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, 1998 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
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(Address of principal executive offices and zip code)
Registrant's telephone number including area code 507-354-4111
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
-------------------
Common Stock, $5.00 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _X_
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant.
Not Available
-------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
1,732,455 Shares Outstanding at December 31, 1998
Documents Incorporated By Reference
-----------------------------------
Documents: Form 10-K Reference:
Proxy Statement, Filed Part III, Items 10-13
Within 120 Days
<PAGE>
PART I
Item 1. Business
New Ulm Telecom, Inc. was incorporated in 1905 under the laws of the State of
Minnesota, with headquarters in New Ulm, Minnesota. The Company's principal line
of business is the operation of local exchange telephone companies.
New Ulm Telecom, Inc. is the parent company for eight wholly-owned subsidiaries,
which are:
Western Telephone Company
Peoples Telephone Company
New Ulm Phonery, Inc.
New Ulm Cellular #7, Inc.
New Ulm Cellular #8, Inc.
New Ulm Cellular #9, Inc.
New Ulm Cellular #10, 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, 1998, the
Company served 15,956 access lines.
New Ulm Phonery, Inc. is a non-regulated telecommunications business which sells
and services telephone apparatus on a retail level primarily in the areas served
by the three operating telephone companies.
New Ulm Cellular #7, 8, 9 and 10, Inc. own cellular interests in a limited
liability corporation that provides cellular phone service in southern
Minnesota.
New Ulm Long Distance, Inc. is a non-regulated long distance business which
sells long distance service.
The Registrant's operations consist of only one segment, which is to provide
local exchange telephone service and related access to the long distance
network. The Company does not have any collective bargaining agreements with its
employees.
New Ulm Telecom, Inc. provides telephone service to the cities of New Ulm,
Courtland, Klossner, Searles and the adjacent rural areas. Western Telephone
Company provides telephone service to the cities of Springfield, Sanborn and the
adjacent rural areas. Peoples Telephone Company provides telephone service to
Aurelia, Iowa and the adjacent rural areas. Peoples Telephone Company operates a
cable television system in the city of Aurelia, Iowa, serving approximately 385
customers. Western Telephone Company operates three cable television systems in
Minnesota (cities of Sandborn, Jeffers and Wabasso) serving approximately 415
customers.
New Ulm Telecom, Inc., Western Telephone Company, and Peoples Telephone Company
derive their principal revenues from local service charges to their subscribers
and access charges to interexchange carriers for providing access to the long
distance network. Revenues are also received from long distance carriers for
providing the billing and collection of long distance toll calls to subscribers.
The three telephone companies are public utilities operating exclusively within
their serving areas pursuant to Indeterminate Permits and Certificates of
Territorial Authority issued by the Minnesota Public Utilities Commission and
the Iowa Utilities Board. The Minnesota Public Utilities Commission and the Iowa
Utilities Board regulate most services provided by the three telephone
companies.
1
<PAGE>
PART I
Item 1. (Continued)
The activities of New Ulm Phonery, Inc. are centered around the sale, lease and
service of telephone equipment primarily in the areas within the telephone
company's operations. New Ulm Phonery, Inc. also provides electronic voice mail,
video conferencing and internet services.
The four cellular companies derive their revenue from their respective
percentage ownership of the cellular limited liability corporation (LLC).
Peoples Telephone Company also has an equity interest in two rural service areas
in Iowa. The cellular LLC provides their cellular phone service on the wireline
side. The service area that the LLC operates in also has a non-wireline provider
that is the competition for that area. In addition, new wireless technology
called Personal Communications Service (PCS) will provide new competitors in the
future.
The Registrant and its subsidiaries are not planning to provide any new products
or services which would require the investment of a material amount of the
assets of the Registrant or its subsidiaries.
The materials and supplies which are necessary to the operation of the
businesses of the Registrant and its subsidiaries are available from a variety
of sources. No supply problems are anticipated during the coming year.
Patents, trademarks, licenses and concessions are not significant in the
businesses of the Registrant or its subsidiaries.
The Registrant's businesses are not highly seasonal. The Registrant and its
subsidiaries are engaged in service businesses. Working capital practices
primarily involve the allocation of funds for the construction and maintenance
of telephone plant, the payroll cost of skilled labor and the inventory to
service its telephone equipment customers.
The Registrant and its subsidiaries are not dependent upon any single customer
or small group of customers. There is no customer that accounts for ten percent
or more of the Registrant's consolidated revenues.
The Registrant and its subsidiaries are in a service business which provides an
ongoing benefit to their customers for a fee. These services are repetitive and
recurring. Backlog orders are not a significant factor in providing these
services.
There is no material portion of the businesses of the Registrant or its
subsidiaries which may be subject to renegotiation of profits or termination of
contracts at the election of the Government.
As a result of the Telecommunications Act of 1996, telephone companies no longer
have an exclusive franchise service area. Under the law, competitors may offer
telephone service to the Company's customers and request access to the Company's
local network facilities. The law also permits existing telephone companies to
offer telephone service outside their existing franchise service area. The law
includes universal service provisions, interconnection requirements, and rules
mandating how competition will be implemented. The FCC and state regulatory
agencies are responsible for establishing rule making procedures to implement
the law. The rule making procedures are not complete and a number of court cases
have already been filed challenging various aspects of the rules and procedures.
Until the rule making procedures are complete and the court issues settled, the
Company cannot predict how the new law will affect its business.
2
<PAGE>
PART I
Item 1. (Continued)
The three telephone companies currently do not have competition in the providing
of basic local telephone service. Competition does exist in some services
provided for interexchange carriers such as customer billing services. The
competition comes from the interexchange carriers themselves. The provision of
these services is by contract and is primarily controlled by the interexchange
carriers. The Company has experienced competition in the providing of access
service whereby the local network is by-passed through private line switched
voice and data services, microwave, or cellular service. Other services such as
directory advertising and local private line transport are open to competition.
Competition is based primarily on cost, service and experience.
There are a number of companies engaged in the sale of telephone equipment at
the retail level competing with New Ulm Phonery, Inc. Competition is based
primarily on price, service, and experience. No company is dominant in this
field.
The Registrant and its subsidiaries do not engage in material research and
development activities.
The Registrant and its subsidiaries anticipate no material effects on their
capital expenditures, earnings or competitive position because of laws relating
to the protection of the environment.
As of December 31, 1998, the total full time employees of the Registrant and its
subsidiaries was 42. New Ulm Telecom, Inc. employed 35 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 four cellular subsidiaries have no employees.
The Registrant and its subsidiaries operate only in southern Minnesota and
northern Iowa and have no foreign operations.
Item 2. Properties
The three operating telephone companies own central office equipment. The
central office equipment is used to record, switch and transmit the telephone
calls. New Ulm Telecom, Inc.'s host central office equipment was purchased in
1991 and consists of a Northern Telecom DMS-100/200 digital switch. New Ulm
Telecom, Inc. also has remote switching sites in two locations in New Ulm and in
the city of Courtland. The equipment at these remote switching sites is housed
within specially designed central office equipment buildings.
Western Telephone Company installed Northern Telecom remote central office
equipment in 1996. This remote switching equipment utilizes the host switch in
New Ulm. Western Telephone Company also has a remote switching site in the city
of Sanborn. The equipment at Sanborn is housed within a specially designed
central office equipment building.
3
<PAGE>
PART I
Item 2. (Continued)
Peoples Telephone Company's central office equipment was purchased in 1989 and
consists of a Stromberg Carlson DCO digital switch.
The Company owns various buildings and related land as follows:
(1) New Ulm Telecom, Inc. owns a building which is located at 400
Second Street North, New Ulm, Minnesota. It was originally
constructed in 1918 with various additions and remodeling through
the years. This building contains the main business offices and
central office equipment. The building also has warehouse and
garage space. This building contains approximately 23,700 square
feet of floor space.
(2) New Ulm Telecom, Inc. constructed a warehouse in 1992 that is
located at 225 20th South Street, New Ulm, Minnesota. The
warehouse has 10,800 square feet of space and is used primarily
as a storage facility for trucks, generators, trailers, plows,
and inventory used in outside plant construction.
(3) New Ulm Telecom, Inc. has three remote central office buildings
that are located on the north side of New Ulm, the south side of
New Ulm, and in Courtland. These buildings contain central office
equipment that remote off of New Ulm's main central office
equipment.
(4) New Ulm Telecom, Inc. owns buildings in Klossner and Searles,
Minnesota. These buildings were built in 1954 and were formally
used to house central office equipment. These buildings are now
used for storage.
(5) New Ulm Telecom, Inc. owns land located at the corner of 7th
Street South and Valley Street in New Ulm, Minnesota. This lot is
utilized as storage for poles and cable inventory and contains
approximately 5,000 square feet of fenced in storage area.
(6) Western Telephone Company owns a building at 22 South Marshall,
Springfield, Minnesota. This building contains the business
office and central office equipment. This building contains
approximately 2,100 square feet of floor space.
(7) Western Telephone Company has a building in Sanborn, Minnesota,
which contains central office equipment that remotes off of
Western's central office equipment.
(8) Western owns a warehouse located at 22 South Marshall,
Springfield, Minnesota. This building is used as a storage
facility for vehicles, other work equipment and inventory used in
outside plant construction. This building contains approximately
3,750 square feet of space.
(9) Peoples Telephone Company owns a building in Aurelia, Iowa that
houses the business office, central office equipment and cable
television headend equipment.
(10) Peoples Telephone Company owns a building that is adjacent to its
main office building. This building will be used to expand the
present main office building.
4
<PAGE>
PART I
Item 2. (Continued)
(11) A warehouse building that contains approximately 1,875 sq. ft. is
owned by Peoples Telephone Company.
(12) Peoples Telephone Company also owns a vacant lot that is 25' x
100' in downtown Aurelia, Iowa.
In addition, New Ulm Telecom, Inc., Western Telephone Company and Peoples
Telephone Company own the lines, cables and associated outside physical plant
utilized in providing telephone service in their service areas. Western
Telephone Company and Peoples Telephone Company owns the cables and equipment to
provide cable television services.
New Ulm Phonery, Inc. owns the telephone sets and other similarly used
instruments and equipment which are leased to subscribers.
The Registrant believes that its property is suitable and adequate to provide
the necessary services and believes all properties are adequately insured. Note
6 to the financial statements describes mortgages and collateral relating to the
above properties, while Note 1 describes the composite depreciation rate.
Item 3. Legal Proceedings
There is no material litigation pending or threatened involving the Registrant
at this time in any court.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is not traded on an exchange or in the
over-the-counter market; as such, it has a limited market. As of December 31,
1998, there were approximately 1,033 holders of record of the Company's common
stock.
Dividends
Dividends were declared quarterly in 1998 and 1997. In addition to the quarterly
dividends, a special dividend was declared in 1998 and 1997.
Dividends were $1.07 in 1998 (which includes the special dividend of $.25 per
share), $.99 in 1997 (which includes the special dividend of $.25 per share),
and $.65 per share in 1996. 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
<PAGE>
PART II
Item 6. Selected Financial Data
Selected Income Statement Data:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating Revenues $10,478,643 $ 9,666,727 $ 9,346,224 $ 8,975,187 $ 8,494,517
Operating Expenses 6,324,215 5,812,800 5,631,181 5,477,162 4,915,602
Operating Income 4,154,428 3,853,927 3,715,043 3,498,025 3,578,915
Other Income (Expenses) 1,220,803 935,548 275,016 247,873 (39,317)
Income Taxes 2,136,011 1,976,220 1,586,544 1,491,105 1,412,631
Net Income 3,239,220 2,813,255 2,403,515 2,254,793 2,126,967
Basic Net Income Per
Share 1.87 1.62 1.39 1.30 1.23
Dividends Per Share 1.07 .99 .65 .58 .54
</TABLE>
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets $ 5,223,431 $ 4,411,510 $ 3,938,975 $ 3,478,049 $ 2,748,395
Current Liabilities 2,332,221 1,325,949 937,488 949,532 821,823
Working Capital 2,891,210 3,085,561 3,001,487 2,528,517 1,926,572
Total Assets 26,043,448 23,978,695 22,849,405 22,021,455 20,976,195
Long-Term Debt 3,666,666 4,033,332 4,400,000 4,766,666 5,133,333
Stockholders' Equity 18,868,991 17,483,498 16,385,373 15,113,728 13,869,534
Book Value Per Share 10.89 10.09 9.46 8.72 8.01
</TABLE>
All per share amounts have been adjusted to reflect a three-for-one stock split
effective April 1, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Description of Business
The Company operates in one business segment providing telephone service in six
Minnesota cities and one Iowa city and the adjacent rural areas. The Company
provides telephone service to over 15,900 access lines through its three local
exchange telephone companies. In addition, the Company is an investor in a
cellular limited liability corporation in southern Minnesota, a competitive
local exchange company limited liability corporation in northwest Iowa, and two
RSAs (rural service areas) in northwest Iowa. The Company also operates four
cable television systems and resells long distance service.
6
<PAGE>
PART II
Item 7. (Continued)
Results of Operations
The Company's operating revenues are principally derived from the local service
and access revenues received through the operations of its three local exchange
companies. Local service revenues are earned by providing customers access to
connecting points within the local exchange boundaries and, in certain cases, to
other local exchanges through extended area service plans, which eliminates toll
service between those local exchanges. Revenues are derived from local service
by charging a flat monthly fee. The three local exchange telephone companies
receive access revenues for providing intrastate and interstate exchanges
services to long distance carriers (inter-exchange carriers or IXC). Access
revenues come in several forms: flat rate compensation (i.e. end-user fees and
dedicated point to point facilities) or usage sensitive (i.e. toll-interstate
and intrastate). In the case of interstate calls, access revenues are determined
according to rules promulgated by the Federal Communications Commission (FCC)
and administered by the National Exchange Carrier Association (NECA). Intrastate
calls are administered by state regulatory agencies. Access revenues have
increased steadily in recent years. The reason for this can be attributed to
increased subscribers, calling patterns and technological advances, despite the
rate reductions to the IXCs. In addition, the Company also sells and leases
customer premises telephone equipment, provides inside wiring services and
custom calling features, provides internet access and sells and leases other
facilities for private line data transmission (i.e. local area network, virtual
private network, and wide area network) and other communications services.
Monthly fees for basic and premium services comprise the majority of revenues
from the cable television ventures. These revenues are part of nonregulated
revenues on the consolidated statement of income. The billing and collecting
services for the IXCs are also another revenue source for the Company. This
service is provided in lieu of the IXCs directly billing the end user for toll
service. The following table reflects the percentage of revenue derived from
each category over the past three years:
Year Ended December 31
-----------------------------
1998 1997 1996
----- ----- -----
Local Network 21.8% 22.4% 22.0%
Network Access 49.2 50.6 53.0
Billing and Collection 4.9 5.5 5.8
Miscellaneous 3.7 4.0 3.5
Nonregulated 20.4 17.5 15.7
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
7
<PAGE>
PART II
Item 7. (Continued)
1998 COMPARED TO 1997
The Company attained record earnings for the year ended December 31, 1998.
Operating revenues and net income surpassed December 31, 1997 totals by $811,916
or 8.4% and $425,965 or 15.1%, respectively. Local network increased $122,892 or
5.7% due to an increase in access lines and an increase in the monthly local
service rates October 1, 1998. Network access revenues increased $264,192 or
5.4% due to increased monthly settlements from NECA, continued growth of
interstate and intrastate access minutes of use, as well as business customers
increased demand for data transport resulting in increased dedicated point to
point transmission facilities. Revenues from billing and collection deceased
$17,477 or 3.3% as a result of IXCs taking back the billing and collecting
function. Nonregulated revenues continued the strong growth pattern established
during the past few years, resulting in an increase of $446,803 or 26.4%. Sales
of customer premises telephone equipment and continued double-digit growth in
internet access were the major contributors to this sizable growth. The
Company's long distance service has shown considerable growth during the past
year, which enhances revenues in other areas of the Company, for example, access
revenues and billing and collection.
Operating expenses increased by $511,415 or 8.8%. Plant operations increased by
$110,022 or 9.7% due to higher maintenance expenses on telephone plant.
Depreciation increased by $82,514 or 4.9%, which is directly related to an
increase in property, plant and equipment. General and administrative expenses
increased $145,618 or 12.0% due to the Company's continued search for
acquisition opportunities and other investments to increase shareholder value
and dividends. Other operating expenses increased by $220,278 or 20.0%, which
can be directly related to the nonregulated revenue growth. The areas most
effected are cost of goods sold related to customer premises telephone equipment
and increased facility upgrades and customer service devoted to high quality
internet access.
Operating income increased $300,501 or 7.8%.
Other income and expenses increased $285,255 or 30.5%. Interest expense
decreased $24,479 or 8.9% due to a reduction in long-term debt. Interest income
increased $19,945 or 13.2% reflecting an increase in cash available for
investments. Cellular investment income increased $240,831 or 22.7%, which is
due to the Company's equity interest in the increased profits of Midwest
Wireless Communications L.L.C.
Income before income taxes increased $585,756 or 12.2%. The Company's cellular
investment income represents 24.2% of pre-tax income. Income taxes increased
$159,791 or 8.1%.
The increases in operating revenues and other income contributed significantly
to the $425,965 or 15.1% increase in net income. The increase in net income
reflects the Company's continued revenue growth in excess of the Company's
growth in operating expenses.
8
<PAGE>
PART II
Item 7. (Continued)
1997 COMPARED TO 1996
The Company accomplished record earnings for the year ending December 31, 1997.
New highs were set for revenues and net income. Total operating revenues
increased by $320,503, or 3.4%. The increased operating revenues were a result
of increased local network and nonregulated revenues. Local network revenues are
those revenues derived from providing basic telephone service and local private
line. Nonregulated revenues include transport from toll cable, retail sales of
telephone apparatus, cable television and long distance services. Local network
revenues increased $106,158, or 5.2%, which can be attributed to access line
growth of 700 lines, or an increase of 4.9%. Nonregulated revenues increased
$223,859, or 15.3%. Increased customer premise sales, Internet activation and
monthly service, and transport revenue accounts for approximately 75% of
nonregulated revenue growth. The remaining growth is attributed to cable
television and enhanced phone service monthly revenue.
Operating expenses increased by $181,619 or 3.2%. General and administrative, as
well as other operating expenses, accounted for the increase in operating
expenses in conjunction with a $161,449 decrease in depreciation. General and
administrative expenses increased $106,444 or 9.7%, which can be attributed to
additional training and the company pursuing other business ventures to increase
revenues and stockholder value. Other operating expenses increased $238,698 or
27.7%. This increase was due mainly to an increase of cost of goods sold,
enhancements to our internet system to accommodate the increase of approximately
500 subscribers during 1997, and additional marketing efforts associated with
our new long distance service being offered. Depreciation decreased by $161,449
or 8.8%. The decrease was due to an unusually high amount of depreciation
recorded for fiscal year ending December 31, 1996 for Western Telephone Co. due
to the replacement of its central office equipment with a remote central office
switch.
Interest expense decreased $23,571 or 7.9% reflecting the reduction in long-term
debt. Interest income increased $17,547 or 13.2%, which reflects an increase in
cash available for investment opportunities. The company's cellular investment
income increased $619,414 or 140.8%. This investment income is derived from the
company's ownership interest in Midwest Wireless Communications L.L.C. Midwest
Wireless owns and operates the five Southern Minnesota RSAs as well as the
Rochester MSA. The Company's cellular interests contributed $1,059,486 or 22.1%
of pre-tax income.
Income taxes increased $389,676 or 24.6%, with the effective tax rate increasing
from 39.8% in 1996 to 41.3% in 1997.
The increases in operating revenues and other income reflect favorably upon the
$409,740 or 17.1% increase in net income. The increase in net income reflects
the Company's continued steady revenue growth in excess of the company's growth
in operating expenses.
9
<PAGE>
PART II
Item 7. (Continued)
Regulatory Matters
The Telecommunications Act passed by the federal government in February of 1996
will result in significant changes to the telecommunications industry. The FCC
is in the process of determining how competition will be introduced by setting
standards for wholesale pricing, unbundling local network rates, and
interconnection rates. State regulators will also be involved in implementing
the transition to a competitive environment, but the exact roles that the FCC
and state regulators will play are yet to be determined.
The Company follows the accounting practices prescribed by regulatory
authorities in accordance with Statement of Financial Accounting Standards No.
71 "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71).
Under SFAS No. 71, regulators may require certain treatment of revenues or
expenses that are recoverable through rates in future periods. Changes in
regulation and increased competition could impact the applicability of SFAS No.
71 in the future. At this time, the Company believes SFAS No. 71 is applicable.
Accounting Pronouncements
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Adoption of this
standard had no effect on the Company's calculation of earnings per share.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and presenting comprehensive income and its components in the
financial statements and is effective for fiscal years beginning after December
15, 1997. Adoption of this standard had no effect on the Company's results of
operations or financial position.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way public enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Adoption of this standard had no effect on the Company's
results of operations or financial position.
Year 2000 Conversion
In short, the "Year 2000 Issue" results from computer programs that were written
using two digits rather than four to define the applicable year. A problem
arises when the Registrant's date sensitive computer programs recognize a date
using "00" as the Year 1900 rather than 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including the
temporary inability to process transactions, send invoices or engage in normal
business activities.
10
<PAGE>
PART II
Item 7. (Continued)
A team of internal staff is managing the Company's comprehensive Year 2000
initiative. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers and financial institutions are fully supported.
The Company has identified which software upgrades to its NORTEL switching and
transport network are necessary to become Year 2000 compliant. All upgrades will
be completed by June 1, 1999. These upgrades are part of an ongoing contract
that is entered into every three years to keep the network up to current
standards. The Company would be entering into this upgrade normally and will not
need to accelerate any upgrades to become Year 2000 compliant.
The Company's internal business software consists of a billing and customer
care, plant records and trouble reporting software that is currently Year 2000
compliant. A conversion of the Company's accounting and financial reporting
software will be completed by July 1, 1999. This conversion is part of the
Company's business plan and was not entered into for the sole purpose of Year
2000 compliance. However, the new system will be Year 2000 compliant.
While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have material effect on the Company. The cost of the Year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
Liquidity and Capital Resources
The Company's net working capital of $2,891,210 at December 31, 1998 is a
decrease of $194,351 from 1997. The Company operates in a capital-intensive
industry. The largest contributing factor to the Company's investing activity is
additions to property, plant and equipment, which used $4,455,937 over the past
three years. The Company used $328,808 to make additional investments in Midwest
Wireless Communications L.L.C. Dividends paid to shareholders was the largest
financing activity, totaling $1,853,727 or $1.07 per share, an 8.1% increase
over the $.99 paid in 1997. The Company's primary source of working capital
continued to come from its operating activity, which is historically driven by
net income and depreciation. The Company's financial strength continues to be
supported by its 1998 current ratio (2.24 to 1).
The Company continues to make investments in state-of-the-art technology to
offer subscribers the best possible service. Capital expenditures for 1999 are
expected to be $2,450,000. Management believes the Company will generate
sufficient working capital internally from operations to meet its operating
needs and maintain historical dividend and fixed asset addition levels. The
Company has a line of credit of $1,640,000 with the Rural Telephone Finance
Corporation with interest at 1 1/2% over the prime rate.
Factors Affecting Future Performance
The Company's future results of operation and other forward-looking statements
are subject to risks and uncertainties, including, but not limited to, the
effects of deregulation in the telecommunications industry as a result of the
Telecommunications Act of 1996 and Year 2000 compliance. Such forward-looking
statements are subject to risks and uncertainties that could cause the Company's
actual results to differ materially from such statements and the Company
disclaims any obligation to update or revise any forward-looking statements
based on the occurrence of future events or the receipt of new information.
11
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Ulm Telecom,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
St. Paul, Minnesota
February 17, 1999 OLSEN THIELEN & CO., LTD.
12
<PAGE>
NEW ULM TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Local Network $ 2,284,739 $ 2,161,847 $ 2,055,689
Network Access 5,158,435 4,894,243 4,950,007
Billing and Collection 514,052 531,529 542,360
Miscellaneous 382,942 387,436 330,355
Nonregulated 2,138,475 1,691,672 1,467,813
------------ ------------ ------------
Total Operating Revenues 10,478,643 9,666,727 9,346,224
------------ ------------ ------------
OPERATING EXPENSES:
Plant Operations 1,249,178 1,139,156 1,182,166
Depreciation 1,766,118 1,683,604 1,845,053
Amortization 113,777 113,776 113,776
Customer Operations 517,340 564,358 523,422
General and Administrative 1,357,110 1,211,492 1,105,048
Other Operating 1,320,692 1,100,414 861,716
------------ ------------ ------------
Total Operating Expenses 6,324,215 5,812,800 5,631,181
------------ ------------ ------------
OPERATING INCOME 4,154,428 3,853,927 3,715,043
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest Expense (250,269) (274,748) (298,319)
Interest Income 170,755 150,810 133,263
Cellular Investment Income - Note 3 1,300,317 1,059,486 440,072
------------ ------------ ------------
Other Income (Expenses), Net 1,220,803 935,548 275,016
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,375,231 4,789,475 3,990,059
INCOME TAXES - Note 7 2,136,011 1,976,220 1,586,544
------------ ------------ ------------
NET INCOME $ 3,239,220 $ 2,813,255 $ 2,403,515
============ ============ ============
BASIC NET INCOME PER SHARE $ 1.87 $ 1.62 $ 1.39
============ ============ ============
DIVIDENDS PER SHARE $ 1.07 $ .99 $ .65
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE>
NEW ULM TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
================================================================================
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,551,066 $ 906,716
Certificates of Deposit 900,000 2,000,000
Receivables, Net of Allowance for Doubtful
Accounts of $33,000 and $31,000 1,322,903 933,109
Materials, Supplies and Inventories 354,027 488,770
Prepaid Expenses 95,435 82,915
----------- -----------
Total Current Assets 5,223,431 4,411,510
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Excess of Cost Over Net Assets Acquired, Net 3,560,233 3,674,010
Notes Receivable - Note 9 783,448 79,965
Cellular Investments - Note 3 4,507,078 3,547,686
Other 437,466 331,863
----------- -----------
Total Investments and Other Assets 9,288,225 7,633,524
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Telecommunications Plant 26,261,325 25,039,400
Other Property and Equipment 1,568,153 1,462,575
Cable Television Plant 787,548 762,048
----------- -----------
Total 28,617,026 27,264,023
Less Accumulated Depreciation 17,085,234 15,330,362
----------- -----------
Net Property, Plant and Equipment 11,531,792 11,933,661
----------- -----------
TOTAL ASSETS $26,043,448 $23,978,695
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
NEW ULM TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current Portion of Long-Term Debt $ 366,666 $ 366,666
Accounts Payable 1,686,643 622,110
Accrued Taxes 54,514 62,198
Other Accrued Liabilities 224,398 274,975
----------- -----------
Total Current Liabilities 2,332,221 1,325,949
----------- -----------
LONG-TERM DEBT - Note 6 3,300,000 3,666,666
----------- -----------
DEFERRED CREDITS: - Note 7
Income Taxes 1,519,148 1,467,487
Investment Tax Credits 23,088 35,095
----------- -----------
Total Deferred Credits 1,542,236 1,502,582
----------- -----------
STOCKHOLDERS' EQUITY: - Note 8
Common Stock - $5.00 Par Value, 6,400,000
Shares Authorized, 1,732,455 Shares Issued
and Outstanding 8,662,275 8,662,275
Retained Earnings 10,206,716 8,821,223
----------- -----------
Total Stockholders' Equity 18,868,991 17,483,498
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $26,043,448 $23,978,695
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
NEW ULM TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
================================================================================
<TABLE>
<CAPTION>
Common Stock
------------------------------- Retained
Shares Amount Earnings
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE on December 31, 1995 577,485 $ 2,887,425 $ 12,226,303
Three-for-One Stock Split - Note 8 1,154,970 5,774,850 (5,774,850)
Net Income 2,403,515
Dividends (1,131,870)
------------ ------------ ------------
BALANCE on December 31, 1996 1,732,455 8,662,275 7,723,098
Net Income 2,813,255
Dividends (1,715,130)
------------ ------------ ------------
BALANCE on December 31, 1997 1,732,455 8,662,275 8,821,223
Net Income 3,239,220
Dividends (1,853,727)
------------ ------------ ------------
BALANCE on December 31, 1998 1,732,455 $ 8,662,275 $ 10,206,716
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
NEW ULM TELECOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
================================================================================
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,239,220 $ 2,813,255 $ 2,403,515
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities:
Depreciation and Amortization 1,879,895 1,797,380 1,958,829
Cellular Investment Income (1,300,317) (1,059,486) (440,072)
Distributions from Cellular
Investments 669,733 289,731 226,747
(Increase) Decrease in:
Receivables (389,542) 46,926 199,981
Materials, Supplies and Inventories 134,743 (130,870) 12,562
Prepaid Expenses (12,520) (1,046) 9,720
Increase (Decrease) in:
Accounts Payable 1,064,533 398,368 (37,381)
Accrued Taxes (7,684) 4,548 278
Other Accrued Liabilities (50,577) (14,455) 25,059
Deferred Income Taxes 51,661 28,208 (30,511)
Deferred Investment Tax Credits (12,007) (18,836) (34,474)
----------- ----------- -----------
Net Cash Provided By
Operating Activities 5,267,138 4,153,723 4,294,253
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant
and Equipment, Net (1,364,249) (1,471,433) (1,620,255)
Change in Certificates of Deposit 1,100,000 (100,000) (500,000)
Change in Notes Receivable (703,735) (438) (57,026)
Purchase of Cellular Investments (328,808) (31,636) (443,803)
Other, Net (105,603) (179,572) 14,023
----------- ----------- -----------
Net Cash Used In Investing Activities (1,402,395) (1,783,079) (2,607,061)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments of Long-Term Debt (366,666) (366,668) (366,667)
Dividends (1,853,727) (1,715,130) (1,131,870)
----------- ----------- -----------
Net Cash Used In Financing Activities (2,220,393) (2,081,798) (1,498,537)
----------- ----------- -----------
NET INCREASE IN CASH 1,644,350 288,846 188,655
CASH at Beginning of Year 906,716 617,870 429,215
----------- ----------- -----------
CASH at End of Year $ 2,551,066 $ 906,716 $ 617,870
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
NEW ULM TELECOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - The Company's principal line of business is providing
local telephone service and access to long-distance telephone service through
its local exchange network. The Company owns and operates three independent
telephone companies serving six communities in southern Minnesota, one community
in Iowa, and the adjacent rural areas. The Company also has investments in
cellular entities and operates four cable television systems.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and its eight wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
REGULATORY ACCOUNTING - The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles including certain
accounting practices prescribed by regulatory authorities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "ACCOUNTING FOR THE
EFFECTS OF CERTAIN TYPES OF REGULATION". For example, the Company's financial
statements are affected by depreciation rates prescribed by regulatory
authorities, which may result in different depreciation rates then for an
unregulated enterprise.
ACCOUNTING ESTIMATES - The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amount of revenues and expenses
during the operating period. Actual results could differ from those estimates.
MATERIALS, SUPPLIES AND INVENTORIES - Materials, supplies and inventories are
recorded at the lower of average cost or market.
PROPERTY AND DEPRECIATION - Property, plant and equipment are recorded at
original cost. Additions, improvements or major renewals are capitalized. When
telecommunications assets are sold, retired or otherwise disposed of, the cost
plus removal costs less salvage is charged to accumulated depreciation. Any
gains or losses on non-telecommunications property and equipment retirements are
reflected in the current year operations.
Depreciation is computed using the straight-line method based on estimated
service or remaining useful lives. The composite depreciation rates on
telecommunications equipment for the three years ended December 31, 1998, 1997
and 1996 were 6.6%, 6.7%, and 7.7%. Other property is depreciated over estimated
useful lives of three to fifteen years.
18
<PAGE>
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS AND OTHER ASSETS - The excess of cost over net assets of acquired
companies is being amortized equally over 40 years and is shown net of
accumulated amortization of $990,808 and $877,031 at December 31, 1998 and 1997.
Investment in a cellular telephone limited liability corporation is recorded
using the equity method of accounting, which reflects original cost and equity
in undistributed earnings and losses, because the Company believes it has the
ability to significantly influence the operating and financial policies of this
corporation.
Cellular investments in two Iowa RSAs consist of a common stock equity interest
of less than 20%. The cost method is used to account for these RSA investments.
Long-term investments in other companies that are not intended for resale or are
not readily marketable are valued at the lower of cost or net realizable value.
NETWORK ACCESS REVENUE - Revenues are recognized when earned. Interstate access
revenue is based on settlements with the National Exchange Carrier Association.
Interstate access settlements are based on cost studies for New Ulm Telecom,
Inc. and by nationwide average cost schedules for two of its subsidiaries,
Western Telephone Company and Peoples Telephone Company. Access revenues for New
Ulm Telecom, Inc. include estimates which management believes are reasonable,
pending finalization of cost studies. Local and intrastate access revenues are
based on tariffs filed with the state regulatory commissions.
INCOME TAXES AND INVESTMENT TAX CREDITS - The provision for income taxes
consists of an amount for taxes currently payable and a provision for tax
consequences deferred to future periods. Deferred income taxes are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The major temporary difference that resulted in the
net deferred tax liability is depreciation, which for tax purposes is determined
based on accelerated methods and shorter lives. For financial statement
purposes, deferred investment tax credits are being amortized as a reduction of
the provision for income taxes over the estimated useful lives of the related
property, plant and equipment.
CREDIT RISK - Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, certificates of
deposit and receivables. The Company places its cash investments with high
credit quality financial institutions in accounts which, at times, may exceed
the federally insured limits. The Company has not experienced any losses in
these accounts and does not believe it is exposed to any significant credit
risk. Concentrations of credit risk with respect to trade receivables are
limited due to the Company's large number of customers.
19
<PAGE>
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC NET INCOME PER COMMON SHARE - Basic net income per common share is based
on the weighted average number of shares outstanding of 1,732,455 shares during
each of the three years presented.
SEGMENT INFORMATION - The Company has one reportable industry segment,
telecommunications. No single customer accounted for more than 10% of
consolidated revenues.
RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 financial statements
have been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on net income for either period.
NOTE 2 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
CERTIFICATES OF DEPOSIT: The carrying amount approximates fair value because of
the short maturity of those instruments.
LONG-TERM INVESTMENTS: It was not practicable to estimate a fair value for
common stock investments in companies carried on the cost basis due to a lack of
quoted market prices. The Company believes the original cost is not impaired at
December 31, 1998.
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 7.9% and 7.7% ownership in Midwest Wireless
Communications L.L.C. at December 31, 1998 and 1997. This entity provides
cellular phone service to southern Minnesota. The difference between the
carrying amount of this equity method investment and the underlying equity in
its net assets is $1,031,128 as of December 31, 1998, net of accumulated
amortization of $39,242. This amount is being expensed equally over 40 years.
Amortization expense of $19,621 was included in cellular investment income in
1998 and 1997.
20
<PAGE>
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 3 - CELLULAR INVESTMENTS (CONTINUED)
Cellular investments consist of the following:
1998 1997
----------- ------------
Midwest Wireless Communications L.L.C.:
Cost Less Accumulated Amortization $ 1,967,445 $ 1,678,058
Cumulative Income 3,708,142 2,388,204
Cumulative Distributions (1,650,596) (980,863)
----------- -----------
4,024,991 3,085,399
Other Investments, Recorded at Cost 482,087 462,287
----------- -----------
Total $ 4,507,078 $ 3,547,686
=========== ===========
The following is summarized financial information as of and for the years ended
December 31, 1998 and 1997 and for the period from inception (July 1, 1996) to
December 31, 1996 for Midwest Wireless Communications L.L.C.:
1998 1997 1996
----------- ----------- -----------
Current Assets $13,299,257 $13,622,176 $ 6,211,038
Noncurrent Assets 52,488,557 39,729,609 35,243,820
Current Liabilities 11,783,859 8,403,886 4,299,058
Noncurrent Liabilities 16,165,583 15,344,657 17,393,410
Members' Equity 37,838,372 29,603,242 19,762,390
Revenues 49,119,033 40,284,059 17,982,165
Expenses 32,147,085 26,660,623 13,970,615
Net Income 16,971,948 13,623,436 4,011,550
NOTE 4 - RETIREMENT
The Company's total contribution to its 401(k) employee savings plan was $85,877
in 1998, $93,302 in 1997 and $89,507 in 1996.
NOTE 5 - LINE OF CREDIT
The Company has a revolving short-term line of credit of $1,640,000 at 1 1/2%
over the bank prime rate with the Rural Telephone Finance Cooperative. No
amounts were outstanding at December 31, 1998 and 1997 under this line of
credit.
21
<PAGE>
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 6 - LONG-TERM DEBT
Long-term debt is as follows:
1998 1997
----------- -----------
Unsecured note payable by New Ulm Telecom,
Inc. to Phoenix Home Life Mutual Insurance
Company in quarterly installments of $65,000
plus 6.45% interest through December 1, 2008. $ 2,600,000 $ 2,860,000
Unsecured note payable by Western Telephone
Company, a wholly owned subsidiary, to Phoenix
Home Life Mutual Insurance Company in
quarterly installments of $18,333 plus 6.45%
interest through December 1, 2008. The
payment of this note is guaranteed by New Ulm
Telecom, Inc. 733,333 806,665
Unsecured note payable by Peoples Telephone
Company, a wholly owned subsidiary, to Phoenix
Home Life Mutual Insurance Company in
quarterly installments of $8,333 plus 6.45%
interest through December 1, 2008. The
payment of this note is guaranteed by New Ulm
Telecom, Inc. 333,333 366,667
----------- -----------
Total 3,666,666 4,033,332
Less Amount Due Within One Year 366,666 366,666
----------- -----------
Long-Term Debt $ 3,300,000 $ 3,666,666
=========== ===========
Principal payments required during the next five years are $366,666 annually.
Cash payments for interest were $252,240 in 1998, $276,718 in 1997, and $300,290
in 1996.
The debt agreements contain covenants relating to maintenance of working
capital, additional borrowings, leases, and payment of cash dividends. At
December 31, 1998, approximately $772,000 of consolidated retained earnings were
available for dividends under these covenants.
NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS
Income tax expense consists of the following:
1998 1997 1996
----------- ----------- -----------
Taxes Currently Payable:
Federal $ 1,583,343 $ 1,478,402 $ 1,239,127
State 513,014 488,446 412,402
Deferred Income Taxes 51,661 28,208 (30,511)
Amortization of Investment Tax
Credits (12,007) (18,836) (34,474)
----------- ----------- -----------
Income Tax Expense $ 2,136,011 $ 1,976,220 $ 1,586,544
=========== =========== ===========
22
<PAGE>
NEW ULM TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 7 - INCOME TAXES AND INVESTMENT TAX CREDITS (CONTINUED)
The differences between the statutory federal tax rate and the effective tax
rate were as follows:
1998 1997 1996
---- ---- ----
Statutory Tax Rate 35.0% 35.0% 35.0%
Effect of:
Surtax Exemption (1.0) (1.0) (1.0)
State Income Taxes, Net of
Federal Tax Benefit 6.7 6.7 6.7
Amortization of Investment Tax
Credits (.2) (.4) (.9)
Other (.8) 1.0 --
---- ---- ----
Effective Tax Rate 39.7% 41.3% 39.8%
==== ==== ====
The components of deferred income taxes are as follows:
1998 1997 1996
---------- ---------- ----------
Deferred Tax Liabilities:
Depreciation $1,423,489 $1,448,315 $1,408,139
Other 95,659 19,172 31,140
---------- ---------- ----------
Total $1,519,148 $1,467,487 $1,439,279
========== ========== ==========
Cash payments for income taxes were $2,231,500 in 1998, $1,942,500 in 1997, and
$1,639,398 in 1996.
NOTE 8 - COMMON STOCK
On March 4, 1996, the Company's Board of Directors declared a three-for-one
stock split, effected in the form of a stock dividend, to stockholders of record
on March 4, 1996, payable on April 1, 1996. An amount equal to the par value of
the additional 1,154,970 shares issued has been transferred from retained
earnings to the common stock account. Earnings and dividends per common share
for 1996 reflect the stock split effective for the entire year.
NOTE 9 - RELATED PARTY TRANSACTIONS
Notes receivable include $700,000 from an officer. The note is secured by New
Ulm Telecom, Inc. common stock and has a variable interest rate. The interest
rate at December 13, 1998 was 6.0%. The note is to be paid in full upon
termination of employment or death.
23
<PAGE>
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, 1998.
24
<PAGE>
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 12
Consolidated Statement of Income for the Three Years
Ended December 31, 1998, 1997 and 1996 13
Consolidated Balance Sheet at December 31, 1998 and 1997 14-15
Consolidated Statement of Stockholders' Equity for the
Three Years Ended December 31, 1998, 1997 and 1996 16
Consolidated Statement of Cash Flows for the Three
Years Ended December 31, 1998, 1997 and 1996 17
Notes to Consolidated Financial Statements 18-23
(a)2. Financial Statement schedules:
Separate financial statements of Midwest Wireless
Communications L.L.C, a 50 percent or less owned equity
method investment, are included as part of this report
because this entity constitutes a "significant
subsidiary" pursuant to the provisions of Regulation S-X,
Article 3-09. 27-39
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 40.
27 Financial data schedule
b) Reports on Form 8-K
None
25
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NEW ULM TELECOM, INC.
(Registrant)
Date March 30, 1999 By:
------------------ --------------------------------------
James Jensen, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Date March 30, 1999 By:
------------------ --------------------------------------
R. T. Rodenberg, Chairman of the Board
and Director
--------------------------------------
Bill Otis, Executive Vice-President/
Chief Operating Officer
--------------------------------------
Mark Retzlaff, Vice-President
and Director
--------------------------------------
Gary Nelson, Secretary and Director
--------------------------------------
Lavern Biebl, Treasurer and Director
--------------------------------------
Chris Hopp, Controller
--------------------------------------
Rosemary Dittrich, Director
--------------------------------------
Linus Grathwohl, Director
--------------------------------------
Perry Meyer, Director
--------------------------------------
Robert Ranweiler, Director
26
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
Midwest Wireless Communications L.L.C.:
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, changes in members'
equity and cash flows present fairly, in all material respects, the financial
position of Midwest Wireless Communications L.L.C. (the Company) and subsidiary
at December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
February 5, 1999
28
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,147,979 $ 2,063,280
Marketable securities 3,946,270 5,911,871
Accounts receivable, less allowance for doubtful accounts of
$282,287 and $360,122 in 1998 and 1997, respectively 4,228,358 4,548,991
Inventories 1,624,026 770,617
Other 352,624 327,417
----------- -----------
Total current assets 13,299,257 13,622,176
Property, cellular plant and equipment, net 34,078,742 21,032,370
Investment in Switch 2000 -- 1,466,820
FCC licenses, net 16,736,528 16,832,224
Investments and other 1,673,287 398,195
----------- -----------
Total assets $65,787,814 $53,351,785
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of long-term debt 1,279,048 2,767,000
Accounts payable 6,212,502 2,106,461
Accrued commissions 615,757 649,891
Accrued liabilities 3,676,552 2,880,534
----------- -----------
Total current liabilities 11,783,859 8,403,886
Other liabilities 517,491 195,247
Long-term debt 15,648,092 15,149,410
----------- -----------
Total liabilities 27,949,442 23,748,543
Members' equity 37,838,372 29,603,242
----------- -----------
Total liabilities and members' equity $65,787,814 $53,351,785
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
Operating revenues:
Retail service $ 33,403,860 $ 27,785,727
Roamer service 12,393,902 10,374,827
Equipment sales 3,321,271 2,123,505
------------ ------------
49,119,033 40,284,059
------------ ------------
Operating expenses:
Operations and maintenance 10,054,893 8,464,911
Cost of equipment sold 3,897,151 2,988,131
Depreciation 4,707,905 3,068,687
Amortization 481,392 448,864
Selling, general and administrative 11,024,317 9,517,110
Home roamer costs 1,353,930 804,709
------------ ------------
31,519,588 25,292,412
------------ ------------
Operating income 17,599,445 14,991,647
------------ ------------
Other income (expense):
Equity loss on Switch 2000 (710,330) (482,459)
Interest expense (890,930) (1,106,380)
Interest and dividend income 711,388 220,628
Other 262,375 --
------------ ------------
(627,497) (1,368,211)
------------ ------------
Net income $ 16,971,948 $ 13,623,436
============ ============
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
TOTAL
CAPITAL ACCUMULATED MEMBERS'
CONTRIBUTIONS INCOME EQUITY
Balance, December 31, 1996 $ 15,750,840 $ 4,011,550 $ 19,762,390
Redemption of units (2,646) (24,468) (27,114)
Distributions to members -- (3,755,470) (3,755,470)
Net income -- 13,623,436 13,623,436
------------ ------------ ------------
Balance, December 31, 1997 15,748,194 13,855,048 29,603,242
Redemption of units (11,416) (119,438) (130,854)
Distributions to members -- (8,605,964) (8,605,964)
Net income -- 16,971,948 16,971,948
------------ ------------ ------------
Balance, December 31, 1998 $ 15,736,778 $ 22,101,594 $ 37,838,372
============ ============ ============
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,971,948 $ 13,623,436
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for bad debts 266,901 769,330
Depreciation 4,707,905 3,068,687
Amortization 481,392 448,864
Equity loss on investments in Switch 2000 710,330 482,459
Appreciation rights 322,244 195,247
Accretion of discount (210,403) (106,506)
Changes in assets and liabilities:
Accounts receivable 53,732 (1,178,753)
Inventories (853,409) (345,351)
Accounts payable (994,241) 1,166,996
Accrued liabilities 761,884 1,321,436
Other (25,207) 689
------------ ------------
Net cash provided by operating activities 22,193,076 19,446,534
------------ ------------
Cash flows from investing activities:
Payments for property, cellular plant and equipment (11,514,175) (7,893,976)
Purchases of marketable securities (12,794,926) (10,805,365)
Proceeds received upon maturity of marketable securities 14,970,930 5,000,000
Purchase of Switch 2000 interests (383,330) --
Purchase of FCC licenses (385,696) --
Purchases of investments (1,150,092) (173,427)
Other (125,000) --
------------ ------------
Net cash used in investing activities (11,382,289) (13,872,768)
------------ ------------
Cash flows from financing activities:
Proceeds on long-term debt borrowings 16,372,239 --
Payments on long-term debt (17,361,509) (1,046,000)
Distributions to members (8,605,964) (3,755,470)
Redemption of units (130,854) (27,114)
------------ ------------
Net cash used in financing activities (9,726,088) (4,828,584)
------------ ------------
Net change in cash and cash equivalents 1,084,699 745,182
Cash and cash equivalents, beginning of year 2,063,280 1,318,098
------------ ------------
Cash and cash equivalents, end of year $ 3,147,979 $ 2,063,280
============ ============
Supplemental disclosure:
Cash paid during the year for interest $ 1,015,834 $ 1,116,505
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF CONSOLIDATION:
Midwest Wireless Communications L.L.C. (the Company) is a Delaware limited
liability company organized to provide cellular communications services in
certain service areas within the State of Minnesota. The latest date the
Company may be dissolved is December 31, 2034.
The consolidated financial statements of the Company include its
subsidiary, Switch 2000 L.L.C. (Switch 2000) as of December 31, 1998 and
for the period October 1, 1998 to December 31, 1998 (see Note 2). All
intercompany transactions have been eliminated from the consolidated
financial statements.
ESTIMATES:
The Company prepares its financial statements in conformity with generally
accepted accounting principles, which require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the period presented. They also affect the
disclosure of contingencies. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS:
For the purpose of the statements of cash flows, the Company considers all
investments purchased with original maturities of three months or less to
be cash equivalents.
MARKETABLE SECURITIES:
Marketable securities which the Company has the positive intent and ability
to hold to maturity are stated at cost adjusted for accretion of discounts
computed under a method which approximates the interest method. The
marketable securities have maturity dates ranging from March 1999 to June
1999. The market value approximated amortized cost at December 31, 1998.
Unrealized gains and losses were not significant.
CELLULAR TELEPHONE INVENTORIES:
Inventories consist primarily of cellular phones and accessories held for
resale with cost determined using the specific identification method.
Consistent with industry practice, losses on sales of cellular phones are
recognized in the period in which sales are made as a cost of acquiring
subscribers.
33
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY, CELLULAR PLANT AND EQUIPMENT:
Property, cellular plant and equipment is stated at its original cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the cellular plant and equipment, which range from three to
fifteen years.
Property, cellular plant and equipment consists of the following:
1998 1997
Land $ 1,442,308 $ 1,212,608
Plant in service 49,641,677 29,184,958
Plant under construction 3,112,679 1,273,872
------------ ------------
54,196,664 31,671,438
Less accumulated depreciation (20,117,922) (10,639,068)
------------ ------------
$ 34,078,742 $ 21,032,370
============ ============
At December 31, 1998 and 1997, accounts payable includes $5,100,282 and
$418,396, respectively, related to the purchase of property, cellular plant
and equipment. The Company capitalized interest in the amount of $248,377
and $151,361 for the year ended December 31, 1998 and 1997, respectively.
INCOME TAXES:
No provision for income taxes has been recorded since all income, losses
and tax credits are allocated to the members for inclusion in their
respective income tax returns.
ADVERTISING:
Advertising costs are expensed as incurred. Total advertising expenses were
$1,412,628 and $1,049,000 for the year ended December 31, 1998 and 1997,
respectively.
34
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FEDERAL COMMUNICATIONS COMMISSION (FCC) LICENSES:
The Company acquired a FCC license to provide cellular service in FCC
market NO. 288B in conjunction with the purchase of the Rochester service
area on June 28, 1996. This license was recorded at fair market value and
is being amortized on a straight-line basis over 39 years.
During 1998, the Company acquired FCC licenses to provide LMDS services
within the Company's service area. The licenses were recorded at fair
market value and are being amortized on a straight-line basis over 10
years. FCC licenses consist of the following:
1998 1997
Cellular license $ 17,505,700 $ 17,505,700
LMDS licenses 357,696 --
Other 28,000 --
------------ ------------
17,891,396 17,505,700
Less accumulated amortization (1,154,868) (673,476)
------------ ------------
$ 16,736,528 $ 16,832,224
============ ============
2. INVESTMENT IN SWITCH 2000:
Switch 2000 provides switching and interconnection services to the Company.
During 1997, and for the period January 1, 1998 through September 30, 1998,
the Company had ownership and voting interests in Switch 2000 of 54.93% and
45.55%, respectively. Accordingly, during this period, this investment was
accounted for using the equity method of accounting.
During September and October of 1998, the Company gained 100% ownership
interest in Switch 2000 by acquiring the remaining equity interest in
Switch 2000 for a purchase price of $383,330 in cash and equipment with a
fair market value of $700,277, The acquisition was accounted for under the
purchase method of accounting; accordingly, the assets and liabilities of
Switch 2000, principally cellular plant and equipment, were recorded at
fair value. The cellular plant and equipment acquired is being depreciated
over a period of two years.
35
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT IN SWITCH 2000, CONTINUED:
Effective June 30, 1997, Switch 2000 and the Company entered into a
Management Agreement which expired on December 3l, 1997. The Company
continued to provide management services to Switch 2000 through September
30, 1998. Under the terms of the Management Agreement, Switch 2000 retained
the services of the Company to manage the operations of Switch 2000,
including administration of transport and switching services and other
general business operations. Switch 2000 was required to pay a management
fee equal to the total costs incurred by the Company related to the
management of Switch 2000. Total management fees paid to the Company during
1998 and 1997 were $196,000 and $119,000, respectively.
Switch 2000, in turn, allocated management fees and certain other expenses,
primarily network costs, to its owners, which included the Company. Amounts
billed to the Company totaled approximately $l,802,000 for the period from
January 1, 1998 to September 30, 1998 and $2,879,000 for the year ended
December 31, 1997. The Company had an amount due to Switch 2000 of $227,000
at December 31, 1997.
Switch 2000 had assets of $3,376,866 and liabilities of $708,893 at
December 31, 1997.
3. 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.
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 as defined in the Agreement.
4. DEBT:
Effective July 29, 1998, the Company entered into an agreement (the
Agreement) with the Rural Telephone Finance Cooperative (the Cooperative)
to refinance the indebtedness of the Company. Proceeds in the amount of
$16,372,239 received under the agreement were used to pay the entire
outstanding principal balance on the previous debt.
36
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. DEBT, CONTINUED:
The Agreement includes a term note with principal and interest payable in
quarterly installments beginning October 31, 1998, with final maturity in
2008. The Agreement provides the Company the option to fix the interest
rate on borrowings (or portions thereof) through the maturity date. The
variable rate is based on the Cooperative's cost of capital and is adjusted
monthly. This rate was 6.1% as of December 31, 1998. As of December 31,
1998, the Company had borrowings of $8,087,356 outstanding under the
variable rate and $8,839,784 at a fixed rate of 5.75%.
The Agreement provides for an acquisition note of up to $36,842,105.
Advances under the acquisition note are subject to the lender's review and
of the Company's acquisition plan and any regulatory approval required to
accomplish the contemplated acquisition. Borrowings under the acquisition
are subject to the same interest rate terms as the term note. The
acquisition note becomes due ten years after the date of the initial
borrowing, at which time the outstanding principal and interest are due. As
of December 31, 1998, no amounts were outstanding under the acquisition
note.
The Agreement also provides for a revolving loan of up to $10,000,000.
Borrowings under the revolving loan bear interest at the prime rate plus
one and one-half percent. The revolving loan expires July 29, 2003, at
which time the outstanding principal and interest are due. The Company had
no amounts outstanding under the revolving loan as of December 31, 1998.
The Agreement requires the Company to maintain an investment in the
Cooperative in the amount of at least 5% of the outstanding debt balance.
The Agreement also contains covenants that restrict distributions to
members and require the Company to maintain a debt coverage service ratio
of not less than 1.25. Substantially all assets of the Company are pledged
as collateral under the Agreement.
Maturities of long-term debt are as follows:
1999 $ 1,279,048
2000 1,366,249
2001 1,459,395
2002 1,558,892
2003 1,665,173
Thereafter 9,598,383
------------
$ 16,927,140
============
37
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS:
Future minimum rental payments required under operating leases, principally
for real estate related to tower sites and other contractual commitments
that have initial or remaining noncancellable terms in excess of one year
as of December 31, 1998, are as follows:
1999 $ 353,091
2000 181,245
2001 120,628
2002 117,378
2003 112,878
Thereafter 1,668,436
------------
$ 2,553,656
============
Rental expense was $433,550 and $424,554 for the year ended December 31,
1998 and 1997, respectively.
6. CELL SITE SHARING AGREEMENTS:
The Company is subject to an agreement with a partnership located in
Wisconsin, to jointly operate common cellular base station facilities (Cell
Sites) in Nelson, Wisconsin and Red Wing, Minnesota. Under the agreement,
both parties agreed to share: the costs to construct the Cell Sites,
selected ongoing costs of operation and roamer revenues attributable to the
Cell Sites.
The Company has included its proportionate share of the assets,
liabilities, revenues and expenses of the Cell Sites in these financial
statements. As of December 3l, 1998 and 1997, these assets were
approximately $769,000 and $766,000 and liabilities were approximately $800
and $2,700, respectively. For the years ended December 31, 1998 and 1997,
revenues were approximately $573,000 and $521,000 and operating expenses
were $275,000 and $165,000, respectively.
7. CONCENTRATION OF CREDIT RISK:
The Company provides cellular service and sells cellular telephones to a
diversified group of consumers within a concentrated geographical area. The
Company performs credit evaluations of its customers and requires a deposit
when deemed necessary. Receivables are generally due within 30 days. Credit
losses related to customers have been within management's expectations.
38
<PAGE>
MIDWEST WIRELESS COMMUNICATIONS L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. EMPLOYEE BENEFITS:
The Company established the Midwest Wireless Communications L.L.C. 401(k)
Profit Sharing Plan and Trust (the 401(k) Plan) for all employees who meet
certain service and age requirements. The 401(k) Plan is comprised of an
employer matching contribution component and a profit sharing component.
Employer matching contributions to this component of the plan were $128,219
and $91,968 for the years ended December 31, 1998 and 1997, respectively.
Profit sharing contributions are 100% vested after five years employment.
Profit sharing contribution expenses were $155,286 and $118,411 for the
years ended December 31, 1998 and 1997, respectively.
Effective January 1, 1997, the Company established the Midwest Wireless
Communications L.L.C. Appreciation Rights Plan (the Plan) for certain key
employees. The Plan is designed to create two classes of appreciation
rights, Class A and Class B, which become fully vested three years and five
years after the first day of the year the rights are granted, respectively.
Participants in the Plan are eligible to receive awards based on the change
in members' equity from the date of grant through the end of the vesting
period. The Board of Managers granted both Class A and Class B appreciation
rights in 1997. Under the terms of the Plan, no additional Class B
appreciation rights will be granted, and additional Class A appreciation
rights will be granted at the discretion of the Board of Managers. The
Company recognized $322,244 and $195,247 in compensation expense related to
the Plan for the years ended December 31, 1998 and 1997, respectively.
39
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
(1) Western Telephone Company
100% - Owned Subsidiary
Incorporated in the State of Minnesota
(2) Peoples Telephone Company
100% - Owned Subsidiary
Incorporated in the State of Iowa
(3) New Ulm Phonery, Inc.
100% - Owned Subsidiary
Incorporated in the State of Minnesota
(4) New Ulm Cellular #7, Inc.
100% - Owned Subsidiary
Incorporated in the State of Minnesota
(5) New Ulm Cellular #8, Inc.
100% - Owned Subsidiary
Incorporated in the State of Minnesota
(6) New Ulm Cellular #9, Inc.
100% - Owned Subsidiary
Incorporated in the State of Minnesota
(7) New Ulm Cellular #10, Inc.
100% - Owned Subsidiary
Incorporated in the State of Minnesota
(8) New Ulm Long Distance, Inc.
100% - Owned Subsidiary
Incorporated in the State of Minnesota
The financial statements of all such subsidiaries are included on the
consolidated financial statements of New Ulm Telecom, Inc.
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW ULM
TELECOM, INC.'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,451,066
<SECURITIES> 0
<RECEIVABLES> 1,322,903
<ALLOWANCES> 33,000
<INVENTORY> 354,027
<CURRENT-ASSETS> 5,223,431
<PP&E> 28,617,026
<DEPRECIATION> 17,085,234
<TOTAL-ASSETS> 26,043,448
<CURRENT-LIABILITIES> 2,332,221
<BONDS> 3,300,000
0
0
<COMMON> 8,662,275
<OTHER-SE> 10,206,716
<TOTAL-LIABILITY-AND-EQUITY> 26,043,448
<SALES> 0
<TOTAL-REVENUES> 10,478,643
<CGS> 0
<TOTAL-COSTS> 6,324,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,269
<INCOME-PRETAX> 5,375,231
<INCOME-TAX> 2,136,011
<INCOME-CONTINUING> 3,239,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,239,220
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.87
</TABLE>
