newulm105600_10ka.htm - Generated by SEC Publisher for SEC Filing

10-K/A 1 newulm105600_10ka.htm AMENDMENT NO. 1 TO FORM 10-K FOR FISCAL PERIOD ENDED DECEMBER 31, 2009 newulm105600_10ka.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

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

	For the fiscal period ending December 31, 2009 or

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

For the transition period from_____to_____

Commission File Number: 0-3024

NEW ULM TELECOM, INC.

(Exact name of registrant as specified in its charter)

Minnesota		41-0440990
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

27 North Minnesota Street
New Ulm, Minnesota 56073

(Address of principal executive offices)

Registrant’s telephone number, including area code: (507) 354-4111

Securities registered pursuant to Section 12 (g) of the Act:

Title of Class

Common Stock, $1.66 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

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

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

Indicate by check mark 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. Yes ☒ No ☐

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

☐ Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company

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

The number of shares of the registrant’s common stock, $1.66 par value, outstanding as of March 26, 2010 was 5,115,435. The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2009 was $30,693,617 based on the closing sale price of $6.32 per share on The OTC Bulletin Board.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 2010 (Proxy Statement) are incorporated by reference in Part III of this Form 10-K.

EXPLANATORY NOTE

This Amendment No. 1 (“Amendment No. 1”) to the Annual Report on Form 10-K/A for New Ulm Telecom, Inc., (the “Company”) amends the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 initially filed with the Securities and Exchange Commission (“the SEC”) on March 29, 2010 (the “Original Filing”).

This Amendment No. 1 Is being filed solely to correct a typographical error in the Report of the Independent Registered Public Accounting Firm for the December 31, 2009 consolidated financial statements of Hector Communications Corporation, a significant subsidiary of the Company. The typographical error occurred at page 86 of the Form 10-K.

We have also included an updated signature page and currently dated certifications from the Company’s Acting Chief Executive and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to this report.

Except as set forth above, the Original Filing has not been amended, updated or otherwise modified.

TABLE OF CONTENTS

Item 15. Exhibits and Financial Statements Schedules

(b) Separate financial statements of Hector Communications Corporation, 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.

SIGNATURES

31.1*	Certification of Chief Executive Officer Under Rule 13a-14(a) Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer Under Rule 13a-14(a) Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer Under 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer Under 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

HECTOR COMMUNICATIONS CORPORATION

Consolidated Financial Statements

December 31, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Hector Communications Corporation

New Ulm, Minnesota

We have audited the accompanying consolidated balance sheets of Hector Communications Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2009. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, 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 Hector Communications Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/Olsen Thielen & Co., Ltd.

St. Paul, Minnesota
March 25, 2010

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2009 AND 2008

ASSETS

CURRENT ASSETS:	2009			2008
Cash and cash equivalents	$	1,415,260		$	3,227,462
Accounts receivable (net of allowance of $70,748 and $72,833)		1,936,008			2,209,617
Income Taxes Receivable		153,521			—
Materials, supplies and inventories (Note 1)		609,616			579,251
Deferred income taxes		238,640			715,000
Other Current Assets		121,834			105,017
Total current assets		4,474,879			6,836,347

PROPERTY, PLANT AND EQUIPMENT: (Notes 1 and 2)		50,872,133			45,377,089
less accumulated depreciation		(18,981,147	)		(13,091,766	)
Net property, plant and equipment		31,890,986			32,285,323

OTHER ASSETS:
Goodwill (Note 3)		60,191,264			60,191,264
Intangibles (Note 3)		32,520,200			35,619,800
Investment in unconsolidated affiliates (Note 5)		3,534,878			4,158,544
Other investments (Notes 1, 6 and 8)		3,916,454			3,877,656
Other assets (Note 1)		517,624			652,225
Total other assets		100,680,420			104,499,489
TOTAL ASSETS	$	137,046,285		$	143,621,159

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Notes payable and current portion of long-term debt (Note 8)	$	4,900,000		$	4,500,000
Accounts payable		998,901			755,021
Payable to affiliates		366,630			110,257
Accrued expenses		1,471,388			1,535,263
Fair Value of Interest Rate Swaps		—			1,211,586
Income taxes payable		—			1,961,676
Total current liabilities		7,736,919			10,073,803

LONG TERM DEBT, less current portion (Note 8)		54,250,030			59,949,725
DEFERRED INCOME TAXES (Note 7)		13,797,504			14,786,658
FAIR VALUE OF INTEREST RATE SWAPS (Note 9)		2,681,427			2,436,662
DEFERRED COMPENSATIONS (Note 10)		403,259			845,008
Total liabilities		71,132,220			78,018,053

STOCKHOLDERS’ EQUITY:
Common Stock, par value $0.01 per share; 1,000,000 shares authorized; 900,000 shares issued and outstanding		9,000			9,000
Paid in Capital		53,991,000			53,991,000
Retained Earnings		6,095,616			3,975,471
Accumulated other comprehensive losses		(1,918,470	)		(2,446,168	)
Total Stockholders’ Equity		58,177,146			55,529,303

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	137,046,285		$	143,621,159

See the notes to the consolidated financial statements.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


	2009			2008			2007
REVENUES:
Voice services	$	18,170,372		$	18,601,793		$	20,347,184
Video services		2,622,972			2,616,771			2,530,562
Internet services		5,233,726			5,203,560			4,885,670
Other nonregulated services		2,248,172			2,449,823			2,721,494
Total revenues		28,275,242			28,871,947			30,484,910

COSTS AND EXPENSES:
Plant operations, excluding depreciation		6,405,189			6,315,371			5,914,863
Customer operations		1,472,494			1,342,481			1,384,184
General and administrative		1,610,310			2,543,234			3,413,556
Depreciation and amortization		9,252,239			9,290,992			9,936,713
Other operating expenses		2,594,368			2,735,812			2,649,116
Total costs and expenses		21,334,600			22,227,890			23,298,432

OPERATING INCOME		6,940,642			6,644,057			7,186,478

OTHER INCOME (EXPENSE):
Interest expense		(3,710,903	)		(4,335,349	)		(6,186,228	)
Interest and dividend income		225,610			301,896			662,751
Income from investments in unconsolidated affiliates (Note 5)		156,564			304,082			245,245
Gain on sale of assets		18,232			233,258			829,968
Other income (expense), net		(3,310,497	)		(3,496,113	)		(4,448,264	)

INCOME BEFORE INCOME TAXES		3,630,145			3,147,944			2,738,214

INCOME TAX EXPENSE (Note 7)		1,510,000			1,270,000			1,129,000

NET INCOME	$	2,120,145		$	1,877,944		$	1,609,214

BASIC AND DILUTED NET INCOME PER SHARE	$	2.36		$	2.09		$	1.79

See the notes to the consolidated financial statements.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

	2009			2008			2007
Net income	$	2,120,145		$	1,877,944		$	1,609,214

Other comprehensive income (loss):
Unrealized holding gain (loss) on marketable securities		(77,856	)		(449,211	)		443,062
Income tax benefit (expense) related to unrealized holding gain (loss) on marketable securities		31,142			179,684			(177,202	)
Reclassification adjustment for gains on marketable securities included in net income		—			—			(323,654	)
Income tax expense related to reclassification adjustments for gains included in net income		—			—			129,460
Unrealized gain (loss) on interest rate swap agreement		966,821			(2,740,349	)		(807,919	)
Income tax benefit (expense) related to unrealized gain (loss) on interest rate swap agreement		(392,409	)		1,097,551			326,960
Other comprehensive income (loss)		527,698			(1,912,325	)		(409,293	)

Comprehensive income (loss)	$	2,647,843		$	(34,381	)	$	1,199,921

See the notes to the consolidated financial statements.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 and 2007

	Common Stock		Paid In Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)			Total
BALANCE at December 31, 2006	$	9,000	$	53,991,000	$	488,313	$	(124,550	)	$	54,363,763

Net Income					$	1,609,214				$	1,609,214
Change in unrealized losses on marketable securites, net of deferred taxes							$	71,666		$	71,666
Change in unrealized losses on interest rate swap agreement, net of deferred taxes							$	(480,959	)	$	(480,959	)

BALANCE at December 31, 2007	$	9,000	$	53,991,000	$	2,097,527	$	(533,843	)	$	55,563,684

Net Income					$	1,877,944				$	1,877,944
Change in unrealized losses on marketable securites, net of deferred taxes							$	(269,527	)	$	(269,527	)
Change in unrealized losses on interest rate swap agreement, net of deferred taxes							$	(1,642,798	)	$	(1,642,798	)

BALANCE at December 31, 2008	$	9,000	$	53,991,000	$	3,975,471	$	(2,446,168	)	$	55,529,303

Net Income					$	2,120,145				$	2,120,145
Change in unrealized losses on marketable securites, net of deferred taxes							$	(46,714	)	$	(46,714	)
Change in unrealized losses on interest rate swap agreement, net of deferred taxes							$	574,412		$	574,412

BALANCE at December 31, 2009	$	9,000	$	53,991,000	$	6,095,616	$	(1,918,470	)	$	58,177,146

See the notes to the consolidated financial statements.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

	2009			2008			2007
Cash Flows from Operating Activities:
Net income	$	2,120,145		$	1,877,944		$	1,609,214
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		9,386,843			9,425,596			10,071,317
Income from unconsolidated affiliates		(156,564	)		(304,082	)		(245,245	)
Cash distributions from unconsolidated affiliates		105,321			176,777			156,432
Gain on sale of assets		(18,232	)		(233,258	)		(829,968	)
Noncash patronage refund		(159,717	)		(108,716	)		(42,838	)
Noncash interest income from notes		—			—			(1,019	)
Changes in assets and liabilities:
Accounts receivable		273,609			245,297			146,113
Income taxes receivable		(153,521	)		—			—
Materials and supplies		(30,365	)		275,357			(117,373	)
Other current assets		(16,817	)		921,097			83,810
Accounts payable		500,253			(151,077	)		(377,430	)
Accrued expenses		(63,875	)		(312,379	)		(901,026	)
Interest Rate Swap		—			—			—
Income taxes payable		(1,961,676	)		1,961,676			(17,452,809	)
Deferred taxes		(874,061	)		(5,738,238	)		(1,830,625	)
Deferred compensation		(441,749	)		(43,625	)		39,896
Net cash provided by (used in) operating activities		8,509,594			7,992,369			(9,691,551	)

Cash Flows from Investing Activities:
Purchases of property, plant and equipment		(5,758,244	)		(5,081,267	)		(3,133,579	)
Proceeds from sales of CATV Properties		—			233,258			—
Purchases of investments		(21,531	)		(272,934	)		(176,704	)
Increase in intangibles		—			—			(34,105	)
Payable to USCC		—			(832,701	)		(3,195,812	)
Proceeds from sales of investments		757,674			4,382,379			3,927,697
Net cash used in investing activities		(5,022,101	)		(1,571,265	)		(2,612,503	)

Cash Flows from Financing Activities:
Repayment of notes payable and long-term debt		(6,679,917	)		(10,744,918	)		(10,937,786	)
Proceeds from issuance of long-term debt		1,380,222			—			—
Net cash used in financing activities		(5,299,695	)		(10,744,918	)		(10,937,786	)

Net Decrease in Cash and Cash Equivalents		(1,812,202	)		(4,323,814	)		(23,241,840	)

Cash and Cash Equivalents at Beginning of Period		3,227,462			7,551,276			30,793,116

Cash and Cash Equivalents at End of Period	$	1,415,260		$	3,227,462		$	7,551,276

Supplemental disclosures of cash flow information:
Interest paid during the period	$	4,123,586		$	4,915,370		$	6,715,991
Income taxes paid during the period		4,499,258			4,861,678			20,597,318

See the notes to the consolidated financial statements.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business: On November 3, 2006, Hector Acquisition Corporation (HAC) acquired all of the Company’s outstanding common stock. Simultaneous with the acquisition, HAC was merged into the Company and the new legal entity was renamed Hector Communication Corporation. In connection with this acquisition, the accounts of the Company were adjusted using the push down basis of accounting to recognize the allocation of the consideration paid for the common stock to the respective net assets acquired.

Hector Communications Corporation owns a 100% interest in five local exchange telephone subsidiaries. The Company also owns a 100% interest in Alliance Telecommunications Corporation, which owns and operates four local exchange telephone companies. At December 31, 2009, the Company’s subsidiaries provided telephone service to 25,542 access lines in 28 rural communities in Minnesota, Wisconsin and North Dakota and cable television services to 4,422 subscribers in Minnesota. The Company is also an investor in partnerships and corporations providing other telecommunications related services.

Principles of consolidation: The consolidated financial statements include the accounts of Hector Communications Corporation and its subsidiaries (“Hector” or the “Company”). All material intercompany transactions and accounts have been eliminated.

Regulatory accounting: Accounting practices prescribed by regulatory authorities have been considered in the preparation of the financial statements and formulation of accounting policies for telephone subsidiaries. These policies conform to accounting principles generally accepted in the United States of America as applied to regulated public utilities.

Estimates: The presentation 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, liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates. The Company’s financial statements are also affected by depreciation rates prescribed by regulators, which may result in different depreciation rates than for an unregulated enterprise.

Subsequent Events: In preparing these financial statements, the Company has evaluated for recognition or disclosure the events or transactions that occurred through March 25, 2010, the date the financial statements were available to be issued.

Revenue recognition: Revenues are recognized when earned, regardless of the period in which they are billed. Network access revenues are based upon interstate tariffs filed with the Federal Communications Commission by the National Exchange Carriers Association (NECA) and state tariffs filed with state regulatory agencies. Interstate network access revenues are furnished in conjunction with interexchange carriers and are determined by cost separation studies and nationwide average schedules. Access charges billed to interexchange carriers for interstate access are pooled with like revenues from all NECA member companies. A portion of the pooled access revenue the Company receives from the pool is based on the Company’s actual costs of providing the interstate access service. The remaining interstate revenue settlements are based upon nationwide average schedule costs of providing interstate access service. Revenues include estimates pending finalization of cost studies for those subsidiaries receiving cost based access settlements. Management believes recorded revenues are reasonable based on estimates of final cost separation studies, which are typically settled within two years.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Presentation of Taxes Collected From Customers: Sales, excise, and other taxes are imposed on most of the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.

Income taxes: The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Significant components of the Company’s deferred taxes arise from differences in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, partnerships due to the differences between book and tax income, and intangible assets which are amortized for book purposes but not deductible for tax purposes.

Effective January 1, 2009, the Company adopted new guidance related to uncertainty in income taxes. This guidance clarifies the recognition threshold and measurement requirements for income tax positions taken or expected to be taken in income tax returns. Under the new standards, the Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by taxing authorities. In addition, any interest or penalties assessed by a taxing authority would be reflected in income tax expense. Prior to January 1, 2009, the Company accrued liabilities for uncertain tax positions if losses were probable and could be reasonably estimated. The Company has identified no significant income tax uncertainties. The Company is open to examination for tax years 2006 through 2008.

Net income per share: Basic and diluted net income per common share is based on the weighted average number of common shares outstanding during the period presented.

Cash and cash equivalents: The Company considers temporary cash investments with an original maturity of three months or less to be cash equivalents. The Company places its cash investments with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts. The account balances at times exceed the federally insured limits. The Company has not experienced losses in these accounts and does not believe they are exposed to any significant credit risk.

Accounts receivable: Receivables are stated at the amount the Company expects to collect from outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to the receivable accounts.

A significant portion of the Company’s revenues is received from long distance carriers in the telephone industry. Consequently, the Company is directly affected by the financial well-being of that industry. The credit risk associated with these accounts is minimized due to the large number of long distance carriers.

Materials, supplies and inventories: Materials, supplies and inventories are valued at the lower of average cost or market.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property, plant and equipment: Property, plant and equipment is recorded at cost. Depreciation is computed using principally the straight-line method based on estimated service or remaining useful lives of the various classes of depreciable assets. Maintenance and repairs are charged to operations and additions or improvements are capitalized. Items of telecommunications property sold, retired or otherwise disposed of in the ordinary course of business are removed from assets and any gains or losses are included in accumulated depreciation. Any gains or losses on non-telecommunications property and equipment retirements are reflected in the current year operations. The Company reviews long lived assets for impairment if certain events or changes in circumstances indicate that impairment may exist. The Company has not recorded any impairment losses on property, plant and equipment for the years ended December 31, 2009, 2008 or 2007.

Investments in unconsolidated affiliates: The Company is an investor in several partnerships and limited liability corporations (Note 5). The Company’s percentage of ownership in these joint ventures ranges from 5% to 20%. The Company uses the equity method of accounting for these investments, which reflects original cost and recognition of the Company’s share of operating income or losses from the respective operations.

Other investments: The Company owns CoBank stock and investments in the stock of other telecommunications service providers. Long-term investments in corporations that are not intended for resale or are not readily marketable and in which the Company does not exercise significant influence are valued using the cost method. The cost method requires the Company to periodically evaluate these investments for impairment and if impairment is found, reduce the investment’s valuation to its net realizable value. No impairment charges have been taken against these investments

Intangibles and other assets: Intangible assets owned by the Company include customer relationships, trade names, and regulatory rights acquired and customer lists purchased. Other assets owned by the Company include deferred debt issuance costs, and other deferred charges. Intangible assets determined to have an indefinite useful life are not amortized. Intangible assets with a determinable life are amortized over the useful life.

Disclosures about fair value of financial instruments: Effective January 1, 2008, the Company adopted new guidance related to fair value measurements and disclosures. This new guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. The fair value of the Company’s investment securities were determined based on Level 1 inputs. The fair value of the interest rate swap agreements were determined based on Level 2 inputs.

The fair value of the Company’s other financial instruments approximate carrying value except for long-term investments in other companies. Other long-term investments are not intended for resale and are not readily marketable, thus a reasonable estimate of fair value is not practicable. The fair value of long-term debt is estimated based on current rates offered to the Company for debt with similar terms and maturities. The fair value of the Company’s debt approximates carrying value.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Principles: Effective January 1, 2009 the Company adopted amended guidance regarding “Disclosures about Derivative Instruments and Hedging Activities.” The amended guidance requires enhanced disclosures about a Company’s derivatives and hedging activities in order to improve the transparency of their financial reporting. The amended guidance is effective for financial statements issued for fiscal years beginning after November 15, 2008. Adoption of the amended guidance impacted disclosures only and did not have an impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued guidance regarding “Subsequent Events.” The new guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the new guidance provides (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The new guidance is effective for annual financial periods ending after June 15, 2009, and shall be applied prospectively. Adoption of the new guidance impacted disclosures only and did not have an impact on the Company’s consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance related to establishing the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. This new guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued new guidance related to Revenue Recognition specifically multiple-deliverable revenue arrangements. This guidance provides application guidance on whether multiple deliverables exist, how the deliverables should be separated, and how the consideration should be allocated to one or more units of accounting. The guidance establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified for the fiscal year beginning on or after June 15, 2010; however, earlier application is permitted. The Company has not determined the impact that this update may have on its consolidated financial statements.

In January 2010, the FASB issued new guidance related to, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This new guidance requires new disclosures and clarifies existing disclosure requirements about fair value measurements as set forth in the FASB Codification Subtopic 820-10. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. Early adoption is permitted. Adoption of this guidance impacts disclosures only and will not have an impact on the Company’s consolidated financial statements.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - PROPERTY, PLANT AND EQUIPMENT

The cost of property, plant and equipment and the estimated useful lives are as follows:

	Estimated Useful life	Dec 31, 2009			Dec 31, 2008
Land		$	414,052		$	414,052
Buildings	5-40 years		3,683,689			3,573,317
Machinery and equipment	3-15 years		770,068			691,367
Furniture and fixtures	5-10 years		240,280			200,948
Telephone plant	5-33 years		42,951,598			38,463,911
Cable television plant	10-15 years		2,310,708			1,648,976
Construction in progress			501,738			384,518
			50,872,133			45,377,089
Less accumulated depreciation			(18,981,147	)		(13,091,766	)
		$	31,890,986		$	32,285,323

Depreciation expense included in costs and expenses from operations was $6,152,640, $6,186,392 and $6,818,700 for the years ended December 31, 2009, 2008 and 2007.

NOTE 3 - GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill balance relates to the Company’s acquisition by HAC as discussed in Note 1. A preliminary purchase price allocation resulted in goodwill of $86,347,040. During 2007, the Company obtained an independent appraisal of the identifiable intangible assets acquired as a result of the business combination and revised the purchase price allocation in accordance with the independent appraisal. Along with the valuation of identifiable intangible assets acquired, the appraisal also determined the estimated useful lives of those amortizable assets based on historical customer churn statistics for the customer relationship intangible asset, and the estimated useful life of the Company’s regulated investment base for the identified regulatory rights intangible asset.

In addition, in 2008 and 2007, the Company received $4,323,450 and $2,699,833, respectively, of funds released from an escrow account related to the pre-acquisition sale of Midwest Wireless Holdings as discussed in Note 4. These funds were not recorded in the allocation of the purchase price of the Company as they were contingent on future events. In 2008 and 2007, when the contingency was resolved and the funds were released, they were recorded against goodwill net of the related income taxes.

A summary of changes to the Company’s goodwill is as follows:


Balance at December 31, 2006	$	86,347,040
Reclassification of identified intangible assets acquired net of deferred income taxes of $10,555,100		(22,373,900	)
Midwest Wireless Holdings escrow funds received net of income taxes of $1,026,200		(1,673,683	)
Other adjustments		(432,046	)
Balance at December 31, 2007	$	61,867,411
Additional income taxes on liquidation of Subsidiary holding a portion of the Midwest Wireless investment		1,003,903
Midwest Wireless Holdings escrow funds received net of income taxes of $1,643,400		(2,680,050	)
Balance at December 31, 2008 and 2009	$	60,191,264

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - GOODWILL AND INTANGIBLE ASSETS (Continued)

Under generally accepted accounting principles, goodwill and intangible assets with indefinite useful lives are not amortized but are instead tested for impairment on at least an annual basis and when changes in circumstances indicate that the value of goodwill may be below its carrying value. In 2009 and 2008, the Company engaged an independent valuation firm to complete its annual impairment test for goodwill acquired. Such testing resulted in no impairment charge to goodwill, as the determined fair value was sufficient to pass the first step of the impairment test in both years.

The components of the Company’s identified intangible assets are as follows:

	December 31, 2009					December 31, 2008
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Definitely Lived Intangibles:
Customer Relationships - 11.58 Yr Life	$	31,125,000	$	(8,249,936	)	$	31,125,000	$	(5,536,624	)
Regulatory Rights - 13.61 Yr Life		5,193,000		(1,158,864	)		5,193,000		(772,576	)
Indefinitely Lived Intangibles
Trade name		5,611,000		—			5,611,000		—
Totals	$	41,929,000	$	(9,408,800	)	$	41,929,000	$	(6,309,200	)
Net Identified Intangible Assets			$	32,520,200				$	35,619,800

Amortization expense of definitely lived intangible assets was $3,099,600 for the year ended December 31, 2009, $3,104,600 for the years ended December 31, 2008 and 2007. Amortization expense for the next five years is estimated at $3,104,600 annually.

NOTE 4 - MIDWEST WIRELESS HOLDINGS LLC

Hector Communications Corporation owned approximately 8% of Midwest Wireless Holdings L.L.C (MWH). In November of 2005, Midwest Wireless Holdings L.L.C. (MWH) and Alltel Corporation (Alltel) entered into an agreement for Alltel to purchase MWH. The transaction was closed October 2, 2006 after the satisfaction of conditions and the receipt of regulatory approvals, which was prior to Hector Acquisition Corporation’s purchase of the Company. Under the terms of the agreement, all of the members of MWH sold their membership interests to Alltel. Upon closing, the members received approximately 90% of the sale proceeds. Alltel delivered the other 10% to the escrow agent. The escrow account was to be used for any true-up adjustments, indemnifications, and other specified costs.

In 2008 and 2007, the Company received $4,323,450 and $2,699,883 of the escrowed funds. These funds net of related income taxes were recorded against goodwill as they related to a pre-acquisition contingency which was resolved subsequent to the acquisition of the Company by HAC.

A portion of the Company’s investment in MWH was held in a subsidiary which was 49% owned by United States Cellular Corporation (USCC). This subsidiary was liquidated in 2008 upon receipt of the final indemnification escrow payments. At December 31, 2007, the Company had a balance payable to USCC which represents the amount of proceeds from the MHW sale due to USCC from the Company. The full liability was paid to USCC in 2008.

NOTE 5 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company is a co-investor with other rural telephone companies in several partnerships and limited liability corporations. These joint ventures make it possible to offer certain services to customers, including centralized switching or fiber optic transport of messaging, that the Company could not afford to offer on its own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. The Company recognizes income and losses from these investments on the equity method of accounting. The following table summarizes the Company’s ownership percentage, investment at December 31, 2009 and 2008 and income or loss from these investments for the years ended December 31, 2009, 2008 and 2007.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES (Continued)

	Ownership Interest	Book Value at December 31, 2009		Book Value at December 31, 2008		Income (Loss) 2009			Income (Loss) 2008			Income (Loss) 2007
Broadband Visions	16.7%	$	787,793	$	856,561	$	(68,767	)	$	(18,641	)	$	(14,582	)
Communications Mgmt Grp	6.5%		540,887		441,860		99,027			126,581			75,817
Independent Pinnacle Services	7.9%		—		669,726		51,972			69,633			83,233
Northern Transport Group	20.0%		—		—		—			(39,452	)		(41,940	)
NW Minnesota Spec Access	5.3%		21,461		10,065		11,396			600			17,298
702 Communications	18.1%		1,512,396		1,552,292		9,003			113,354			75,476
West Central Transport	5.0%		223,345		201,457		46,888			60,864			49,943
Midwest AWS Limited Partners	13.5%		238,598		219,038		7,212			(7,639	)		—
SkyCom 700 mhz LLC	8.4%		210,398		207,545		(167	)		(1,218	)		—

		$	3,534,878	$	4,158,544	$	156,564		$	304,082		$	245,245

In 2009, the Company received $706,595 in cash for its ownership of Independent Pinnacle Services. The proceeds exceeded the investment of $688,423 by $18,172, which was recorded as a gain in 2009.

NOTE 6 - MARKETABLE SECURITIES

The Company holds investments in marketable securities that are classified as non-current other investments. Marketable securities consist of equity securities of other telecommunications companies. The Company’s marketable securities portfolio was classified as available-for-sale at December 31, 2009 and 2008. The cost and fair value of available-for-sale investment securities were as follows:

	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2009	$	1,263,806	$	41,689	$	557,698	$	747,797
December 31, 2008	$	1,263,806	$	—	$	438,151	$	825,655

The following table shows the Company’s investments’ gross unrealized losses, fair value, and the length of time that individual security have been in a continuous unrealized loss position at December 31, 2009 and 2008.

	2009
	12 Months or More					Total
Description	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Equity Securities	$	514,802	$	(557,698	)	$	514,802	$	(557,698	)

	2008
	12 Months or More					Total
Description	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Equity Securities	$	682,110	$	(390,390	)	$	682,110	$	(390,390	)

The investment security in an unrealized loss position is traded on the over-the-counter bulletin board market. The unrealized losses on the Company’s investment in this equity security is considered to be a reflection of current economic conditions in the United States and global economy over the past two years which have placed unwarranted downward pressure on the investment’s stock price, and that price is not believed to be directly correlated with the net worth of the investment’s stock value. In addition, the Company also believes that there has been no deterioration in the financial condition or overall fundamentals of the individual security held. The Company has the intent and ability to hold this security until the unrealized losses are recovered. Based on this analysis, the Company has concluded that this investment is not other-than-temporarily impaired at December 31, 2009.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - MARKETABLE SECURITIES (Continued)

Realized gains on the sales of securities are based on the book value of the securities sold using the specific identification method. In 2007, the Company sold marketable securities for a gain of $323,654. Net proceeds from the sales were $515,665. There were no marketable security sales in 2009 or 2008.

Net unrealized gains (losses) on marketable securities, net of related deferred taxes, are included in stockholders’ equity as accumulated other comprehensive income (loss) at December 31, 2009, 2008 and 2007 as follows:

	Net Unrealized Gains (Losses)			Deferred Income Taxes			Accumulated Comprehensive Income (Losses)
December 31, 2009	$	(77,856	)	$	31,142		$	(46,714	)
December 31, 2008	$	(449,211	)	$	179,211		$	(269,527	)
December 31, 2007	$	119,408		$	(47,742	)	$	71,666

These amounts have no cash effect and are not included in the statement of cash flows.

NOTE 7 - INCOME TAXES

Hector Communications Corporation and its subsidiaries file a consolidated tax return. Income tax expenses (benefits) were as follows:

	2009			2008			2007
Currently payable taxes:
Federal	$	1,598,767		$	5,338,235		$	1,948,612
State		785,294			1,670,003			533,156
		2,384,061			7,008,238			2,481,768
Deferred income tax		(874,061	)		(5,738,238	)		(1,352,768	)
	$	1,510,000		$	1,270,000		$	1,129,000

Deferred tax liabilities and assets as of December 31 related to the following:

	2009			2008
Deferred tax liabilities:
Accelerated depreciation	$	4,137,196		$	3,996,584
Intangibles		10,745,311			11,931,545
Partnership and LLC investments		244,119			222,778
		15,126,626			16,150,907
Deferred tax assets:
Deferred compensation		158,724			332,971
Accrued expenses		238,640			230,383
Interest rate swaps		1,072,562			1,464,971
Other		97,836			50,924
		1,567,762			2,079,249

	$	13,558,864		$	14,071,658

Presented on the balance sheet as:

Current deferred tax asset	$	(238,640	)	$	(715,000	)
Non current deferred tax liability		13,797,504			14,786,658

Net deferred tax	$	13,558,864		$	14,071,658

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - INCOME TAXES (Continued)

The provision for income taxes varied from the federal statutory tax rate as follows:

	2009			2008			2007
Tax at U.S. statutory Rate		35.0	%		35.0	%		35.0	%
Surtax exemption		(1.0	)		(1.0	)		(1.0	)
State income taxes, net of federal benefit		8.6			7.2			7.9
Other		(1.0	)		(0.8	)		(0.7	)
Effective tax rate		41.6	%		40.4	%		41.2	%

NOTE 8 - LONG-TERM DEBT

The Company’s long-term debt is as follows:

	December 31, 2008		December 31, 2008
CoBank
Term loan facility	$	57,665,000	$	64,300,000
Revolving credit facility		1,380,222		—
RDUP
Rural economic development loan		104,808		149,725
Total		59,150,030		64,449,725
Less current portion		4,900,000		4,500,000
	$	54,250,030	$	59,949,725

The Term Loan Facility payable to CoBank by the Company was the main vehicle to finance the acquisition by HAC. Principal payments on this facility were deferred for one year and began in December 2007. Principal payments will be due quarterly until September 30, 2013 when the remaining balance of $41,765,000 is due. Interest is payable quarterly at a variable rate plus the LIBOR margin rate (2.56%, 4.56% and 7.44% at December 31, 2009, 2008 and 2007). The LIBOR margin rate which can range from .75% to 3.0% will increase or decrease based on how the Company’s “leverage ratio” increases or decreases as defined in the loan agreement. As mentioned in Note 9, the Company has effectively fixed the interest rates and payments on $51,000,000 of this debt through interest rate swap agreements. CoBank syndicated $25,000,000 of the original term loan facility to other financial institutions, but remains the administrative agent for the loan.

The Company also has available a Revolving Credit Facility payable to CoBank which is payable in full on November 3, 2013. This revolving credit facility allows the Company to borrow up to $10,000,000 of which $8,619,778 is available on December 31, 2009. Interest is payable quarterly at a variable rate (4.5% at December 31, 2009).

The RDUP economic development loan consists of a non-interest bearing note payable to the RDUP in equal monthly payments of $3,743. The loan was made to one of the Company’s subsidiaries. This loan matures in 2012. Proceeds from the loan were lent to a city in the subsidiaries’ service territory under identical repayment terms.

As a condition of maintaining the Company’s loan with CoBank, the Company owns stock in the bank. The Company’s investment in CoBank stock was $2,647,533 and $2,487,815 as of December 31, 2009 and 2008.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - LONG-TERM DEBT (Continued)

CoBank is a cooperative, owned and controlled by its customers. Each customer borrowing from the bank on a patronage basis shares in the bank’s net income through payment of patronage refunds. Patronage refunds receivable included in accounts receivable were $416,126 and $467,388 at December 31, 2009 and 2008. Approximately 65% of patronage refunds are received in cash, with the balance in stock in the bank. The accrued patronage refund is reflected in the Company’s operating statement as a reduction of interest expense. The Company recorded patronage refunds of $406,074 and $453,806 for the years ending December 31, 2009 and 2008. The Company cannot predict what patronage refunds might be in future years.

Pledges of the parent company assets and the stock of the Company’s subsidiaries secure the CoBank loans.

The security and loan agreements underlying the CoBank notes contain certain restrictions on distributions to stockholders, capital additions and investments in or loans to others. In addition, the Company is required to maintain certain financial ratios relating to leverage, debt service and interest coverage, and equity to total assets. The Company was in compliance with these covenants at December 31, 2009 and 2008.

The annual requirements for principal payments on notes payable and long-term debt are as follows:

2010	$	4,900,000
2011		5,300,000
2012		5,700,000
2013		43,250,030

NOTE 9 - INTEREST RATE SWAP

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The Company uses variable-rate debt to finance its capital expenditures and acquisitions. The variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. The Company and its primary lender, CoBank, believe it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Company has entered into interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk. The swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company pays a fixed contractual interest rate plus an additional payment if the variable rate (LIBOR) payment is below a contractual rate, or it receives a payment if the variable rate payment is above the contractual rate.

In 2006, the Company entered into a swap for a notional amount of $38,000,000 delivered November 2006. The term was 3 years and the fixed contractual interest rate is 5.10% plus leverage margin. This swap expired November 2009. The Company entered into another swap agreement for $38,000,000 delivered November 2009. This swap delivery is concurrent with the maturity of first swap of $38,000,000. The term is 2 years and the fixed contractual interest rate will be 4.18% plus leverage margin. This swap expires November 2011.

In 2008, the Company entered into a swap for $13,000,000 delivered September 2008. The term is 3 years and the fixed contractual interest rate is 3.76% plus leverage margin. This swap expires November 2011.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - INTEREST RATE SWAP (Continued)

The interest rate swaps qualify as cash flow hedges for accounting purposes under generally accepted accounting principles and as such, the gains or losses in the fair value of the swaps are recorded as a separate component of other comprehensive income (loss) rather than in earnings. The fair value of the Company’s interest rate swap agreement is determined from a valuation received from CoBank which is based on the present value of expected future cash flows using discount rates appropriate with the terms of the swaps. The fair value indicates an estimated amount the Company would receive or pay if the contracts were canceled or transferred to other parties. If the Company were to terminate its interest rate swap agreements, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income (loss), which is classified in stockholder’s equity, into earnings on the consolidated statements of income. At December 31, 2009 and 2008, the fair value loss of the swaps was $2,681,427 and $3,648,248 which has been recorded, net of deferred tax of $1,072,562 and $1,464,971, as a decrease in comprehensive income (loss).

NOTE 10 - EMPLOYEE BENEFIT PLANS

The Company has 401(k) savings plans for its employees. Employees who are under the age of fifty and most certain service requirements may contribute up to $16,500 of their salaries to the plan on a pretax basis. The Company matches a portion of employee contributions. Contributions to the plan by the Company were $79,764, $84,166 and $101,365 for the years ending December 31, 2009, 2008 and 2007.

The Company has a deferred compensation agreement with two former officers of one of its subsidiaries. Under the agreement, the salaries of these officers were continued after their retirement based on a formula stated in the agreement. The Company is responsible for 68% of the remaining deferred compensation, with former partners responsible for the remaining 32%. In 2009, one of the officers died and the Company’s obligation for that officer ceased. The Company adjusted the liability for this change in circumstances. Deferred compensation (benefit) expense included in operations were ($390,055), $216,857 and $110,165 for the years ended December 31, 2009, 2008 and 2007. Payments made under the agreement by the Company were $78,070, $106,694 and $103,336 for the years ended December 31, 2009, 2008 and 2007.

NOTE 11 - TRANSACTIONS WITH AFFILIATES

The Company receives and provides services to various partnerships and limited liability corporations in which it is a minority investor. Services received include transport, directory services, centralized equal access and digital television signals. Services provided include commissioned sales and transport. Revenues from transactions with these affiliates were $448,176, $436,564 and $472,489 for the years ended December 31, 2009, 2008 and 2007. Expenses from transactions with these affiliates were $524,568, $521,764 and $610,369 for the years ended December 31, 2009, 2008 and 2007.

Costs of services the Company receives from affiliated parties may not be indicative of the costs of such services had they been obtained from different parties.

The Company has entered into Management agreements with each of its three shareholders as of November 3, 2006. The terms of the management agreements are one year and will be automatically renewed unless either the Company or the shareholder elects to terminate the service with 120 days written notice. Either party can terminate the agreement at any time with 120 days written notice. The annual management fee began January 1, 2007 and was $325,000, $399,000 and $300,000 for the years ended December 31, 2009, 2008 and 2007.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - TRANSACTIONS WITH AFFILIATES (Continued)

The Company has also contracted with certain shareholders for corporate overhead functions such as accounting, billing and human resources, maintenance of plant, and internet help desk services. Each contract was effective November 3, 2006 and has duration of one year. Each contract will automatically renew unless either party elects to terminate the service with 120 days written notice. The fees for these services are billed at cost plus 20%. Costs include all direct costs and related employee overhead costs. Fees for these services were $1,399,306, $1,329,982 and $1,498,134 for the years ended December 31, 2009, 2008 and 2007.

In addition, the Company’s shareholders provided labor, materials and equipment related to construction of the Company’s property, plant and equipment. The total of these services provided by the Company’s shareholder was $1,608,177, $1,096,700 and $850,650 for the years ended December 31, 2009, 2008 and 2007.

The total balance due from the Company to its shareholders for routine services provided at December 31, 2009 and 2008 were $366,630 and $110,257.

NOTE 12 - SEGMENT INFORMATION

The Company operates in the communication segment and has no other significant business segments. The communication segment consists of voice, data and video communication services delivered to the customer over the Company’s local communications network.

No single customer accounted for a material portion of the Company’s revenues from the years ended December 31, 2009, 2008 and 2007. The Company has no foreign operations.

NOTE 13 - SHAREHOLDER AGREEMENT

The shareholders of the Company have entered into a Shareholder Agreement that requires any shareholder who is selling or otherwise transferring their shares of stock in the Company to first offer to sell those shares to the Company. In the event the Company elects to not purchase such shares, the other shareholders may elect to purchase the shares. Upon occurrence of certain other events specified in the Shareholder Agreement, the Company and the remaining shareholders may purchase the shares owned by a shareholder. The selling price is determined based upon provisions set forth in the agreement.

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.

Dated: November 9, 2010	NEW ULM TELECOM, INC.
	(Registrant)


	By	/s/ Curtis O. Kawlewski
		Curtis O. Kawlewski, Chief Financial Officer (Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report.

/s/ James P. Jensen		November 9, 2010
James P. Jensen, Chair

/s/ Bill D. Otis		November 9, 2010
Bill D. Otis, President and Chief Executive Officer
(Principal Executive Officer)

/s/ Curtis O. Kawlewski		November 9, 2010
Curtis O. Kawlewski, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

/s/ Rosemary J. Dittrich		November 9, 2010
Rosemary Dittrich, Director

/s/ Mary Ellen Domeier		November 9, 2010
Mary Ellen Domeier, Director

/s/ Paul W. Erick		November 9, 2010
Paul W. Erick, Director

/s/ Duane D. Lambrecht		November 9, 2010
Duane Lambrecht, Director

/s/ Perry L. Meyer		November 9, 2010
Perry Meyer, Director

/s/ Dennis E. Miller		November 9, 2010
Dennis Miller, Director