UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~September 30, 2012~~March 31, 2013

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to .

Commission File Number 0-3024

NEW ULM TELECOM, INC.

(Exact name of Registrant as specified in its charter)


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

27 North Minnesota Street

New Ulm, Minnesota 56073

(Address of principal executive offices and zip code)

(507) 354-4111

(Registrant’s telephone number, including area code)

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. Yesx Noo

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yesx Noo

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

o Large accelerated fileroAccelerated filero Non-accelerated filerxSmaller reporting company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox

The total number of shares of the Registrant’s common stock outstanding as of ~~November 9, 2012: 5,132,518.~~May 15, 2013: 5,103,918.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

Item 1	Financial Statements	3-8

	Consolidated Statements of Income (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~	3

	Consolidated Statements of Comprehensive Income ~~(Loss)~~ (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~	4

	Consolidated Balance Sheets (unaudited) as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012	5-6

	Consolidated Statements of Cash Flows (unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~	7

	Consolidated Statements of Stockholders’ Equity (unaudited) for the Year Ended December 31, ~~2011~~2012 and for the ~~Nine~~Three Months ended ~~September 30, 2012~~March 31, 2013	8

	Condensed Notes to Consolidated Financial Statements (unaudited)	~~9-18~~9-19

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~18-30~~19-29

Item 3	Quantitative and Qualitative Disclosures About Market Risk	3029

Item 4	Controls and Procedures	~~30-31~~29-30

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	3130

Item 1A	Risk Factors	3130

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3130

Item 3	Defaults Upon Senior Securities	3130

Item 4	Mine Safety Disclosures	3130

Item 5	Other Information	3130

Item 6	Exhibits Listing	3231

	Signatures	3332

	Exhibits	~~34-37~~33-39

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2012

2011

2012

2011

OPERATING REVENUES:

Local Service

$
1,448,759

$
1,489,581

$
4,364,582

$
4,459,707

Network Access

2,563,335

3,035,447

8,123,960

9,104,649

Video

1,494,017

1,449,038

4,420,306

4,221,963

Data

1,386,433

1,318,277

4,128,579

3,898,769

Long Distance

155,715

163,809

461,078

485,016

Other Non-Regulated

979,088

974,577

2,859,877

2,908,214

Total Operating Revenues

8,027,347

8,430,729

24,358,382

25,078,318

OPERATING EXPENSES:

Plant Operations (Excluding Depreciation and Amortization)

1,497,170

1,500,362

4,828,741

4,657,190

Cost of Video

1,283,744

1,132,272

3,785,252

3,394,769

Cost of Data

210,238

198,870

744,233

647,989

Cost of Other Nonregulated Services

417,227

392,250

1,215,876

1,173,707

Depreciation and Amortization

2,055,708

2,013,785

6,092,798

6,841,531

Selling, General and Administrative

1,339,482

1,711,415

4,573,112

4,920,838

Total Operating Expenses

6,803,569

6,948,954

21,240,012

21,636,024

OPERATING INCOME

1,223,778

1,481,775

3,118,370

3,442,294

OTHER (EXPENSE) INCOME

Interest Expense

(556,562
)

(568,555
)

(1,665,981
)

(1,849,319
)
Interest Income

808

3,493

81,276

86,837

Interest During Construction

6,217

9,914

16,922

34,753

Gain on Disposal of Assets

—

—

—

4,282

Equity in Earnings of Hector Investment

218,372

217,754

711,073

479,260

CoBank Patronage Dividends

—

—

449,878

485,812

Other Investment Income

43,422

73,426

132,364

172,210

Total Other Income (Expense)

(287,743
)

(263,968
)

(274,468
)

(586,165
)

INCOME BEFORE INCOME TAXES

936,035

1,217,807

2,843,902

2,856,129

INCOME TAXES

392,910

511,479

1,193,816

1,170,616

NET INCOME

$
543,125

$
706,328

$
1,650,086

$
1,685,513

BASIC AND DILUTED

NET INCOME PER SHARE

$
0.11

$
0.14

$
0.32

$
0.33

DIVIDENDS PER SHARE

$
0.0825

$
0.0825

$
0.2475

$
0.2450

WEIGHTED AVERAGE SHARES OUTSTANDING

5,132,518

5,115,435

5,123,027

5,115,435

~~Certain historical numbers have been changed to conform to the current year’s presentation.~~


	Three Months Ended March 31,
	2013			2012
OPERATING REVENUES:
Local Service	$	1,685,713		$	1,472,008
Network Access		2,971,600			2,770,012
Video		1,731,457			1,438,854
Data		1,803,080			1,358,828
Long Distance		215,440			155,542
Other Non-Regulated		1,005,155			970,284
Total Operating Revenues		9,412,445			8,165,528

OPERATING EXPENSES:
Plant Operations (Excluding Depreciation and Amortization)		1,881,383			1,688,693
Cost of Video		1,596,651			1,243,405
Cost of Data		249,275			295,404
Cost of Other Nonregulated Services		488,203			393,524
Depreciation and Amortization		2,210,500			2,017,419
Selling, General and Administrative		1,799,326			1,632,972
Total Operating Expenses		8,225,338			7,271,417

OPERATING INCOME		1,187,107			894,111

OTHER (EXPENSE) INCOME
Interest Expense		(571,150	)		(556,282	)
Interest Income		70,727			70,047
Interest During Construction		2,888			3,332
Equity in Earnings of Hector Investment		—			243,486
CoBank Patronage Dividends		521,796			449,878
Other Investment Income		40,625			42,532
Total Other Income (Expense)		64,886			252,993

INCOME BEFORE INCOME TAXES		1,251,993			1,147,104

INCOME TAXES		524,804			481,786

NET INCOME	$	727,189		$	665,318

BASIC AND DILUTED
NET INCOME PER SHARE	$	0.14		$	0.13

DIVIDENDS PER SHARE	$	0.0825		$	0.0825

WEIGHTED AVERAGE SHARES OUTSTANDING		5,103,918			5,115,435

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~
(Unaudited)


	Three Months Ended Septmber 30,						Nine Months Ended Septmber 30,						Three Months Ended March 31,
	2012			2011			2012			2011			2013			2012

Net Income	$	543,125		$	706,328		$	1,650,086		$	1,685,513		$	727,189		$	665,318

Other Comprehensive Income (Loss):
Unrealized Gain (Loss) of Equity Method Investee		2,300			83,456			(14,702	)		296,509
Unrealized Loss of Equity Method Investee														—			(16,775	)
Unrealized Gains on Interest Rate Swaps		237,364			224,637			664,414			562,546			271,950			168,452
Income Tax Expense Related to Unrealized
Gains on Interest Rate Swaps		(96,062	)		(90,911	)		(268,888	)		(227,662	)
Income Tax Expense Related to Unrealized Gains on Interest Rate Swaps														(110,058	)		(68,173	)
Other Comprehensive Income		143,602			217,182			380,824			631,393			161,892			83,504

Comprehensive Income	$	686,727		$	923,510		$	2,030,910		$	2,316,906		$	889,081		$	748,822

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NEW ULM TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS


	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012
CURRENT ASSETS:
Cash and Cash Equivalents	$	590,415	$	1,221,717	$	1,033,267	$	2,749,850
Receivables, Net of Allowance for Doubtful Accounts of $190,000 and $300,000		1,836,396		2,430,589
Receivables, Net of Allowance for Doubtful Accounts of $184,902 and $175,705						1,965,166		1,996,996
Income Taxes Receivable		504,060		167,855		—		201,270
Materials, Supplies, and Inventories		2,687,074		1,946,831		2,542,403		2,276,368
Deferred Income Taxes		861,358		907,352		794,340		795,375
Prepaid Expenses		409,358		454,124		660,257		610,265
Total Current Assets		6,888,661		7,128,468		6,995,433		8,630,124

INVESTMENTS & OTHER ASSETS:
Goodwill		29,707,100		29,707,100		39,975,906		39,975,906
Intangibles		18,658,397		20,215,961		27,991,385		28,609,193
Hector Investment		21,980,827		21,284,456
Other Investments		4,346,307		4,359,226		6,721,848		6,491,513
Other Assets		87,162		116,214		67,794		77,478
Total Investments and Other Assets		74,779,793		75,682,957		74,756,933		75,154,090

PROPERTY, PLANT & EQUIPMENT:
Telecommunications Plant		96,854,967		93,981,635		106,149,677		105,707,925
Other Property & Equipment		7,953,592		6,769,814		10,370,041		10,221,493
Video Plant		8,970,845		8,606,189		9,384,504		9,361,510
Total Property, Plant and Equipment		113,779,404		109,357,638		125,904,222		125,290,928
Less Accumulated Depreciation		78,866,649		74,478,555		81,816,888		80,466,903
Net Property, Plant & Equipment		34,912,755		34,879,083		44,087,334		44,824,025

TOTAL ASSETS	$	116,581,209	$	117,690,508	$	125,839,700	$	128,608,239

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NEW ULM TELECOM, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY


							March 31, 2013			December 31, 2012
	September 30, 2012			December 31, 2011
CURRENT LIABILITIES:
Current Portion of Long-Term Debt	$	3,688,000		$	3,698,883		$	4,588,000		$	4,113,000
Accounts Payable		1,196,693			1,186,665			1,602,779			1,988,390
Checks Written in Excess of Cash Balance		720,027			—
Accrued Income Taxes								162,644			—
Other Accrued Taxes		225,046			204,140			252,687			193,746
Financial Derivative Instruments		578,769			—			31,901			303,851
Deferred Compensation		76,124			195,375			64,571			67,614
Accrued Compensation		123,932			679,158			513,982			569,028
Other Accrued Liabilities		1,313,371			1,396,494			1,508,462			1,399,442
Total Current Liabilities		7,921,962			7,360,715			8,725,026			8,635,071

LONG-TERM DEBT, Less Current Portion		38,085,050			39,809,171			39,096,017			42,494,385

NONCURRENT LIABILITIES:
Loan Guarantees		310,642			453,329			296,468			303,627
Deferred Income Taxes		14,685,359			14,142,484			20,324,587			20,215,563
Unrecognized Tax Benefit								94,952			94,952
Other Accrued Liabilities		156,655			64,217			123,303			136,146
Financial Derivative Instruments		—			1,243,183
Deferred Compensation		874,805			933,488			980,715			997,869
Total Noncurrent Liabilities		16,027,461			16,836,701			21,820,025			21,748,157

COMMITMENTS AND CONTINGENCIES:		—			—			—			—

STOCKHOLDERS’ EQUITY:
Preferred Stock - $1.66 Par Value, 10,000,000 Shares Authorized, None Issued		—			—			—			—
Common Stock - $1.66 Par Value, 90,000,000 Shares Authorized, 5,132,518 and 5,115,435 Shares Issued and Outstanding		8,554,197			8,525,725
Common Stock - $1.66 Par Value, 90,000,000 Shares Authorized, 5,103,918 Shares Issued and Outstanding								8,506,530			8,506,530
Accumulated Other Comprehensive Income (Loss)		(433,410	)		(814,234	)		(17,421	)		(179,313	)
Retained Earnings		46,425,949			45,972,430			47,709,523			47,403,409
Total Stockholders’ Equity		54,546,736			53,683,921			56,198,632			55,730,626

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	116,581,209		$	117,690,508		$	125,839,700		$	128,608,239

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


							Three Months Ended
	Nine Months Ended						March 31, 2013			March 31, 2012
	September 30, 2012			September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,650,086		$	1,685,513		$	727,189		$	665,318
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization		6,121,850			6,870,838			2,220,184			2,027,103
Gain on Disposal of Assets		—			(4,282	)
Undistributed Earnings of Hector Investment		(711,073	)		(479,260	)		—			(243,486	)
Undistributed Earnings of Other Equity Investments		(130,927	)		(162,384	)		(40,025	)		(42,399	)
Noncash Patronage Refund		(157,457	)		(179,057	)		(130,449	)		(157,457	)
Distributions from Equity Investments		200,000			200,000			14,616			—
Stock Issued in Lieu of Cash Payment								21,000			—
Changes in Assets and Liabilities:
Receivables		594,193			(310,515	)		31,830			930,904
Income Taxes Receivable		(336,205	)		85,218			201,270			167,855
Inventories		(740,243	)		(537,471	)		(266,035	)		99,884
Prepaid Expenses		145,566			28,085			(70,992	)		(18,389	)
Accounts Payable		566,867			(18,779	)		(119,253	)		(314,678	)
Checks Written in Excess of Cash Balance		720,027			—
Accrued Income Taxes		—			103,693			162,644			74,363
Other Accrued Taxes		20,906			(52,705	)		58,941			53,978
Other Accrued Liabilities		(545,911	)		(110,101	)		41,131			(219,199	)
Deferred Income Tax		319,981			186,706			—			109,568
Deferred Compensation		(177,934	)		(542,464	)		(20,197	)		(143,062	)
Net Cash Provided by Operating Activities		7,539,726			6,763,035			2,831,854			2,990,303

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant, and Equipment, Net		(5,125,745	)		(4,127,719	)		(1,122,358	)		(1,106,784	)
Proceeds from Disposal of Assets		—			4,282
Other, Net		(41,384	)		(42,000	)		(81,636	)		(42,000	)
Net Cash Used in Investing Activities		(5,167,129	)		(4,165,437	)		(1,203,994	)		(1,148,784	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments of Long-Term Debt		(2,589,383	)		(2,599,476	)		(609,500	)		(870,383	)
Changes in Revolving Credit Facility		854,379			(90,571	)		(2,313,868	)		(440,790	)
Dividends Paid		(1,268,895	)		(1,253,285	)		(421,075	)		(422,025	)
Net Cash Used in Financing Activities		(3,003,899	)		(3,943,332	)		(3,344,443	)		(1,733,198	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(631,302	)		(1,345,734	)
NET INCREASE (DECREASE) IN CASH								(1,716,583	)		108,321

CASH AND CASH EQUIVALENTS at Beginning of Period		1,221,717			2,394,703
CASH at Beginning of Period								2,749,850			1,221,717

CASH AND CASH EQUIVALENTS at End of Period	$	590,415		$	1,048,969
CASH at End of Period							$	1,033,267		$	1,330,038

Supplemental cash flow information:
Cash paid for interest	$	1,643,596		$	1,856,340		$	553,637		$	545,210
Net cash paid for income taxes	$	1,210,000		$	795,000		$	160,000		$	130,000

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NEW ULM TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

YEAR ENDED DECEMBER 31, ~~2011,~~2012, AND
~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30, 2012~~MARCH 31, 2013

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total
Equity

Common Stock

Shares

Amount

BALANCE on December 31, 2010

5,115,435

$
8,525,725

$
(1,700,173
)
$
45,620,217

$
52,445,769

Net Income

2,027,523

2,027,523

Dividends

(1,675,310
)

(1,675,310
)
Unrealized Gains of Equity Method Investee

357,316

357,316

Unrealized Gains on Interest Rate Swaps, Net of Deferred Income Taxes

528,623

528,623

BALANCE on December 31, 2011

5,115,435

8,525,725

(814,234
)

45,972,430

53,683,921

Director’s Stock Plan Stock Issuance

17,083

28,472

72,328

100,800

Net Income

1,650,086

1,650,086

Dividends

(1,268,895
)

(1,268,895
)
Unrealized Losses of Equity Method Investee

(14,702
)

(14,702
)
Unrealized Gains on Interest Rate Swaps, Net of Deferred Income Taxes

395,526

395,526

BALANCE on September 30, 2012

5,132,518

$
8,554,197

$
(433,410
)
$
46,425,949

$
54,546,736


	Common Stock						Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Equity
	Shares			Amount			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Equity
BALANCE on December 31, 2011		5,115,435		$	8,525,725		$	(814,234	)	$	45,972,430		$	53,683,921

Director’s Stock Plan		17,083			28,472						72,328			100,800
Retirement of Stock from HCC Spin-Off		(28,600	)		(47,667	)					(123,934	)		(171,601	)
Net Income											3,174,914			3,174,914
Dividends											(1,692,329	)		(1,692,329	)
Other Comprehensive Income								634,921						634,921

BALANCE on December 31, 2012		5,103,918		$	8,506,530			(179,313	)		47,403,409			55,730,626

Net Income											727,189			727,189
Dividends											(421,075	)		(421,075	)
Other Comprehensive Income								161,892						161,892

BALANCE on March 31, 2013		5,103,918		$	8,506,530		$	(17,421	)	$	47,709,523		$	56,198,632

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

NEW ULM TELECOM, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~September 30, 2012~~March 31, 2013 (Unaudited)

Note 1 – Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements of New Ulm Telecom, Inc. and its subsidiaries (NU Telecom) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.

Our consolidated financial statements report the financial condition and results of operations for NU Telecom and its subsidiaries in one business segment: the Telecom Segment. Inter-company transactions have been eliminated from the consolidated financial statements.

~~Revenue Recognition~~

We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or a service has been provided, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.


Revenue Recognition
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred or a service has been provided, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.

Revenues are earned from our customers primarily through the connection to our local network, digital and commercial television programming, and Internet services (both dial-up and high-speed broadband). Revenues for these services are billed based on set rates for monthly service or based on the amount of time the customer is utilizing our facilities. The revenue for these services is recognized when the service is rendered.

Revenues earned from interexchange carriers (IXC) accessing our network are based on the utilization of our network by these carriers as measured by minutes of use on the network by the individual carriers. Revenues are billed at tariffed access rates for both interstate and intrastate calls. Revenues for these services are recognized based on the period the access is provided.

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Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The Federal Communications Commission (FCC) established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company’s actual or average costs. New Ulm Telecom’s and Sleepy Eye Telephone Company’s (SETC) settlements from the pools are based on its actual costs to provide service, while the settlements for NU Telecom subsidiaries – Western Telephone Company, Peoples Telephone Company and Hutchinson Telephone Company (HTC) are based on nationwide average schedules. Access revenues for New Ulm Telecom and SETC include an estimate of a cost study each year that is trued-up subsequent to the end of any given year. Our management believes the estimates included in our preliminary cost study are reasonable. We cannot predict the future impact that industry or regulatory changes will have on interstate access revenues.

Intrastate access rates are filed with state regulatory commissions in Minnesota and Iowa.

We derive revenues from system sales and services through the sale, installation and servicing of communication systems. In accordance with GAAP, these deliverables are accounted for separately. We recognize revenue from customer contracts for sales and installations using the completed-contract method, which recognizes income when the contract is substantially complete. We recognize rental revenues over the rental period.

~~Cost of Services (excluding depreciation and amortization)~~

Cost of services includes all costs related to delivery of communication services and products. These operating costs include all costs of performing services and providing related products including engineering, network monitoring and transport cost.


Cost of Services (excluding depreciation and amortization)
Cost of services includes all costs related to delivery of communication services and products. These operating costs include all costs of performing services and providing related products including engineering, network monitoring and transport cost.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses include direct and indirect selling expenses, customer service, billing and collections, advertising and all other general and administrative costs associated with the operations of the business.


Selling, General and Administrative Expenses
Selling, general and administrative expenses include direct and indirect selling expenses, customer service, billing and collections, advertising and all other general and administrative costs associated with the operations of the business.

~~Depreciation and Amortization Expense~~

We use the group life method (mass asset accounting) to depreciate the assets of our telephone companies. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. Depreciation expense was $4,535,234 and $5,283,967 for the nine months ended September 30, 2012 and 2011. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.


Depreciation and Amortization Expense
We use the group life method (mass asset accounting) to depreciate the assets of our telephone companies. Telephone plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. Depreciation expense was $1,592,692 and $1,498,231 for the three months ended March 31, 2013 and 2012. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.

~~Income Taxes~~

The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Significant components of our deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax basis. Our effective income tax rate is normally higher than the United States tax rate due to state income taxes and permanent differences.


Income Taxes
The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Significant components of our deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax basis. Our effective income tax rate is normally higher than the United States tax rate due to state income taxes and permanent differences.

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We account for income taxes in accordance with GAAP. As required by GAAP, we recognize the financial statement benefit of tax positions only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

WeAs of March 31, 2013 we had ~~no net~~$143,866 of unrecognized tax benefits ~~at September 30,~~net of a federal tax benefit of $48,914, which if recognized would affect the effective tax rate. Currently, the State of Minnesota is examining Hector Communications Corporation’s (HCC) 2006 state tax return. The examination of this return is expected to be completed in 2013. As of March 31, 2012 we had no unrecognized tax benefits that, if recognized, would affect the ~~income~~effective tax ~~provision when recorded.~~rate.

We are primarily subject to United States, Minnesota and Iowa income taxes. Tax years subsequent to 2008 remain open to examination by ~~federal~~United States and state tax authorities. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. As of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012 we had no$19,136 of accrued interest ~~or penalties accrued~~ that ~~were~~ related to income tax matters.

Recent Accounting Developments

In February 2013, the Financial Accounting Standards Board issued ASU 2013-02 to improve the disclosure of reclassifications out of accumulated other comprehensive income. The Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Also, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income (only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period) either on the face of the statement where net income is presented or in the notes. The adoption of this guidance did not have a material impact on our disclosures or consolidated financial statements.

We reviewed all ~~other~~ significant ~~newly~~recently issued accounting pronouncements and determined they are either not applicable to our business or that no material effect is expected on our financial position and results of ~~operations or disclosures.~~operations.

Note 2 – Acquisitions and Dispositions

Hector Communications Corporation Spin-Off Agreement

On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. HCC was equally owned by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt.

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The preliminary allocation of the spin-off value of HCC is shown below:


Current assets	$	439,664
Property, plant and equipment		9,847,787
Investments		2,412,938
Customer relationship intangible		9,900,000
Trade name intangible		570,000
Excess costs over net assets acquired (Goodwill)		10,268,806
Current liablities		(300,621	)
Deferred liabilities		(7,675,522	)
Total price allocation		25,463,052
Less Cash Acquired		(18,150	)

Total Consideration For Acquisition, Net	$	25,444,902

This spin-off was accounted for using the acquisition method of accounting for business combinations, and accordingly, the acquired assets were recorded at estimated fair values as of the date of acquisition. Based upon our preliminary spin-off value allocation, the excess of the purchase price and acquisition costs over the fair value of the net identifiable tangible assets acquired was $20,738,806, which is not deductible for income tax purposes. The Company recorded an intangible asset related to the acquired company’s customer relationships of $9,900,000 and trade name intangible of $570,000. The estimated useful life of the customer relationship intangible is 14 years and trade name intangible is 5 years.

The preliminary valuation allocation is subject to change based on pending operational true-ups related to accounts receivable and accounts payable.

Pro Forma Financial Information

Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments. The following pro forma results presented are for the first quarter of 2012 as if the spin-off had been completed on January 1, 2012. The Company provided this pro forma condensed Statement of Income to facilitate analysis of the 2012 first quarter Statement of Income.


	THREE MONTHS ENDED MARCH 31, 2012
	Actual New Ulm Telecom, Inc.		Actual Sleepy Eye Telephone Co.		Pro Forma Adjustments			New Ulm Telecom, Inc. Pro Forma Combined
REVENUES	$	8,165,528	$	1,394,353	$	(89,860	)	$	9,470,021

NET INCOME	$	665,318	$	326,497	$	(369,445	) *	$	622,370

BASIC AND DILUTED NET INCOME PER SHARE	$	0.13	$	0.06	$	(0.07	)	$	0.12

* These adjustments include depreciation, amortization, management services, equity income and interest expense, net of the related tax benefit.

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The operating results for SETC are included in the March 31, 2013 operating results of NU Telecom, but are not included in the operating results of NU Telecom as of March 31, 2012.

Note 23 – Fair Value Measurements

We have adopted the rules prescribed under GAAP for our financial assets and liabilities. GAAP includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:


	Level 1:	Inputs are quoted prices in active markets for identical assets or liabilities.
	Level 2:	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market-corroborated inputs that are derived principally from or corroborated by observable market data.
	Level 3:	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

We use financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We account for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.

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We have entered into interest rate swaps with our lender, CoBank, ACB, to manage our cash flow exposure to fluctuations in interest rates. These instruments were designated as cash flow hedges and were effective at mitigating the risk of fluctuations on interest rates in the market place. Any gains or losses related to changes in the fair value of these derivatives are accounted for as a component of accumulated other comprehensive income (loss) for as long as the hedge remains effective.

The fair value of our interest rate swap agreements is discussed in Note 56 – “Interest Rate Swaps”. ~~Our~~The fair value of our swap ~~agreements’ fair values~~agreements were determined based on Level 2 inputs.

Other Financial Instruments

Other Investments- It is difficult to estimate a fair value for equity investments in companies carried on the equity or cost basis due to a lack of quoted market prices. We conducted an evaluation of our investments in all of our companies in connection with the preparation of our audited financial statements at December 31, ~~2011.~~2012. We believe the carrying value of our investments is not impaired.

Debt– We estimate the fair value of our long-term debt based on the discounted future cash flows we expect to pay using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value.

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Other Financial Instruments- Our financial instruments also include cash equivalents, trade accounts receivable and accounts payable ~~for which~~where the current carrying amounts approximate fair market value.

Note 34 – Goodwill and ~~Other Intangible Assets~~Intangibles

We account for goodwill and other intangible assets under GAAP. Under GAAP, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. Our goodwill totaled ~~$29,707,100~~$39,975,906 at ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011.~~2012.

As required by GAAP, we do not amortize goodwill and other intangible assets with indefinite lives, but test for impairment on an annual basis or earlier if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. These circumstances include, but are not limited to (i) a significant adverse change in the business climate, (ii) unanticipated competition or (iii) an adverse action or assessment by a regulator. Determining impairment involves estimating the fair value of a reporting unit using a combination of (i) the income or discounted cash flows approach and (ii) the market approach that utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. We recognize impairment loss when the carrying amount of goodwill exceeds its implied fair value.

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In ~~2011, 2010~~2012 and ~~2009,~~2011, we engaged an independent valuation firm to complete our annual impairment testing for goodwill. For ~~2011, 2010~~2012 and ~~2009,~~2011, the testing resulted in no impairment charge to goodwill as the determined fair value was sufficient to pass the first step of the impairment test.

Our intangible assets subject to amortization consist of acquired customer relationships, regulatory rights and a noncompetition agreement. As of December 31, 2009, our management determined that our trade name intangible was no longer an indefinite-lived intangible asset due to the rebranding of HTC’s products and services. Our management ~~anticipates~~anticipated that this rebranding process would take approximately three years to ~~complete. We anticipate an~~complete and would result in additional ~~charge to~~ amortization expense of $266,667 per year, over the three years which began in 2010 and ended in 2012, due to this rebranding process.

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We amortize intangible assets with finite lives over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. In addition, we periodically reassess the carrying value, useful lives and classifications of our identifiable intangible assets. The components of our identified intangible assets are as follows:


			September 30, 2012				December 31, 2011
	Useful Lives		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
													March 31, 2013				December 31, 2012
											Useful Lives		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Definite-Lived Intangible Assets
Customers Relationships		14-15 yrs	$	19,378,445	$	6,560,072	$	19,378,445	$	5,522,504		14-15 yrs	$	29,278,445	$	7,428,571	$	29,278,445	$	6,905,929
Regulatory Rights		15 yrs		4,000,000		1,266,657		4,000,000		1,066,659		15 yrs		4,000,000		1,399,989		4,000,000		1,333,323
Non-Competition Agreement		5 yrs		800,000		759,985		800,000		639,988		5 yrs		800,000		800,000		800,000		800,000
Trade Name		3 yrs		800,000		733,334		800,000		533,333		3-5 yrs		1,370,000		828,500		1,370,000		800,000
Indefinitely-Lived Intangible Assets
Video Franchise				3,000,000		0		3,000,000		0				3,000,000		—		3,000,000		—
Total			$	27,978,445	$	9,320,048	$	27,978,445	$	7,762,484			$	38,448,445	$	10,457,060	$	38,448,445	$	9,839,252

Net Identified Intangible Assets					$	18,658,397			$	20,215,961					$	27,991,385			$	28,609,193

Amortization expense related to the definite-lived intangible assets was ~~$1,557,564~~$617,808 and ~~$1,557,564~~$519,188 for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 and ~~2011.~~2012.

Amortization expense for the remaining ~~three~~nine months of ~~2012~~2013 and the five years subsequent to ~~2012~~2013 is estimated to be:


	•	(~~October~~April 1 – December 31) - ~~$519,094~~$1,853,425
	•	~~2013 - $1,649,992~~
	•	2014 - ~~$1,649,992~~$2,471,233
	•	2015 - ~~$1,649,992~~$2,471,233
	•	2016 - ~~$1,648,605~~$2,469,256
	•	2017 - ~~$1,647,939~~$2,469,083
	•	2018 - $2,355,083

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Note 45 – Secured Credit Facility

We have a credit facility with CoBank, ACB. Under the credit facility, we entered into separate Master Loan Agreements (MLAs) and a series of supplements to ~~those~~the respective MLAs.

NU Telecom and its respective subsidiaries also have entered into security agreements under which substantially all of the assets of NU Telecom and its respective subsidiaries have been pledged to CoBank, ACB as collateral. In addition, NU Telecom and its respective subsidiaries have guaranteed all obligations under the credit facility.

Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if our “Total Leverage ~~Ratio,”~~Ratio”, that is, the ratio of our “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 we are not in default or potential default under our loan agreements. As of September 30, 2012, our Total Leverage Ratio fell below the 3:50 to 1:00 ratio, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders.

AsTable of ~~September 30,~~Contents

At March 31, 2013 and 2012, we were in compliance with all the stipulated financial ratios in our loan agreements.

As described in Note 56 – “Interest Rate ~~Swaps,”~~Swaps”, we have entered into interest rate swaps that effectively fix our interest rates and cover ~~$36.0~~$3.0 million at a weighted average rate of ~~5.52%~~6.54%, as of ~~September 30, 2012.~~March 31, 2013. The additional ~~$11.0~~debt of $46.8 million ~~of outstanding debt~~ ($~~5.2~~6.1 million available under the revolving credit facilities and ~~$5.8~~$40.7 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of ~~2.24%~~2.42%, as of ~~September 30, 2012.~~March 31, 2013.

Note 56 – Interest Rate Swaps

We assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.

We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facilities with CoBank, ACB require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.

To meet this objective, we entered into Interest Rate Swap Agreements with CoBank, ACB. Under these Interest Rate Swap Agreements and subsequent swaps that each covers a specified notional dollar amount, we have changed the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of these interest rate swaps, we pay a fixed contractual interest rate and (i) make an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment is above the contractual rate.

Each month, we make interest payments to CoBank, ACB under its loan agreements based on the current applicable LIBOR Rate, plus the contractual LIBOR margin then in effect with respect to each applicable loan, without reflecting any interest rate swaps. At the end of each calendar quarter, CoBank, ACB adjusts our aggregate interest payments based upon the difference, if any, between the amounts paid by us during the quarter and the current effective interest rate set forth in the table below. All net interest payments made by us are reported in our consolidated income statement as interest expense.

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Pursuant to these interest rate swap agreements, we entered into interest rate swaps covering (i) $39.0 million of our aggregate indebtedness to CoBank, ACB effective March 19, 2008 and (ii) an additional $6.0 million of our aggregate indebtedness to CoBank, ACB effective June 23, 2008. These swaps effectively locked in the interest rate on (i) $6.0 million of variable-rate debt through March 2011, (ii) $33.0 million of variable-rate debt through March 2013, (iii) $3.0 million of variable-rate debt through June 2011 and (iv) $3.0 million of variable-rate debt through June 2013.

~~On January 1, 2011, we entered into a cash management agreement with CoBank, ACB. This agreement reduces our borrowing expense in the form~~Table of lower interest expense by ensuring there are no idle funds in our bank accounts as those excess funds are used to reduce our debt. When we have excess cash in our bank accounts, our surplus cash is automatically applied to our outstanding loan balances in our revolver debt facilities and when we have a cash deficit position in our bank accounts, CoBank, ACB advances funds on our revolver debt facilities to fund the deficit position. Over time, our interest expense is reduced as we are in a cash surplus position more often than a deficit position.Contents

On March 31, ~~2011, $5,000,000~~2013, $33,000,000 of our swaps matured on Loan RX0583-T1 ($~~1,000,000)~~11,250,000) and Loan RX0584-T1 ($~~4,000,000)~~21,750,000). No gain or loss was recognized on these swaps as they had reached their full maturities.

~~On June 30, 2011, an additional $3,000,000 of our swaps matured on Loan RX0583-T2. No gain or loss was recognized on this swap as it had reached its full maturity.~~

As of ~~September 30, 2012~~March 31, 2013 we had the following interest rate swaps in effect.

Loan #

Maturity Date

Notional Amount

Current Effective Interest Rate (1)

Maturity Date

Notional Amount

Current Effective Interest Rate (1)

RX0583-T1

03/31/2013

11,250,000

5.26% (LIBOR Rate of 3.26% plus
2.00% LIBOR Margin)

RX0583-T2

06/30/2013

3,000,000

6.54% (LIBOR Rate of 4.54% plus
2.00% LIBOR Margin)

06/30/2013

3,000,000

6.54% (LIBOR Rate of 4.54% plus
2.00% LIBOR Margin)

RX0584-T1

03/31/2013

21,750,000

5.51% (LIBOR Rate of 3.26% plus
2.25% LIBOR Margin)

(1) As described in Note 45 – “Secured Credit ~~Facility,” each~~Facility”, the note initially bears interest at a LIBOR rate determined by the maturity of the note, plus a “LIBOR Margin” rate equal to ~~either~~ 2.00% ~~or 2.25%~~ according to the individual secured credit facility. The LIBOR Margin decreases as the borrower’s “Leverage Ratio” decreases. The “Current Effective Interest Rate” in the table reflects the rate we pay giving effect to the swaps.

~~These~~The interest rate ~~swaps qualify~~swap qualifies as a cash flow ~~hedges~~hedge for accounting purposes under GAAP. We have reflected the effect of ~~these~~this hedging ~~transactions~~transaction in ~~the~~our financial statements. The unrealized gains were reported in other comprehensive ~~income (loss).~~income. If we were to terminate our interest rate swap ~~agreements,~~agreement, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income, ~~(loss),~~ which is classified in stockholders’ equity, into earnings on the consolidated statements of income.

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The fair value of the Company’s interest rate swap ~~agreements~~agreement is determined based on valuations received from CoBank, ACB and are based on the present value of expected future cash flows using discount rates appropriate with the terms of the swap agreements. The fair value indicates an estimated amount we would have to pay if the contracts were canceled or transferred to other parties.

Note 67 – Other Investments

We are a co-investor with other rural telephone companies in several partnerships and limited liability companies. These joint ventures make it possible to offer services to customers, including digital video services and fiber optic transport services that we would have difficulty offering on our own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. We recognize income and losses from these investments on the equity method of accounting. For a listing of our investments, see Note 910 – “Segment Information”.

Note 78 – Guarantees

On September 30, 2011, ~~Fibercomm,~~FiberComm, LC refinanced two existing loans with American State Bank with a new ten-year loan, maturing on September 30, 2021. As of ~~September 30, 2012,~~March 31, 2013, we have recorded a liability of ~~$310,642~~$296,468 in connection with the guarantee on this new loan. This guarantee may be exercised if FiberComm, LC does not make its required payments on this note.

Note 89 – Deferred Compensation

As ~~part~~ of ~~the acquisition of HTC,~~March 31, 2013 and 2012, we have recorded other deferred compensation relating to ~~the estimated present value of~~ executive compensation payable to certain former executives of ~~HTC.~~past acquisitions.

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Note 910 – Segment Information

We operate in the Telecom Segment and have no other significant business segments. The Telecom Segment consists of voice, data and video communication services delivered to the customer over our local communications network. No single customer accounted for a material portion of our consolidated revenues.

The Telecom Segment operates the following incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) and has investment ownership interests as follows:

Telecom Segment


●▪	ILECs:
	§▪	~~New Ulm~~NU Telecom, ~~Inc.,~~ the parent company;
	§▪	Hutchinson Telephone Company, a wholly-owned subsidiary of NU Telecom;
	§▪	~~Western~~Peoples Telephone Company, a wholly-owned subsidiary of NU Telecom;
	▪	Sleepy Eye Telephone Company, a wholly-owned subsidiary of NU Telecom; and
	§▪	~~Peoples~~Western Telephone Company, a wholly-owned subsidiary of NU Telecom;
●▪	CLECs:
	§▪	~~New Ulm~~NU Telecom, ~~Inc.~~ located in Redwood Falls, Minnesota; and
	§▪	Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield, Minnesota;

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●▪	Our investments and interests in the following entities include some management responsibilities:
	§▪	~~Hector Communications Corporation (HCC)~~FiberComm, LC – ~~33.33%~~18.27% subsidiary equity ownership ~~interest;~~interest. FiberComm, LC is located in Sioux City, Iowa;
	§	~~FiberComm, LC – 18.27% ownership interest;~~
	§▪	Broadband Visions, LLC – ~~16.21%~~24.39% subsidiary equity ownership ~~interest;~~interest. Broadband Visions, LLC provides video headend and Internet services; and
	§▪	Independent Emergency Services, LLC – 14.29% subsidiary equity ownership interest. Independent Emergency Services, LLC is a provider of E-911 services to the State of Minnesota as well as a number of counties located in Minnesota.

Note 1011 – Commitments and Contingencies

We are involved in certain contractual disputes in the ordinary course of business. We do not believe the ultimate resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows. We did not experience any changes to material contractual obligations in the first ~~nine~~three months of ~~2012.~~2013. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2011~~2012 for the discussion relating to commitments and contingencies.

Note 1112 – Hector Communications Corporation

On November 3, 2006 we acquired a one-third interest in HCC. HCC iswas equally owned ~~equally~~ by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Each of the owners ~~provides~~provided management and other operational services to HCC and its subsidiaries.

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On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt.

Our President and Chief Executive Officer, Mr. Bill D. Otis, ~~has~~had been named Chairman of the Board of Directors and President of HCC. Ms. Barbara A.J. Bornhoft, our Vice-President and Chief Operating Officer, also ~~serves~~served on the Board of Directors of HCC.

~~The following table summarizes financial information~~HCC had operating revenues of ~~HCC~~$6,606,950, operating income of $1,238,067 and net income of $730,459 for the ~~periods~~period ended ~~September 30, 2012 and 2011:~~March 31, 2012.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2012

2011

2012

2011

Operating Revenues

$
6,734,525

$
7,009,738

$
20,094,730

$
20,313,870

Operating Income

1,171,484

1,617,257

3,679,295

4,150,419

Net Income

655,118

653,262

2,133,220

1,437,780

Note 1213 – Subsequent Events

On ~~November 5, 2012 HCC and its owners/shareholders: Blue Earth Valley Communications, Inc.~~April 30, 2013, NU Telecom’s Board of Directors declared a quarterly dividend on our common stock of $0.0850 per share (which was an increase of $0.0025 per share from prior quarters), ~~Arvig Enterprises, Inc. and NU Telecom submitted a Joint Petition~~payable on June 14, 2013 to stockholders of record at the ~~Minnesota Public Utilities Commission (MPUC) pursuant to Minnesota Statute §237.23 to enter into a Spin-Off Agreement, the purpose~~close of ~~which, among other things, is to distribute the Independent Local Exchange Company subsidiary holdings of Hector, for the continued and uninterrupted operations and service to all customers.~~

The three owners/shareholders are negotiating the terms of the potential Spin-Off of Hector, but have not yet entered into finalizing the negotiations or entered into a material agreement. The Company intends to file a Current Reportbusiness on ~~Form 8-K when the terms of the Spin-Off are finalized and the parties enter into a definitive agreement.~~

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~~The Company has filed a Current Report on Form 8-K because the Joint Petition filed with the MPUC is a publically available document.~~May 10, 2013.

We have evaluated and disclosed subsequent events through the filing date of this Quarterly Report on Form 10-Q.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as ~~“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “targets,” “projects,” “will,” “may,” “continues,”~~“expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “targets”, “projects”, “will”, “may”, “continues”, and ~~“should,”~~“should”, and variations of these words and similar expressions, are intended to identify these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from such statements. Factors that might cause differences include, but are not limited to, those contained in Item 1A of Part II, “Risk Factors,” and Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated herein by reference.

Because of these risks, uncertainties and assumptions and the fact that any forward-looking statements made by us and our management are based on estimates, projections, beliefs and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. In addition, forward-looking statements speak only as of the date they are ~~made.~~made, which is the filing date of this Form 10-Q. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the SEC, we do not undertake any ~~obligations~~obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

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Critical Accounting Policies and Estimates

~~Preparing~~Management’s discussion and analysis of financial condition and results of operations stated in this Form 10-Q, are based upon NU Telecom’s consolidated unaudited financial statements that have been prepared in ~~conformity~~accordance with GAAP and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate. The preparation of our financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based on our management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from those estimates and assumptions. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. ~~A description~~For a summary of ~~the~~our significant accounting policies, ~~that we consider particularly important for~~see Note 1 – “Summary of Significant Accounting Policies” to the ~~portrayal of our results of operations and financial position, and which may require a higher level of judgment by our management, is~~Consolidated Financial Statements contained ~~under the caption, “Critical Accounting Policies and Estimates,” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations~~ in our Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012, which is incorporated herein by reference.

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Results of Operations

Overview

NU Telecom offers a diverse array of communications products and services. Our ILEC and CLEC businesses provide local telephone service and network access to other telecommunications carriers for calls originated or terminated on our network. In addition, we provide long distance service, dial-up and broadband Internet access, and video services. ~~In 2010, we acquired the assets of the cable television (CATV) system located in and around Glencoe, Minnesota,~~On December 31, 2012 NU Telecom completed a spin-off agreement with HCC, continuing the expansion of our service ~~area.~~area into the Minnesota communities and surrounding areas of Bellechester, Goodhue, Hanska, Mazzepa, Sleepy Eye and White Rock. We also sell and service other communications products.

Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our networks, which consists of switches and cable, data, Internet protocol (IP) and digital TV. We also need capital to maintain our networks and infrastructure; fund the payroll costs of our highly skilled labor force; maintain inventory to service capital projects, our network and our telephone equipment customers; and to provide for the carrying value of trade accounts receivable, some of which may take several months to collect in the normal course of business.

Executive Summary


	•	On December 31, 2012 NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. HCC was equally owned by NU Telecom, Blue Earth Valley Communications, Inc. and Arvig Enterprises, Inc. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments of HCC and incurred $3.3 million of additional debt to finance the spin-off. Additional information pertaining to this acquisition is available in Note 2 – “Acquisitions and Dispositions.”

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	•	Net income in the first quarter of 2013 totaled $727,189, which is a 9.30% increase compared to the first quarter of 2012. This increase was primarily due to the addition of the operating results of SETC, which we acquired through the HCC spin-off.

	•	Consolidated revenue for the first quarter of 2013 totaled $9,412,445, which is a 15.27% increase compared to the first quarter of 2012. This increase was primarily due to the addition of the operating results of SETC, which we acquired through the HCC spin-off.

	•	The HCC spin-off added approximately 4,700 access lines, 1,100 video customers, 2,900 broadband customers, 100 dial-up internet customers and 2,400 long distance customers to our customer base as of December 31, 2012.

Trends

Included below is a synopsis of trends management believes will continue to affect our business in 2013.

Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the telecommunications industry from ~~CATV~~cable television providers (CATV), Voice over Internet Protocol (VoIP) providers, wireless, other competitors and emerging technologies. As we experience access line losses, our switched access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs and lower demand for dedicated lines may affect our future voice and switched access revenues. Voice and switched access revenues may also be significantly affected by potential changes in rate regulation at the state and federal levels. We continue to monitor regulatory changes as we believe that rate regulation will continue to be scrutinized and may be subject to change. Access ~~line losses totaled 1,081~~lines increased 3,532 or ~~4.0%~~13.4% for the twelve months ended ~~September 30, 2012.~~March 31, 2013 due to the addition of SETC.

Growth in broadband customer sales along with continued migration to higher connectivity speeds and the sales of Internet value-added services such as on-line data backup are expected to continue to offset some of the revenue declines from the unfavorable access line trends discussed above.

To combat competitive pressures, we continue to emphasize the bundling of our products and services. Our customers can bundle local phone, high-speed Internet, long distance and video services. These bundles provide our customers with one convenient location to obtain all of their communications and entertainment needs, a convenient billing solution and bundle discounts. We believe that product bundles positively impact our customer retention, and the associated discounts provide our customers the best value for their communications and entertainment needs. We have built a state-of-the-art broadband network, which, along with the bundling of our voice, Internet and video services allows us to meet customer demands for products and services. We continue to focus on the research and deployment of advanced technological products that include broadband services, private line, VoIP, digital video, Internet Protocol Television ~~(IPTV)~~ and managed services.

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We continue to evaluate our operating structure to identify opportunities for increased operational efficiencies and effectiveness. Among other things, this involves evaluating opportunities for task automation, network efficiency and the balancing of our workforce based on the current needs of our customers.

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In November, 2011 the FCC released proposed rulemaking which comprehensively reforms and begins a new era in universal service and intercarrier compensation. This reform order impacts numerous support mechanisms and network access revenue streams that we have received in the past. While these rules may be altered based on ongoing petitions for reconsideration and are being challenged through appeals, we are evaluating them. We cannot predict the entire impact these regulatory changes will have on our revenue and costs, but do believe it will increase the historical decline in revenue and profitability of our company.

Financial results for the Telecom Segment are included below:

Telecom Segment

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Operating Revenues

Local Service

$
1,448,759

$
1,489,581

$
4,364,582

$
4,459,707

Network Access

2,563,335

3,035,447

8,123,960

9,104,649

Video

1,494,017

1,449,038

4,420,306

4,221,963

Data

1,386,433

1,318,277

4,128,579

3,898,769

Long Distance

155,715

163,809

461,078

485,016

Other

979,088

974,577

2,859,877

2,908,214

Total Operating Revenues

8,027,347

8,430,729

24,358,382

25,078,318

Cost of Services, Excluding Depreciation and Amortization

3,408,379

3,223,754

10,574,102

9,873,655

Selling, General and Administrative

1,339,482

1,711,415

4,573,112

4,920,838

Depreciation and Amortization Expenses

2,055,708

2,013,785

6,092,798

6,841,531

Total Operating Expenses

6,803,569

6,948,954

21,240,012

21,636,024

Operating Income

$
1,223,778

$
1,481,775

$
3,118,370

$
3,442,294

Net Income

$
543,125

$
706,328

$
1,650,086

$
1,685,513

Capital Expenditures

$
1,658,374

$
1,263,261

$
5,125,745

$
4,127,719

September 30,

Key metrics

2012

2011

Access Lines

25,717

26,798

Video Customers

10,034

10,324

Broadband Customers

10,623

10,162

Dial Up Internet Customers

443

711

Long Distance Customers

13,192

13,431

~~Certain historical numbers have been changed to conform to the current year’s presentation.~~Telecom Segment


	Three Months Ended March 31,
	2013		2012			Increase (Decrease)
Operating Revenues
Local Service	$	1,685,713	$	1,472,008	$	213,705		14.52	%
Network Access		2,971,600		2,770,012		201,588		7.28	%
Video		1,731,457		1,438,854		292,603		20.34	%
Data		1,803,080		1,358,828		444,252		32.69	%
Long Distance		215,440		155,542		59,898		38.51	%
Other		1,005,155		970,284		34,871		3.59	%
Total Operating Revenues		9,412,445		8,165,528		1,246,917		15.27	%

Cost of Services, Excluding Depreciation and Amortization		4,215,512		3,621,026		594,486		16.42	%
Selling, General and Administrative		1,799,326		1,632,972		166,354		10.19	%
Depreciation and Amortization Expenses		2,210,500		2,017,419		193,081		9.57	%
Total Operating Expenses		8,225,338		7,271,417		953,921		13.12	%

Operating Income	$	1,187,107	$	894,111	$	292,996		32.77	%

Net Income	$	727,189	$	665,318	$	61,871		9.30	%

Capital Expenditures	$	1,122,358	$	1,106,784	$	15,574		1.41	%

Key metrics
Access Lines		29,860		26,328		3,532		13.42	%
Video Customers		11,098		10,235		863		8.43	%
Broadband Customers		13,774		10,620		3,154		29.70	%
Dial Up Internet Customers		423		539		(116	)	-21.52	%
Long Distance Customers		15,215		13,426		1,789		13.32	%

Revenue

Local Service – We receive recurring revenue for basic local services that enable end-user customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local telephone services, our customers may choose from a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Local service revenue was ~~$1,448,759,~~$1,685,713, which is ~~$40,822~~$213,705 or ~~2.7% lower~~14.52% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. The increase was ~~$4,364,582, which is $95,125 or 2.1% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases were~~ primarily due to the ~~loss~~addition of ~~1,081 or 4.0% of our customer base at September 30, 2012 compared to September 30, 2011. The decreases were partially offset by increases in local private line~~access lines and ~~other optional services.~~revenues associated with the HCC spin-off on December 31, 2012. Our access lines are decreasing as customers are increasingly utilizing other technologies, such as wireless phones and IP services, as well as customers eliminating second phone lines when they move their Internet service from a dial-up platform to a broadband platform. The number of access lines we serve as an ILEC and CLEC have been decreasing, which is consistent with a general industry trend. To help offset declines in local service revenue, we implemented an overall strategy that continues to focus on selling a competitive bundle of services. Our focus on marketing competitive service bundles to our customers helps create value for the customer and aids in the retention of our voice lines.

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Network Access – We provide access services to other telecommunications carriers for the use of our facilities to terminate or originate long distance calls on our network. Additionally, we bill subscriber line charges (SLCs) to substantially all of our end-user customers for access to the public switched network. These monthly SLCs are regulated and approved by the FCC. In addition, network access revenue is derived from several federally administered pooling arrangements designed to provide network support and distribute funding to the ILECs. Network access revenue was ~~$2,563,335,~~$2,971,600, which is ~~$472,112~~$201,588 or ~~15.6% lower~~7.28% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. This increase was ~~$8,123,960, which is $980,689 or 10.8% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases in network access revenues were~~ primarily due to additional revenues associated with the HCC spin-off on December 31, 2012, offset by lower minutes of use and the implementation of the ~~FCC~~ Intercarrier Compensation and Universal Service Fund reform order ~~in regards~~as it relates to state access pricing levels that took effect on July 3, 2012.

Video – We provide a variety of enhanced data network services on a monthly recurring basis to our end-user customers. This includes the broadband access portion of traditional Telecom broadband service. We also receive monthly recurring revenue from our end-user subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve ~~eleven~~seventeen communities with our digital TV services and five communities with our CATV services. Video revenue was ~~$1,494,017,~~$1,731,457, which is ~~$44,979~~$292,603 or ~~3.1%~~20.34% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. This increase was ~~$4,420,306, which is $198,343 or 4.7% higher in the nine months ended September 30, 2012 compared~~primarily due to the ~~nine months ended September 30, 2011.~~addition of video customers and revenues associated with the HCC spin-off on December 31, 2012. A combination of rate increases introduced into several of our markets over the course of ~~2011 and 2012; and~~2012 also contributed to the ~~launching of IPTV services~~increase in ~~New Ulm, Courtland, Redwood Falls, Springfield, Sanborn, Hutchinson and Litchfield, Minnesota and Aurelia, Iowa resulted in the increased~~ revenues. This new enhanced service offering provides our customers with desired features and options, such as digital video recording. We also recognize increased revenues from these additional features and options.

Data – We provide Internet services, including dial-up and high speed Internet to business and residential customers. Our revenue is received in various flat rate packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data revenue was ~~$1,386,433,~~$1,803,080, which is ~~$68,156~~$444,252 or ~~5.2%~~32.69% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. This increase was ~~$4,128,579, which is $229,810 or 5.9% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. These increases were~~ primarily due to ~~a 461 or 4.5% increase in our broadband customers.~~the addition of data customers and revenues associated with the HCC spin-off on December 31, 2012. We expect future growth in this area will be driven by customer migration from dial-up Internet to broadband products, such as our broadband services, expansion of service areas and our aggressively packaging and selling service bundles.

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Long Distance – Our end-user customers are billed for toll or long-distance services on either a per call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. Long distance revenue was ~~$155,715,~~$215,440, which is ~~$8,094~~$59,898 or ~~4.9% lower~~38.51% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. This increase was ~~$461,078, which is $23,938 or 4.9% lower in the nine months ended September 30, 2012 compared~~primarily due to the ~~nine months ended September 30, 2011. These decreases were primarily the result~~addition of ~~a 239 or 1.8% decrease in our~~ long distance ~~customer base at September 30, 2012 compared to September 30, 2011. Our long distance customer base continues to decline as our~~ customers ~~utilize other technologies such as wireless~~ and ~~IP services to satisfy their long distance communication needs.~~revenues associated with the HCC spin-off on December 31, 2012.

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Other Revenue – We generate revenue from directory publishing, sales and service of customer premise equipment (CPE), bill processing and add/move/change services. Our directory publishing revenue ~~from end-user subscribers~~ for Yellow Page advertising in our telephone directories recurs monthly. We also provide the retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services as TechTrends Wireless, our branded product. We receive both recurring revenue for the wireless product, as well as revenue collected for the sale of wireless phones and accessories. Other revenue was ~~$979,088,~~$1,005,155, which is ~~$4,511~~$34,871 or ~~0.5%~~3.59% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011.~~March 31, 2012. This increase was primarily due to additional revenues associated with the HCC spin-off on December 31, 2012 and increases in the sales of cellular phone and activation revenues, partially offset by a decrease in the sales of CPE revenues. Other revenue was $2,859,877, which is $48,337 or 1.7% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This decrease was primarily due to a decrease in the sales of CPE and a decrease in leased CPE revenues. These decreases were partially offset by increases in the sales of cellular phones and activation revenues.CPE.

Cost of Services (excluding Depreciation and Amortization)

Cost of services (excluding depreciation and amortization) was ~~$3,408,379,~~$4,215,512, which is ~~$184,625~~$594,486 or ~~5.7%~~16.42% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. The increase was ~~$10,574,102, which is $700,447 or 7.1% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increases were~~ primarily due to higher expenses associated with the HCC spin-off on December 31, 2012, higher programming cost from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and ~~software, partially offset by lower employee benefit costs.~~software.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were ~~$1,339,482,~~$1,799,326, which is ~~$371,933~~$166,354 or ~~21.7% lower~~10.19% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and were $4,573,112, which is $347,726 or 7.1% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.~~March 31, 2012. The ~~decreases were~~increase was primarily due to ~~lower employee benefit~~higher expenses and one-time costs ~~partially offset by increased expenses~~ associated with ~~complying with new SEC financial reporting requirements.~~the HCC spin-off on December 31, 2012.

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Depreciation and Amortization

Depreciation and amortization was ~~$2,055,708,~~$2,210,500, which is ~~$41,923~~$193,081 or ~~2.1%~~9.57% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011.~~March 31, 2012. This increase iswas primarily due to ~~an increase~~tangible and intangible asset additions received in the HCC spin-off and other increases in our plant and broadband network. ~~Depreciation~~The spin-off was accounted for using the acquisition method of accounting for business combinations, and ~~amortization was $6,092,798, which is $748,733 or 10.9% lower~~accordingly, based upon our preliminary spin-off price allocation, the acquired assets were recorded at estimated fair values as of the date of acquisition. Details of the fair value recorded on the tangible and intangible assets acquired in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This decrease was primarily due to portions of our legacy telephone network becoming fully depreciated during 2011 as we migrate to a new broadband network.HCC spin-off are included in Note 2 – “Acquisitions and Dispositions”.

Operating Income

Operating income was ~~$1,223,778,~~$1,187,107, which is ~~$257,997~~$292,996 or ~~17.4% lower~~32.77% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011.~~March 31, 2012. This ~~decrease~~increase was primarily due to ~~a decrease in revenues combined with~~ an increase in ~~cost of services and depreciation and amortization, partially~~revenues, offset by ~~a decrease~~an increase in ~~selling, general and administrative~~ expenses ~~all~~resulting from the acquisition of ~~which are described above. Operating income was $3,118,370, which is $323,924 or 9.4% lower in~~one-third of the ~~nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. This decrease was primarily due to a decrease in revenues combined with increases in cost~~net assets of ~~services, partially offset by a decrease in selling, general and administrative expenses, and depreciation and amortization, all~~HCC on December 31, 2012.

Table of ~~which are described above.~~Contents

See Consolidated Statements of Income on Page 3 (for discussion below)

Other Income and Interest Expense

Interest expense was ~~$556,562,~~$571,150, which is ~~$11,993~~$14,868 or ~~2.1% lower~~2.7% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and~~March 31, 2012. This increase was ~~$1,665,981, which is $183,338 or 9.9% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decreases were~~ primarily due to ~~lower~~higher outstanding debt balances ~~and~~due to the ~~maturing of several of our swap agreements~~additional debt incurred in connection with ~~CoBank, ACB during 2011. The variable rate we now pay on~~ the ~~portion of debt that had been previously swapped is lower than the fixed rate we had been paying.~~HCC spin-off.

Interest income was ~~$808,~~$70,727, which is ~~$2,685~~$680 or ~~76.9% lower~~1.0% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended September 30, 2011 and was $81,276, which is $5,561 or 6.4% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a result of servicing our debt, excess cash available to purchase investments was lower, and combined with lower interest rates offered by banks and other investment institutions, our interest income has declined.March 31, 2012.

Our equity portion of HCC’s net income was ~~$218,372, which is $618 or 0.3% higher in~~$243,486 for the three months ended ~~September 30,~~March 31, 2012. On December 31, 2012 ~~compared to~~NU Telecom completed a spin-off agreement with HCC. NU Telecom had originally acquired a one-third interest in HCC on November 3, 2006. Under the spin-off agreement, NU Telecom received all of the stock of SETC and other assets and investments and incurred $3.3 million of additional debt. The operating results of SETC for the first quarter of 2013 are included in the operating results of NU Telecom.

Other income for the three months ended ~~September 30, 2011~~March 31, 2013 and ~~was $711,073, which is $231,813 or 48.4% higher in the nine months ended September 30,~~ 2012, compared to the nine months ended September 30, 2011. HCC’s total net income was $655,118, which was $1,856 higher in the three months ended September 30, 2012 compared to the three months ended September 30, 2011 and was $2,133,220, which was $695,440 higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. These increases were primarily the result of lower interest expense paid by Hector for their outstanding debt.

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~~Other income for the nine months ended September 30, 2012 and 2011,~~ included a patronage credit earned with CoBank, ACB as a result of our debt agreements with them. The patronage credit allocated and received in ~~2012 amounted~~2013 was $521,796, compared to $449,878 ~~compared to $485,812~~ allocated and received in ~~2011.~~2012. CoBank, ACB determines and pays the patronage credit annually, generally in the first quarter of the ~~calendar~~ year, based on its results from the prior year. We record these patronage credits as income when they are received.

Other investment income was ~~$43,422,~~$40,625, which is ~~$30,004~~$1,907 or ~~40.9%~~4.5% lower in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and was $132,364, which is $39,846 or 23.1% lower in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.~~March 31, 2012. Other investment income ~~includes~~is primarily from our equity ~~ownerships~~ownership in several partnerships and limited liability companies.

Income Taxes

Income tax expense was ~~$392,910,~~$524,804, which is ~~$118,569~~$43,018 or ~~23.2% lower~~8.9% higher in the three months ended ~~September 30, 2012~~March 31, 2013 compared to the three months ended ~~September 30, 2011 and was $1,193,816, which is $23,200 or 2.0% higher in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.~~March 31, 2012. The effective income tax rates for the ~~nine~~three months ending ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ were approximately ~~42.0%~~41.9% and ~~41.0%~~42.0%. The increase in the effective tax rate for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was primarily due to the recognition of approximately $29,000 in net tax benefits in the nine months ended September 30, 2011. This amount was originally reserved for the 2006 tax year, which was no longer open for examination by federal and state tax authorities. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.

~~Hector Communications Corporation Investment~~

In accordance with GAAP, we currently report our one-third ownership of HCC on the equity method. Under this method, we report our pro-rata share of net income or net loss each period from HCC’s operations. For the three months ended September 30, 2012 and 2011, we reported net income of $218,372 and $217,754. For the nine months ended September 30, 2012 and 2011, we reported net income of $711,073 and $479,260. All reported net income amounts reflect our one-third ownership. As set forth in Note 11 – “Hector Communications Corporation,” in the first nine months of 2012 and 2011, HCC had revenues of approximately $20.1 million and $20.3 million that are not reflected in our financial statements.

The pro forma information for our investment in HCC is shown in the following table using the proportionate consolidation method. We are providing this pro forma information to show the effect that our HCC investment has on our net income and would have on our operating income before interest, taxes, depreciation and amortization (OIBITDA) if we included these earnings in our operating income.

~~Table of Contents~~

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Proportionate Method:

Operating Revenues

$
2,244,841

$
2,336,579

$
6,698,243

$
6,771,290

Operating Expenses, Excluding
Depreciation and Amortization

1,108,417

1,069,237

3,255,065

3,182,257

Depreciation and Amortization

745,930

728,257

2,216,747

2,205,560

Total Operating Expenses

1,854,347

1,797,494

5,471,812

5,387,817

Operating Income

390,494

539,085

1,226,431

1,383,473

Net Income

$
218,372

$
217,754

$
711,073

$
479,260

If we included our proportionate share of HCC’s OIBITDA in the OIBITDA of NU Telecom, our combined OIBITDA would have increased from $3,279,486 and $3,495,560 for NU Telecom alone, to $4,415,910 and $4,762,902 for the three months ended September 30, 2012 and 2011, and would have increased from $9,211,168 and $10,283,825 for NU Telecom alone, to $12,654,346 and $13,872,858 for the nine months ended September 30, 2012 and 2011.

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

NU Telecom Operating Income

$
1,223,778

$
1,481,775

$
3,118,370

$
3,442,294

NU Telecom Depreciation and Amortization

2,055,708

2,013,785

6,092,798

6,841,531

NU Telecom OIBITDA

$
3,279,486

$
3,495,560

$
9,211,168

$
10,283,825

HCC Proportionate Operating Income

$
390,494

$
539,085

$
1,226,431

$
1,383,473

HCC Proportionate Depreciation and Amort

745,930

728,257

2,216,747

2,205,560

HCC Proportionate OIBITDA

$
1,136,424

$
1,267,342

$
3,443,178

$
3,589,033

Combined OIBITDA

$
4,415,910

$
4,762,902

$
12,654,346

$
13,872,858

Adjusted OIBITDA is a common measure of operating performance in the telecommunications industry. The presentation of OIBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as a substitute for consolidated net income (loss) as a measure of performance and may not be comparable to similarly titled measures used by other companies.

Liquidity and Capital Resources

Capital Structure

NU Telecom’s total capital structure (long-term and short-term debt obligations, plus stockholders’ equity) was ~~$96,319,786~~$99,882,649 at ~~September 30, 2012,~~March 31, 2013, reflecting ~~56.6%~~56.3% equity and ~~43.4%~~43.7% debt. This compares to a capital structure of ~~$97,191,975~~$102,338,011 at December 31, ~~2011,~~2012, reflecting ~~55.2%~~54.5% equity and ~~44.8%~~45.5% debt. In the telecommunications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately ~~3.44~~2.94 times debt to EBITDA (earnings before interest, taxes, depreciation and amortization) as defined in our credit agreements, well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand and revolving credit facility, are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and temporary financing of trade accounts receivable.

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Liquidity Outlook

Our short-term and long-term liquidity needs arise primarily from (i) capital expenditures; (ii) working capital requirements needed to support the growth of our business; (iii) debt service; (iv) dividend payments on our common stock and (v) potential acquisitions.

Our primary sources of liquidity for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. ~~In addition,~~At March 31, 2013 we ~~currently have~~had a working capital deficit of $1,729,593. However, at March 31, 2013 we also had approximately ~~$5.2~~$6.1 million available under our revolving credit facility to fund any short-term working capital needs.

Cash Flows

We expect our liquidity needs to include capital expenditures, payment of interest and principal on our indebtedness, income taxes and dividends. We use our cash inflow to manage the temporary increases in cash demand and utilize our revolving credit facility to manage more significant fluctuations in liquidity caused by growth initiatives.

While it is often difficult for us to predict the impact of general economic conditions on our business, we believe that we will be able to meet our current and long-term cash requirements primarily through our operating cash flows. We were in full compliance with our debt covenants as of ~~September 30, 2012,~~March 31, 2013, and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.

~~While we~~We periodically seek to add growth initiatives by either expanding our network or our markets through ~~organic/~~organic or internal investments or through strategic ~~acquisitions, we~~acquisitions. We feel that we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing. At this time, we do not anticipate our capital structure will limit our growth initiatives over the next twelve months.

The following table summarizes our cash flow:


	Nine Months Ended September 30,												Three Months Ended March 31,
	2012			2011			Change			%				2013			2012
Net cash provided by (used in):
Operating activities	$	7,539,726		$	6,763,035		$	776,691			11.48	%	$	2,831,854		$	2,990,303
Investing activities		(5,167,129	)		(4,165,437	)		(1,001,692	)		-24.05	%		(1,203,994	)		(1,148,784	)
Financing activities		(3,003,899	)		(3,943,332	)		939,433			23.82	%		(3,344,443	)		(1,733,198	)
Increase (Decrease) in cash and cash equivalents	$	(631,302	)	$	(1,345,734	)	$	714,432			53.09	%
Increase (Decrease) in cash													$	(1,716,583	)	$	108,321

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Cash Flows from Operating Activities

~~The increase in cash flows provided~~Cash generated by operations for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 was $2,831,854, compared to ~~the nine months ended September 30, 2011~~cash generated by operations of $2,990,303 in 2012. The decrease in cash from operating activities in 2013 was primarily due to ~~a decrease in receivables due to the collection of a large amount of outstanding receivables,~~ an increase in ~~accounts payable and the other liabilities, partially offset by the increase in income taxes receivable and~~ inventories and a decrease in ~~other accrued liabilities.~~accounts payable.

Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash ~~and cash equivalents~~ at ~~September 30, 2012 were $590,415,~~March 31, 2013 was $1,033,267, compared to ~~$1,221,717~~$2,749,850 at December 31, ~~2011.~~2012.

Cash Flows Used in Investing Activities

We operate in a capital intensive business. We continue to upgrade our local networks for changes in technology in order to provide advanced services to our customers.

Cash ~~flows~~ used in investing activities ~~were higher~~was $1,203,994 in the first ~~nine~~three months of ~~2012~~2013 compared to $1,148,784 in the first ~~nine~~three months of ~~2011 primarily due to higher capital expenditures in 2012 related to current operations.~~2012. Capital expenditures relating to on-going operations were ~~$5,125,745~~$1,122,358 for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013, compared to ~~$4,127,719~~$1,106,784 for the ~~nine~~three months ended ~~September 30, 2011.~~March 31, 2012. We expect total plant additions to be approximately ~~$6,500,000~~$6.0 million in ~~2012.~~2013. Our investing expenditures have been financed with cash flows from our current operations and advances on our line of credit. We believe that our current operations will provide adequate cash flows to fund our plant additions for the remainder of this year; however, funding from our revolving credit facility is available if the timing of our cash flows from operations does not match our cash flow requirements. We currently have approximately ~~$5.2~~$6.1 million available under our existing credit facility to fund capital expenditures and other operating needs.

Cash Flows Used in Financing Activities

Cash used in financing activities for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 was $3,344,443 and included long-term debt repayments of ~~$2,589,383~~$609,500, payments on our revolving credit facility of $2,313,868 and the distribution of ~~$1,268,895~~$421,075 of dividends to ~~stockholders, offset by a $854,379 increase in debt due the use of our revolving credit facility.~~stockholders.

Working Capital

We had working capital deficit (i.e. current assets minus current liabilities) of ~~$1,033,301~~$1,729,593 as of ~~September 30, 2012,~~March 31, 2013, with current assets of approximately ~~$6.9~~$7.0 million and current liabilities of approximately ~~$7.9~~$8.7 million, compared to a working capital deficit of ~~$232,247~~$4,947 as of December 31, ~~2011.~~2012. The ratio of current assets to current liabilities was ~~0.87~~0.80 and ~~0.97~~1.00 as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011. The decrease~~2012. In addition, if it becomes necessary, we will have sufficient availability under our revolving credit facility to fund any fluctuations in ~~the~~ working capital ~~was primarily due to a portion of our long-term swaps becoming short-term in 2012, an increase in checks written in excess of~~and other cash ~~balances and decreases in cash and cash equivalents and receivables, partially offset by an increase in inventories.~~needs.

~~Table of Contents~~

Dividends and Restrictions

We declared a quarterly dividend of $.0825 per share for the first ~~second~~quarter of 2013 and ~~third quarters of~~ 2012, which totaled $421,075 for the first quarter of 2013 and $422,025 for the first quarter of 2012. Our Board of Directors consider dividend payment practices that reflect its judgment that our stockholders would be better served if we retained a higher portion of the cash generated by our business in excess of our expected cash needs to use for other purposes, such as to make investments in our business, rather than distribute cash to our stockholders. We expect to continue to pay quarterly dividends during 2013, but only if and ~~$423,435 per quarter for~~to the ~~second and third quarters. We~~extent declared by our Board of Directors on a quarterly ~~dividend~~basis and subject to various restrictions on our ability to do so (described below). Dividends on our common stock are not cumulative.

Table of ~~$.08 per share for~~Contents

Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if our “Total Leverage Ratio”, that is, the ~~first quarter~~ratio of ~~2011, which totaled $409,235~~our “Indebtedness” to “EBITDA” (in each case as defined in the loan documents) is equal to or less than 3:50 to 1:00, and ~~a quarterly dividend of $.0825 per share for~~(b) in either case, if we were not in default or potential default under the ~~second and third quarters of 2011, which totaled $422,025 per quarter.~~ loan agreements. If we fail to comply with these covenants, our ability to pay dividends would be limited. At March 31, 2012 we were in compliance with all the stipulated financial ratios in our loan agreements.

Our Board of Directors reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs. Should our Board of Directors determine a dividend will be declared, we expect we will have sufficient availability from our current cash flows from operations to fund our existing cash needs and the payment of our dividends. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any fluctuations in working capital and other cash ~~needs.~~needs

Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,050,000 in any year and (ii) in any amount if our “Total Leverage Ratio,” that is, the ratio of our “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 we were not in default or potential default under the loan agreements. If we fail to comply with these covenants, our ability to pay dividends would be limited. As of September 30, 2012, our Total Leverage Ratio fell below the 3:50 to 1:00 ratio, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. At September 30, 2012, we were in compliance with all the stipulated financial ratios in our loan agreements.

~~Obligations and Commitments~~

We have a credit facility with CoBank, ACB. Information about our contractual obligations, including obligations under the credit facility, and along with the cash principal payments due each period on our unsecured note payable and long-term debt is set forth in the following table. For additional information about our contractual obligations as of September 30, 2012 see Note 4 – “Secured Credit Facility”.

Description

Total

October 1 -
December 31
2012

2013-2014

2015-2016

Thereafter

Deferred Compensation

$
950,929

$
17,441

$
133,137

$
124,766

$
675,585

Long-term Debt

41,773,050

1,109,500

40,663,550

0

0

Interest on Long-term Debt (A)

2,414,130

539,188

1,874,942

0

0

Loan Guarantees

310,642

7,013

59,285

64,830

179,514

Operating Lease

93,030

6,645

53,160

33,225

0

Purchase Obligations (B)

0

0

0

0

0

Total Contractual Cash Obligations

$
45,541,781

$
1,679,787

$
42,784,074

$
222,821

$
855,099


	A.	Interest on long-term debt is estimated using rates in effect as of September 30, 2012. We use interest rate swap agreements to manage our cash flow exposure to interest rate movements on a portion of our variable rate debt obligations (see Note 5 – “Interest Rate Swaps”).

	B.	~~There were no purchase obligations outstanding as of September 30, 2012.~~

~~Table of Contents~~

Long-Term Debt

See Note 45 – “Secured Credit Facility” for information pertaining to our long-term debt.

Federal Regulation and Legislation

Intercarrier Compensation and Universal Service Fund (USF) Reform

OnThe FCC released the National Broadband Plan in April 2010 recommending significant changes in the Access Charge policy and processes. This was followed on November 18, 2011, by FCC Order 11-161 (the Transformation Order), with comprehensive rules reforming all forms of intercarrier compensation and implementing a new support mechanism for the ~~FCC released an order (the Order) which established a framework for reform~~deployment of broadband. Generally, the intercarrier compensation ~~system~~reform sets forth a path towards a “bill & keep” regime where there is no compensation for termination of traffic received from another carrier. The timeline for this transition has numerous steps depending on the type of traffic exchanged and the ~~federal USF. The Order included two major provisions:~~


	•	~~the elimination of terminating switched access rates and other per-minute terminating charges between service providers by 2018, through annual reductions in rates; and~~

	•	~~the provision of USF support for voice and broadband services.~~

~~In reforming the USF, the Order established a short-term (Phase 1) and a longer-term (Phase 2) framework for a new fund, the Connect America Fund (CAF). Under Phase 1~~regulated status of the ~~CAF, the Order provides for continued legacy USF funding frozen at 2011 levels as well as the opportunity for incremental broadband funding to~~affected local exchange carrier.

These rules have been clarified in several orders on Reconsideration, and while they are being challenged through appeals in Federal Appellate courts, we are already experiencing their impact on our companies. If they remain in place, they will force a ~~number~~substantial reduction of ~~unserved locations equal to the amount of incremental support accepted divided by $775.~~

For Phase 2 of CAF, the FCC is working to establish rules for CAF funding based on a forward-looking cost model to further extend broadband to high-cost areas. If the FCC does not complete Phase 2 of CAF by the end of 2012, our USF funding will continue to be frozen at 2011 levels until completion of Phase 2 of CAF, but we will be required to use one-third of the frozen legacy support to operate and build broadband networks beginning in 2013. In 2014, this condition will increase from one-third to two-thirds, and in 2015 will increase to 100 percent. Based on current expenditures, we do not foresee any concerns complying with these additional funding conditions for all periods. The FCC is currently conducting the CAF Phase 2 rule-making proceeding, and we do not expect this proceeding to be complete by the end of 2012.

~~As part of the Order’s reform of~~terminating intercarrier compensation, ~~the FCC established two recovery mechanisms that mitigate the revenue reductions resulting from the reductions~~including intrastate and ultimate elimination of terminating access rates. First, the FCC established a monthly charge that may be assessed to our retail consumers (Access Recovery Charge or ARC) subject to certain rate caps. Second, revenue reductions not recovered from the assessment of the ARC are eligible for recovery through additional universal service support through an access recovery mechanism.

~~On April 25, 2012 the FCC decided that on July 1, 2014 originating~~interstate access charges, over the next nine years and provide for ~~intrastate long distance traffic exchanged between an IP network~~certain support mechanisms and ~~the traditional telecommunications network will be subject to no higher than interstate originating access rates. We continue to assess the impacts~~end user charges as a means of ~~the FCC’s intercarrier compensation reform on our business activities.~~

Additional implications of the Order will likely result in future additional rule making and require significant interpretation, management judgment and collaboration with other telecommunications carriers. We believe the steps we have taken to diversify our revenue streams and focus on growth opportunities will help us navigate through this transition without significant adverse effects.offsetting compensation.

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The Transformation Order also confirmed the applicability of access charges on VoIP traffic and eliminated reciprocal compensation charges for termination of local wireless traffic. Despite these changes IXCs and others are still quite aggressive in disputing carrier access charges and/or the applicability of access charges to their traffic.

Due to the combination of rate reforms instituted by the FCC, competitive substitution by wireless and other carriers and decreased use of the switched network, the aggregate amount of interstate network access charges paid by long distance carriers to access providers such as our ILECs and CLECs, has decreased and we project that this decline will continue.

The Minnesota Public Utilities Commission has considered intrastate access reform and universal service for several years, but has not yet taken action. On August 25, 2010 the Iowa Utilities Board closed a docket on exploration of a state USF. We are actively participating in access reform proceedings in the regulatory and legislative arenas on both the state and federal level. We cannot estimate the impact, if any, of future potential state access revenue changes or the availability of state universal service support.

In recent years, IXCs and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to their network traffic. A prime example of this is the claim that companies who provide VoIP technology services are exempt from having to pay access charges. We believe that long distance and other communication providers will continue to challenge the applicability of access charges either before the FCC or directly with the LECs. To date, no long distance or other carriers have made a claim to us contesting the applicability of access charges on VoIP traffic. We cannot predict the likelihood of future claims and cannot estimate the impact.

Recent Accounting Developments

See Note 1 – “Basis of Presentation and Consolidation” for a discussion of recent accounting developments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not have operations subject to risks of foreign currency fluctuations. We do, however, use derivative financial instruments that qualify as cash-flow hedges to manage our exposure to interest rate fluctuations onNot required for a portion of our variable-interest rate debt. Our 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, we executed interest-rate swap agreements, effectively locking in the interest rate on $6.0 million of our variable-rate debt through March 2011, and $33.0 million of our variable-rate debt through March 2013. On June 23, 2008, we executed interest-rate swap agreements, effectively locking in the interest rate on $3.0 million of our variable-rate debt through June 2011, and $3.0 million of variable-rate debt through June 2013. A summary of these agreements is contained in Note 5 – “Interest Rate Swaps”.smaller reporting company.

We report the cumulative gain or loss on current derivative instruments as a component of accumulated other comprehensive income (loss) in stockholders’ equity. If the protection agreement is concluded prior to reaching full maturity, the cumulative gain or loss is recognized in earnings. At the conclusion of the full term maturity of the protection agreement, no gain or loss is recognized. For any portion of our debt not covered with interest rate swap agreements, our 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, 2012, our interest expense would have increased approximately $11,300.

Item 4. Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) or Rule 15d-15(e), as of the end of the period subject to this Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

As of the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

Table of Contents

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~September 30, 2012~~March 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

~~From time~~Other than routine litigation incidental to ~~time~~our business, there are no pending material legal proceedings to which we are ~~involved in legal proceedings arising in the ordinary course~~a party or to which any of our ~~business. There~~property is ~~no litigation pending that could have a material adverse effect on our results of operations and financial condition.~~subject.

Item 1A. Risk Factors.

~~There have not been any material changes to the risk factors previously disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K~~Not required for ~~the fiscal year ended December 31, 2011.~~a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information.

None.

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Item 6. Exhibits.


Exhibit Number		Description

10.4.1		New Ulm Telecom, Inc. Amended Management Incentive Plan

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance ~~File~~Document

101.SCH		XBRL Taxonomy Extension Schema ~~File~~Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase ~~File~~Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase ~~File~~Document

101.LAB		XBRL Taxonomy Extension Label Linkbase ~~File~~Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase ~~File~~Document

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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.


Dated: May 15, 2013	~~November 9, 2012~~	By	/s/ Bill D. Otis
			Bill D. Otis, President and Chief Executive Officer

Dated: May 15, 2013	~~November 9, 2012~~	By	/s/ Curtis O. Kawlewski
			Curtis O. Kawlewski, Chief Financial Officer

3332


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
OPERATING REVENUES:
Local Service	$	1,448,759		$	1,489,581		$	4,364,582		$	4,459,707
Network Access		2,563,335			3,035,447			8,123,960			9,104,649
Video		1,494,017			1,449,038			4,420,306			4,221,963
Data		1,386,433			1,318,277			4,128,579			3,898,769
Long Distance		155,715			163,809			461,078			485,016
Other Non-Regulated		979,088			974,577			2,859,877			2,908,214
Total Operating Revenues		8,027,347			8,430,729			24,358,382			25,078,318

OPERATING EXPENSES:
Plant Operations (Excluding Depreciation and Amortization)		1,497,170			1,500,362			4,828,741			4,657,190
Cost of Video		1,283,744			1,132,272			3,785,252			3,394,769
Cost of Data		210,238			198,870			744,233			647,989
Cost of Other Nonregulated Services		417,227			392,250			1,215,876			1,173,707
Depreciation and Amortization		2,055,708			2,013,785			6,092,798			6,841,531
Selling, General and Administrative		1,339,482			1,711,415			4,573,112			4,920,838
Total Operating Expenses		6,803,569			6,948,954			21,240,012			21,636,024

OPERATING INCOME		1,223,778			1,481,775			3,118,370			3,442,294

OTHER (EXPENSE) INCOME
Interest Expense		(556,562	)		(568,555	)		(1,665,981	)		(1,849,319	)
Interest Income		808			3,493			81,276			86,837
Interest During Construction		6,217			9,914			16,922			34,753
Gain on Disposal of Assets		—			—			—			4,282
Equity in Earnings of Hector Investment		218,372			217,754			711,073			479,260
CoBank Patronage Dividends		—			—			449,878			485,812
Other Investment Income		43,422			73,426			132,364			172,210
Total Other Income (Expense)		(287,743	)		(263,968	)		(274,468	)		(586,165	)

INCOME BEFORE INCOME TAXES		936,035			1,217,807			2,843,902			2,856,129

INCOME TAXES		392,910			511,479			1,193,816			1,170,616

NET INCOME	$	543,125		$	706,328		$	1,650,086		$	1,685,513

BASIC AND DILUTED
NET INCOME PER SHARE	$	0.11		$	0.14		$	0.32		$	0.33

DIVIDENDS PER SHARE	$	0.0825		$	0.0825		$	0.2475		$	0.2450

WEIGHTED AVERAGE SHARES OUTSTANDING		5,132,518			5,115,435			5,123,027			5,115,435


Telecom Segment

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Operating Revenues
Local Service	$	1,448,759	$	1,489,581	$	4,364,582	$	4,459,707
Network Access		2,563,335		3,035,447		8,123,960		9,104,649
Video		1,494,017		1,449,038		4,420,306		4,221,963
Data		1,386,433		1,318,277		4,128,579		3,898,769
Long Distance		155,715		163,809		461,078		485,016
Other		979,088		974,577		2,859,877		2,908,214
Total Operating Revenues		8,027,347		8,430,729		24,358,382		25,078,318

Cost of Services, Excluding Depreciation and Amortization		3,408,379		3,223,754		10,574,102		9,873,655
Selling, General and Administrative		1,339,482		1,711,415		4,573,112		4,920,838
Depreciation and Amortization Expenses		2,055,708		2,013,785		6,092,798		6,841,531
Total Operating Expenses		6,803,569		6,948,954		21,240,012		21,636,024

Operating Income	$	1,223,778	$	1,481,775	$	3,118,370	$	3,442,294

Net Income	$	543,125	$	706,328	$	1,650,086	$	1,685,513

Capital Expenditures	$	1,658,374	$	1,263,261	$	5,125,745	$	4,127,719

			September 30,
Key metrics			2012		2011
Access Lines				25,717		26,798
Video Customers				10,034		10,324
Broadband Customers				10,623		10,162
Dial Up Internet Customers				443		711
Long Distance Customers				13,192		13,431


Description	Total		October 1 - December 31 2012		2013-2014		2015-2016		Thereafter
Deferred Compensation	$	950,929	$	17,441	$	133,137	$	124,766	$	675,585
Long-term Debt		41,773,050		1,109,500		40,663,550		0		0
Interest on Long-term Debt (A)		2,414,130		539,188		1,874,942		0		0
Loan Guarantees		310,642		7,013		59,285		64,830		179,514
Operating Lease		93,030		6,645		53,160		33,225		0
Purchase Obligations (B)		0		0		0		0		0
Total Contractual Cash Obligations	$	45,541,781	$	1,679,787	$	42,784,074	$	222,821	$	855,099