 or 37.9% higher in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The effective income tax rates for the nine months ending September 30, 2013 and 2012 were approximately 42.0% for both periods. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.

 

Liquidity and Capital Resources

 

Capital Structure

 

NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was $100,399,011 at September 30, 2013, reflecting 56.8% equity and 43.2% debt. This compares to a capital structure of $102,338,011 at December 31, 2012, reflecting 54.5% equity and 45.5% debt. In the telecommunications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 3.06 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.

 

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, 2013 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At September 30, 2013 we had a working capital surplus of $579,431. In addition, at September 30, 2013 we had approximately $4.0 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, 2013, and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.

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We periodically seek to add growth initiatives by either expanding our network or our markets through organic or internal investments or through strategic acquisitions. We feel that 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,

   

 

2013

 

 

2012

Net cash provided by (used in):

           

Operating activities

 

$

7,377,133

 

$

7,539,726

Investing activities

   

(3,907,632)

   

(5,167,129)

Financing activities

   

(4,483,846)

   

(3,003,899)

Increase (Decrease) in cash

 

$

(1,014,345)

 

$

(631,302)

 

 

Cash Flows from Operating Activities

 

Cash generated by operations for the nine months ended September 30, 2013 was $7,377,133, compared to cash generated by operations of $7,539,726 in 2012. The decrease in cash from operating activities in 2013 was primarily due to an increase in accounts receivable.

 

Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash at September 30, 2013 was $1,735,505, compared to $2,749,850 at December 31, 2012.

 

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 used in investing activities was $3,907,632 in the first nine months of 2013 compared to $5,167,129 in the first nine months of 2012. Capital expenditures relating to on-going operations were $3,929,302 for the nine months ended September 30, 2013, compared to $5,125,745 for the nine months ended September 30, 2012. We expect total plant additions to be approximately $6.0 million in 2013. 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 $4.0 million available under our existing credit facility to fund capital expenditures and other operating needs.

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Cash Flows Used in Financing Activities

 

Cash used in financing activities for the nine months ended September 30, 2013 was $4,483,846 and included long-term debt repayments of $3,028,500, payments on our revolving credit facility of $165,393 and the distribution of $1,289,953 of dividends to stockholders.

 

Working Capital

 

We had a working capital surplus (i.e. current assets minus current liabilities) of $579,431 as of September 30, 2013, with current assets of approximately $8.7 million and current liabilities of approximately $8.1 million, compared to a working capital deficit of $4,947 as of December 31, 2012. The ratio of current assets to current liabilities was 1.07 and 1.00 as of September 30, 2013 and December 31, 2012. In addition, if it becomes necessary, we will have sufficient availability under our revolving credit facility to fund any fluctuations in working capital and other cash needs. 

 

Dividends and Restrictions

 

We declared a quarterly dividend of $.0850 per share for the second and third quarters of 2013 and a quarterly dividend of $.0825 per share for the first quarter of 2013, which totaled $435,043 for the third quarter, $433,835 for the second quarter and $421,075 for the first quarter. 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 expect to continue to pay quarterly dividends during 2013, but only if and to the extent declared by our Board of Directors on a quarterly basis and subject to various restrictions on our ability to do so (described below). Dividends on our common stock are not cumulative. 

 

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. At September 30, 2013 we were in compliance with all the stipulated financial ratios in our loan agreements.

 

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

 

Long-Term Debt

 

See Note 5 – “Secured Credit Facility” for information pertaining to our long-term debt.

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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

 

Not required for a smaller reporting company.

 

Item 4. Controls and Procedures

 

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

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

Changes in Internal Control over Financial Reporting

 

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

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Not required for a smaller reporting company.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

             

Exhibit

Number           Description 

 

3.2                   By-Laws of New Ulm Telecom, Inc.

 

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

 

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

 

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

 

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

 

101.INS          XBRL Instance Document

 

101.SCH         XBRL Taxonomy Extension Schema Document

 

101.CAL         XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF         XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB         XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE          XBRL Taxonomy Extension Presentation Linkbase Document

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