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Cash Flows
Cash provided by operations was $5,005,919 for the nine months ended
September 30, 2009 compared to cash provided by operations of $7,227,204 in the
same period in 2008. The reduction in cash flows provided by operations for the
nine months ended September 30, 2009 was the result of several factors
including a higher level of net income in 2008 as compared to 2009, the 2008
acquisition of HTC and the timing of income tax payments. The cash flows
provided by operations for the nine months ended September 30, 2008 were
primarily attributable to net income, and depreciation and amortization. In
connection with the presentation of the HTC acquisition, the Company has
reclassified some operating and investing activities in the statement of cash
flows for the nine months ended September 30, 2008.
Cash used in investing activities was $2,388,620 for the nine months
ended September 30, 2009 compared to cash used in investing activities of
$62,910,129 in the same period in 2008. In 2008, the Company used approximately
$67 million of cash to purchase HTC. The Company received approximately $5.1
million in proceeds from the MWH sale of its cellular investment and $1.5
million from the sale of marketable securities. In 2009, cash was primarily
used in the acquisition of capital assets, partially offset by the receipt of
approximately $1.9 million in proceeds from the sale of equity investments to
Iowa Telecom. The Company expects total plant additions of approximately
$6,000,000 in 2009. The Company will finance these upgrades from existing working
capital and operating cash flows. Capital expenditures were $4,033,768 during
the first nine months of 2009 as compared to $1,988,987 for the same period in
2008. The Company operates in a capital-intensive business. The Company is
continually upgrading its local networks for changes in technology to provide
the most advanced services to its customers.
Cash used in financing activities was $3,326,326 for the nine months
ended September 30, 2009 compared to cash provided by financing activities of
$50,272,283 for the nine months ended September 30, 2008. In 2009, the Company
used debt proceeds of $400,000 reflecting the Companys draw down on its
revolver, less repayments of $2,294,004 and dividends paid of $1,432,322. In
2008, the Company used debt proceeds of $59,700,000 for the purchase of HTC,
less debt repayments of $7,893,087 and dividends paid of $1,534,630.
Dividends
The Company paid dividends of $1,432,322 during the first nine months
of 2009 and $1,534,630 during the same period in 2008. This represented
dividends of $.10 per share for the first two quarters of 2009 and $.08 per
share during the third quarter of 2009. Dividends of $.10 per share were paid
for each of the first three quarters of 2008. The Company continues to reinvest
in its infrastructure while maintaining dividends to shareholders. The Board of
Directors reviews dividend declarations based on anticipated earnings, capital
requirements, the operating and financial condition of the Company, and any
loan requirements.
The Companys loan agreements have put restrictions on the ability of
the Company to pay cash dividends to its shareholders. However, the Company is
allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and
(ii) in any amount if New Ulms Total Leverage Ratio, that is, the ratio of
its Indebtedness to EBITDA (in each case as defined in the loan documents)
is equal to or less than 3.50 to 1.00, and (b) in either case if New Ulm is not
in default or potential default under the loan agreements.
34
Table of Contents
During the first nine months of 2009 and at September 30, 2009, the
Company was in compliance with the financial ratios in the loan agreements. At
December 31, 2008, the Company did not meet its Equity to Total Asset Ratio
requirement of 40.0%, but had Equity to Total Asset Ratio of 39.59%. The
Company obtained a waiver from CoBank, ACB for the Companys non-compliance
with this covenant at December 31, 2008. At December 31, 2008, the Company was
in compliance with all other financial ratios contained in the loan agreement.
In connection with the granting of the waiver, the Company and CoBank, ACB
amended the MLA to lower the Total Leverage Ratio for the period from March 31,
2008 through December 31, 2010 to 4.25:1.0. The Total Leverage Ratio had been
4.5:1.0 for the period from March 31, 2008 through December 31, 2009.
Contractual Obligations
As of September 30, 2009, the Company had an unsecured loan in the
amount of $51,824 with the City of Redwood Falls, Minnesota that bears interest
at 5% and matures on January 1, 2012.
In connection with its acquisition of HTC in 2008, New Ulm and HTC as
New Ulms new subsidiary entered into a credit facility with CoBank, ACB. For
information about the Companys contractual obligations, along with the cash principal
payments due each period on its unsecured note payable and long-term debt, see
Note 4 Secured Credit Facility of the Consolidated Financial Statements of
this Form 10-Q.
The Table
below sets forth the Companys total contractual cash obligations at September
30, 2009 and for the balance of 2009, and the periods 2010-2011, 2012-2013, and
after 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October-December
|
|
|
|
|
|
Description
|
|
Total
|
|
2009
|
|
2010-2011
|
|
2012-2013
|
|
Thereafter
|
|
Deferred Compensation
|
|
$
|
2,674,488
|
|
$
|
181,251
|
|
$
|
1,364,374
|
|
$
|
262,989
|
|
$
|
865,874
|
|
Long-term Debt
|
|
|
49,876,824
|
|
|
125,000
|
|
|
6,416,941
|
|
|
6,886,883
|
|
|
36,448,000
|
|
Interest on Long-term Debt (A)
|
|
|
13,565,436
|
|
|
707,301
|
|
|
5,564,579
|
|
|
5,059,754
|
|
|
2,233,801
|
|
Loan Guarantees
|
|
|
502,990
|
|
|
34,314
|
|
|
74,220
|
|
|
276,557
|
|
|
117,899
|
|
Operating Lease
|
|
|
66,015
|
|
|
7,335
|
|
|
58,680
|
|
|
|
|
|
|
|
Purchase Obligations (B)
|
|
|
935,477
|
|
|
935,477
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations
|
|
$
|
67,621,230
|
|
$
|
1,990,678
|
|
$
|
13,478,794
|
|
$
|
12,486,183
|
|
$
|
39,665,574
|
|
|
|
A.
|
Interest
on long-term debt is estimated using rates in effect as of September 30,
2009. The Company uses interest rate swap agreements to manage its cash flow
exposure to interest rate movements on a portion of its variable rate debt
obligations (see Note 5 to the Consolidated Financial Statements of this Form
10-Q).
|
|
|
B.
|
Purchase
obligations consist primarily of commitments incurred for capital
improvements.
|
35
Table of Contents
Working Capital
The Company had working capital of $2,431,657 as of September 30, 2009,
compared to working capital of $2,399,276 as of December 31, 2008. The ratio of
current assets to current liabilities was 1.4:1.0 as of September 30, 2009 and
1.3:1.0 as of December 31, 2008.
Long-Term Debt
See Note 4 Secured Credit Facility of the Consolidated Financial
Statements of this Form 10-Q.
Other
The Company has not conducted a public equity offering. It operates
with original equity capital, retained earnings and indebtedness in the form of
senior debt and bank lines of credit.
By utilizing cash flow from operations and current cash balances, the
Company feels it has adequate resources to meet its anticipated operating,
capital expenditures, and debt service requirements for at least the next
twelve months.
Recent Economic Developments and Effects of
Inflation
The Company believes it has been able to mitigate the effects of the
recent economic swings by (i) prudent borrowing practices, (ii) anticipating
the need for enhancements to equipment and acquiring this equipment, and (iii)
pursuing appropriate budgeting strategies. While the trend is uncertain, the
Company anticipates that even with the downturn in the current economy,
customers will continue to utilize telecommunications systems and services at
levels that will enable the Company to operate profitably.
Recent Accounting Developments
In June 2009,
the FASB issued SFAS No. 168,
The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles,
which is incorporated in FASB Accounting Standards
Codification (ASC) Topic 105,
Generally
Accepted Accounting Principles
, identifies the ASC as the
authoritative source of generally accepted accounting principles in the United
States. Rules and interpretive releases of the SEC under federal securities
laws are also sources of authoritative GAAP for SEC registrants. This standard
is effective for financial statements issued for reporting periods that end
after September 15, 2009. The Company adopted SFAS No. 168 in the current
quarter and included references to the ASC within our consolidated financial
statements.
Effective June
30, 2009, the Company adopted Financial Accounting Standards Board Accounting
Standards Codification (ASC) Topic 855, Subsequent Events. ASC Topic 855
addresses the types and timing of events that should be reported in the
financial statements for events occurring between the balance sheet date and
the date the financial statements are issued or available to be issued. The
Company reviewed subsequent events for inclusion in the financial statements
through November 6, 2009, the date that the accompanying financial statements
were issued. The adoption of the ASC Topic did not affect the Companys
financial position or results of operations.
36
Table of Contents
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to risks of foreign
currency fluctuations. The Company does, however, use derivative financial
instruments to manage exposure to interest rate fluctuations. The Companys
objectives for holding derivatives are to minimize interest rate risks using
the most effective methods to eliminate or reduce the impact of these
exposures. Variable rate debt instruments are subject to interest rate risk. On
March 19, 2008, the Company executed interest-rate swap agreements, effectively
locking in the interest rate on $6,000,000 of variable-rate debt through March
of 2011 and $33,000,000 of variable-rate debt through March 2013. On June 23,
2008, the Company executed interest-rate swap agreements, effectively locking
in the interest rate on $3,000,000 of variable-rate debt through June of 2011
and $3,000,000 of variable-rate debt through June 2013. A summary of these
agreements is contained in Note 5 to the Consolidated Financial Statements of
this Form 10-Q.
The gain or loss on current derivative instruments is reported as a
component of accumulated other comprehensive income (loss) in stockholders
equity. It is recognized in retained earnings when the protection agreement is
terminated. At the conclusion of the full term maturity of the protection
agreement, no gain or loss is recognized. The Companys earnings are affected
by changes in interest rates as a portion of our long-term debt has variable
interest rates based on LIBOR. If interest rates for the portion of our
long-term debt based on variable rates had averaged 10% more for the nine
months ended September 30, 2009, interest expense would have increased
approximately $222,500.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of December 31, 2008, under the supervision of and with the
participation of the Companys Chief Executive Officer, the Chief Financial
Officer, and the Chief Operating Officer, an assessment of the effectiveness of
the design and operation of the Companys disclosure controls and procedures
pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b) was carried out by
management. In the course of completing managements assessment of the
Companys internal control over financial reporting, management has identified
a control deficiency that is a material weakness, as reported in the Companys
Annual Report on Form 10-K for 2008, which was filed on March 30, 2009 (the 2008
Form 10-K). As of the date of that assessment, the Chief Executive Officer,
the Chief Financial Officer, and Chief Operating Officer concluded that as a
result of the material weakness, the Companys disclosure controls and
procedures were not effective as of December 31, 2008. Specifically, the
Company did not have, and through its engagement of an independent tax
consultant, did not acquire, adequate technical expertise to effectively
oversee and review the Companys tax accounting for the Companys ownership of
an equity method investment. The Company hired an independent tax consultant to
prepare its income tax provision and returns. There was an error in the tax
treatment of its equity method investment that has been corrected in the 2008
financial statements. As a result of this material weakness above, management
had determined that its internal control over financial reporting was not
effective as of December 31, 2008.
37
Table of Contents
A material weakness is a significant deficiency (as defined in Public
Company Accounting Oversight Board Auditing Standard No. 2), or a combination
of significant deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will not
be prevented or detected.
The Companys management with the participation of the Chief Executive
Officer and the Chief Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-(e)) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based upon that evaluation, they have concluded that the
Companys disclosure controls and procedures are not effective in ensuring that
all material information required to be filed with the Securities and Exchange
Commission is recorded, processed, summarized, and reported within the time
period specified in the rules and forms of the Commission because of the
material weakness in its internal control over financial reporting as discussed
and reported in the Companys 2008 Form 10-K.
In light of the material weaknesses described in the 2008 Form 10-K,
management continues to assess options and is determining appropriate
remediation steps to ensure adequate oversight in relation to its income tax
provision and return preparation. Management believes that the interim
consolidated financial statements included in this report fairly presents in
all material respects, the Companys financial condition, results of
operations, and cash flows for the period presented.
There have been no changes in the Companys internal control over
financial reporting during the quarter ended September 30, 2009, that have
materially affected, or are reasonably likely to materially affect, its
internal control over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1A.
RISK FACTORS
Other than the additional risk factor described below, there have been
no material changes to the risk factors described in our Annual Report on Form
10-K for the year ended December 31, 2008.
The Company is experiencing higher operating
costs which it may not be able to pass along to its customers.
In the nine
months ended September 30, 2009, the Company incurred higher operating expenses
than in the prior years comparable nine month period, due primarily in part to
(i) higher levels of depreciation and amortization representing the Companys
continued investment in plant, property and equipment, (ii) higher relative
costs of programming, (iii) increased selling, general and administrative
expenses related to maintaining a high level of customer service. Given the
current economic environment, the Company has not implemented any significant
price increases to cover these additional expenses. As a result, its operating
margin and operating income for the first nine months of 2009 were lower than
in the prior year. The Company intends to continue to improve and upgrade its
physical plant and equipment and to focus on delivering high-quality products
and services to its customer base and believes that this level of service will
enable it to maintain and increase revenues. If the Company is unable to
significantly cut costs or increase its revenues, either through price
increases or selling additional services to existing and future customers, the
Company will continue to experience lower operating margins and operating
income.
38
Table of Contents
ITEM 6.
EXHIBITS
See Index to
Exhibits on page 41 of this Form 10-Q.
39
Table of Contents
S
IGNATURES
Pursuant
to the requirements 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.
|
|
|
Dated:
November 6, 2009
|
By
|
|
|
|
Bill Otis,
President and Chief Executive Officer
|
|
|
|
Dated:
November 6, 2009
|
By
|
|
|
|
Nancy
Blankenhagen, Chief Financial Officer
|
40
Table of Contents
I
NDEX TO EXHIBITS
|
|
|
|
Exhibit
Number
|
|
Description
|
|
|
|
10.1
|
|
Waiver,
Release and Amendment letter dated September 14, 2009 between CoBank, ACB and
New Ulm Telecom, Inc. and Subsidiaries
|
|
|
|
31.1
|
|
Chief
Executive Officer Certification Pursuant to Exchange Act Rule 13a-14, As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Chief
Financial Officer Certification Pursuant to Exchange Act Rule 13a-14, As
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
41
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