-----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, IJJxV5/cbIY/P215G54Xy+joF98FEiIKUp//VMtwbQ+J4Klgox+NjxTMnUjo2W8I Du+xXHeFU8RaLgf88MPFPw== 0000897101-01-500097.txt : 20010409 0000897101-01-500097.hdr.sgml : 20010409 ACCESSION NUMBER: 0000897101-01-500097 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 1591317 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 newulm010569-10k.txt NEW ULM TELECOM, INC. FORM 10-K 12-31-2000 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, 2000 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. 1,721,020 Shares Outstanding at February 28, 2001 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, 2000, the Company served 17,035 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 competitive 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 370 customers. Western Telephone Company operates three cable television systems in Minnesota (cities of Sanborn, Jeffers and Wabasso) serving approximately 390 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 companies' operations. New Ulm Phonery, Inc. also provides electronic voice mail, video conferencing and internet services. The cellular company derives a majority of 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, with the exception of competitive video services in New Ulm, Minnesota beginning January 1, 2001. 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 bypassed 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, 2000, the total full time employees of the Registrant and its subsidiaries was 62. New Ulm Telecom, Inc. employed 55 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 three locations; two in New Ulm and one 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 land located north/northwest of the city of New Ulm along Highway 14 in Nicollet County. This land will be used for a tower sight. (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, 2000, there were approximately 1,209 holders of record of the Company's common stock. Dividends Dividends were declared quarterly in 2000, 1999 and 1998. In addition to the quarterly dividends, a special dividend was declared in 1998. Dividends were $1.00 in 2000, $.95 in 1999 and $1.07 per share in 1998 (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 ---------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------- ---------------- ---------------- ---------------- ---------------- Operating Revenues $ 12,822,162 $ 11,757,082 $ 10,478,643 $ 9,666,727 $ 9,346,224 Operating Expenses 8,482,594 7,106,612 6,333,981 5,812,800 5,631,181 Operating Income 4,339,568 4,650,470 4,144,662 3,853,927 3,715,043 Other Income (Expenses) 829,696 1,132,540 1,230,569 935,548 275,016 Income Taxes 2,206,137 2,453,587 2,136,011 1,976,220 1,586,544 Net Income 2,963,127 3,329,423 3,239,220 2,813,255 2,403,515 Basic Net Income Per Share 1.71 1.92 1.87 1.62 1.39 Dividends Per Share 1.00 .95 1.07 .99 .65 Selected Balance Sheet Data: Year Ended December 31 ---------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------- ---------------- --------------- ---------------- ---------------- Current Assets $ 4,182,561 $ 4,235,750 $ 5,223,431 $ 4,411,510 $ 3,938,975 Current Liabilities 2,708,359 2,013,263 2,332,221 1,325,949 937,488 Working Capital 1,474,202 2,222,487 2,891,210 3,085,561 3,001,487 Total Assets 34,958,288 27,027,069 26,043,448 23,978,695 22,849,405 Long-Term Debt 9,857,333 3,300,000 3,666,666 4,033,332 4,400,000 Stockholders' Equity 21,766,504 20,552,582 18,868,991 17,483,498 16,385,373 Book Value Per Share 12.57 11.86 10.89 10.09 9.46
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 17,000 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 limited liability company in northwest Iowa, and two RSAs (rural service areas) in northwestern 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 IXCs). 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 --------------------------------- 2000 1999 1998 ------- ------- ------- Local Network 22.1% 23.0% 21.8% Network Access 48.0 48.4 49.2 Billing and Collection 3.4 3.7 4.9 Miscellaneous 3.3 3.7 3.7 Nonregulated 23.2 21.2 20.4 ------- ------- ------- Total 100.0% 100.0% 100.0% ======= ======= ======= 7 PART II Item 7. (Continued) 2000 COMPARED TO 1999 --------------------- Operating revenues increased 9.1% to $12,822,162. The revenue breakdown by operating group was as follows:
New Ulm Telecom, Inc. and Subsidiaries Year Ended December 31 ------------------------------------------------------------- 2000 1999 1998 --------------- ---------------- ---------------- Local Network $ 2,827,646 $ 2,701,274 $ 2,284,739 Network Access 6,156,479 5,691,393 5,158,435 Billing and Collection 442,574 440,700 514,052 Miscellaneous 422,283 435,083 382,942 Nonregulated 2,973,180 2,488,632 2,138,475 --------------- ---------------- ---------------- Total Operating Revenues $ 12,822,162 $ 11,757,082 $ 10,478,643 =============== ================ ================
Local network revenues increased $126,372 or 4.7%. The increase was due to an increase in access lines served, which increased 2.1% to 17,021. 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, most notably in the broadband services. Network access revenues increased $465,086 or 8.2%. The increase can be attributed to increased use of the telephone network by residential and business customers and increased universal service support. In addition, the Company is investing heavily in a broadband infrastructure in New Ulm, Minnesota to bring broadband services to the community. The approximately $8 million invested to date has positively impacted the cost settlement basis of the Company. Nonregulated revenues increased $484,548 or 19.5%. This increase was fueled by the demand for internet services, call management services, and the continued demand of technical communication solutions for residential and business customers. The Company was able to capture the demand due to increased marketing efforts, customer surveys, focus groups, and a calling program, which focuses on a one-to-one relationship with customers. The Company is determining satisfaction levels, interest in additional products and services, and upselling to customers through this program. Operating expenses increased 19.4% or $1,375,982. The expense breakdown by operating group was as follows:
New Ulm Telecom, Inc. and Subsidiaries Year Ended December 31 ------------------------------------------------------------- 2000 1999 1998 --------------- ---------------- ---------------- Plant Operations $ 1,743,268 $ 1,440,065 $ 1,249,178 Depreciation 2,190,427 1,935,122 1,766,118 Amortization 113,824 113,824 113,777 Customer 853,705 600,209 517,340 General and Administrative 1,746,414 1,670,644 1,357,110 Other Operating Expenses 1,834,956 1,346,748 1,330,458 --------------- ---------------- ---------------- Total Operating Expenses $ 8,482,594 $ 7,106,612 $ 6,333,981 =============== ================ ================
8 PART II Item 7. (Continued) Plant operations increased 21.1% or $303,203. 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 12.5% or $255,305. Additions to property, plant and equipment of approximately $9,550,000 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 and responding to the needs of our subscribers. In addition, the Company believes they are proactively supplying customers with solutions to their communication needs. Customer expenses increased 42.2% or $253,496, due largely to the growth in customers served and services offered. This increase reflects the Company's commitment to the objective of achieving 100% customer satisfaction by making the customer our top priority, deserving our best service, attitude and consideration. To realize this objective, the Company has implemented marketing programs, customer surveys, focus groups, a calling program to enhance customer relations, and specialized training for customer service personnel. General and administrative expenses increased 4.5% or $75,770 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 decreased 6.7% or $310,902. The Company has placed considerable emphasis on customer service and the commitment to offering broadband services. The Company is positioning itself to be the communications provider of choice in all of the communities it serves. This commitment was realized through additional staffing in the customer support and technical areas, adding broadband infrastructure and a considerable investment in education. The Company's goals are to create an environment of knowledgeable personnel that are capable of solving all of the customers' communications needs and desires at all levels of the organization. This commitment will be realized in an environment that recognizes and expects the employees to achieve excellence in all facets of their jobs, encourages innovations and empowers employees to make the right decisions. Interest expense increased $191,263 or 84.3% as a result of a new loan for significant capital expenditures. Interest expense totaling $160,771 was capitalized in 2000 in conjunction with these expenditures. Cellular partnership income decreased $353,821 or 26.5%, due to the startup costs associated with the addition of Iowa and Wisconsin RSA's purchased in the first quarter of 2000. Other investment income increased $111,091; losses from the Company's investment in a competitive local exchange carrier (CLEC) in northwestern Iowa totaled $1,072 compared to $117,004 for 1999. The Company anticipated substantial losses during this CLEC's start-up phase and is extremely pleased with the progress it has seen in 2000. Income before income taxes decreased 10.6% or $613,746. The Company's effective tax rate of 42.7% is higher than the standard Federal statutory tax rate due primarily to state income taxes. The increases in operating expenses, which the Company had anticipated, contributed significantly to the $366,296 or 11.0% decrease in net income. 9 PART II Item 7. (Continued) 1999 COMPARED TO 1998 --------------------- The Company attained record earnings for the year ended December 31, 1999. Operating revenues and net income surpassed December 31, 1998 totals by $1,278,439 or 12.2% and $90,203 or 2.8%, respectively. Local network increased $416,535 or 18.2% due to an increase in access lines and an increase in the monthly local service rates October 1, 1998. Network access revenues increased $532,958 or 10.3% 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 $73,352 or 14.3% 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 $350,157 or 16.4%. 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 $772,631 or 12.2%. Plant operations increased by $190,887 or 15.3% due to higher maintenance expenses on telephone plant. Depreciation increased by $169,004 or 9.6%, which is directly related to an increase in property, plant and equipment. General and administrative expenses increased $313,534 or 23.1% due to the Company's continued search for acquisition opportunities and other investments to increase shareholder value and dividends. Other operating expenses increased by $16,290 or 1.2%, 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 $505,808 or 12.2%. Other income and expenses decreased $98,029 or 8.0%. Interest expense decreased $23,489 or 9.4% due to a reduction in long-term debt. Interest income increased $24,037 or 14.1% reflecting an increase in cash available for investments. Cellular investment income increased $35,172 or 2.7%, 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 $407,779 or 7.6%. The Company's cellular investment income represents 23.1% of pre-tax income. Income taxes increased $317,576 or 14.9% The increases in operating revenues and other income contributed significantly to the $90,203 or 2.8% 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 is resulting in significant changes to the telecommunications industry. The FCC is in the process of determining how competition will be implemented 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's local exchange telephone companies are subject to the jurisdiction of Minnesota and Iowa with respect to a variety of matters, including rates for intrastate access services, the conditions and quality of service and accounting methods. Rates for local telephone service are not established directly by regulatory authorities, but their authority over other matters limits the Company's ability to implement rate increases. In addition, the regulatory process inherently restricts the Company's ability to immediately pass cost increases along to customers unless the cost increases are anticipated and the rate increases implemented prospectively. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which was to be effective January 1, 2000 but subsequently was deferred to fiscal years beginning after June 15, 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. The Company does not believe adoption of this standard will have an 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", which was effective no later than the fourth quarter of fiscal years beginning after December 15, 1999. SAB 101 summarizes certain of the staff's views regarding generally accepted accounting principles for revenue recognition and deferred costs in the financial statements. SAB 101 did not have a material effect on the Company's financial statements. 11 PART II Item 7. (Continued) Liquidity and Capital Resources The Company's net working capital of $1,474,202 at December 31, 2000 is a decrease of $748,285 from 1999. 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 $13,715,037 over the past three years. Dividends paid to shareholders was the biggest use of funds from the Company's financing activities, which totaled $1,732,455 or $1.00 per share, a 5% increase from the $.95 paid in 1999. The primary source of funds from the Company's financing activities was a long-term loan for $6,924,000 from CoBank, which financed a portion of the $9.5 million of plant additions in 2000 (as of December 31, 2000, unadvanced loan funds of $2,576,000 are available under the terms of this agreement). 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 2000 current ratio (1.54 to 1) and its EBITDA of $7,891,558 (earnings before interest, taxes, depreciation and amortization), which is a measure of the Company's pre-tax cash flow. 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 has an unsecured ten-year reducing revolving credit facility to CoBank 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. 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles. St. Paul, Minnesota February 22, 2001 OLSEN THIELEN & CO., LTD. 13 NEW ULM TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
================================================================================================================= 2000 1999 1998 ---------------- --------------- ---------------- OPERATING REVENUES: Local Network $ 2,827,646 $ 2,701,274 $ 2,284,739 Network Access 6,156,479 5,691,393 5,158,435 Billing and Collection 442,574 440,700 514,052 Miscellaneous 422,283 435,083 382,942 Nonregulated 2,973,180 2,488,632 2,138,475 ---------------- --------------- ---------------- Total Operating Revenues 12,822,162 11,757,082 10,478,643 ---------------- --------------- ---------------- OPERATING EXPENSES: Plant Operations 1,743,268 1,440,065 1,249,178 Depreciation 2,190,427 1,935,122 1,766,118 Amortization 113,824 113,824 113,777 Customer Operations 853,705 600,209 517,340 General and Administrative 1,746,414 1,670,644 1,357,110 Other Operating 1,834,956 1,346,748 1,330,458 ---------------- --------------- ---------------- Total Operating Expenses 8,482,594 7,106,612 6,333,981 ---------------- --------------- ---------------- OPERATING INCOME 4,339,568 4,650,470 4,144,662 ---------------- --------------- ---------------- OTHER INCOME (EXPENSES): Interest Expense (418,043) (226,780) (250,269) Interest Income 117,096 146,718 170,755 Allowance for Funds Used During Construction 160,771 - - Cellular Investment Income 981,668 1,335,489 1,300,317 Other Investment Income (Expense) (11,796) (122,887) 9,766 ---------------- --------------- ---------------- Other Income (Expenses), Net 829,696 1,132,540 1,230,569 ---------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 5,169,264 5,783,010 5,375,231 INCOME TAXES 2,206,137 2,453,587 2,136,011 ---------------- --------------- ---------------- NET INCOME $ 2,963,127 $ 3,329,423 $ 3,239,220 ================ =============== ================ BASIC NET INCOME PER SHARE $ 1.71 $ 1.92 $ 1.87 ================ =============== ================ DIVIDENDS PER SHARE $ 1.00 $ 0.95 $ 1.07 ================ =============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 14 NEW ULM TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 AND 1999
===================================================================================================== ASSETS 2000 1999 ---------------- ---------------- CURRENT ASSETS: Cash $ 700,744 $ 1,533,044 Certificates of Deposit - 600,000 Receivables, Net of Allowance for Doubtful Accounts of $34,000 and $33,000 1,493,288 1,457,274 Materials, Supplies and Inventories 1,860,969 557,315 Prepaid Expenses 127,560 88,117 ---------------- ---------------- Total Current Assets 4,182,561 4,235,750 ---------------- ---------------- INVESTMENTS AND OTHER ASSETS: Excess of Cost Over Net Assets Acquired, Net 3,332,681 3,446,456 Notes Receivable 981,483 977,166 Cellular Investments 5,721,718 5,282,233 Other 982,910 688,593 ---------------- ---------------- Total Investments and Other Assets 11,018,792 10,394,448 ---------------- ---------------- PROPERTY, PLANT AND EQUIPMENT: Telecommunications Plant 37,355,385 28,356,244 Other Property and Equipment 1,920,514 1,779,022 Cable Television Plant 1,147,862 802,899 ---------------- ---------------- Total 40,423,761 30,938,165 Less Accumulated Depreciation 20,666,826 18,541,294 ---------------- ---------------- Net Property, Plant and Equipment 19,756,935 12,396,871 ---------------- ---------------- TOTAL ASSETS $ 34,958,288 $ 27,027,069 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 15 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 AND 1999
====================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ---------------- ---------------- CURRENT LIABILITIES: Current Portion of Long-Term Debt $ 866,666 $ 366,666 Accounts Payable 1,285,007 1,256,049 Accrued Taxes 104,013 58,006 Other Accrued Liabilities 452,673 332,542 ---------------- ---------------- Total Current Liabilities 2,708,359 2,013,263 ---------------- ---------------- LONG-TERM DEBT 8,990,667 2,933,334 ---------------- ---------------- DEFERRED CREDITS: Income Taxes 1,478,964 1,510,554 Investment Tax Credits 13,794 17,336 ---------------- ---------------- Total Deferred Credits 1,492,758 1,527,890 ---------------- ---------------- STOCKHOLDERS' EQUITY: Common Stock - $5.00 Par Value, 6,400,000 Shares Authorized, 1,731,955 and 1,732,455 Shares Issued and Outstanding 8,659,775 8,662,275 Retained Earnings 13,106,729 11,890,307 ---------------- ---------------- Total Stockholders' Equity 21,766,504 20,552,582 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,958,288 $ 27,027,069 ================ ================
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, 2000, 1999, AND 1998
================================================================================================== Common Stock ----------------------------------- Retained Shares Amount Earnings ------------- -------------- --------------- 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 Retired Stock (500) (2,500) (14,250) Net Income 2,963,127 Dividends (1,732,455) ------------ -------------- --------------- BALANCE on December 31, 2000 1,731,955 $ 8,659,775 $ 13,106,729 ============ ============== ===============
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, 2000, 1999, AND 1998
======================================================================================================================= 2000 1999 1998 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,963,127 $ 3,329,423 $ 3,239,220 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation and Amortization 2,304,251 2,048,946 1,879,895 Cellular Investment Income (981,668) (1,335,489) (1,300,317) Distributions from Cellular Investments 542,183 560,334 669,733 (Increase) Decrease in: Receivables (36,014) (134,371) (389,542) Materials, Supplies and Inventories (1,303,654) (203,288) 134,743 Prepaid Expenses (39,443) 7,318 (12,520) Increase (Decrease) in: Accounts Payable 28,958 (430,594) 1,064,533 Accrued Taxes 46,007 3,492 (7,684) Other Accrued Liabilities 120,131 108,144 (50,577) Deferred Income Taxes (31,590) (8,594) 51,661 Deferred Investment Tax Credits (3,542) (5,752) (12,007) --------------- --------------- --------------- Net Cash Provided By Operating Activities 3,608,746 3,939,569 5,267,138 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to Property, Plant and Equipment, Net (9,550,540) (2,800,248) (1,364,249) Change in Certificates of Deposit 600,000 300,000 1,100,000 Change in Notes Receivable (4,317) (193,718) (703,735) Purchase of Cellular Investments - - (328,808) Other, Net (294,317) (251,127) (105,603) --------------- --------------- --------------- Net Cash Used In Investing Activities (9,249,174) (2,945,093) (1,402,395) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal Payments of Long-Term Debt (366,667) (366,666) (366,666) Issuance of Long-Term Debt 6,924,000 - - Retired Stock (16,750) - - Dividends (1,732,455) (1,645,832) (1,853,727) --------------- --------------- --------------- Net Cash Provided By (Used In) Financing Activities 4,808,128 (2,012,498) (2,220,393) --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH (832,300) (1,018,022) 1,644,350 CASH at Beginning of Year 1,533,044 2,551,066 906,716 --------------- --------------- --------------- CASH at End of Year $ 700,744 $ 1,533,044 $ 2,551,066 =============== =============== ===============
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 in the ordinary course of business, 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, 2000, 1999 and 1998 were 6.3%, 6.7%, and 6.6%. Other property is depreciated over estimated useful lives of three to fifteen years. 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 $1,218,360 and $1,104,585 at December 31, 2000 and 1999. 19 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS AND OTHER ASSETS (CONTINUED) 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. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The Company includes in its telecommunications plant accounts an average cost of debt used for the construction of the plant. 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 1,732,205 for 2000 and 1,732,455 shares during 1999 and 1998. 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, 2000. 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 a 7.58% and 9.84% ownership in Midwest Wireless Holdings L.L.C. (MWH) at December 31, 2000 and 1999. This entity provides cellular phone service to southern Minnesota, northwestern Iowa and southwestern Wisconsin. The difference between the carrying amount of the MWH investment and the underlying equity in the net assets of MWH at the time of purchase of ownership interests is $1,842,856 as of December 31, 2000, net of accumulated amortization of $107,627. This amount is being expensed equally over 40 years. Amortization expense of $48,764 and $19,621 was included in cellular investment income in 2000 and 1999. Cellular investments consist of the following:
2000 1999 --------------- --------------- MWH: Cost Less Accumulated Amortization $ 1,899,060 $ 1,947,824 Cumulative Income 6,093,684 5,063,252 Cumulative Distributions (2,753,113) (2,210,930) --------------- --------------- 5,239,631 4,800,146 Other Investments, Recorded at Cost 482,087 482,087 --------------- --------------- Total $ 5,721,718 $ 5,282,233 =============== ===============
21 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 3 - CELLULAR INVESTMENTS (CONTINUED) MWH was formed in November 1999. Upon its formation, MWH became an 85.83% member of Midwest Wireless Communications, LLC (MWC). The following is summarized financial information as of and for the years ended December 31, 2000 and 1999 for MWH, and December 31, 1998 for MWC:
2000 1999 1998 ----------------- ---------------- ---------------- Current Assets $ 14,363,696 $ 10,152,590 $ 13,299,257 Noncurrent Assets 250,179,199 63,760,822 52,488,557 Current Liabilities 25,397,983 10,136,761 11,783,859 Noncurrent Liabilities 130,370,191 34,338,781 16,165,583 Members' Equity 108,774,721 29,437,870 37,838,372 Revenues 104,192,081 58,002,457 49,119,033 Operating Income 24,545,298 17,495,438 17,599,445 Net Income 14,297,071 13,821,243 16,971,948
NOTE 4 - RETIREMENT PLAN The Company's contribution to its 401(k) employee savings plan was $139,452 in 2000, $111,682 in 1999 and $85,877 in 1998. 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, 2000 and 1999 under this line of credit. NOTE 6 - LONG-TERM DEBT Long-term debt is as follows:
2000 1999 -------------- -------------- Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $65,000 plus 6.45% interest through December 1, 2008. $ 2,080,000 $ 2,340,000 Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $18,333 plus 6.45% interest through December 1, 2008. 586,667 660,000 Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $8,333 plus 6.45% interest through December 1, 2008. 266,666 300,000 Unsecured ten year reducing revolving credit facility to CoBank, ACB in quarterly installments of $250,000 (beginning in 2001) plus a variable rate of interest through July 20, 2010 (7.79% at December 31, 2000). 6,924,000 - -------------- -------------- Total 9,857,333 3,300,000 Less Amount Due Within One Year 866,666 366,666 -------------- -------------- Long-Term Debt $ 8,990,667 $ 2,933,334 ============== ==============
22 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 6 - LONG-TERM DEBT (CONTINUED) Unadvanced CoBank loan funds total $2,576,000 at December 31, 2000. Principal payments of $250,000 per quarter, plus interest at a variable rate, begin once the funds are fully drawn or as the maximum term agreement amount available of $10,000,000 reduces to an amount that equals what has been borrowed. Quarterly line of credit commitment reductions are $250,000 beginning September 30, 2000. Management expects to borrow up to the available amount during the third quarter of 2001. The CoBank loan agreement contains loan covenants that the Company must comply with including several financial ratios that must be met on a quarterly and annual basis. Principal payments required during the next five years are: 2001 - $866,666; 2002 - $1,366,666; 2003 - $1,366,666; 2004 - $1,366,666; and 2005 - $1,366,666. Cash payments for interest, net of amounts capitalized, were $208,028 in 2000, $228,599 in 1999, and $252,240 in 1998. The Phoenix Home Life Mutual Insurance Company debt agreements contain covenants relating to maintenance of working capital, additional borrowings, leases, and payment of cash dividends. At December 31, 2000, approximately $540,000 of consolidated retained earnings were available for dividends under these covenants. In addition to this, the Company can distribute up to 50% of future consolidated net income. NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS Income tax expense consists of the following:
2000 1999 1998 -------------- -------------- -------------- Taxes Currently Payable: Federal $ 1,669,697 $ 1,884,829 $ 1,583,343 State 571,572 583,104 513,014 Deferred Income Taxes (31,590) (8,594) 51,661 Amortization of Investment Tax Credits (3,542) (5,752) (12,007) -------------- -------------- -------------- Income Tax Expense $ 2,206,137 $ 2,453,587 $ 2,136,011 ============== ============== ==============
The differences between the statutory federal tax rate and the effective tax rate were as follows:
2000 1999 1998 ------- ------- ------- 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 6.5 6.7 6.4 Amortization of Investment Tax Credits (.1) (.1) (.2) Non-Deductible Expenses 1.5 2.1 2.3 Prior Year Tax Adjustment .8 (.3) (2.8) ------- ------ ------ Effective Tax Rate 42.7% 42.4% 39.7% ====== ====== ======
23 NEW ULM TELECOM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS (CONTINUED) The components of deferred income taxes are as follows: 2000 1999 -------------- -------------- Deferred Tax Liabilities: Depreciation $ 1,465,034 $ 1,380,836 Other 13,930 129,718 -------------- -------------- Total $ 1,478,964 $ 1,510,554 ============== ============== Cash payments for income taxes were $2,065,082 in 2000, $2,471,000 in 1999, and $2,231,500 in 1998. 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, 2000 was 5.9%. The original note, which became due on January 1, 2001, was renewed. The new note is a 5 year note, secured by New Ulm Telecom, Inc. common stock with an annual interest rate of 6.09%. This note requires an annual payment of $55,228, including interest, with payments commencing on January 1, 2002 and a final balloon payment due on January 1, 2006. NOTE 9 - COMMITMENTS The Company's capital budget for 2001 is approximately $4,250,000, which will be financed through additional long-term borrowings and internally generated funds. As of December 31, 2000 the Company has no purchase commitments. 24 Item 8. Supplemental Financial Information UNAUDITED QUARTERLY OPERATING RESULTS
Quarter Ended -------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 --------------- --------------- ----------------- ----------------- 2000: Revenues $ 2,923,788 $ 3,156,873 $ 3,099,586 $ 3,641,915 Operating Income 959,903 1,051,368 951,950 1,376,347 Net Income 782,361 687,768 487,242 1,005,756 Basic Net Income per Share 0.45 0.40 0.28 0.58 1999: Revenues $ 2,741,980 $ 2,984,129 $ 2,926,690 $ 3,104,283 Operating Income 1,137,380 1,320,555 1,149,594 1,042,941 Net Income 825,687 929,894 828,857 744,985 Basic Net Income per Share 0.47 0.54 0.48 0.43
25 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, 2000. 26 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, 2000, 1999 and 1998 14 Consolidated Balance Sheet at December 31, 2000 and 1999 15-16 Consolidated Statement of Stockholders' Equity for the Three Years Ended December 31, 2000, 1999 and 1998 17 Consolidated Statement of Cash Flows for the Three Years Ended December 31, 2000, 1999 and 1998 18 Notes to Consolidated Financial Statements 19-24 (a)2. Financial Statement schedules: Separate financial statements of Midwest Wireless Holdings 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. 29-41 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 42. b) Reports on Form 8-K None 27 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, 2001 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, 2001 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 28 MIDWEST WIRELESS HOLDINGS L.L.C. REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers Midwest Wireless Holdings 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 Holdings L.L.C. (the Company) and its subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. PRICEWATERHOUSECOOPERS, LLP February 2, 2001 30 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AT DECEMBER 31, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------ ASSETS 2000 1999 Current assets: Cash and cash equivalents $ 2,043,704 $ 1,378,350 Restricted cash 1,000,000 Accounts receivable, less allowance for doubtful accounts of $477,152 and $258,120 in 2000 and 1999, respectively 8,751,005 4,726,962 Inventories 2,718,772 2,519,796 Other 850,215 527,482 ----------------- ----------------- Total current assets 14,363,696 10,152,590 Property, cellular plant and equipment, net 73,523,318 43,997,663 FCC licenses, net 169,125,264 16,514,927 Investments in cooperatives 7,530,617 2,201,408 Deferred acquisition costs 1,046,824 ----------------- ----------------- Total assets $ 264,542,895 $ 73,913,412 ================= ================= LIABILITIES AND MEMBERS' EQUITY Current liabilities: Current portion of long-term debt $ 10,415,285 $ 2,426,350 Accounts payable 6,125,308 3,029,225 Accrued commissions 1,554,219 818,592 Other accrued expenses 7,303,171 3,862,594 ----------------- ----------------- Total current liabilities 25,397,983 10,136,761 Other liabilities 2,103,289 1,156,949 Revolving loan 2,500,000 2,000,000 Long-term debt 119,922,125 26,334,775 ----------------- ----------------- Total liabilities 149,923,397 39,628,485 Minority interest 5,844,777 4,847,057 Commitments Members' equity 108,774,721 29,437,870 ----------------- ----------------- Total liabilities and members' equity $ 264,542,895 $ 73,913,412 ================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 31 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
- -------------------------------------------------------------------------------------------- 2000 1999 Operating revenues: Subscriber service $ 63,993,328 $ 40,279,007 Roamer service 29,721,562 11,671,572 Equipment sales 9,015,304 5,651,878 Service fees 1,461,887 400,000 ---------------- ----------------- 104,192,081 58,002,457 ---------------- ----------------- Operating expenses: Operations and maintenance 19,785,719 10,502,756 Cost of equipment sold 10,458,625 5,570,633 Depreciation 12,278,169 7,528,105 Amortization of FCC licenses 3,780,643 494,381 Selling, general and administrative 24,520,349 14,711,883 Home roamer costs 8,823,278 1,699,261 ---------------- ----------------- 79,646,783 40,507,019 ---------------- ----------------- Operating income 24,545,298 17,495,438 ---------------- ----------------- Other income (expense): Interest expense (8,651,813) (1,291,817) Interest and dividend income 312,229 230,760 Other (6,186) (393,575) ---------------- ----------------- (8,345,770) (1,454,632) ---------------- ----------------- Net income before minority interest 16,199,528 16,040,806 Minority interest (1,902,457) (2,219,563) ---------------- ----------------- Net income $ 14,297,071 $ 13,821,243 ================ =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 32 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL ACCUMULATED MEMBERS' CONTRIBUTIONS INCOME EQUITY Balance, December 31, 1998 $ 13,659,443 $ 19,162,709 $ 32,822,152 Redemption of units (1,012,261) (11,751,826) (12,764,087) Equity adjustment for minority interests related to redemption 670,371 777,852 1,448,223 Distributions to members (5,889,661) (5,889,661) Net income 13,821,243 13,821,243 -------------- -------------- -------------- Balance, December 31, 1999 13,317,553 16,120,317 29,437,870 Issuance of units related to the acquisition of Iowa properties 51,418,250 51,418,250 Issuance of units related to the acquisition of Wisconsin properties 20,061,217 20,061,217 Distributions to members (6,439,687) (6,439,687) Net income 14,297,071 14,297,071 -------------- -------------- -------------- Balance, December 31, 2000 $ 84,797,020 $ 23,977,701 $ 108,774,721 ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 33 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------------- 2000 1999 Cash flows from operating activities: Net income $ 14,297,071 $ 13,821,243 Adjustments to reconcile net income to net cash provided by operating activities: Net income allocated to minority interest 1,902,457 2,219,563 Provision for bad debts 623,261 (211,225) Capitalized interest (608,199) (243,973) Depreciation 12,278,169 7,582,105 Amortization of FCC licenses 3,780,643 494,381 Loss on disposal of equipment 27,278 390,567 Accretion of discount on marketable securities (124,204) Changes in assets and liabilities: Accounts receivable (2,665,409) (287,379) Inventories (122,081) (895,770) Accounts payable 1,471,296 (674,665) Other accrued expenses 3,253,070 388,877 Other liabilities 946,340 639,458 Other (322,733) (174,858) ------------------ ----------------- Net cash provided by operating activities 34,861,163 22,924,120 ------------------ ----------------- Cash flows from investing activities: Acquisition of cellular properties (96,215,489) Payments for property, cellular plant and equipment (28,028,072) (20,141,712) Purchase of FCC licenses (354,900) (287,300) Purchases of cooperative stock (5,329,209) (653,121) Purchases of marketable securities (6,679,526) Proceeds received upon maturity of marketable securities 10,750,000 Payments for deferred acquisition costs (921,824 Release (restriction) of cash 1,000,000 (1,000,000) ------------------ ----------------- Net cash used in investing activities (128,927,670) (18,933,483) ------------------ ----------------- Cash flows from financing activities: Proceeds on revolving loan 500,000 2,000,000 Proceeds on long-term debt borrowings 107,706,887 13,368,420 Payments on long-term debt (6,130,602) (1,534,435) Distributions to members (6,439,687) (5,889,661) Distribution from subsidiary to minority interest (904,737) (940,503) Redemption of units (12,764,087) ------------------ ----------------- Net cash provided by (used in) financing activities 94,731,861 (5,760,266) ------------------ ----------------- Net change in cash and cash equivalents 665,354 (1,769,629) Cash and cash equivalents, beginning of year 1,378,350 3,147,979 ------------------ ----------------- Cash and cash equivalents, end of year $ 2,043,704 $ 1,378,350 ================== ================= Supplemental disclosure: Cash paid during the year for interest $ 7,587,435 1,156,323 Equity units issued for acquisitions 71,479,467
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 34 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF CONSOLIDATION Midwest Wireless Holdings L.L.C. (the Company) was formed in November 1999 as a Delaware limited liability company to acquire and operate cellular communications properties in the Midwest portion of the United States of America. Upon its formation, the Company exchanged its equity units for approximately 86% of the equity units of Midwest Wireless Communications, L.L.C. The transaction was accounted for on the historical cost basis as a combination of entities under common control, and the consolidated financial statements reflect the results of operations as if the combination had occurred on January 1, 1999. The consolidated financial statements include the Company's wholly-owned subsidiaries, Midwest Wireless Iowa, L.L.C. and Midwest Wireless Wisconsin, L.L.C., as well as its majority-owned subsidiary, Midwest Wireless Communications, L.L.C. 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 accounting principles generally accepted in the United States of America 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. 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. CELLULAR TELEPHONE INVENTORIES Inventories consist primarily of cellular phones and accessories held for resale with cost determined using the specific identification method. Losses on sales of cellular phones are recognized in the period in which sales are made as a cost of acquiring subscribers. 35 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 1 to 30 years. Major renewals or betterments are capitalized, while repair and maintenance expenditures are charged to operations as incurred. Interest incurred on external borrowings during construction is capitalized. 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. LONG-LIVED ASSETS The Company periodically reviews long-lived assets, FCC licenses and fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability is based on projected cash flows on an undiscounted basis. FEDERAL COMMUNICATIONS COMMISSION (FCC) LICENSES FCC licenses consist of the cost of acquiring cellular, personal communication services (PCS), and local multi-point distribution (LMDS) licenses. It also includes the value assigned to cellular licenses acquired through the acquisitions of operating cellular systems. Amortization is computed using the straight-line method over lives ranging from 10 to 39.5 years. 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 $3,021,650 and $1,754,394 for the years ended December 31, 2000 and 1999, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock and options using the intrinsic value method. 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. Upon closing of the acquisition in 2000, the restricted funds were released to the Company. DEFERRED ACQUISITION COSTS During 1999, the Company paid certain external deferred acquisition costs of $1,046,824 in connection with the pending acquisition of certain cellular properties. These costs were allocated as part of the purchase price upon the closing of the acquisition in 2000. See Note 3. 36 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PROPERTY, CELLULAR PLANT AND EQUIPMENT 2000 1999 Land $ 2,093,598 $ 1,696,989 Plant in service 94,427,420 56,271,401 Plant under construction 9,004,718 8,453,176 ----------------- ---------------- 105,525,736 66,421,566 Less accumulated deprecation (32,002,418) (22,423,903) ----------------- ---------------- $ 73,523,318 $ 43,997,663 ================= ================ At December 31, 2000 and 1999, accounts payable includes $2,891,666 and $1,295,835, respectively, related to the purchase of property, cellular plant and equipment. The Company capitalized interest in the amount of $608,199 and $243,973 for the years ended December 31, 2000 and 1999, respectively. FCC LICENSES 2000 1999 Cellular license $ 173,541,780 $ 17,505,700 LMDS licenses 357,696 357,696 PCS licenses 287,300 287,300 Other 354,900 ----------------- --------------- 174,541,676 18,150,696 Less accumulated amortization (5,416,412) (1,635,769) ----------------- --------------- $ 169,125,264 $ 16,514,927 ================= =============== 3. ACQUISITIONS On February 29, 2000, the Company, through its wholly-owned subsidiary, Midwest Wireless Iowa, L.L.C., completed its acquisition of cellular communications properties providing services to a 28-county area of Iowa (the "Iowa properties"). On March 17, 2000, the Company through its wholly-owned subsidiary, Midwest Wireless Wisconsin, L.L.C., completed its acquisition of cellular communications properties providing services to a 4-county area of Wisconsin and Minnesota (the "Wisconsin properties"). The Company allocated the excess purchase price over net tangible assets to FCC licenses and is amortizing it over 39.5 years. The acquisitions were accounted for as purchases. As a result, the financial statements include the operations related to the Iowa and Wisconsin properties beginning at their respective acquisition dates. 37 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following table presents the computation of the purchase price, the estimated fair value of tangible assets acquired, and the amount allocated to FCC licenses.
IOWA WISCONSIN Cash $ 89,242,760 $ 5,078,783 Equity units issued 51,418,250 20,061,217 Acquisition expenses 2,760,681 180,089 Liabilities assumed: Accounts payable and accrued liabilities 28,956 Customer deposits 4,700 35,600 Advance revenue 792,218 90,616 ----------------- ----------------- Total purchase price 144,218,609 25,475,261 Estimated fair value of tangible assets acquired: Accounts receivable 1,699,586 282,309 Inventories 76,895 Property, cellular plant and equipment 9,101,600 2,497,400 ----------------- ----------------- 10,878,081 2,779,709 ----------------- ----------------- FCC licenses $ 133,340,528 $ 22,695,552 ================= =================
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. 38 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5. DEBT Long-term debt consists of the following:
RATE AT BALANCE AT DECEMBER 31 DECEMBER 31 ---------------------- ---------------------------------------- MATURITY 2000 1999 2000 1999 RTFC note, variable rate 5/12/09 8.40% 6.95% $ 12,052,934 $ 13,113,035 RTFC note, fixed rate 7/29/08 5.75% 5.75% 7,458,340 8,171,831 RTFC note, variable rate 7/28/08 8.40% 6.95% 6,823,500 7,476,259 RTFC revolving note 7/29/03 9.10% 7.60% 2,500,000 2,000,000 RTFC note, variable rate 3/2/10 8.40% 95,743,583 RTFC note, variable rate 2/3/15 8.40% 8,259,053 ------------------ ------------------ $ 132,837,410 $ 30,761,125 ================== ==================
The Company has entered into various agreements (the Agreements) with the Rural Telephone Finance Cooperative (RTFC). In 2000, the Company entered into an agreement to fund the acquisitions of the Iowa and Wisconsin cellular markets and the construction of a new headquarters building. The Agreements provide for borrowings of up to $159,725,739. The principal and interest on the variable and fixed rate notes are payable in quarterly installments. The Agreements provide the Company the option to fix the interest rate on borrowings (or portions thereof) through the maturity date. The variable rate is based on RTFC's cost of capital and is adjusted monthly. The Agreements also provide for a revolving loan of up to $10,000,000. Borrowings under the revolving loan bear interest at the prime rate of 7.6% and 6.1% at December 31, 2000 and 1999, respectively, plus one and one-half percent. The outstanding principal and interest are due upon maturity. The Agreements require the Company to maintain an investment in RTFC in the amount of at least 5% of the outstanding debt balance. The Agreements also contain 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: 2001 $ 10,415,285 2002 11,182,775 2003 14,507,117 2004 12,892,539 2005 13,845,587 Thereafter 69,994,107 ----------------- $ 132,837,410 ================= 39 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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, 2000, are as follows: 2001 $ 477,776 2002 405,853 2003 309,140 2004 224,424 2005 144,621 Thereafter 360,010 --------------- $ 1,921,824 =============== Rental expense was $773,324 and $666,765 for the years ended December 31, 2000 and 1999, respectively. 7. EMPLOYEE BENEFITS The Company established the Midwest Wireless Holdings L.L.C. 401(k) Profit Sharing Plan and Trust (formerly the Midwest Wireless Communications L.L.C. 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 $292,508 and $185,909 for the years ended December 31, 2000 and 1999, respectively. Profit sharing contributions are 100% vested after five years of employment. Profit sharing contribution expenses were $309,312 and $210,606 for the years ended December 31, 2000 and 1999, respectively. Effective January 1, 1997, the Company established the Midwest Wireless Holdings L.L.C. Appreciation Rights Plan (formerly the Midwest Wireless Communications L.L.C. Appreciation Rights Plan) (the Plan) for certain key employees. Effective January 1, 2000, the Plan was amended to clarify certain language and definitions in the Plan. 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 defined increases 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. In 2000, the Board of Managers issued additional Class A appreciation rights to certain key employees and authorized an additional 9,000 rights for potential new Plan participants. The Company recognized $1,137,500 and $639,458 in compensation expense related to the Plan for the years ended December 31, 2000 and 1999, respectively. 40 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. OPTION PLAN During 2000, the Company's Board of Managers adopted and approved the Midwest Wireless Holdings L.L.C. Unit Option Plan under which options to purchase 46,742 units of the Company's membership units may be granted to employees with terms and vesting periods determined by the Company's Board of Managers at the date of grant. The exercise price is equal to the fair market value of the units at the time the option is granted, as determined by the Board of Managers. Options granted under the plan expire ten years from the date of grant. During 2000, the Company granted options to purchase 4,092 membership units under this plan at an exercise price of $299.06 per unit. The options granted vest 100% three years after they were granted. At December 31, 2000, there were 42,650 units available for issuance under this plan. The following table summarizes information about stock options outstanding and exercisable at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICES NUMBER LIFE PRICE NUMBER PRICE $ 299.06 4,092 9.58 $ 299.06 -- --
The Company accounts for stock-based compensation using the intrinsic value method. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the fair value of the stock at the date of the grant over the amount an employee must pay to acquire the stock. Such compensation costs are amortized on a straight-line basis over the underlying option's vesting term. No such compensation expense was recognized for the period ended December 31, 2000. If the Company had elected to recognize compensation expense for options granted using the fair value method in 2000, net income would have been as follows: Net income: As reported $ 14,297,071 Pro forma 14,251,198 The weighted average fair value of options at the date of grant was $80.71 in 2000. The fair value for each option grant was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: Dividend yield 2.07% Volatility factor 1.00% Risk-free interest rate 6.19% Expected lives 10 years 41 EX-21 2 newulm010569-ex21.txt EXHIBIT 21 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. 42 -----END PRIVACY-ENHANCED MESSAGE-----