-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Atr5GEWcr0jVhulINhI4MDMIxqsdeUvUNsOq46zA+m25qGfK+9zbQnoReHoVKve4 taiZTkZeuBfhkLAqc7/rkQ== 0000897101-00-000317.txt : 20000331 0000897101-00-000317.hdr.sgml : 20000331 ACCESSION NUMBER: 0000897101-00-000317 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ULM TELECOM INC CENTRAL INDEX KEY: 0000071557 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 410440990 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-03024 FILM NUMBER: 587141 BUSINESS ADDRESS: STREET 1: 400 2ND ST N CITY: NEW ULM STATE: MN ZIP: 56073 BUSINESS PHONE: 5073544111 MAIL ADDRESS: STREET 1: P O BOX 697 CITY: NEW ULM STATE: MN ZIP: 56073 FORMER COMPANY: FORMER CONFORMED NAME: NEW ULM RURAL TELEPHONE CO DATE OF NAME CHANGE: 19840816 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 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 Identification incorporation or organization) No.) 400 Second Street North New Ulm, Minnesota 56073 --------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number including area code: 507-354-4111 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Title of each class ------------------- Common Stock, $5.00 par value 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 _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not Available ------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 1,732,455 Shares Outstanding at December 31, 1999 Documents Incorporated By Reference ----------------------------------- Documents: Form 10-K Reference: Proxy Statement, Filed Part III, Items 10-13 Within 120 Days PART I Item 1. Business New Ulm Telecom, Inc. was incorporated in 1905 under the laws of the State of Minnesota, with headquarters in New Ulm, Minnesota. The Company's principal line of business is the operation of local exchange telephone companies. New Ulm Telecom, Inc. is the parent company for five wholly-owned subsidiaries, which are: Western Telephone Company Peoples Telephone Company New Ulm Phonery, Inc. New Ulm Cellular #9, Inc. New Ulm Long Distance, Inc. New Ulm Telecom, Inc., Western Telephone Company and Peoples Telephone Company are independent telephone companies which are regulated by the state utilities commissions. None of these companies has experienced a major change in the scope or direction of their operations during the past year. At December 31, 1999, the Company served 16,686 access lines. New Ulm Phonery, Inc. is a non-regulated telecommunications business which sells and services telephone apparatus on a retail level primarily in the areas served by the three operating telephone companies. New Ulm Cellular #9, Inc. owns an interest in a limited liability company that provides cellular phone service in southern Minnesota (in 1999, New Ulm Cellular #7, #8, and #10, Inc. were merged into #9). Peoples Telephone Company owns an interest in a limited liability company that provides compeitive local exchange service in northwestern Iowa. New Ulm Long Distance, Inc. is a non-regulated long distance business which sells long distance service. The Registrant's operations consist of only one segment, which is to provide local exchange telephone service and related access to the long distance network. The Company does not have any collective bargaining agreements with its employees. New Ulm Telecom, Inc. provides telephone service to the cities of New Ulm, Courtland, Klossner, Searles and the adjacent rural areas. Western Telephone Company provides telephone service to the cities of Springfield, Sanborn and the adjacent rural areas. Peoples Telephone Company provides telephone service to Aurelia, Iowa and the adjacent rural areas. Peoples Telephone Company operates a cable television system in the city of Aurelia, Iowa, serving approximately 375 customers. Western Telephone Company operates three cable television systems in Minnesota (cities of Sandborn, Jeffers and Wabasso) serving approximately 413 customers. New Ulm Telecom, Inc., Western Telephone Company, and Peoples Telephone Company derive their principal revenues from local service charges to their subscribers and access charges to interexchange carriers for providing access to the long distance network. Revenues are also received from long distance carriers for providing the billing and collection of long distance toll calls to subscribers. The three telephone companies are public utilities operating exclusively within their serving areas pursuant to Indeterminate Permits and Certificates of Territorial Authority issued by the Minnesota Public Utilities Commission and the Iowa Utilities Board. The Minnesota Public Utilities Commission and the Iowa Utilities Board regulate most services provided by the three telephone companies. 1 PART I Item 1. (Continued) The activities of New Ulm Phonery, Inc. are centered around the sale, lease and service of telephone equipment primarily in the areas within the telephone company's operations. New Ulm Phonery, Inc. also provides electronic voice mail, video conferencing and internet services. The cellular company derives its revenue from the percentage ownership of the cellular limited liability company (LLC). Peoples Telephone Company also has an equity interest in two rural service areas in Iowa. The cellular LLC provides their cellular phone service on the wireline side. The service area that the LLC operates in also has a non-wireline provider that is the competition for that area. In addition, new wireless technology called Personal Communications Service (PCS) will provide new competitors in the future. The Registrant and its subsidiaries are not planning to provide any new products or services which would require the investment of a material amount of the assets of the Registrant or its subsidiaries. The materials and supplies which are necessary to the operation of the businesses of the Registrant and its subsidiaries are available from a variety of sources. No supply problems are anticipated during the coming year. Patents, trademarks, licenses and concessions are not significant in the businesses of the Registrant or its subsidiaries. The Registrant's businesses are not highly seasonal. The Registrant and its subsidiaries are engaged in service businesses. Working capital practices primarily involve the allocation of funds for the construction and maintenance of telephone plant, the payroll cost of skilled labor and the inventory to service its telephone equipment customers. The Registrant and its subsidiaries are not dependent upon any single customer or small group of customers. There is no customer that accounts for ten percent or more of the Registrant's consolidated revenues. The Registrant and its subsidiaries are in a service business which provides an ongoing benefit to their customers for a fee. These services are repetitive and recurring. Backlog orders are not a significant factor in providing these services. There is no material portion of the businesses of the Registrant or its subsidiaries which may be subject to renegotiation of profits or termination of contracts at the election of the Government. As a result of the Telecommunications Act of 1996, telephone companies no longer have an exclusive franchise service area. Under the law, competitors may offer telephone service to the Company's customers and request access to the Company's local network facilities. The law also permits existing telephone companies to offer telephone service outside their existing franchise service area. The law includes universal service provisions, interconnection requirements, and rules mandating how competition will be implemented. The FCC and state regulatory agencies are responsible for establishing rule making procedures to implement the law. The rule making procedures are not complete and a number of court cases have already been filed challenging various aspects of the rules and procedures. Until the rule making procedures are complete and the court issues settled, the Company cannot predict how the new law will affect its business. 2 PART I Item 1. (Continued) The three telephone companies currently do not have competition in the providing of basic local telephone service. Competition does exist in some services provided for interexchange carriers such as customer billing services. The competition comes from the interexchange carriers themselves. The provision of these services is by contract and is primarily controlled by the interexchange carriers. The Company has experienced competition in the providing of access service whereby the local network is by-passed through private line switched voice and data services, microwave, or cellular service. Other services such as directory advertising and local private line transport are open to competition. Competition is based primarily on cost, service and experience. There are a number of companies engaged in the sale of telephone equipment at the retail level competing with New Ulm Phonery, Inc. Competition is based primarily on price, service, and experience. No company is dominant in this field. The Registrant and its subsidiaries do not engage in material research and development activities. The Registrant and its subsidiaries anticipate no material effects on their capital expenditures, earnings or competitive position because of laws relating to the protection of the environment. As of December 31, 1999, the total full time employees of the Registrant and its subsidiaries was 47. New Ulm Telecom, Inc. employed 40 full time employees, Western Telephone Company had 4 full time employees and Peoples Telephone Company had 3 full time employees. New Ulm Phonery, Inc.'s and New Ulm Long Distance, Inc.'s labor are provided by the employees of New Ulm Telecom, Inc. The cellular subsidiary has no employees. The Registrant and its subsidiaries operate only in southern Minnesota and northern Iowa and have no foreign operations. Item 2. Properties The three operating telephone companies own central office equipment. The central office equipment is used to record, switch and transmit the telephone calls. New Ulm Telecom, Inc.'s host central office equipment was purchased in 1991 and consists of a Northern Telecom DMS-100/200 digital switch. New Ulm Telecom, Inc. also has remote switching sites in two locations in New Ulm and in the city of Courtland. The equipment at these remote switching sites is housed within specially designed central office equipment buildings. Western Telephone Company installed Northern Telecom remote central office equipment in 1996. This remote switching equipment utilizes the host switch in New Ulm. Western Telephone Company also has a remote switching site in the city of Sanborn. The equipment at Sanborn is housed within a specially designed central office equipment building. 3 PART I Item 2. (Continued) Peoples Telephone Company's central office equipment was installed in 1999 and consists of an RSC digital remote switch. The Company leases most switching facilities from Fibercom, LLC. The Company owns various buildings and related land as follows: (1) New Ulm Telecom, Inc. owns a building which is located at 400 Second Street North, New Ulm, Minnesota. It was originally constructed in 1918 with various additions and remodeling through the years. This building contains the main business offices and central office equipment. The building also has warehouse and garage space. This building contains approximately 23,700 square feet of floor space. (2) New Ulm Telecom, Inc. constructed a warehouse in 1992 that is located at 225 20th South Street, New Ulm, Minnesota. The warehouse has 10,800 square feet of space and is used primarily as a storage facility for trucks, generators, trailers, plows and inventory used in outside plant construction. (3) New Ulm Telecom, Inc. has three remote central office buildings that are located on the north side of New Ulm, the south side of New Ulm, and in Courtland. These buildings contain central office equipment that remote off of New Ulm's main central office equipment. (4) New Ulm Telecom, Inc. owns buildings in Klossner and Searles, Minnesota. These buildings were built in 1954 and were formally used to house central office equipment. These buildings are now used for storage. (5) New Ulm Telecom, Inc. owns land located at the corner of 7th Street South and Valley Street in New Ulm, Minnesota. This lot is utilized as storage for poles and cable inventory and contains approximately 5,000 square feet of fenced-in storage area. (6) Western Telephone Company owns a building at 22 South Marshall, Springfield, Minnesota. This building contains the business office and central office equipment. This building contains approximately 2,100 square feet of floor space. (7) Western Telephone Company has a building in Sanborn, Minnesota, which contains central office equipment that remotes off of Western's central office equipment. (8) Western owns a warehouse located at 22 South Marshall, Springfield, Minnesota. This building is used as a storage facility for vehicles, other work equipment and inventory used in outside plant construction. This building contains approximately 3,750 square feet of space. (9) Peoples Telephone Company owns a building in Aurelia, Iowa that houses the business office, central office equipment and cable television headend equipment. (10) Peoples Telephone Company owns a building that is adjacent to its main office building. This building will be used to expand the present main office building. 4 PART I Item 2. (Continued) (11) A warehouse building that contains approximately 1,875 sq. ft. is owned by Peoples Telephone Company. (12) Peoples Telephone Company also owns a vacant lot that is 25' x 100' in downtown Aurelia, Iowa. In addition, New Ulm Telecom, Inc., Western Telephone Company and Peoples Telephone Company own the lines, cables and associated outside physical plant utilized in providing telephone service in their service areas. Western Telephone Company and Peoples Telephone Company owns the cables and equipment to provide cable television services. New Ulm Phonery, Inc. owns the telephone sets and other similarly used instruments and equipment which are leased to subscribers. The Registrant believes that its property is suitable and adequate to provide the necessary services and believes all properties are adequately insured. Note 6 to the financial statements describes mortgages and collateral relating to the above properties, while Note 1 describes the composite depreciation rate. Item 3. Legal Proceedings There is no material litigation pending or threatened involving the Registrant at this time in any court. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's common stock is not traded on an exchange or in the over-the-counter market; as such, it has a limited market. As of December 31, 1999, there were approximately 1,121 holders of record of the Company's common stock. Dividends Dividends were declared quarterly in 1999, 1998 and 1997. In addition to the quarterly dividends, a special dividend was declared in 1998 and 1997. Dividends were $.95 in 1999, $1.07 in 1998 (which includes the special dividend of $.25 per share), and $.99 per share in 1997 (which includes a special dividend of $.25 per share). Any increase in dividends will be decided by the Board of Directors based on anticipated earnings, capital requirements and the operating and financial condition of the Company. See Note 6 to the financial statements for restrictions on the payment of dividends. 5 PART II Item 6. Selected Financial Data Selected Income Statement Data:
Year Ended December 31 ---------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------- ---------------- --------------- ---------------- ---------------- Operating Revenues $ 11,757,082 $ 10,478,643 $ 9,666,727 $ 9,346,224 $ 8,975,187 Operating Expenses 7,106,612 6,333,981 5,812,800 5,631,181 5,477,162 Operating Income 4,650,470 4,144,662 3,853,927 3,715,043 3,498,025 Other Income (Expenses) 1,132,540 1,230,569 935,548 275,016 247,873 Income Taxes 2,453,587 2,136,011 1,976,220 1,586,544 1,491,105 Net Income 3,329,423 3,239,220 2,813,255 2,403,515 2,254,793 Basic Net Income Per Share 1.92 1.87 1.62 1.39 1.30 Dividends Per Share .95 1.07 .99 .65 .58 Selected Balance Sheet Data: Year Ended December 31 ---------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------- ---------------- --------------- ---------------- ---------------- Current Assets $ 4,235,750 $ 5,223,431 $ 4,411,510 $ 3,938,975 $ 3,478,049 Current Liabilities 2,013,263 2,332,221 1,325,949 937,488 949,532 Working Capital 2,222,487 2,891,210 3,085,561 3,001,487 2,528,517 Total Assets 27,027,069 26,043,448 23,978,695 22,849,405 22,021,455 Long-Term Debt 3,300,000 3,666,666 4,033,332 4,400,000 4,766,666 Stockholders' Equity 20,552,582 18,868,991 17,483,498 16,385,373 15,113,728 Book Value Per Share 11.86 10.89 10.09 9.46 8.72
All per share amounts have been adjusted to reflect a three-for-one stock split effective April 1, 1996. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Description of Business The Company operates in one business segment providing telephone service in six Minnesota cities and one Iowa city and the adjacent rural areas. The Company provides telephone service to over 16,300 access lines through its three local exchange telephone companies. In addition, the Company is an investor in a cellular limited liability company in southern Minnesota, a competitive local exchange company limited liability company in northwest Iowa, and two RSAs (rural service areas) in northwest Iowa. The Company also operates four cable television systems and resells long distance service. 6 PART II Item 7. (Continued) Results of Operations The Company's operating revenues are principally derived from the local service and access revenues received through the operations of its three local exchange companies. Local service revenues are earned by providing customers access to connecting points within the local exchange boundaries and, in certain cases, to other local exchanges through extended area service plans, which eliminates toll service between those local exchanges. Revenues are derived from local service by charging a flat monthly fee. The three local exchange telephone companies receive access revenues for providing intrastate and interstate exchanges services to long distance carriers (inter-exchange carriers or IXC). Access revenues come in several forms: flat rate compensation (i.e. end user fees and dedicated point-to-point facilities) or usage sensitive (i.e. toll-interstate and intrastate). In the case of interstate calls, access revenues are determined according to rules promulgated by the Federal Communications Commission (FCC) and administered by the National Exchange Carrier Association (NECA). Intrastate calls are administered by state regulatory agencies. Access revenues have increased steadily in recent years. The reason for this can be attributed to increased subscribers, calling patterns and technological advances, despite the rate reductions to the IXCs. In addition, the Company also sells and leases customer premises telephone equipment, provides inside wiring services and custom calling features, provides internet access and sells and leases other facilities for private line data transmission (i.e. local area network, virtual private network, and wide area network) and other communications services. Monthly fees for basic and premium services comprise the majority of revenues from the cable television ventures. These revenues are part of nonregulated revenues on the consolidated statement of income. The billing and collecting services for the IXCs are also another revenue source for the Company. This service is provided in lieu of the IXCs directly billing the end user for toll service. The following table reflects the percentage of revenue derived from each category over the past three years: Year Ended December 31 ---------------------------------- 1999 1998 1997 ------- ------- -------- Local Network 23.0% 21.8% 22.4% Network Access 48.4 49.2 50.6 Billing and Collection 3.7 4.9 5.5 Miscellaneous 3.7 3.7 4.0 Nonregulated 21.2 20.4 17.5 ------- ------- ------- Total 100.0% 100.0% 100.0% ======= ======= ======= 7 PART II Item 7. (Continued) 1999 COMPARED TO 1998 Operating revenues increased 12% to $11,757,082. The revenue breakdown by operating group was as follows:
New Ulm Telecom, Inc. and Subsidiaries Year Ended December 31 ------------------------------------------------------------- 1999 1998 1997 --------------- ---------------- ---------------- Local Network $ 2,701,274 $ 2,284,739 $ 2,161,847 Network Access 5,691,393 5,158,435 4,894,243 Billing and Collection 440,700 514,052 531,529 Miscellaneous 435,083 382,942 387,436 Nonregulated 2,488,632 2,138,475 1,691,672 --------------- ---------------- ---------------- Total Operating Revenues $ 11,757,082 $ 10,478,643 $ 9,666,727 =============== ================ ================
Local network revenues increased $416,535 or 18%. The increase was due to an increase in access lines served, which increased 4.6% to 16,686 and a complete year of increased local service rates, which took effect October 1, 1998. Growth in access lines was due to increased development within the Company's service areas. Increased demand for access lines can be attributed to residential and business growth for the communities served in conjunction with the demand for advanced telephone services such as Internet services. Network access revenues increased $532,958 or 10%. The increase can be attributed to increased use of the telephone network by residential and business customers and increased universal service support. Miscellaneous revenues increased $52,141 or 14%. The increase was chiefly due to an increase in directory advertising. Nonregulated revenues increased $350,157 or 16%. Revenue increases in this group were due to increased Internet revenue, voicemail revenue, billed labor revenue and long distance subscribers, which translates into increased minutes of use and revenue. Operating expenses increased 12% or $772,631. The expense breakdown by operating group was as follows:
New Ulm Telecom, Inc. and Subsidiaries Year Ended December 31 ------------------------------------------------------------- 1999 1998 1997 --------------- ---------------- ---------------- Plant Operations $ 1,440,065 $ 1,249,178 $ 1,139,156 Depreciation 1,935,122 1,766,118 1,683,604 Amortization 113,824 113,777 113,776 Customer 600,209 517,340 564,358 General and Administrative 1,670,644 1,357,110 1,211,492 Other Operating Expenses 1,346,748 1,330,458 1,100,414 --------------- ---------------- ---------------- Total Operating Expenses $ 7,106,612 $ 6,333,981 $ 5,812,800 =============== ================ ================
8 PART II Item 7. (Continued) Plant operations increased 15% or $190,887. The increase was due to the maintenance of the increased plant facilities that were necessary to supply our customers' demands for advanced services. Depreciation and amortization increased 9% or $169,004. Additions to property, plant and equipment of $2,800,000 were the reason for this increase. The Company continues to supply the communities it serves with the most current services and products available. This strategy is in line with the Company's vision for the future of communications. Customer expenses increased 16% or $82,869, due largely to the growth in customers served and services offered. General and administrative expenses increased 23% or $313,534 due to the Company's expanding operations. The Company has invested considerable time and money developing a strategic plan for the future. Competition is evident in all parts of the United States and the threat of competition is closely becoming a reality. The Company is preparing itself for this reality as well as continuing to search for investment opportunities to provide our shareholders with the growth they anticipate. In addition, the Company is continuing to market its' products and services in an aggressive manner. Operating income increased 12% or $505,808. Interest income declined $24,037 or 14%. The decline is caused by the lack of investment dollars due to internal financing of capital expenditures. Cellular partnership income increased $35,172 or 3%, due to continuing growth in the number of customers using cellular services. Other investment income declined $132,653. Losses from the Company's investment in a competitive local exchange carrier (CLEC) in northwest Iowa totaled $117,000. The Company anticipated substantial losses during this Company's start-up phase. Income before income taxes increased 8% or $407,779. The Company's effective tax rate of 42.4% is higher than the standard Federal statutory tax rate due primarily to state income taxes. The increases in operating revenues contributed significantly to the $90,203 or 3% increase in net income. The increase in net income reflects the Company's continued revenue growth in excess of the Company's growth in operating expenses. 9 PART II Item 7. (Continued) 1998 COMPARED TO 1997 The Company attained record earnings for the year ended December 31, 1998. Operating revenues and net income surpassed December 31, 1997 totals by $811,916 or 8.4% and $425,965 or 15.1%, respectively. Local network increased $122,892 or 5.7% due to an increase in access lines and an increase in the monthly local service rates October 1, 1998. Network access revenues increased $264,192 or 5.4% due to increased monthly settlements from NECA, continued growth of interstate and intrastate access minutes of use, as well as business customers increased demand for data transport resulting in increased dedicated point to point transmission facilities. Revenues from billing and collection deceased $17,477 or 3.3% as a result of IXCs taking back the billing and collecting function. Nonregulated revenues continued the strong growth pattern established during the past few years, resulting in an increase of $446,803 or 26.4%. Sales of customer premises telephone equipment and continued double-digit growth in internet access were the major contributors to this sizable growth. The Company's long distance service has shown considerable growth during the past year, which enhances revenues in other areas of the Company, for example, access revenues and billing and collection. Operating expenses increased by $511,415 or 8.8%. Plant operations increased by $110,022 or 9.7% due to higher maintenance expenses on telephone plant. Depreciation increased by $82,514 or 4.9%, which is directly related to an increase in property, plant and equipment. General and administrative expenses increased $145,618 or 12.0% due to the Company's continued search for acquisition opportunities and other investments to increase shareholder value and dividends. Other operating expenses increased by $220,278 or 20.0%, which can be directly related to the nonregulated revenue growth. The areas most effected are cost of goods sold related to customer premises telephone equipment and increased facility upgrades and customer service devoted to high quality internet access. Operating income increased $300,501 or 7.8%. Other income and expenses increased $285,255 or 30.5%. Interest expense decreased $24,479 or 8.9% due to a reduction in long-term debt. Interest income increased $19,945 or 13.2% reflecting an increase in cash available for investments. Cellular investment income increased $240,831 or 22.7%, which is due to the Company's equity interest in the increased profits of Midwest Wireless Communications L.L.C. Income before income taxes increased $585,756 or 12.2%. The Company's cellular investment income represents 24.2% of pre-tax income. Income taxes increased $159,791 or 8.1% The increases in operating revenues and other income contributed significantly to the $425,965 or 15.1% increase in net income. The increase in net income reflects the Company's continued revenue growth in excess of the Company's growth in operating expenses. 10 PART II Item 7. (Continued) Regulatory Matters The Telecommunications Act passed by the federal government in February of 1996 will result in significant changes to the telecommunications industry. The FCC is in the process of determining how competition will be introduced by setting standards for wholesale pricing, unbundling local network rates, and interconnection rates. State regulators will also be involved in implementing the transition to a competitive environment, but the exact roles that the FCC and state regulators will play are yet to be determined. The Company follows the accounting practices prescribed by regulatory authorities in accordance with Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). Under SFAS No. 71, regulators may require certain treatment of revenues or expenses that are recoverable through rates in future periods. Changes in regulation and increased competition could impact the applicability of SFAS No. 71 in the future. At this time, the Company believes SFAS No. 71 is applicable. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was to be effective January 1, 2000. SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 137, an amendment of SFAS No. 133, was issued in June of 1999 and defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. Adoption of this standard will have no effect on the Company's results of operation or financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the staff's views regarding generally accepted accounting principles for revenue recognition and deferred costs in the financial statements. The Company does not believe SAB 101 will have a material effect on its financial statements. Year 2000 Conversion In 1999 the Company contracted with Nortel to upgrade its central office switching equipment to Year 2000 compliance. The Company completed installation and testing of the new equipment in November 1999. The Company is not aware of any disruptions of telephone service to its customers due to Year 2000 problems. 11 PART II Item 7. (Continued) Liquidity and Capital Resources The Company's net working capital of $2,222,487 at December 31, 1999 is a decrease of $668,723 from 1998. The Company operates in a capital-intensive industry. The largest contributing factor to the Company's investing activity is additions to property, plant and equipment, which required $5,635,930 over the past three years. Dividends paid to shareholders was the biggest use of funds from the Company's financing activities, which totaled $1,645,832 or $.95 per share, an 11% decrease from the $1.07 paid in 1998 (which included a special dividend of $.25 per share). Excluding the special dividend of $.25 per share the dividend amount paid per share increased $.13 per share or 16%. The Company's primary source of working capital continued to come from its operating activity, which is historically driven by net income and depreciation. The Company's financial strength continues to be supported by its 1999 current ratio (2.10 to 1) and its EBITDA (earnings before interest, taxes, depreciation and amortization) which is a measure of the Company's pre-tax cash flow ($8,058,736). The Company has a line of credit of $1,640,000 with the Rural Telephone Finance Corporation with interest at 1 1/2% over the prime rate, but is also in the process of negotiating a new loan to cover a portion of the planned construction costs discussed in Note 9 to the financial statements. Factors Affecting Future Performance The Company's future results of operation and other forward-looking statements are subject to risks and uncertainties, including, but not limited to, the effects of deregulation in the telecommunications industry as a result of the Telecommunications Act of 1996, and continued Year 2000 compliance. Such forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from such statements and the Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events or the receipt of new information. 12 PART II Item 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors New Ulm Telecom, Inc. New Ulm, Minnesota We have audited the accompanying consolidated balance sheet of New Ulm Telecom, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Ulm Telecom, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ OLSEN THIELEN & CO., LTD. St. Paul, Minnesota February 17, 2000 13 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 ================================================================================
1999 1998 1997 ---------------- --------------- ---------------- OPERATING REVENUES: Local Network $ 2,701,274 $ 2,284,739 $ 2,161,847 Network Access 5,691,393 5,158,435 4,894,243 Billing and Collection 440,700 514,052 531,529 Miscellaneous 435,083 382,942 387,436 Nonregulated 2,488,632 2,138,475 1,691,672 ---------------- --------------- ---------------- Total Operating Revenues 11,757,082 10,478,643 9,666,727 ---------------- --------------- ---------------- OPERATING EXPENSES: Plant Operations 1,440,065 1,249,178 1,139,156 Depreciation 1,935,122 1,766,118 1,683,604 Amortization 113,824 113,777 113,776 Customer Operations 600,209 517,340 564,358 General and Administrative 1,670,644 1,357,110 1,211,492 Other Operating 1,346,748 1,330,458 1,100,414 ---------------- --------------- ---------------- Total Operating Expenses 7,106,612 6,333,981 5,812,800 ---------------- --------------- ---------------- OPERATING INCOME 4,650,470 4,144,662 3,853,927 ---------------- --------------- ---------------- OTHER INCOME (EXPENSES): Interest Expense (226,780) (250,269) (274,748) Interest Income 146,718 170,755 150,810 Cellular Investment Income 1,335,489 1,300,317 1,059,486 Other Investment Income (Expense) (122,887) 9,766 -- ---------------- --------------- ---------------- Other Income (Expenses), Net 1,132,540 1,230,569 935,548 ---------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 5,783,010 5,375,231 4,789,475 INCOME TAXES 2,453,587 2,136,011 1,976,220 ---------------- --------------- ---------------- NET INCOME $ 3,329,423 $ 3,239,220 $ 2,813,255 ================ =============== ================ BASIC NET INCOME PER SHARE $ 1.92 $ 1.87 $ 1.62 ================ =============== ================ DIVIDENDS PER SHARE $ 0.95 $ 1.07 $ .99 ================ =============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 14 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 AND 1998 ================================================================================ ASSETS
1999 1998 ---------------- ---------------- CURRENT ASSETS: Cash $ 1,533,044 $ 2,551,066 Certificates of Deposit 600,000 900,000 Receivables, Net of Allowance for Doubtful Accounts of $33,000 1,457,274 1,322,903 Materials, Supplies and Inventories 557,315 354,027 Prepaid Expenses 88,117 95,435 ---------------- ---------------- Total Current Assets 4,235,750 5,223,431 ---------------- ---------------- INVESTMENTS AND OTHER ASSETS: Excess of Cost Over Net Assets Acquired, Net 3,446,456 3,560,233 Notes Receivable 977,166 783,448 Cellular Investments 5,282,233 4,507,078 Other 688,593 437,466 ---------------- ---------------- Total Investments and Other Assets 10,394,448 9,288,225 ---------------- ---------------- PROPERTY, PLANT AND EQUIPMENT: Telecommunications Plant 28,356,244 26,261,325 Other Property and Equipment 1,779,022 1,568,153 Cable Television Plant 802,899 787,548 ---------------- ---------------- Total 30,938,165 28,617,026 Less Accumulated Depreciation 18,541,294 17,085,234 ---------------- ---------------- Net Property, Plant and Equipment 12,396,871 11,531,792 ---------------- ---------------- TOTAL ASSETS $ 27,027,069 $ 26,043,448 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 15 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 AND 1998 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998 ---------------- ---------------- CURRENT LIABILITIES: Current Portion of Long-Term Debt $ 366,666 $ 366,666 Accounts Payable 1,256,049 1,686,643 Accrued Taxes 58,006 54,514 Other Accrued Liabilities 332,542 224,398 ---------------- ---------------- Total Current Liabilities 2,013,263 2,332,221 ---------------- ---------------- LONG-TERM DEBT 2,933,334 3,300,000 ---------------- ---------------- DEFERRED CREDITS: Income Taxes 1,510,554 1,519,148 Investment Tax Credits 17,336 23,088 ---------------- ---------------- Total Deferred Credits 1,527,890 1,542,236 ---------------- ---------------- COMMITMENTS STOCKHOLDERS' EQUITY: Common Stock - $5.00 Par Value, 6,400,000 Shares Authorized, 1,732,455 Shares Issued and Outstanding 8,662,275 8,662,275 Retained Earnings 11,890,307 10,206,716 ---------------- ---------------- Total Stockholders' Equity 20,552,582 18,868,991 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,027,069 $ 26,043,448 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 16 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 ================================================================================
Common Stock --------------------------------- Retained Shares Amount Earnings ------------ -------------- --------------- BALANCE on December 31, 1996 1,732,455 $ 8,662,275 $ 7,723,098 Net Income 2,813,255 Dividends (1,715,130) ------------ -------------- ---------------- BALANCE on December 31, 1997 1,732,455 8,662,275 8,821,223 Net Income 3,239,220 Dividends (1,853,727) ------------ -------------- ---------------- BALANCE on December 31, 1998 1,732,455 8,662,275 10,206,716 Net Income 3,329,423 Dividends (1,645,832) ------------ -------------- --------------- BALANCE on December 31, 1999 1,732,455 $ 8,662,275 $ 11,890,307 ============ ============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 17 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 ================================================================================
1999 1998 1997 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 3,329,423 $ 3,239,220 $ 2,813,255 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation and Amortization 2,048,946 1,879,895 1,797,380 Cellular Investment Income (1,335,489) (1,300,317) (1,059,486) Distributions from Cellular Investments 560,334 669,733 289,731 (Increase) Decrease in: Receivables (134,371) (389,542) 46,926 Materials, Supplies and Inventories (203,288) 134,743 (130,870) Prepaid Expenses 7,318 (12,520) (1,046) Increase (Decrease) in: Accounts Payable (430,594) 1,064,533 398,368 Accrued Taxes 3,492 (7,684) 4,548 Other Accrued Liabilities 108,144 (50,577) (14,455) Deferred Income Taxes (8,594) 51,661 28,208 Deferred Investment Tax Credits (5,752) (12,007) (18,836) --------------- --------------- --------------- Net Cash Provided By Operating Activities 3,939,569 5,267,138 4,153,723 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to Property, Plant and Equipment, Net (2,800,248) (1,364,249) (1,471,433) Change in Certificates of Deposit 300,000 1,100,000 (100,000) Change in Notes Receivable (193,718) (703,735) (438) Purchase of Cellular Investments -- (328,808) (31,636) Other, Net (251,127) (105,603) (179,572) --------------- --------------- --------------- Net Cash Used In Investing Activities (2,945,093) (1,402,395) (1,783,079) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal Payments of Long-Term Debt (366,666) (366,666) (366,668) Dividends (1,645,832) (1,853,727) (1,715,130) --------------- --------------- --------------- Net Cash Used In Financing Activities (2,012,498) (2,220,393) (2,081,798) --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH (1,018,022) 1,644,350 288,846 CASH at Beginning of Year 2,551,066 906,716 617,870 --------------- --------------- --------------- CASH at End of Year $ 1,533,044 $ 2,551,066 $ 906,716 =============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 18 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company's principal line of business is providing local telephone service and access to long-distance telephone service through its local exchange network. The Company owns and operates three independent telephone companies serving six communities in southern Minnesota, one community in Iowa, and the adjacent rural areas. The Company also has investments in cellular entities and operates four cable television systems. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its five wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. REGULATORY ACCOUNTING The consolidated financial statements have been prepared in conformity with generally accepted accounting principles including certain accounting practices prescribed by regulatory authorities in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION". ACCOUNTING ESTIMATES The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the operating period. Actual results could differ from those estimates. MATERIALS, SUPPLIES AND INVENTORIES Materials, supplies and inventories are recorded at the lower of average cost or market. PROPERTY AND DEPRECIATION Property, plant and equipment are recorded at original cost. Additions, improvements or major renewals are capitalized. When telecommunications assets are sold, retired or otherwise disposed of, the cost plus removal costs less salvage is charged to accumulated depreciation. Any gains or losses on non-telecommunications property and equipment retirements are reflected in the current year operations. Depreciation is computed using the straight-line method based on estimated service or remaining useful lives. The composite depreciation rates on telecommunications equipment for the three years ended December 31, 1999, 1998 and 1997 were 6.7%, 6.6%, and 6.7%. Other property is depreciated over estimated useful lives of three to fifteen years. 19 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS AND OTHER ASSETS The excess of cost over net assets of acquired companies is being amortized equally over 40 years and is shown net of accumulated amortization of $1,104,585 and $990,808 at December 31, 1999 and 1998. Investment in a cellular telephone limited liability company is recorded using the equity method of accounting, which reflects original cost and equity in undistributed earnings and losses, because the Company believes it has the ability to significantly influence the operating and financial policies of this company. Cellular investments in two Iowa RSAs consist of a common stock equity interest of less than 20%. The cost method is used to account for these RSA investments. Long-term investments in other companies that are not intended for resale or are not readily marketable are valued at the lower of cost or net realizable value. NETWORK ACCESS REVENUE Revenues are recognized when earned. Interstate access revenue is based on settlements with the National Exchange Carrier Association. Interstate access settlements are based on cost studies for New Ulm Telecom, Inc. and by nationwide average cost schedules for two of its subsidiaries, Western Telephone Company and Peoples Telephone Company. Access revenues for New Ulm Telecom, Inc. include estimates which management believes are reasonable, pending finalization of cost studies. Local network and intrastate access revenues are based on tariffs filed with the state regulatory commissions. INCOME TAXES AND INVESTMENT TAX CREDITS The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The major temporary difference that resulted in the net deferred tax liability is depreciation, which for tax purposes is determined based on accelerated methods and shorter lives. For financial statement purposes, deferred investment tax credits are being amortized as a reduction of the provision for income taxes over the estimated useful lives of the related property, plant and equipment. CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, certificates of deposit and receivables. The Company places its cash investments with high credit quality financial institutions in accounts which, at times, may exceed the federally insured limits. The Company has not experienced any losses in these accounts and does not believe it is exposed to any significant credit risk. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers. 20 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIC NET INCOME PER COMMON SHARE Basic net income per common share is based on the weighted average number of shares outstanding of 1,732,455 shares during each of the three years presented. SEGMENT INFORMATION The Company has one reportable industry segment, telecommunications. No single customer accounted for more than 10% of consolidated revenues. NOTE 2 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: CERTIFICATES OF DEPOSIT: The carrying amount approximates fair value because of the short maturity of those instruments. LONG-TERM INVESTMENTS: It was not practicable to estimate a fair value for common stock investments in companies carried on the cost basis due to a lack of quoted market prices. The Company believes the original cost is not impaired at December 31, 1999. LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated based on the discounted value of the future cash flows expected to be paid using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value. NOTE 3 - CELLULAR INVESTMENTS Cellular investments include an 8.45% and 7.90% ownership in Midwest Wireless Communications L.L.C. at December 31, 1999 and 1998. This entity provides cellular phone service to southern Minnesota. The difference between the carrying amount of this equity method investment and the underlying equity in its net assets is $1,913,602 as of December 31, 1999, net of accumulated amortization of $58,863. This amount is being expensed equally over 40 years. Amortization expense of $19,621 was included in cellular investment income in 1999 and 1998. 21 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 3 - CELLULAR INVESTMENTS (CONTINUED) Cellular investments consist of the following:
1999 1998 ---------------- --------------- Midwest Wireless Communications L.L.C.: Cost Less Accumulated Amortization $ 1,947,824 $ 1,967,445 Cumulative Income 5,063,252 3,708,142 Cumulative Distributions (2,210,930) (1,650,596) ---------------- --------------- 4,800,146 4,024,991 Other Investments, Recorded at Cost 482,087 482,087 ---------------- --------------- Total $ 5,282,233 $ 4,507,078 ================ ===============
The following is summarized financial information as of and for the years ended December 31, 1999 and 1998 and for the period from inception (July 1, 1997) to December 31, 1997 for Midwest Wireless Communications L.L.C.:
1999 1998 1997 --------------- ---------------- ---------------- Current Assets $ 10,073,808 $ 13,299,257 $ 13,622,176 Noncurrent Assets 63,760,822 52,488,557 39,729,609 Current Liabilities 10,136,761 11,783,859 8,403,886 Noncurrent Liabilities 29,491,724 16,165,583 15,344,657 Members' Equity 34,206,145 37,838,372 29,603,242 Revenues 57,332,457 49,119,033 40,284,059 Expenses 41,370,433 32,147,085 26,660,623 Net Income 15,962,024 16,971,948 13,623,436
NOTE 4 - RETIREMENT PLAN The Company's total contribution to its 401(k) employee savings plan was $111,682 in 1999, $85,877 in 1998 and $93,302 in 1997. NOTE 5 - LINE OF CREDIT The Company has a revolving short-term line of credit of $1,640,000 at 1 1/2% over the bank prime rate with the Rural Telephone Finance Cooperative. No amounts were outstanding at December 31, 1999 and 1998 under this line of credit. 22 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 6 - LONG-TERM DEBT Long-term debt is as follows:
1999 1998 -------------- -------------- Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $65,000 plus 6.45% interest through December 1, 2008. $ 2,340,000 $ 2,600,000 Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $18,333 plus 6.45% interest through December 1, 2008. The payment of this note is guaranteed by New Ulm Telecom, Inc. 660,000 733,333 Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $8,333 plus 6.45% interest through December 1, 2008. The payment of this note is guaranteed by New Ulm Telecom, Inc. 300,000 333,333 -------------- -------------- Total 3,300,000 3,666,666 Less Amount Due Within One Year 366,666 366,666 -------------- -------------- Long-Term Debt $ 2,933,334 $ 3,300,000 ============== ==============
Principal payments required during the next five years are $366,666 annually. Cash payments for interest were $228,599 in 1999, $252,240 in 1998, and $276,718 in 1997. The debt agreements contain covenants relating to maintenance of working capital, additional borrowings, leases, and payment of cash dividends. At December 31, 1999, approximately $790,000 of consolidated retained earnings were available for dividends under these covenants. NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS Income tax expense consists of the following:
1999 1998 1997 -------------- -------------- -------------- Taxes Currently Payable: Federal $ 1,884,829 $ 1,583,343 $ 1,478,402 State 583,104 513,014 488,446 Deferred Income Taxes (8,594) 51,661 28,208 Amortization of Investment Tax Credits (5,752) (12,007) (18,836) -------------- -------------- -------------- Income Tax Expense $ 2,453,587 $ 2,136,011 $ 1,976,220 ============== ============== ==============
23 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS (CONTINUED) The differences between the statutory federal tax rate and the effective tax rate were as follows:
1999 1998 1997 ------------- ------------- ------------- Statutory Tax Rate 35.0% 35.0% 35.0% Effect of: Surtax Exemption (1.0) (1.0) (1.0) State Income Taxes, Net of Federal Tax Benefit 6.7 6.4 6.7 Amortization of Investment Tax Credits (.1) (.2) (.4) Non-Deductible Expenses 2.1 2.3 2.5 Prior Year Tax Adjustment (.3) (2.8) (1.5) -------- -------- --------- Effective Tax Rate 42.4% 39.7% 41.3% ======== ======== =========
The components of deferred income taxes are as follows:
1999 1998 -------------- -------------- Deferred Tax Liabilities: Depreciation $ 1,380,836 $ 1,423,489 Other 129,718 95,659 -------------- -------------- Total $ 1,510,554 $ 1,519,148 ============== ==============
Cash payments for income taxes were $2,471,000 in 1999, $2,231,500 in 1998, and $1,942,500 in 1997 NOTE 8 - RELATED PARTY TRANSACTIONS Notes receivable include $700,000 from an officer. The note is secured by New Ulm Telecom, Inc. common stock and has a variable interest rate. The interest rate at December 31, 1999 was 5.2%. The note is to be paid in full on January 1, 2001. NOTE 9 - COMMITMENTS The Company's capital budget for 2000 is approximately $7,700,000. As of December 31, 1999 the Company has purchase commitments for equipment totaling $2,250,000. 24 PART II Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions The information for Part III, Items 10, 11, 12, and 13, are hereby incorporated by reference to the Company's Proxy Statement, which will be filed with the Commission within 120 days after the close of the fiscal year ending December 31, 1999. 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)1. Financial Statements Included in Part II of this report:
Page Numbers ------------ Independent Auditors' Report 13 Consolidated Statement of Income for the Three Years Ended December 31, 1999, 1998 and 1997 14 Consolidated Balance Sheet at December 31, 1999 and 1998 15-16 Consolidated Statement of Stockholders' Equity for the Three Years Ended December 31, 1999, 1998 and 1997 17 Consolidated Statement of Cash Flows for the Three Years Ended December 31, 1999, 1998 and 1997 18 Notes to Consolidated Financial Statements 19-24 (a)2. Financial Statement schedules: Separate financial statements of Midwest Wireless Communications L.L.C, a 50 percent or less owned equity method investment, are included as part of this report because this entity constitutes a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-09. 28-42 Other schedules are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.
(a)3. Exhibits Exhibits required to be filed by Item 601 of Regulation S-K are included as Exhibits to this report as follows: 3(i) Restated Articles of Incorporation (incorporated by reference to the New Ulm Telecom, Inc. Form 10-K dated December 31, 1986). 3(ii) Restated By-Laws (incorporated by reference to the New Ulm Telecom, Inc. Form 10-K dated December 31, 1986). 4 The registrant, by signing this Report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument which defines the rights of holders of long-term debt of the registrant and all of its subsidiaries for which consolidated financial statements are required to be filed, and which authorizes a total amount of securities not in excess of 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. 21 Subsidiaries of the Registrant are included as an Exhibit to this report on page 41. 27 Financial data schedule b) Reports on Form 8-K None 26 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEW ULM TELECOM, INC. (Registrant) Date March 30, 2000 By: /s/ Bill Otis --------------------- -------------------------- Bill Otis, President (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Date March 30, 2000 By: /s/ Chris Hopp --------------------- --------------------------------------- Chris Hopp, Treasurer (Principal Financial and Accounting Officer) /s/ James Jensen --------------------------------------- James Jensen, Chairman of the Board /s/ Duane Lambrecht --------------------------------------- Duane Lambrecht, Director /s/ Mark Retzlaff --------------------------------------- Mark Retzlaff, Director /s/ Gary Nelson --------------------------------------- Gary Nelson, Director /s/ Lavern Biebl --------------------------------------- Lavern Biebl, Director /s/ Rosemary Dittrich --------------------------------------- Rosemary Dittrich, Director /s/ Mary Ellen Domeier --------------------------------------- Mary Ellen Domeier, Director /s/ Perry Meyer --------------------------------------- Perry Meyer, Director /s/ Robert Ranweiler --------------------------------------- Robert Ranweiler, Director 27 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS, L.L.C.) REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers Midwest Wireless Communications L.L.C.: In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, changes in members' equity and cash flows present fairly, in all material respects, the financial position of Midwest Wireless Communications L.L.C. (a subsidiary of Midwest Wireless Holdings L.L.C.) (the Company) and subsidiary at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS, LLP February 4, 2000 29 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AT DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998 Current assets: Cash and cash equivalents $ 1,378,350 $ 3,147,979 Restricted cash 1,000,000 Marketable securities -- 3,946,270 Accounts receivable, less allowance for doubtful accounts of $258,120 and $282,287in 1999 and 1998, respectively 4,326,962 4,228,358 Due from Parent 321,218 -- Inventories 2,519,796 1,624,026 Other 527,482 352,624 ---------------- ---------------- Total current assets 10,073,808 13,299,257 Property, cellular plant and equipment, net 43,997,663 34,078,742 FCC licenses, net 16,514,927 16,736,528 Investments in cooperatives 2,201,408 1,548,287 Deferred acquisition costs 1,046,824 125,000 ---------------- ---------------- Total assets $ 73,834,630 $ 65,787,814 ================ ================ LIABILITIES AND MEMBERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,426,350 $ 1,279,048 Accounts payable 3,029,225 6,212,502 Accrued commissions 818,592 615,757 Accrued liabilities 3,862,594 3,676,552 ---------------- ---------------- Total current liabilities 10,136,761 11,783,859 Other liabilities 1,156,949 517,491 Revolving loan 2,000,000 -- Long-term debt 26,334,775 15,648,092 ---------------- ---------------- Total liabilities 39,628,485 27,949,442 Commitments Members' equity 34,206,145 37,838,372 ---------------- ---------------- Total liabilities and members' equity $ 73,834,630 $ 65,787,814 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 30 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 Operating revenues: Retail service $ 40,009,007 $ 33,403,860 Roamer service 11,671,572 12,393,902 Equipment sales 5,651,878 3,321,271 ---------------- ---------------- 57,332,457 49,119,033 ---------------- ---------------- Operating expenses: Operations and maintenance 10,636,197 10,054,893 Cost of equipment sold 5,683,363 3,897,151 Depreciation 7,528,105 4,707,905 Amortization 494,381 481,392 Selling, general and administrative 14,314,802 11,024,317 Home roamer costs 1,699,261 1,353,930 ---------------- ---------------- 40,356,109 31,519,588 ---------------- ---------------- Operating income 16,976,348 17,599,445 ---------------- ---------------- Other income (expense): Equity loss on Switch 2000 -- (710,330) Interest expense (1,291,817) (890,930) Interest and dividend income 230,760 711,388 Other 46,733 262,375 ---------------- ---------------- (1,014,324) (627,497) ---------------- ---------------- Net income $ 15,962,024 $ 16,971,948 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 31 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
TOTAL CAPITAL ACCUMULATED MEMBERS' CONTRIBUTIONS INCOME EQUITY Balance, December 31, 1997 $ 15,748,194 $ 13,855,048 $ 29,603,242 Redemption of units (11,416) (119,438) (130,854) Distributions to members -- (8,605,964) (8,605,964) Net income -- 16,971,948 16,971,948 ---------------- ----------------- ----------------- Balance, December 31, 1998 15,736,778 22,101,594 37,838,372 Redemption of units (1,012,261) (11,751,826) (12,764,087) Distributions to members -- (6,830,164) (6,830,164) Net income -- 15,962,024 15,962,024 ---------------- ----------------- ----------------- Balance, December 31, 1999 $ 14,724,517 $ 19,481,628 $ 34,206,145 ================ ================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 32 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 Cash flows from operating activities: Net income $ 15,962,024 $ 16,971,948 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debts 58,775 266,901 Management fee to Parent 396,033 Depreciation 7,582,105 4,707,905 Amortization 494,381 481,392 Loss on disposal of equipment 390,567 Equity loss on investment in Switch 2000 710,330 Appreciation rights 639,458 322,244 Accretion of discount on marketable securities (124,204) (210,403) Changes in assets and liabilities: Accounts receivable (157,379) 53,732 Due from Parent (717,251) Inventories (895,770) (853,409) Accounts payable (4,479,112) (994,241) Accrued liabilities 388,877 761,884 Other (174,858) (25,207) ---------------- ----------------- Net cash provided by operating activities 19,363,646 22,193,076 ---------------- ----------------- Cash flows from investing activities: Payments for property, cellular plant and equipment (16,581,238) (11,514,175) Purchases of marketable securities (6,679,526) (12,794,926) Proceeds received upon maturity of marketable securities 10,750,000 14,970,930 Purchase of Switch 2000 interests (383,330) Purchase of FCC licenses (287,300) (385,696) Purchases of cooperative stock (653,121) (1,150,092) Payments for deferred acquisition costs (921,824) (125,000) Restriction of cash (1,000,000) -- ---------------- ----------------- Net cash used in investing activities (15,373,009) (11,382,289) ---------------- ----------------- Cash flows from financing activities: Proceeds on revolving loan 2,000,000 Proceeds on long-term debt borrowings 13,368,420 16,372,239 Payments on long-term debt (1,534,435) (17,361,509) Distributions to members (6,830,164) (8,605,964) Redemption of units (12,764,087) (130,854) ---------------- ----------------- Net cash used in financing activities (5,760,266) (9,726,088) ---------------- ----------------- Net change in cash and cash equivalents (1,769,629) 1,084,699 Cash and cash equivalents, beginning of year 3,147,979 2,063,280 ---------------- ----------------- Cash and cash equivalents, end of year $ 1,378,350 $ 3,147,979 ================ ================= Supplemental disclosure: Cash paid during the year for interest $ 1,156,323 $ 1,015,834 ================ =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 33 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF CONSOLIDATION: Midwest Wireless Communications L.L.C. (the Company) is a Delaware limited liability company organized to provide cellular communications services in certain service areas within the State of Minnesota. The latest date the Company may be dissolved is December 31, 2034. On November 29, 1999, certain members which held an 86% interest in the Company exchanged their interests for a 100% interest in Midwest Wireless Holdings L.L.C. (the Parent). CONSOLIDATION: The consolidated financial statements of the Company include its subsidiary, Switch 2000 L.L.C. (Switch 2000) as of December 31, 1999, and from the date of acquisition (October 1, 1998) to December 31, 1998 (see Note 2). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION: Service revenue consists of the base monthly service fee and airtime revenue. Base monthly service fees are billed one month in advance and are recognized in the month earned. Airtime and roamer revenue is recognized when the service is provided. The Company recognizes other service revenues from equipment installations, equipment sales and connection fees when earned. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK: The Company provides cellular service and cellular telephones to a diversified group of consumers within a concentrated geographical area. The Company performs credit evaluations of its customers and requires a deposit when deemed necessary. Receivables are generally due within 30 days. Credit losses related to customers have been within management's expectations. 34 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: CASH AND CASH EQUIVALENTS: For the purpose of the statements of cash flows, the Company considers all investments purchased with original maturities of three months or less to be cash equivalents. MARKETABLE SECURITIES: Marketable securities which the Company has the positive intent and ability to hold to maturity are stated at cost adjusted for the accretion of discounts computed under a method which approximates the interest method. The market value approximated amortized cost at December 31, 1998. Unrealized gains and losses were not significant. CELLULAR TELEPHONE INVENTORIES: Inventories consist primarily of cellular phones and accessories held for resale with cost determined using the specific identification method. Consistent with industry practice, losses on sales of cellular phones are recognized in the period in which sales are made as a cost of acquiring subscribers. PROPERTY, CELLULAR PLANT AND EQUIPMENT: Property, cellular plant and equipment is stated at its original cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the cellular plant and equipment, which range from one to fifteen years. Major renewals or betterments are capitalized, while repair and maintenance expenditures are charged to operations as incurred. The cost and accumulated depreciation of property, cellular plant and equipment disposed of or sold are eliminated from their respective accounts, and the resulting gain or loss is recorded in operations. INCOME TAXES: No provision for income taxes has been recorded since all income, losses and tax credits are allocated to the members for inclusion in their respective income tax returns. ADVERTISING: Advertising costs are expensed as incurred. Total advertising expenses were $1,754,394 and $1,412,628 for the years ended December 31, 1999 and 1998, respectively. FEDERAL COMMUNICATIONS COMMISSION (FCC) LICENSES: FCC licenses are recorded at fair market value and are amortized on a straight-line basis over lives ranging from 10 to 39 years. 35 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SELECT ACCOUNT INFORMATION: RESTRICTED CASH: At June 29, 1999, the Company signed a letter of intent to acquire certain cellular properties. In connection with the pending acquisition, the Company deposited $1,000,000 into an escrow account. Currently, other subsidiaries of the Company's Parent are expected to complete the acquisitions in the first quarter of 2000. Upon closing of the acquisition or in the event that the acquisition fails to occur on or before June 30, 2000, the restricted funds will be released to the Company. If the Company materially breaches the acquisition agreement, the restricted cash will be released to the seller. DEFERRED ACQUISITION COSTS: During 1999, the Company paid certain external deferred acquisition costs of $1,046,824 on behalf of the Parent in connection with the pending acquisition of certain cellular properties. Upon closing of the acquisitions, these costs will be allocated to the Parent and the Company will record a receivable due from the Parent. PROPERTY, CELLULAR PLANT AND EQUIPMENT: 1999 1998 Land $ 1,696,989 $ 1,442,308 Plant in service 56,271,401 49,641,677 Plant under construction 8,453,176 3,112,679 ---------------- ---------------- 66,421,566 54,196,664 Less accumulated deprecation (22,423,903) (20,117,922) ---------------- ---------------- $ 43,997,663 $ 34,078,742 ================ ================ At December 31, 1999 and 1998, accounts payable includes $1,295,835 and $5,100,282, respectively, related to the purchase of property, cellular plant and equipment. The Company capitalized interest in the amount of $243,973 and $248,377 for the years ended December 31, 1999 and 1998, respectively. 36 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SELECT ACCOUNT INFORMATION, CONTINUED: FCC LICENSES: 1999 1998 Cellular license $ 17,505,700 $ 17,505,700 LMDS licenses 357,696 357,696 PCS licenses 287,300 Other 28,000 ---------------- --------------- 18,150,696 17,891,396 Less accumulated amortization (1,635,769) (1,154,868) ---------------- --------------- $ 16,514,927 $ 16,736,528 ================ =============== 3. INVESTMENT IN SWITCH 2000: Switch 2000 provided switching and interconnection services to the Company through December 31, 1998. During the period January 1, 1998, through September 30, 1998, the Company had ownership and voting interests in Switch 2000 of 45.55%. Accordingly, during this period, this investment was accounted for using the equity method of accounting. During September and October of 1998, the Company gained 100% ownership interest in Switch 2000 by acquiring the remaining equity interest in Switch 2000 for a purchase price of $383,330 in cash and equipment with a fair market value of $700,277. The acquisition was accounted for under the purchase method of accounting; accordingly, the assets and liabilities of Switch 2000, principally cellular plant and equipment, were recorded at fair value. The cellular plant and equipment acquired is being depreciated over a period of two years. Effective June 30, 1997, Switch 2000 and the Company entered into a Management Agreement which expired on December 31, 1997. The Company continued to provide management services to Switch 2000 through September 30, 1998. Under the terms of the Management Agreement, Switch 2000 retained the services of the Company to manage the operations of Switch 2000, including administration of transport and switching services and other general business operations. Switch 2000 was required to pay a management fee equal to the total costs incurred by the Company related to the management of Switch 2000. Total management fees paid to the Company during 1998 were $196,000. Switch 2000, in turn, allocated management fees and certain other expenses, primarily network costs, to its owners, which included the Company. Amounts billed to the Company totaled approximately $1,802,000 for the period from January 1, 1998, to September 30, 1998. 37 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. MEMBERS' CAPITAL: Members' capital includes capital contributions made by the members and the accumulated income resulting from operations. Company income or loss is allocated to the individual members based upon their ownership percentage, as defined in the Limited Liability Company Agreement (the Agreement). Pursuant to the Agreement, members are not obligated for the debts and obligations of the Company, including accumulated losses in excess of capital contributions. Under the Agreement, no member may transfer or sell any units unless the board of managers approves the terms of such transfer or sale. Upon receipt of a bona fide offer in writing from a third party, the other members and then the Company have the right to purchase all, but not less than all, of the units at the bona fide offer price within a specified time frame. The Agreement also contains the right of co-sale under which no member may transfer its units to an acquiring person, as defined in the Agreement, who after such transfer would be an acquiring person without assuring that each of the other members may participate in the transfer of units under the same terms and conditions. The right of co-sale would terminate in the event the Company completes a sale of securities pursuant to a securities act or if the Company's market capitalization would exceed $200,000,000. Each member is entitled to one vote for each unit owned. Certain restrictions on voting rights exist when units are sold to an acquiring person. 5. DEBT: Effective July 29, 1998, the Company entered into an agreement (the Agreement) with the Rural Telephone Finance Cooperative (the Cooperative) to refinance the indebtedness of the Company. Proceeds in the amount of $16,372,239 received under the Agreement were used to pay the entire outstanding principal balance on the previous debt. The Agreement includes a term note with principal and interest payable in quarterly installments beginning October 31, 1998, with final maturity in 2008. The Agreement provides the Company the option to fix the interest rate on borrowings (or portions thereof) through the maturity date. The variable rate is based on the Cooperative's cost of capital and is adjusted monthly. At December 31, 1999, the Company had borrowings of $7,476,259 outstanding that accrue interest at a variable rate and $8,171,831 outstanding but accrue interest at a fixed rate of 5.75%. The variable rate was 6.95% at December 31, 1999. 38 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. DEBT, CONTINUED: In addition, the Agreement provides for an acquisition note of up to $36,842,105. Advances under the acquisition note are subject to the Cooperative's review and of the Company's acquisition plan and any regulatory approval required to accomplish the contemplated acquisition. Borrowings under the acquisition note are subject to the same interest rate terms as the term note. The acquisition note becomes due ten years after the date of the initial borrowing, at which time the outstanding principal and interest are due. At December 31, 1999, $13,113,035 was outstanding under the acquisition note at the variable rate of 6.95%. The Agreement was also provides for a revolving loan of up to $10,000,000. Borrowings under the revolving loan bear interest at the prime rate plus one and one-half percent. The revolving loan expires on July 29, 2003, at which time the outstanding principal and interest are due. At December 31, 1999 and 1998, there were $2,000,000 of outstanding borrowings under the revolving loan. The prime rate was 8.5% at December 31, 1999. The Agreement requires the Company to maintain an investment in the Cooperative in the amount of at least 5% of the outstanding debt balance. The Agreement also contains covenants that restrict distributions to members and require the Company to maintain a debt coverage service ratio of not less than 1.25. Substantially all assets of the Company are pledged as collateral under the Agreement. Maturities of long-term debt are as follows: 2000 $ 2,426,350 2001 2,583,994 2002 2,571,912 2003 5,110,777 2004 3,121,304 Thereafter 14,946,788 --------------- $ 30,761,125 =============== 6. COMMITMENTS: Future minimum rental payments required under operating leases, principally for real estate related to tower sites, and other contractual commitments that have initial or remaining noncancellable terms in excess of one year as of December 31, 1999, are as follows: 2000 $ 622,932 2001 368,874 2002 275,101 2003 172,839 2004 140,943 Thereafter 1,566,101 --------------- $ 3,146,790 =============== Rental expense was $666,765 and $433,550 for the years ended December 31, 1999 and 1998, respectively. 39 MIDWEST WIRELESS COMMUNICATIONS L.L.C. (A SUBSIDIARY OF MIDWEST WIRELESS HOLDINGS L.L.C.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. CELL SITE SHARING AGREEMENTS: The Company is subject to an agreement with a partnership located in Wisconsin, to jointly operate common cellular base station facilities (Cell Sites) in Nelson and Fountain City, Wisconsin and Red Wing, Minnesota. Under the agreement, both parties agreed to share: the costs to construct the Cell Sites, selected ongoing costs of operation, and roamer revenues attributable to the Cell Sites. The Company has included its proportionate share of the assets, liabilities, revenues and expenses of the Cell Sites in its financial statements. As of December 31, 1999 and 1998, these assets were approximately $1,161,000 and $769,000 and liabilities were approximately $0 and $800, respectively. For the years ended December 31, 1999 and 1998, revenues were approximately $557,000 and $573,000 and operating expenses were approximately $78,000 and $275,000, respectively. 8. DUE FROM PARENT: During 1999, the Company entered into a services agreement with its Parent. Under the terms of the Agreement, the Parent provides certain services to the Company including consulting, constructing cell sites, switching and billing services. During the year ended December 31, 1999, the Company was charged $396,033 for these services. In addition, the Company advanced $717,251 to the Parent for initial funding of the Parent's operations. The net $321,218 is reflected as due from the Parent on the statement of financial position as of December 31, 1999. 9. EMPLOYEE BENEFITS: The Company established the Midwest Wireless Communications L.L.C. 401(k) Profit Sharing Plan and Trust (the 401(k) Plan) for all employees who meet certain service and age requirements. The 401(k) Plan is comprised of an employer matching contribution component and a profit sharing component. Employer matching contributions to this component of the plan were $185,909 and $128,219 for the years ended December 31, 1999 and 1998, respectively. Profit sharing contributions are 100% vested after five years of employment. Profit sharing contribution expenses were $210,606 and $155,286 for the years ended December 31, 1999 and 1998, respectively. Effective January 1, 1997, the Company established the Midwest Wireless Communications L.L.C. Appreciation Rights Plan (the Plan) for certain key employees. The Plan is designed to create two classes of appreciation rights, Class A and Class B, which become fully vested three years and five years after the first day of the year the rights are granted, respectively. Participants in the Plan are eligible to receive awards based on the change in members' equity from the date of grant through the end of the vesting period. The Board of Managers granted both Class A and Class B appreciation rights in 1997. Under the terms of the Plan, no additional Class B appreciation rights will be granted, and additional Class A appreciation rights will be granted at the discretion of the Board of Managers. The Company recognized $639,458 and $322,244 in compensation expense related to the Plan for the years ended December 31, 1999 and 1998, respectively. 40 EX-21 2 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT (1) Western Telephone Company 100% - Owned Subsidiary Incorporated in the State of Minnesota (2) Peoples Telephone Company 100% - Owned Subsidiary Incorporated in the State of Iowa (3) New Ulm Phonery, Inc. 100% - Owned Subsidiary Incorporated in the State of Minnesota (4) New Ulm Cellular #9, Inc. 100% - Owned Subsidiary Incorporated in the State of Minnesota (5) New Ulm Long Distance, Inc. 100% - Owned Subsidiary Incorporated in the State of Minnesota The financial statements of all such subsidiaries are included on the consolidated financial statements of New Ulm Telecom, Inc. 41 EX-27 3 ARTICLE 5 - FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW ULM TELECOM, INC.'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1999 DEC-31-1999 2,133,044 0 1,457,274 33,000 557,315 4,235,750 30,938,165 18,541,294 27,027,069 2,013,263 2,933,334 8,662,275 0 0 11,890,307 27,027,069 0 11,757,082 0 7,106,612 0 0 226,780 5,783,010 2,453,587 3,329,423 0 0 0 3,329,423 1.92 1.92
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