10-K405 1 newulm021618_10k405.txt NEW ULM TELECOM, INC. FORM 10K405 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, 2001 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, $1.66 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. 5,115,585 Shares Outstanding at January 10, 2002 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. (the Company) 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, 2001, the Company served 17,348 access lines. New Ulm Phonery, Inc. is a non-regulated telecommunications business which provides INTERNET services and 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 a 7.58% interest in a limited liability company (Midwest Wireless Holdings L.L.C. (MWH) that provides cellular phone service in southern Minnesota, northwestern Iowa and southwestern Wisconsin (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 five segments; three companies (New Ulm Telecom, Inc. (parent), Western Telephone Company and Peoples Telephone Company) provide local exchange telephone service and related access to the long distance network to over 17,000 customers. New Ulm Phonery, Inc. sells telephone equipment and provides INTERNET services. The MWH investment is a separate segment that is recorded on the equity method of accounting. The Company does not have any collective bargaining agreements with its employees. New Ulm Telecom, Inc. provides telephone service in Minnesota to the cities of New Ulm, Courtland, Klossner, Searles and the adjacent rural areas. Western Telephone Company provides telephone service in Minnesota 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 two cable television systems in Minnesota (cities of Sanborn and Jeffers) serving approximately 220 customers. New Ulm Telecom, Inc. (parent) operates two cable television systems in Minnesota (in the cities of New Ulm and Courtland), serving approximately 1,300 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. 1 PART I Item 1. (Continued) 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. 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 its percentage ownership in MWH. Peoples Telephone Company also has an equity interest in partnerships which provide cellular phone service to two rural service areas in Iowa and a limited liability company which provides service as a competitive local exchange carrier in Iowa (Fibercom, L.C.). 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 local exchange services in Redwood Falls, Minnesota beginning in 2002. 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. 2 PART I Item 1. (Continued) 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 Federal Communications Commission (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. 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 and cable television service 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. Several companies also compete with New Ulm Phonery, Inc. in providing INTERNET services. 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, 2001, 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 Nortel Networks 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. 3 PART I Item 2. (Continued) Western Telephone Company installed Nortel Networks 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. Peoples Telephone Company's central office equipment was installed in 1999 and consists of a Nortel Networks 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 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 a tower and land located north/northwest of the city of New Ulm along Highway 14 in Nicollet County. (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 INTERNET equipment and equipment leased to subscribers such as telephone sets and other similarly used instruments. 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, 2001, there were approximately 1,251 holders of record of the Company's common stock. Dividends Dividends were declared quarterly in 2001, 2000 and 1999. Dividends were $.33 in 2001, $.33 in 2000 and $.32 per share in 1999. The dividends per share data has been restated to reflect the three-for-one stock split effective January 10, 2002. 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 ---------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------- ---------------- --------------- ---------------- ---------------- Operating Revenues $ 13,664,018 $ 12,822,162 $ 11,757,082 $ 10,478,643 $ 9,666,727 Operating Expenses 9,735,843 8,482,594 7,106,612 6,333,981 5,812,800 Operating Income 3,928,175 4,339,568 4,650,470 4,144,662 3,853,927 Other Income (Expenses) 810,702 829,696 1,132,540 1,230,569 935,548 Income Taxes 1,970,639 2,206,137 2,453,587 2,136,011 1,976,220 Net Income 2,768,238 2,963,127 3,329,423 3,239,220 2,813,255 Basic and Diluted Net Income Per Share .54 .57 .64 .62 .54 Dividends Per Share .33 .33 .32 .36 .33 Selected Balance Sheet Data: Year Ended December 31 ---------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------- ---------------- --------------- ---------------- ---------------- Current Assets $ 7,202,902 $ 4,182,561 $ 4,235,750 $ 5,223,431 $ 4,411,510 Current Liabilities 3,010,930 2,708,359 2,013,263 2,332,221 1,325,949 Working Capital 4,191,972 1,474,202 2,222,487 2,891,210 3,085,561 Total Assets 42,851,780 34,958,288 27,027,069 26,043,448 23,978,695 Long-Term Debt 17,566,666 9,857,333 3,300,000 3,666,666 4,033,332 Stockholders' Equity 21,844,756 21,766,504 20,552,582 18,868,991 17,483,498 Book Value Per Share 4.27 4.19 3.95 3.63 3.36
All per share data has been restated to reflect the three-for-one stock split effective January 10, 2002. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for 2001, 2000 and 1999 As described on pages 1 and 2, the Company operates five business segments; the majority of its operations consists of four segments that provide telephone and related ancillary services, and cable television services to numerous communities in Minnesota and Iowa. A fifth segment has a 7.58% interest in MWH and records this investment on the equity method of accounting. The equity method is used due to the influence the Company has over the operations and management of this LLC. 6 PART II Item 7. (Continued) CONSOLIDATED RESULTS OF OPERATIONS o 2001 consolidated revenues were $13,664,000, compared with $12,822,000 in 2000, an increase of $842,000 or 6.6%. The New Ulm Telecom, Inc. sector provided $702,000 of the increase with the introduction of new service offerings: digital video and digital subscriber line (DSL). New Ulm Telecom, Inc. invested $8,000,000 in its infrastructure, which allowed it to enhance its local network and offer these new services to its subscribers. All other segments had relatively no change. o 2001 consolidated operating expenses were $9,736,000, compared with $8,483,000 in 2000, an increase of $1,253,000 or 14.8%. The New Ulm Telecom, Inc. sector provided $1,156,000 of the increase, with $756,000 of the increase attributed to depreciation expense. The remaining $400,000 is associated with additional expenses (programming fees, transport costs, employee costs, advertising) incurred with the introduction of video services offered in the City of New Ulm, Minnesota. o 2001 consolidated net income was $2,768,000 compared with $2,963,000 in 2000. The decrease in consolidated net income was $195,000 or 6.6%. o 2000 consolidated revenues increased $1,065,000 or 9.1% over 1999. The New Ulm Telecom segment contributed $472,000 of the increase, which can be attributed to network access revenues. This increase can be attributed to the additional investment in the segment's network infrastructure. New Ulm Phonery was responsible for $225,000 of the increase. This increase is due to the continued success of the Company's INTERNET service. o 2000 consolidated operating expenses increased $1,376,000 or 19.4% over 1999. The New Ulm Telecom segment was responsible for $846,000 or 61.5% of the increase. This increase can be mostly attributed to the Company's ambitious goal of offering video services (increase to depreciation of $201,000 and plant operations of $303,000) to all subscribers. The segment had plant investments of $8,953,000 during 2000. The Phonery was responsible for $406,000 or 29.5% of the increase. This increase was due to the Company's emphasis on offering high quality INTERNET service. o 2000 consolidated net income was $2,963,000 compared with $3,329,000 in 1999. The decrease in net income of $366,000 or 11.0% can be attributed the increased operating expenses and a decrease of $354,000 in the Company's share of equity in earnings of MWH. 7 PART II Item 7. (Continued) In the Segment operations discussions which follow, specific discussion of year-to-year changes by segment are given. An overall review of the year-to-year changes in Company operations is provided in the following table: SUMMARY OF OPERATIONS
2001 2000 1999 ---------------- ---------------- --------------- Year Ended December 31: Operating Income: New Ulm Telecom $ 1,193,964 $ 1,648,539 $ 2,022,997 Western Telephone 1,278,040 1,289,103 1,267,872 Peoples Telephone 490,644 476,003 401,050 New Ulm Phonery 750,750 720,454 900,919 Other 214,777 205,469 57,632 ---------------- ---------------- --------------- Total 3,928,175 4,339,568 4,650,470 Other Income 1,483,044 1,247,739 1,359,320 Interest Expense (672,342) (418,043) (226,780) Income Taxes (1,970,639) (2,206,137) (2,453,587) ---------------- ---------------- --------------- Net Income $ 2,768,238 $ 2,963,127 $ 3,329,423 ================ ================ =============== Basic and Diluted Earnings Per Share $ .54 $ .57 $ .64 Weighted Average Shares Outstanding 5,135,655 5,196,615 5,197,365
All per share data has been restated to reflect the three-for-one stock split effective January 10, 2002. RESULTS OF OPERATIONS BY BUSINESS SEGMENT New Ulm Telecom Operations New Ulm Telecom revenues represent 56.3% of 2001 consolidated operating revenues. Revenues are primarily earned by providing approximately 13,700 customers access to New Ulm Telecom's local network, and by providing interexchange access for long distance network carriers. The New Ulm Telecom segment also earns revenue through billing and collecting for various long distance companies, directory advertising and providing video services (a new venture undertaken in 2001) to its subscribers. Total New Ulm Telecom segment revenues have grown 18.0% since 1999.
2001 2000 1999 ---------------- --------------- ---------------- Operating Revenues: Local Network $ 2,751,689 $ 2,398,257 $ 2,289,257 Network Access 3,970,146 3,886,447 3,512,508 Other 965,956 701,398 712,363 ---------------- --------------- ---------------- Total Operating Revenues 7,687,791 6,986,102 6,514,128 ---------------- --------------- ---------------- Cash Operating Expenses 4,062,075 3,661,598 3,016,546 Noncash Operating Expenses 2,431,752 1,675,965 1,474,585 ---------------- --------------- ---------------- Total Operating Expenses 6,493,827 5,337,563 4,491,131 ---------------- --------------- ---------------- Operating Income 1,193,964 1,648,539 2,022,997 ---------------- --------------- ---------------- Net Income 179,585 775,184 1,065,119 ---------------- --------------- ---------------- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA(1)) 3,625,716 3,324,504 3,497,582 Capital Expenditures 6,421,321 8,953,429 1,830,503
------------------------- 1 EBITDA represents operating income plus depreciation and amortization expense. EBITDA, which is not a measure of financial performance or liquidity under generally accepted accounting principles, is provided because the Company understands that such information is used by certain investors when analyzing the financial position and performance of the Company. Because of the variety of methods used by companies and analysts to calculate EBITDA, and the fact that EBITDA calculations may not accurately measure a company's ability to meet debt service requirements, caution should be used in relying on any EBITDA presentation. The Company sees value in disclosing its calculation of EBITDA for the financial community and in displaying the change in EBITDA. The Company believes an increasing EBITDA depicts increased ability to attract financing and increased valuation of the Company's business. 8 PART II Item 7. (Continued) From the table above, New Ulm Telecom revenues increased $702,000 or 10.0% in 2001 and $472,000 or 7.2% in 2000. Local network revenue increased in the New Ulm Telecom segment by $353,000 or 14.7% in 2001 and $109,000 or 4.8% in 2000. The increases are significant considering the number of access lines increased 2.1% and 1.9% in 2001 and 2000. The revenue increases were accomplished with promotion and packaging of vertical services, most notably, the introduction of DSL, to supplement basic line charges. DSL, which is used to provide high-speed access to the INTERNET, was responsible for approximately $150,000 of the 2001 increase. A local service rate increase beginning in February 2001 provided $200,000 additional local service revenues in 2001. Network access revenue increased $84,000 or 2.2% in 2001 and $374,000 or 10.6% in 2000. Access minutes in 2001 decreased by 4.4% over 2000 and 2000 increased by 2.3% over 1999. The increases in network access revenue in 2001 were significant considering the decrease in minutes of use and the negative effects of network access pricing, a common industry trend. The New Ulm Telecom segment has invested $15,375,000 in capital expenditures during 2001 and 2000. These capital expenditures, enhancing this segment's infrastructure, have allowed New Ulm Telecom to receive additional settlements from the National Exchange Carrier Association (NECA). New Ulm Telecom has now become eligible for high-cost loop funding. Other operating revenues increased $265,000 or 37.8% in 2001 and decreased $11,000 or 1.5% in 2000. Due to the infrastructure enhancements that have taken place since 2000, the New Ulm Telecom segment has been able to begin offering video services over the existing infrastructure. The video product was responsible for $260,000 of new revenues in 2001 as compared to 2000. Cash operating expenses increased $400,000 or 10.9% in 2001 and $645,000 or 21.4% in 2000. Cash operating expenses have increased due to the number of services offered. The New Ulm Telecom segment recognized the need to compete in all aspects of communication services. This realization has motivated the segment to enhance its awareness of customer satisfaction, additional services (video and DSL), aggressive marketing (brand recognition) and solutions for our customers' communication needs. The Company is striving for cost efficiencies and technological improvements to maintain its operating margins in the New Ulm Telecom segment. Noncash operating expenses increased $756,000 or 45.1% in 2001 and $201,000 or 13.6% in 2000. Depreciation expense is the main cause of these increases. The increase in depreciation expense is reflective of the new investments of $15,375,000 in the segment's infrastructure as mentioned above. The New Ulm Telecom segment capital expenditures in 1999 were more reflective of a typical year. 9 PART II Item 7. (Continued) Western Telephone Company Operations Western Telephone Company revenues represent 17.1% of 2001 consolidated operating revenues. Revenues are primarily earned by providing approximately 2,600 customers access to Western Telephone Company's local network, and in providing interexchange access for long distance network carriers. The Western Telephone Company segment also earns revenue through billing and collecting for various long distance companies, directory advertising, cable television service, and INTERNET access to its subscribers. Total Western Telephone Company segment revenues have grown 3.7% since 1999.
2001 2000 1999 ---------------- --------------- ---------------- Operating Revenues: Local Network $ 383,139 $ 320,083 $ 306,813 Network Access 1,565,633 1,582,366 1,569,317 Other 392,360 412,986 381,345 ---------------- --------------- ---------------- Total Operating Revenues 2,341,132 2,315,435 2,257,475 ---------------- --------------- ---------------- Cash Operating Expenses 677,895 652,117 630,505 Noncash Operating Expenses 385,197 374,215 359,098 ---------------- --------------- ---------------- Total Operating Expenses 1,063,092 1,026,332 989,603 ---------------- --------------- ---------------- Operating Income 1,278,040 1,289,103 1,267,872 ---------------- --------------- ---------------- Net Income 798,815 796,541 740,879 ---------------- --------------- ---------------- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA(1)) 1,663,237 1,663,318 1,626,970 Capital Expenditures 181,558 368,406 347,578
From the table above, Western Telephone Company revenues increased $26,000 or 1.1% in 2001 and $58,000 or 2.6% in 2000. Local network revenue increased in the Western Telephone Company segment by $63,000 or 19.7% for 2001 over 2000 and $13,000 or 4.3% for 2000 over 1999. The increases are significant considering the number of access lines increased .6% and 2.7% in 2001 and 2000. The revenue increases were accomplished with promotion and packaging of vertical services, most notably, the introduction of DSL, to supplement basic line charges. DSL, which is used to provide high-speed access to the INTERNET, was responsible for approximately $15,000 of the 2001 increase. A local service rate increase beginning in February 2001 provided $40,000 additional local service revenues in 2001. Network access revenue decreased $17,000 or 1.1% in 2001 and increased $13,000 or .8% in 2000. Access minutes decreased 2.3% in 2001 and increased 4.2% in 2000. The negative effects of network access pricing, a common industry trend, will erode the increases in volume of switched minutes of use, minimizing future increases in network access revenue. The continued utilization of the INTERNET (e-mail, voice-over-IP) will continue to decrease the volume of switched minutes of use. Cash operating expenses increased $26,000 or 4.0% in 2001 and $22,000 or 3.5% in 2000. Cash operating expenses have increased due to the number of services offered. The Western Telephone Company segment recognized the need to compete in all aspects of communication services. This realization has motivated the segment to enhance its awareness of customer satisfaction, additional services (DSL), aggressive marketing (brand recognition) and solutions for our customers' communication needs. The Company is striving for cost efficiencies and technological improvements to maintain its operating margins in the Western Telephone Company segment. 10 PART II Item 7. (Continued) The Western Telephone Company segment capital expenditures for 2001 are more reflective of a typical year. In 2000 and 1999 the segment had capital projects of $220,000 in 2000 and $200,000 in 1999 due to the construction of a fiber route, which is used to provide transport routes to a point of interconnection in Windom, Minnesota. Peoples Telephone Company Operations Peoples Telephone Company revenues represent 7.6% of 2001 consolidated operating revenues. Revenues are primarily earned by providing approximately 930 customers access to Peoples Telephone Company's local network, and in providing interexchange access for long distance network carriers. The Peoples Telephone Company segment also earns revenue through billing and collecting for various long distance companies, directory advertising, cable television service, and INTERNET access to its subscribers. Total Peoples Telephone Company segment revenues have grown 17.0% since 1999.
2001 2000 1999 ---------------- --------------- ---------------- Operating Revenues: Local Network $ 141,654 $ 109,306 $ 105,216 Network Access 690,392 687,666 609,568 Other 210,698 195,179 176,071 ---------------- --------------- ---------------- Total Operating Revenues 1,042,744 992,151 890,855 ---------------- --------------- ---------------- Cash Operating Expenses 417,076 397,348 369,228 Noncash Operating Expenses 135,024 118,800 120,577 ---------------- --------------- ---------------- Total Operating Expenses 552,100 516,148 489,805 ---------------- --------------- ---------------- Operating Income 490,644 476,003 401,050 ---------------- --------------- ---------------- Net Income 410,652 309,318 179,303 ---------------- --------------- ---------------- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA(1)) 625,668 594,803 521,627 Capital Expenditures 161,894 128,156 410,557
From the table above, Peoples Telephone Company revenues increased $51,000 or 5.1% in 2001 and $101,000 or 11.4% in 2000. Local network revenue increased in the Peoples Telephone Company segment by $32,000 or 29.6% in 2001 and $4,000 or 3.9% in 2000. The increases are significant considering the number of access lines served increased .3% during 2001 and 3.8% in 2000. The revenue increases were accomplished with promotion and packaging of vertical services, most notably, the introduction of digital subscriber line (DSL), to supplement basic line charges. DSL, which is used to provide high-speed access to the INTERNET, was responsible for approximately $5,000 of the 2001 increase. A local service rate increase beginning in February 2001 provided $22,000 additional local service revenues in 2001. Network access revenue increased $3,000 or .4% in 2001 and increased $78,000 or 12.8% in 2000. Access minutes increased 1.7% in 2001 and 5.9% in 2000. The negative effects of network access pricing, a common industry trend, will erode the increases in volume of switched minutes of use, minimizing future increases in network access revenue. The continued utilization of the INTERNET (e-mail, voice-over-IP) will continue to decrease the volume of switched minutes of use. The construction of a fiber route in 1998 and 1999 allowed the Peoples Telephone Company segment to gain access to a larger fiber optic network, which increased access revenue due to an increase in transport facilities. 11 PART II Item 7. (Continued) Cash operating expenses increased $20,000 or 5.0% in 2001 and $28,000 or 7.6% in 2000. Cash operating expenses have increased due to the number of services offered. The Peoples Telephone Company segment recognized the need to compete in all aspects of communication services. This realization has motivated the segment to enhance its awareness of customer satisfaction, additional services (DSL), aggressive marketing (brand recognition) and solutions for our customer's communication needs. The Company is striving for cost efficiencies and technological improvements to maintain its operating margins in the Peoples Telephone Company segment. The Peoples Telephone Company segment capital expenditures for 2001 are more reflective of a typical year. In 2000 the segment invested $175,000 in central office switching equipment. An investment of $200,000 in 1999 allowed the segment to increase its transport facilities through construction of a 14 mile fiber optic network that connects to Iowa Network Services. New Ulm Phonery Operations New Ulm Phonery represents 13.9% of 2001 consolidated operating revenues. Revenues are earned primarily by sales, installation and service of business telephone systems and data communications equipment and access to INTERNET services in the service areas served by New Ulm Telecom, Inc. (New Ulm, Springfield and Sanborn, Minnesota and Aurelia, Iowa). In addition, the Company leases network capacity to provide additional network access revenues. This segment's expertise is the quality installation and maintenance of wide area networking, local networking and transport solutions in communication to end user customers.
2001 2000 1999 ---------------- --------------- ---------------- Operating Revenues $ 1,895,268 $ 1,890,770 $ 1,665,487 ---------------- --------------- ---------------- Cash Operating Expenses 1,021,336 1,035,045 669,882 Noncash Operating Expenses 123,182 135,271 94,686 ---------------- --------------- ---------------- Total Operating Expenses 1,144,518 1,170,316 764,568 ---------------- --------------- ---------------- Operating Income 750,750 720,454 900,919 ---------------- --------------- ---------------- Net Income 482,027 455,572 537,400 ---------------- --------------- ---------------- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA(1)) 873,932 855,725 995,605 Capital Expenditures 463,822 100,549 211,610
From the table above, revenues increased $4,000 or .2% in 2001 and $225,000 or 13.5% in 2000. The segment saw a minor increase in INTERNET subscribers in 2001, while the New Ulm Telecom segment benefited from the customer increased demand for DSL. Pricing for INTERNET actually saw a slight decrease in 2001 as more customers opted for DSL access. Cash operating expenses decreased $14,000 or 1.3% in 2001 and increased $365,000 or 54.5% in 2000. The $351,000 or 52.5% increase since 1999 can be attributed to the need to compete in all aspects of communication services. This realization has motivated the segment to enhance its awareness of customer satisfaction, additional services (DSL), aggressive marketing (brand recognition) and solutions for our customers' communication needs. Increased emphasis of INTERNET access by our customers has led to increased customer service hours (24x7 access to support), maintenance of facilities, marketing and advertising, and the additional need for larger (more bandwidth) access points. The Company is striving for cost efficiencies and technological improvements to maintain its operating margins in the New Ulm Phonery segment. 12 PART II Item 7. (Continued) Cellular Investment The Company has a 7.58% ownership in MWH. Cellular investment income increased $227,000 or 23.1% in 2001. This is comparable to the 28.7% increase in revenues using the proportionate method. The proportionate method applies the Company's ownership percentage to MWH revenues and expenses. Revenues and income continue to grow as MWH adds customers. Acquisitions by MWH in Iowa and Wisconsin in 2000 have had a significant impact on revenues and net income in 2001. In 2000, cellular investment income decreased $354,000 or 26.5% from 1999. The decrease was due to increased expenditures and startup costs (proportionate method) related to the Iowa and Wisconsin acquisitions. The proportionate method shows a 61.3% increase in revenues, and a 77.0% increase in operating expenses.
2001 2000 1999 ---------------- --------------- ---------------- Cellular Investment Income $ 1,208,636 $ 981,668 $ 1,335,489 ================ =============== ================ Proportionate Method: Operating Revenues 10,031,822 7,795,241 4,831,291 ---------------- --------------- ---------------- Cash Operating Expenses 6,206,282 4,775,446 2,748,533 Noncash Operating Expenses 1,750,489 1,261,780 661,558 ---------------- --------------- ---------------- Total Operating Expenses 7,956,771 6,037,226 3,410,091 ---------------- --------------- ---------------- Operating Income 2,075,051 1,758,015 1,421,200 ---------------- --------------- ---------------- Net Income 1,208,636 981,668 1,335,489 ---------------- --------------- ----------------
Other Income and Interest Expense Other income (primarily interest and equity in LLC income) was $8,000 higher in 2001 than 2000. Included in other income is the Company's 12.6% equity ownership in Fibercom, L.C. In 2001, this LLC income was $175,000, an increase of $180,000 from 2000. In 2000, LLC income increased $120,000 over 1999. The overall increase in other income in 2000 resulted from interest expense capitalized as allowance for funds used during construction. Interest expense increased $254,000 in 2001 and $191,000 in 2000. The increases can be attributed to the new $10 million revolving credit facility obtained in July 2000. The Company refinanced the revolving credit facility on December 28, 2001 with a $15 million term loan and a revolving credit facility of $10 million (total debt outstanding at December 31, 2001 was $17,566,666). The term loan facility's weighted average interest rate is variable and was 3.4% at December 31, 2001. The debt was used for a majority of the $16.8 million in capital expenditures since January 1, 2000 and the repurchase of New Ulm Telecom, Inc. stock of $1 million. Income Taxes The effective rate in 2001 was 41.6%, versus 42.7% in 2000 and 42.4% in 1999. For additional information, see Note 7 to the financial statements. 13 PART II Item 7. (Continued) Review of Cash Flows The Company's net working capital of $4,192,000 at December 31, 2001, is an increase of $2,218,000 from 2000. However, the 2001 net working capital includes over $3,000,000 of CoBank loan advances received in December 2001. These funds were expended in the first quarter 2002. They were used to purchase additional common stock investments in two Iowa RSA corporations and early retirement of Phoenix Life Mutual Insurance Company long-term debt. The Company operates in capital intensive businesses. Additions to property, plant and equipment are the Company's largest investing activity, using $19,579,000 of working capital in the three years ended December 31, 2001. For cash flows from financing activities, aside from the routine payment of shareholder dividends and the new levels of indebtedness in 2001 and 2000 (see "Liquidity and Capital Resources" below), the Company used $981,000 to purchase outstanding shares of its common stock in 2001 and $17,000 in 2000. The Company's largest source of working capital has been its operations, primarily from New Ulm Telecom, Western Telephone Company and Peoples Telephone Company. The Company's financial strength continues to be supported by its 2001 current ratio (2.39 to 1.0), its EBITDA1 ($7,003,000) and its proven access to debt markets. Dividends The Company paid dividends of $1,709,000 in 2001. This was a dividend of $.33 per share, which was equal to the $.33 per share paid in 2000. The Company's reinvested growth in equity has come about while maintaining dividends to shareholders. The Company has made no announcements or plans to increase the dividend in 2002. Paying at the existing level of dividends is not expected to negatively impact the liquidity of the Company. Share Repurchase Program The Company's Board of Directors authorized management to repurchase shares of Company common stock through private transactions. During 2000, pursuant to this authorization, the Company repurchased 500 shares for $17,000, and in 2001 the Company repurchased 26,760 shares for $981,000. The Company has no plans to repurchase any shares in 2002. 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. 14 PART II Item 7. (Continued) 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. In February 2001, New Ulm Telecom, Inc., Western Telephone Company and Peoples Telephone Company increased local service rates, adding approximately $262,000 of revenues in 2001. State regulators are considering access charge reform. A docket has been opened but no action is expected in 2002, so the Company cannot estimate the effect on intrastate access revenues of any future changes. Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of each Company's actual or average costs. There has been a decline in the level of interstate access charges in recent years, and the Company believes this trend will continue. In 2001, the FCC amended the interstate access charge structure and the universal support fund mechanisms. The net effect of these changes are not expected to have a material effect on the Company's interstate access revenues beginning in 2002. New Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "BUSINESS COMBINATIONS", which is effective for business combinations initiated after June 30, 2001. SFAS 141 requires all business combinations to be accounted for under the purchase method. The Company does not believe adoption of this standard will have an effect on the Company's results of operation or financial position. Effective January 1, 2002, the Company will adopt SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS". Under this statement goodwill determined to have an indefinite life will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. Company management is still assessing the impact of this standard on its financial position and results of operation. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not believe adoption of this standard will have a material impact on the Company's results of operations or financial position. 15 PART II Item 7. (Continued) In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS", which addresses the accounting and reporting for the disposal of long-lived assets. This statement supercedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that adoption of this standard will have a material impact on the Company's results of operations or financial position. Liquidity and Capital Resources Cash provided from operations and access to new debt continues to be the Company's sources of funds. Cash provided from operating activities increased $2,276,000 in 2001. In 2000 and 2001, the Company received proceeds of $6,924,000 and $8,576,000 in debt, respectively. As of December 31, 2001, after payments (totaling $1,233,333 in 2000 and 2001) total debt was $17,566,666. The Company is comfortably within the debt service covenants placed upon them by CoBank. The Company uses a combination of variable rate short-term and fixed rate long-term financial instruments as of December 31, 2001. The Company continually monitors the interest rates on its short-term bank loans and long-term senior indebtedness. Unadvanced CoBank loan funds were $10,000,000 at December 31, 2001. In addition, $3,000,000 of CoBank funds were advanced in December 2001 and had not been expended at year end. These funds have been designated for the early retirement of Phoenix debt ($2.7 million), cellular investments ($4 million) and CLEC plant construction ($5 million). The Company has not conducted a public equity offering. It operates with original equity capital, retained earnings and recent additions to indebtedness in the form of senior debt and bank lines of credit. The Company is comfortable with debt to total capital proportions of 40 to 55 percent. 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. 16 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. St. Paul, Minnesota February 21, 2002 OLSEN THIELEN & CO., LTD. 17 NEW ULM TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---------------- --------------- ---------------- OPERATING REVENUES: Local Network $ 3,276,482 $ 2,827,646 $ 2,701,274 Network Access 6,226,171 6,156,479 5,691,393 Billing and Collection 382,399 442,574 440,700 Miscellaneous 424,237 422,283 435,083 Nonregulated 3,354,729 2,973,180 2,488,632 ---------------- --------------- ---------------- Total Operating Revenues 13,664,018 12,822,162 11,757,082 ---------------- --------------- ---------------- OPERATING EXPENSES: Plant Operations 1,728,872 1,743,268 1,440,065 Depreciation 2,960,135 2,190,427 1,935,122 Amortization 115,020 113,824 113,824 Customer Operations 749,118 853,705 600,209 General and Administrative 2,004,173 1,746,414 1,670,644 Other Operating 2,178,525 1,834,956 1,346,748 ---------------- --------------- ---------------- Total Operating Expenses 9,735,843 8,482,594 7,106,612 ---------------- --------------- ---------------- OPERATING INCOME 3,928,175 4,339,568 4,650,470 ---------------- --------------- ---------------- OTHER INCOME (EXPENSES): Interest Expense (672,342) (418,043) (226,780) Interest Income 83,432 117,096 146,718 Allowance for Funds Used During Construction 30,442 160,771 - Cellular Investment Income 1,208,636 981,668 1,335,489 Other Investment Income (Expense) 160,534 (11,796) (122,887) ---------------- --------------- ---------------- Other Income (Expenses), Net 810,702 829,696 1,132,540 ---------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 4,738,877 5,169,264 5,783,010 INCOME TAXES 1,970,639 2,206,137 2,453,587 ---------------- --------------- ---------------- NET INCOME $ 2,768,238 $ 2,963,127 $ 3,329,423 ================ =============== ================ BASIC AND DILUTED NET INCOME PER SHARE $ .54 $ .57 $ .64 ================ =============== ================ DIVIDENDS PER SHARE $ .33 $ .33 $ .32 ================ =============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 18 NEW ULM TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 AND 2000
------------------------------------------------------------------------------------------------------------------------- ASSETS 2001 2000 ---------------- ---------------- CURRENT ASSETS: Cash $ 4,245,683 $ 700,744 Receivables, Net of Allowance for Doubtful Accounts of $24,500 and $34,000 1,878,444 1,493,288 Materials, Supplies and Inventories 966,565 1,860,969 Prepaid Expenses 112,210 127,560 ---------------- ---------------- Total Current Assets 7,202,902 4,182,561 ---------------- ---------------- INVESTMENTS AND OTHER ASSETS: Excess of Cost Over Net Assets Acquired, Net 3,248,495 3,332,681 Note Receivable from Officer 687,402 700,000 Notes Receivable 252,854 281,483 Cellular Investments 6,310,830 5,721,718 Other Investments 1,154,736 982,910 ---------------- ---------------- Total Investments and Other Assets 11,654,317 11,018,792 ---------------- ---------------- PROPERTY, PLANT AND EQUIPMENT: Telecommunications Plant 43,032,672 37,355,385 Other Property and Equipment 2,396,063 1,920,514 Cable Television Plant 1,539,443 1,147,862 ---------------- ---------------- Total 46,968,178 40,423,761 Less Accumulated Depreciation 22,973,617 20,666,826 ---------------- ---------------- Net Property, Plant and Equipment 23,994,561 19,756,935 ---------------- ---------------- TOTAL ASSETS $ 42,851,780 $ 34,958,288 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 19 NEW ULM TELECOM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 AND 2000
------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ---------------- ---------------- CURRENT LIABILITIES: Current Portion of Long-Term Debt $ 1,866,666 $ 866,666 Accounts Payable 593,571 1,285,007 Accrued Taxes 66,235 104,013 Other Accrued Liabilities 484,458 452,673 ---------------- ---------------- Total Current Liabilities 3,010,930 2,708,359 ---------------- ---------------- LONG-TERM DEBT 15,700,000 8,990,667 ---------------- ---------------- DEFERRED CREDITS: Income Taxes 2,285,843 1,478,964 Investment Tax Credits 10,251 13,794 ---------------- ---------------- Total Deferred Credits 2,296,094 1,492,758 ---------------- ---------------- STOCKHOLDERS' EQUITY: Common Stock - $1.66 and $5.00 Par Value, 19,200,000 Shares Authorized, 5,115,585 and 1,731,955 Shares Issued and Outstanding 8,525,975 8,659,775 Retained Earnings 13,318,781 13,106,729 ---------------- ---------------- Total Stockholders' Equity 21,844,756 21,766,504 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,851,780 $ 34,958,288 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 20 NEW ULM TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------- Common Stock ------------------------------------ Retained Shares Amount Earnings -------------- -------------- --------------- 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 Retired Stock (26,760) (133,800) (846,777) Net Income 2,768,238 Dividends (1,709,409) Three-for-One Stock Split 3,410,390 ------------ -------------- --------------- BALANCE on December 31, 2001 5,115,585 $ 8,525,975 $ 13,318,781 ============ ============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 21 NEW ULM TELECOM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 2,768,238 $ 2,963,127 $ 3,329,423 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: Depreciation and Amortization 3,075,155 2,304,251 2,048,946 Cellular Investment Income (1,208,636) (981,668) (1,335,489) Distributions from Cellular Investments 619,524 542,183 560,334 Changes in Assets and Liabilities: Receivables (385,156) (36,014) (134,371) Materials, Supplies and Inventories 894,404 (1,303,654) (203,288) Prepaid Expenses 15,350 (39,443) 7,318 Accounts Payable (691,436) 28,958 (430,594) Accrued Taxes (37,778) 46,007 3,492 Other Accrued Liabilities 31,785 120,131 108,144 Deferred Income Taxes 806,879 (31,590) (8,594) Deferred Investment Tax Credits (3,543) (3,542) (5,752) ---------------- --------------- --------------- Net Cash Provided By Operating Activities 5,884,786 3,608,746 3,939,569 ---------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to Property, Plant and Equipment (7,197,761) (9,550,540) (2,800,248) Change in Certificates of Deposit - 600,000 300,000 Change in Notes Receivable 41,227 (4,317) (193,718) Other Investments, Net (202,660) (294,317) (251,127) ---------------- --------------- --------------- Net Cash Used In Investing Activities (7,359,194) (9,249,174) (2,945,093) ---------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal Payments of Long-Term Debt (866,667) (366,667) (366,666) Issuance of Long-Term Debt 8,576,000 6,924,000 - Retired Stock (980,577) (16,750) - Dividends (1,709,409) (1,732,455) (1,645,832) ---------------- --------------- --------------- Net Cash Provided By (Used In) Financing Activities 5,019,347 4,808,128 (2,012,498) ---------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH 3,544,939 (832,300) (1,018,022) CASH at Beginning of Year 700,744 1,533,044 2,551,066 ---------------- --------------- --------------- CASH at End of Year $ 4,245,683 $ 700,744 $ 1,533,044 ================ =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 22 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, INTERNET, digital video, 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 a competitive local exchange carrier (CLEC), 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. 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 plant and equipment for the three years ended December 31, 2001, 2000 and 1999 were 7.2%, 6.3%, and 6.7%. 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 $1,333,380 and $1,218,360 at December 31, 2001 and 2000. 23 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS AND OTHER ASSETS (CONTINUED) In July 2001, the Financial Accounting Standards Board issued Statement 142, "GOODWILL AND OTHER INTANGIBLE ASSETS", which will potentially impact the Company's accounting for its reported goodwill beginning January 1, 2002. Statement 142 eliminates the amortization of goodwill and requires, at a minimum, annual impairment tests for goodwill. Upon adoption of this Statement, the Company is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If there are intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. The Company must also reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Company management is still assessing but has not yet determined the impact of this standard on its financial position and results of operation. Investments in a cellular telephone and CLEC limited liability company are recorded using the equity method of accounting, which reflects original cost and equity in undistributed earnings and losses, because management of the Company believes they have the ability to significantly influence the operating and financial policies of these companies. 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. REVENUE RECOGNITION Revenues are recognized when earned. Interstate access revenues are 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. 24 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash 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. BASIC AND DILUTED NET INCOME PER COMMON SHARE Basic and diluted net income per common share is based on the weighted average number of shares outstanding of 5,135,655 for 2001, 5,196,615 for 2000 and 5,197,365 for 1999. All per share data has been restated to reflect the three-for-one stock split effective January 10, 2002. 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: 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, 2001. 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% ownership in units of Midwest Wireless Holdings L.L.C. (MWH) at December 31, 2001 and 2000. 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 $1,794,092 as of December 31, 2001, net of accumulated amortization of $156,391. This amount is being expensed equally over 40 years. Amortization expense of $48,764 was included as a reduction of cellular investment income in 2001 and 2000. Cellular investments consist of the following: 2001 2000 ------------ ----------- MWH: Cost Less Accumulated Amortization $ 1,850,296 $ 1,899,060 Cumulative Income 7,351,084 6,093,684 Cumulative Distributions (3,372,637) (2,753,113) ----------- ----------- 5,828,743 5,239,631 Other Investments, Recorded at Cost 482,087 482,087 ----------- ----------- Total $ 6,310,830 $ 5,721,718 =========== =========== 25 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 3 - CELLULAR INVESTMENTS (CONTINUED) The following is summarized financial information as of and for the years ended December 31, 2001, 2000 and 1999 for MWH:
2001 2000 1999 ----------------- ----------------- ---------------- Current Assets $ 17,372,431 $ 14,363,696 $ 10,152,590 Noncurrent Assets 285,452,749 250,179,199 63,760,822 Current Liabilities 48,394,693 25,397,983 10,136,761 Noncurrent Liabilities 137,442,305 130,370,191 34,338,781 Members' Equity 117,188,182 108,774,721 29,437,870 Revenues 132,989,226 104,192,081 58,002,457 Operating Income 28,018,634 24,545,298 17,495,438 Net Income 16,588,360 14,297,071 13,821,243
NOTE 4 - RETIREMENT PLAN The Company's contribution to its 401(k) employee savings plan was $166,387 in 2001, $139,452 in 2000 and $111,682 in 1999. NOTE 5 - LINE OF CREDIT The Company has a 60 month revolving line of credit of $1,640,000 at 1 1/2% over the bank reference rate with the Rural Telephone Finance Cooperative. No amounts were outstanding at December 31, 2001 and 2000 under this line of credit, which matures in August 2003. NOTE 6 - LONG-TERM DEBT Long-term debt is as follows:
2001 2000 ------------- ------------- Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $65,000 plus 6.45% interest through December 1, 2008. $ 1,820,000 $ 2,080,000 Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $18,333 plus 6.45% interest through December 1, 2008. 513,333 586,667 Unsecured note payable to Phoenix Home Life Mutual Insurance Company in quarterly installments of $8,333 plus 6.45% interest through December 1, 2008. 233,333 266,666 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. -- 6,924,000 Secured ten year reducing revolving credit facility to CoBank, ACB in monthly installments of $125,000 (beginning in 2002) plus a national variable rate of interest through December 20, 2011 (3.41% at December 31, 2001). 15,000,000 ------------- ------------- Total 17,566,666 9,857,333 Less Amount Due Within One Year 1,866,666 866,666 ------------- ------------- Long-Term Debt $ 15,700,000 $ 8,990,667 ============= =============
26 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 6 - LONG-TERM DEBT (CONTINUED) Unadvanced CoBank loan funds total $10,000,000 at December 31, 2001. These funds are designated for the early retirement of all Phoenix debt in 2002, for future telecommunications plant construction and for cellular investments. Principal payments of $250,000 per quarter, plus interest at CoBank's national 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 March 31, 2002. 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: 2002 - $1,866,666; 2003 - $1,866,666; 2004 - $1,866,666; 2005 - $1,866,666; and 2006 - $1,866,666. Cash payments for interest, net of amounts capitalized, were $683,189 in 2001, $208,028 in 2000, and $228,599 in 1999. 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, 2001, approximately $215,000 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:
2001 2000 1999 -------------- -------------- -------------- Taxes Currently Payable: Federal $ 873,398 $ 1,669,697 $ 1,884,829 State 293,905 571,572 583,104 Deferred Income Taxes 806,879 (31,590) (8,594) Amortization of Investment Tax Credits (3,543) (3,542) (5,752) -------------- -------------- -------------- Income Tax Expense $ 1,970,639 $ 2,206,137 $ 2,453,587 ============== ============== ==============
The differences between the statutory federal tax rate and the effective tax rate were as follows: 2001 2000 1999 ------- ------- ------- 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 6.5 6.7 Amortization of Investment Tax Credits (.1) (.1) (.1) Non-Deductible Expenses 1.4 1.5 2.1 Prior Year Tax Adjustment (.2) .8 (.3) ------- ------ ------ Effective Tax Rate 41.6% 42.7% 42.4% ======= ====== ====== 27 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: 2001 2000 ------------ ------------ Deferred Tax Liabilities: Depreciation $ 2,160,628 $ 1,465,034 Other 125,215 13,930 ------------ ------------ Total $ 2,285,843 $ 1,478,964 ============ ============ Cash payments for income taxes were $1,530,207 in 2001, $2,065,082 in 2000, and $2,471,000 in 1999. NOTE 8 - RELATED PARTY TRANSACTIONS The officer note receivable is secured by New Ulm Telecom, Inc. common stock and has a 6.09% interest rate. A prior, variable interest rate note became due on January 1, 2001 and was renewed. 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 2002 is approximately $7,231,000, which will be financed through additional long-term borrowings and internally generated funds. As of December 31, 2001 the Company has no purchase commitments. The Company has committed to additional common stock investments of approximately $3,900,000 in the two Iowa RSA corporations discussed in Note 1. NOTE 10 - SUBSEQUENT EVENT In the fourth quarter of 2001, the Company's Board of Directors declared a three-for-one stock split of the Company's common shares for stockholders of record on January 10, 2002, payable on February 15, 2002. All per share data included in this report has been restated to reflect this stock split. An amount equal to the additional common shares issued in 2002 has been reflected in the consolidated statement of stockholders' equity for 2001. 28 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 11 - SEGMENT INFORMATION The Company is organized into five business segments: New Ulm Telecom, Inc., three of its wholly owned subsidiaries (Western Telephone Company, Peoples Telephone Company, and New Ulm Phonery, Inc.), and a cellular investment recorded using the equity method of accounting. No single customer accounted for a material portion of the Company's revenues in any of the last three years. The cellular investment is the Company's investment in Midwest Wireless Holdings L.L.C. and is shown using the proportionate method. Segment information is as follows:
New Ulm Western Peoples New Ulm Cellular Telecom Telephone Telephone Phonery Investment ------------ ------------ ------------ ------------ ------------ Year Ended December 31, 2001: Operating Revenues $ 7,687,791 $ 2,341,132 $ 1,042,744 $ 1,895,268 $ 10,031,822 Operating Expenses 6,493,827 1,063,092 552,100 1,144,518 7,956,771 ------------ ------------ ------------ ------------ ------------ Operating Income 1,193,964 1,278,040 490,644 750,750 2,075,051 Interest Expense (620,072) (36,029) (16,241) (713,755) Cellular Investment Income Other Investment Income 65,049 4,744 202,739 1,876 (152,660) ------------ ------------ ------------ ------------ ------------ Income Before Income Taxes $ 638,941 $ 1,246,755 $ 677,142 $ 752,626 $ 1,208,636 ============ ============ ============ ============ ============ Depreciation and Amortization $ 2,431,752 $ 385,197 $ 135,024 $ 123,182 $ 1,692,507 ============ ============ ============ ============ ============ Total Assets $ 52,070,721 $ 9,996,520 $ 4,149,850 $ 3,634,562 $ 22,969,308 ============ ============ ============ ============ ============ Capital Expenditures $ 6,421,321 $ 181,558 $ 161,894 $ 432,988 $ 2,562,355 ============ ============ ============ ============ ============ Year Ended December 31, 2000: Operating Revenues $ 6,986,102 $ 2,315,435 $ 992,151 $ 1,890,770 $ 7,795,241 Operating Expenses 5,337,563 1,026,332 516,148 1,170,316 6,037,226 ------------ ------------ ------------ ------------ ------------ Operating Income 1,648,539 1,289,103 476,003 720,454 1,758,015 Interest Expense (358,985) (40,639) (18,419) (655,807) Cellular Investment Income Other Investment Income 204,660 12,049 46,504 2,858 (120,540) ------------ ------------ ------------ ------------ ------------ Income Before Income Taxes $ 1,494,214 $ 1,260,513 $ 504,088 $ 723,312 $ 981,668 ============ ============ ============ ============ ============ Depreciation and Amortization $ 1,675,965 $ 374,215 $ 118,800 $ 135,271 $ 1,217,258 ============ ============ ============ ============ ============ Total Assets $ 42,770,269 $ 9,286,654 $ 3,766,987 $ 3,147,447 $ 20,052,351 ============ ============ ============ ============ ============ Capital Expenditures $ 8,953,429 $ 368,406 $ 128,156 $ 100,549 $ 9,417,650 ============ ============ ============ ============ ============ Year Ended December 31, 1999: Operating Revenues $ 6,514,128 $ 2,257,475 $ 890,855 $ 1,665,487 $ 4,831,291 Operating Expenses 4,491,131 989,603 489,805 764,568 3,410,091 ------------ ------------ ------------ ------------ ------------ Interest Expense 2,022,997 1,267,872 401,050 900,919 1,421,200 (160,794) (45,343) (20,643) (109,159) Cellular Investment Income Other Investment Income 71,779 33,034 (85,124) 4,142 23,448 ------------ ------------ ------------ ------------ ------------ Income Before Income Taxes $ 1,933,982 $ 1,255,563 $ 295,283 $ 905,061 $ 1,335,489 ============ ============ ============ ============ ============ Depreciation and Amortization $ 1,474,585 $ 359,098 $ 120,577 $ 94,686 $ 677,900 ============ ============ ============ ============ ============ Total Assets $ 32,691,736 $ 8,626,184 $ 3,448,255 $ 2,699,146 $ 6,239,026 ============ ============ ============ ============ ============ Capital Expenditures $ 1,830,503 $ 347,578 $ 410,557 $ 211,610 $ 1,401,115 ============ ============ ============ ============ ============
29 NEW ULM TELECOM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 11 - SEGMENT INFORMATION (CONTINUED) Segment information is as follows (continued):
Segment Totals Others Eliminations Consolidated ------------ ------------ ------------ ------------ Year Ended December 31, 2001: Operating Revenues $ 22,998,757 $ 697,083 $(10,031,822) $ 13,664,018 Operating Expenses 17,210,308 482,306 (7,956,771) 9,735,843 ------------ ------------ ------------ ------------ Operating Income 5,788,449 214,777 (2,075,051) 3,928,175 Interest Expense (1,386,097) 713,755 (672,342) Cellular Investment Income -- 1,208,636 1,208,636 Other Investment Income 121,748 152,660 274,408 ------------ ------------ ------------ ------------ Income Before Income Taxes $ 4,524,100 $ 214,777 $ -- $ 4,738,877 ============ ============ ============ ============ Depreciation and Amortization $ 4,767,662 $ -- $ (1,692,507) $ 3,075,155 ============ ============ ============ ============ Total Assets $ 92,820,961 $ 5,933,600 $(55,902,781) $ 42,851,780 ============ ============ ============ ============ Capital Expenditures $ 9,760,116 $ -- $ (2,562,355) $ 7,197,761 ============ ============ ============ ============ Year Ended December 31, 2000: Operating Revenues $ 19,979,699 $ 637,704 $ (7,795,241) $ 12,822,162 Operating Expenses 14,087,585 432,235 (6,037,226) 8,482,594 ------------ ------------ ------------ ------------ Operating Income 5,892,114 205,469 (1,758,015) 4,339,568 Interest Expense (1,073,850) 655,807 (418,043) Cellular Investment Income -- 981,668 981,668 Other Investment Income 145,531 120,540 266,071 ------------ ------------ ------------ ------------ Income Before Income Taxes $ 4,963,795 $ 205,469 $ -- $ 5,169,264 ============ ============ ============ ============ Depreciation and Amortization $ 3,521,509 $ -- $ (1,217,258) $ 2,304,251 ============ ============ ============ ============ Total Assets $ 79,023,708 $ 5,301,942 $(49,367,362) $ 34,958,288 ============ ============ ============ ============ Capital Expenditures $ 18,968,190 $ -- $ (9,417,650) $ 9,550,540 ============ ============ ============ ============ Year Ended December 31, 1999: Operating Revenues $ 16,159,236 $ 429,137 $ (4,831,291) $ 11,757,082 Operating Expenses 10,145,198 371,505 (3,410,091) 7,106,612 ------------ ------------ ------------ ------------ Operating Income 6,014,038 57,632 (1,421,200) 4,650,470 Interest Expense (335,939) 109,159 (226,780) Cellular Investment Income -- 1,335,489 1,335,489 Other Investment Income 47,279 (23,448) 23,831 ------------ ------------ ------------ ------------ Income Before Income Taxes $ 5,725,378 7,632 $ -- $ 5,783,010 ============ ============ ============ ============ Depreciation and Amortization $ 2,726,846 $ -- (677,900) $ 2,048,946 ============ ============ ============ ============ Total Assets $ 53,704,347 $ 4,843,159 $(31,520,437) $ 27,027,069 ============ ============ ============ ============ Capital Expenditures $ 4,201,363 $ -- $ (1,401,115) $ 2,800,248 ============ ============ ============ ============
30 Item 8. Supplemental Financial Information UNAUDITED QUARTERLY OPERATING RESULTS
Quarter Ended -------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 --------------- --------------- ----------------- ----------------- 2001: Revenues $ 3,225,165 $ 3,330,520 $ 3,234,741 $ 3,873,592 Operating Income 894,781 871,762 968,058 1,193,574 Net Income 654,367 754,903 619,257 739,711 Basic and Diluted Net Income per Share .13 .15 .12 .14 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 and Diluted Net Income per Share .15 .13 .09 .20
All per share data has been restated to reflect the three-for-one stock split effective January 10, 2002. 31 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, 2001. 32 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 17 Consolidated Statement of Income for the Three Years Ended December 31, 2001, 2000 and 1999 18 Consolidated Balance Sheet at December 31, 2001 and 2000 19-20 Consolidated Statement of Stockholders' Equity for the Three Years Ended December 31, 2001, 2000 and 1999 21 Consolidated Statement of Cash Flows for the Three Years Ended December 31, 2001, 2000 and 1999 22 Notes to Consolidated Financial Statements 23-30 (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. 35-49 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 50. b) Reports on Form 8-K ------------------- None
33 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 By: /s/ --------------------- ------------------------------------------ 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 By: /s/ --------------------- ------------------------------------------ Chris Hopp, Treasurer (Principal Financial and Accounting Officer) /s/ ------------------------------------------ James Jensen, Chairman of the Board /s/ ------------------------------------------ Duane Lambrecht, Director /s/ ------------------------------------------ Mark Retzlaff, Director /s/ ------------------------------------------ Gary Nelson, Director /s/ ------------------------------------------ Rosemary Dittrich, Director /s/ ------------------------------------------ Mary Ellen Domeier, Director /s/ ------------------------------------------ Perry Meyer, Director /s/ ------------------------------------------ Robert Ranweiler, Director 34 MIDWEST WIRELESS HOLDINGS L.L.C. REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Members of 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 consolidated financial position of Midwest Wireless Holdings L.L.C. and Subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations, changes in members' equity and their cash flows for each of the three years in the period ended December 31, 2001, 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 Minneapolis, Minnesota February 8, 2002 36 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AT DECEMBER 31, 2001 AND 2000 --------------------------------------------------------------------------------
ASSETS 2001 2000 Current assets: Cash and cash equivalents $ 3,032,464 $ 2,043,704 Accounts receivable, less allowance for doubtful accounts of $572,120 and $477,152 in 2001 and 2000, respectively 10,935,228 8,751,005 Inventories 2,207,887 2,718,772 Other assets 1,396,852 850,215 ----------------- ----------------- Total current assets 17,572,431 14,363,696 Property, cellular plant and equipment, net 89,469,296 73,523,318 FCC licenses, net 187,211,924 169,125,264 Investments in cooperatives 8,771,529 7,530,617 ----------------- ----------------- Total assets $ 303,025,180 $ 264,542,895 ================= ================= LIABILITIES AND MEMBERS' EQUITY Current liabilities: Current portion of long-term debt $ 13,679,657 $ 10,415,285 Revolving loan 20,000,000 -- Accounts payable 3,969,202 6,125,308 Accrued commissions 1,855,554 1,554,219 Other accrued expenses 8,890,280 7,303,171 ---------------- ----------------- Total current liabilities 48,394,693 25,397,983 Other liabilities 1,413,672 2,103,289 Revolving loan -- 2,500,000 Long-term debt 129,114,637 119,922,125 ---------------- ----------------- Total liabilities 178,923,002 149,923,397 Minority interest 6,913,996 5,844,777 Commitments Members' equity 117,188,182 108,774,721 ---------------- ----------------- Total liabilities and members' equity $ 303,025,180 $ 264,542,895 ================ =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 37 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 --------------------------------------------------------------------------------
2001 2000 1999 Operating revenues: Subscriber service $ 85,927,934 $ 63,993,328 $ 40,279,007 Roamer service 36,953,474 29,721,562 11,671,572 Equipment sales 10,058,368 9,015,304 5,651,878 Service fees 49,450 1,461,887 400,000 ------------------ ------------------ ----------------- 132,989,226 104,192,081 58,002,457 ------------------ ------------------ ----------------- Operating expenses: Operations and maintenance 24,776,324 19,785,719 10,502,756 Cost of equipment sold 13,654,007 10,458,625 5,570,633 Home roamer costs 12,919,143 8,823,278 1,699,261 Depreciation 17,822,738 12,278,169 7,528,105 Amortization of FCC licenses 4,505,851 3,780,643 494,381 Selling, general and administrative 31,292,529 24,520,349 14,711,883 ------------------ ------------------ ----------------- 104,970,592 79,646,783 40,507,019 ------------------ ------------------ ----------------- Operating income 28,018,634 24,545,298 17,495,438 ------------------ ------------------ ----------------- Other income (expense): Interest expense (9,416,290) (8,651,813) (1,291,817) Interest and dividend income 136,870 312,229 230,760 Other (41,784) (6,186) (393,575) ------------------ ------------------ ----------------- (9,321,204) (8,345,770) (1,454,632) ------------------ ------------------ ----------------- Net income before minority interest 18,697,430 16,199,528 16,040,806 Minority interest (2,109,070) (1,902,457) (2,219,563) ------------------ ------------------ ----------------- Net income $ 16,588,360 $ 14,297,071 $ 13,821,243 ================== ================== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 38 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 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) (6,439687) Net income -- 14,297,071 14,297,071 ---------------- ----------------- ------------------ Balance, December 31, 2000 84,797,020 23,977,701 108,774,721 Distributions to members -- (8,174,899) (8,174,899) Net income -- 16,588,360 16,588,360 ---------------- ----------------- ------------------ Balance, December 31, 2001 $ 84,797,020 $ 32,391,162 $ 117,188,182 ================ ================= ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 39 MIDWEST WIRELESS HOLDINGS L.L.C. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 --------------------------------------------------------------------------------
2001 2000 1999 Cash flows from operating activities: Net income $ 16,588,360 $ 14,297,071 $ 13,821,243 Adjustments to reconcile net income to net cash provided by operating activities: Net income allocated to minority interest 2,109,070 1,902,457 2,219,563 Provision for bad debts 1,115,719 623,261 (211,225) Depreciation 17,822,738 12,278,169 7,582,105 Amortization of FCC licenses 4,505,851 3,780,643 494,381 Loss (gain) on disposal of fixed assets (2,124) 27,278 390,567 Patronage received in form of cooperative stock (132,785) -- -- Accretion of discount on marketable securities -- -- (124,204) Changes in assets and liabilities: Accounts receivable (3,299,942) (2,665,409) (287,379) Inventories 510,885 (122,081) (895,770) Other assets (546,637) (322,733) (174,858) Accounts payable (2,156,106) 1,471,296 (674,665) Other accrued expenses 1,888,444 3,253,070 388,877 Other liabilities (689,617) 946,340 639,458 ---------------- ---------------- ---------------- Net cash provided by operating activities 37,713,856 35,469,362 23,168,093 ---------------- ---------------- ---------------- Cash flows from investing activities: Acquisition of cellular properties -- (96,215,489) -- Payments for property, cellular plant and equipment (33,804,163) (28,636,271) (20,385,685) Purchases of marketable securities -- -- (6,679,526) Proceeds received upon maturity of marketable securities -- -- 10,750,000 Proceeds from the disposal of fixed assets 37,571 -- -- Purchase of FCC licenses (22,400,000) (354,900) (287,300) Purchases of cooperative stock (1,176,440) (5,329,209) (653,121) Redemption of cooperative stock 68,313 -- -- Payments for deferred acquisition costs (192,511) -- (921,824) Release (restriction) of cash -- 1,000,000 (1,000,000) ---------------- ---------------- ---------------- Net cash used in investing activities (57,467,230) (129,535,869) (19,177,456) ---------------- ---------------- ---------------- Cash flows from financing activities: Proceeds on revolving loan 17,500,000 500,000 2,000,000 Proceeds from long-term debt borrowings 23,473,686 107,706,887 13,368,420 Payments on long-term debt (11,016,802) (6,130,602) (1,534,435 Distributions to members (8,174,899) (6,439,687) (5,889,661) Distribution from subsidiary to minority interest (1,039,851) (904,737) (940,503) Redemption of units -- -- (12,764,087) ---------------- ---------------- ---------------- Net cash provided by (used in) financing activities 20,742,134 94,731,861 (5,760,266) ---------------- ---------------- ---------------- Net change in cash and cash equivalents 988,760 665,354 (1,769,629) Cash and cash equivalents, beginning of year 2,043,704 1,378,350 3,147,979 ---------------- ---------------- ---------------- Cash and cash equivalents, end of year $ 3,032,464 $ 2,043,704 $ 1,378,350 ================ ================ ================ Supplemental disclosure: Cash paid during the year for interest $ 10,461,525 $ 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. 40 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 revenue for equipment installation when the installation is completed. 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 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. 41 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. The estimated useful lives of the cellular plant and equipment are as follows: Building and improvements 3 - 30 years Other equipment 2 - 20 years Communication and network equipment 7 - 15 years Vehicles 3 years Computer equipment 3 years Leased phones 1 year 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 $4,448,949, $3,021,650 and $1,754,394 for the years ended December 31, 2001, 2000 and 1999, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock and options using the intrinsic value method. 42 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 2. SELECT ACCOUNT INFORMATION PROPERTY, CELLULAR PLANT AND EQUIPMENT 2001 2000 Land $ 2,502,910 $ 2,093,598 Plant in service 128,305,172 94,427,420 Plant under construction 5,777,756 9,004,718 ------------- ------------- 136,585,838 105,525,736 Less accumulated deprecation (47,116,542) (32,002,418) ------------- ------------- $ 89,469,296 $ 73,523,318 ============= ============= The Company capitalized interest in the amount of $581,879, $608,199 and $243,973 for the years ended December 31, 2001, 2000 and 1999, respectively. At December 31, 2001, 2000 and 1999, accounts payable included $1,269,501, $2,891,666 and $1,295,835, respectively, related to the purchase of property, cellular, plant and equipment. FCC LICENSES 2001 2000 Cellular license $ 173,541,780 $ 173,541,780 LMDS licenses 357,696 357,696 PCS licenses 22,879,812 287,300 Other 354,900 354,900 ------------- ------------- 197,134,188 174,541,676 Less accumulated amortization (9,922,264) (5,416,412) ------------- ------------- $ 187,211,924 $ 169,125,264 ============= ============= 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). 43 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The Company allocated the excess purchase price over the fair value of the net tangible assets acquired 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. 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 ================ ================
On June 25, 2001, the Company acquired eight digital PCS licenses from McLeod USA, Inc. for a total purchase price of $22,400,000. The purchase is for spectrum licenses only and does not include any other assets. The licenses cover a total population of approximately 1.4 million in 63 counties in northern Iowa, southern Minnesota, eastern South Dakota, eastern Nebraska and western Illinois. The purchase price together with costs incurred of approximately $100,000 to complete the transaction is allocated to FCC licenses. 4. PURCHASE AGREEMENT On August 10, 2001, the Company entered into a purchase agreement for the acquisition of three digital PCS licenses for a total purchase price of $8,635,058. The agreement is for the purchase of spectrum licenses only and does not include any other assets. The licenses cover 26 counties primarily in southern Minnesota. At December 31, 2001, the FCC has not approved this transaction. However, the Company expects approval and expects the acquisition will be completed in 2002. 44 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 5. 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. 6. DEBT Long-term debt consists of the following:
RATE AT BALANCE AT DECEMBER 31 DECEMBER 31 ---------------- ------------------------------------- MATURITY 2001 2000 2001 2000 RTFC note, variable rate 5/12/09 5.25% 8.40% $ 10,928,336 $ 12,052,934 RTFC, variable rate 4/30/09 5.25% 22,872,168 -- RTFC note, fixed rate 7/29/08 5.75% 5.75% 6,696,207 7,458,340 RTFC note, variable rate 7/28/08 5.25% 8.40% 6,126,238 6,823,500 RTFC revolving note 7/29/03 5.95% 9.10% -- 2,500,000 RTFC note, variable rate 3/2/10 5.25% 8.40% 88,254,536 95,743,583 RTFC note, variable rate 2/3/15 5.25% 8.40% 7,916,809 8,259,053 CoBank note, variable rate 10/21/02 4.85% 20,000,000 -- -------------- -------------- $ 162,794,294 $ 132,837,410 ============== ==============
45 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 4.45% and 7.6% at December 31, 2001 and 2000, 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. At December 31, 2001, the Company was not in compliance with this covenant, but a waiver was provided by RTFC. Substantially all assets of the Company are pledged as collateral under the Agreement. On October 22, 2001 the Company entered into an agreement with CoBank, ACB ("CoBank") to fund the acquisition of various PCS licenses, capital expenditures and operating funds. The agreement provides for borrowings of up to $40,000,000 (the "revolving loan"). At December 31, 2001, the Company had drawn $20,000,000 on the revolving loan. At December 31, 2001, borrowings under the agreement bear interest at LIBOR plus 2.5% or 4.85%. The outstanding principal and interest are due upon maturity (October 21, 2002). The agreement with CoBank expires on October 21, 2002. Management plans to pursue a refinancing of this debt prior to its maturity. The revolving loan is subject to various covenants including a limit on the ratio of indebtedness to annualized operating cash flow, a minimum ratio of operating cash flow to interest paid, and a minimum debt coverage service ratio. Substantially all the assets of the Company are pledged as collateral under the agreement with CoBank. RTFC and CoBank have agreed to share a security interest in the Company's assets on a pro rata basis. Maturities of long-term debt are as follows: 2002 $ 33,679,657 2003 14,655,912 2004 15,702,490 2005 16,826,497 2006 18,027,422 Thereafter 63,902,316 ------------- $ 162,794,294 ============= 46 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 7. 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 at December 31, 2001, are as follows: 2002 $ 671,973 2003 498,840 2004 413,579 2005 294,546 2006 154,359 Thereafter 509,835 ------------- $ 2,543,132 ============= Rental expense was $955,514, $773,324 and $666,765 for the years ended December 31, 2001, 2000 and 1999, respectively. 8. 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 $376,783, $292,508 and $185,909 for the years ended December 31, 2001, 2000 and 1999, respectively. Profit sharing contribution expenses were $455,778, $309,312 and $210,606 for the years ended December 31, 2001, 2000 and 1999, respectively. Profit sharing contributions are 100% vested after five years of employment. Effective January 1, 1997, the Company established the Midwest Wireless Holdings L.L.C. Appreciation Rights Plan, as amended (formerly the Midwest Wireless Communications L.L.C. Appreciation Rights Plan) (the Plan) for certain key employees. The Plan is designed to create two classes of appreciation rights, Class A and Class B, which become fully vested three years and five years, respectively, after the first day of the year the rights are granted. 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. However, effective January 1, 2002, the Plan was amended to enable additional Class B appreciation rights to be granted in 2002. In 2000 and 2001, the Board of Managers issued additional Class A appreciation rights to certain key employees and in 2000 authorized an additional 9,000 rights for new Plan participants. The Company recognized $1,053,863, $1,137,500 and $639,458 in compensation expense related to the Plan for the years ended December 31, 2001, 2000 and 1999, respectively. 47 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 9. OPTION PLAN During 2000, the Company's Board of Managers adopted and approved the Midwest Wireless Holdings L.L.C. Unit Option Plan, as amended. Effective July 2001, the Plan was amended to clarify certain language and definitions in the Plan. Under the Plan, 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. The options granted vest 100% three years after they were granted. At December 31, 2001, there were 37,940 units available for issuance under this plan.
OPTIONS OUTSTANDING ----------------------------- WEIGHTED AVAILABLE NUMBER AVERAGE FOR OF PRICE PER GRANT UNITS UNIT Balance, December 31, 1999 -- -- -- Authorized 46,742 -- -- Granted (4,092) 4,092 $ 299.06 ----------- -------- Balance, December 31, 2000 42,650 4,092 $ 299.06 Granted (4,710) 4,710 $ 318.32 ----------- -------- Balance, December 31, 2001 37,940 8,802 $ 309.37 =========== ========
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, 2001 or 2000. If the Company had elected to recognize compensation expense for options granted using the fair value method, net income would have been as follows: 2001 2000 Net income: As reported $ 16,588,360 $ 14,297,071 Pro forma 16,373,577 14,251,198 48 MIDWEST WIRELESS HOLDINGS L.L.C. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The weighted average fair value of options at the date of grant was $52.73 and $80.71 in 2001 and 2000, respectively. The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
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 - $318.32 8,802 8.31 $ 309.37 -- --
The fair value for each option grant was estimated at the date of grant using the minimum value method with the following assumptions: FISCAL YEAR -------------------------------- 2001 2000 Dividend yield 2.47% 2.07% Risk-free interest rate 4.73% 6.19% Expected lives 10 years 10 years 49