--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2000
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 0-18587
-------
HECTOR COMMUNICATIONS CORPORATION
................................................................................
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1666660
................................................................................
(State or other jurisdiction of (Federal Employer
incorporation or organization) Identification No.)
211 South Main Street, Hector, MN 55342
................................................................................
(Address of principal executive offices) (Zip Code)
(320) 848-6611
................................................................................
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. YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at October 31, 2000
----------------------------------- -------------------------------
Common Stock, par value 3,520,400
$.01 per share
Total Pages (15) Exhibit at Page 15
--------------------------------------------------------------------------------
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 14
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
Assets: 2000 1999
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 15,529,531 $ 27,055,772
Short term investments 218,244
Construction fund 328,263 283,604
Accounts receivable, net 4,678,557 4,854,365
Materials, supplies and inventories 816,913 616,985
Prepaid expenses 199,363 171,432
------------ ------------
Total current assets 21,770,871 32,982,158
Property, plant and equipment 92,072,180 84,620,435
less accumulated depreciation (37,106,654) (33,210,402)
------------ ------------
Net property, plant and equipment 54,965,526 51,410,033
Other assets:
Excess of cost over net assets acquired, net 55,831,951 51,405,010
Marketable securities 3,799,987 12,218,303
Wireless telephone investments 12,352,654 9,688,981
Other investments 10,757,854 8,768,797
Other assets 268,568 323,405
------------ ------------
Total other assets 83,011,014 82,404,496
------------ ------------
Total Assets $ 159,747,411 $ 166,796,687
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 5,956,400 $ 5,607,100
Accounts payable 1,807,177 2,481,507
Accrued expenses 2,168,241 2,184,626
Income taxes payable 494,914 3,973,019
------------ ------------
Total current liabilities 10,426,732 14,246,252
Long-term debt, less current portion 85,530,830 86,281,656
Deferred investment tax credits 73,016 140,386
Deferred income taxes 7,388,286 9,435,515
Deferred compensation 897,332 897,113
Minority stockholders interest in Alliance
Telecommunications Corp. 15,993,839 15,813,847
Stockholders' Equity 39,437,376 39,981,918
------------ ------------
Total Liabilities and Stockholders' Equity $ 159,747,411 $ 166,796,687
============ ============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- ---------------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 1,783,868 $ 1,556,028 $ 4,942,097 $ 4,424,323
Network access 5,193,964 4,996,475 15,363,126 14,832,455
Billing and collection 177,677 211,624 504,346 628,779
Nonregulated activities 1,601,814 1,186,474 3,810,739 3,235,340
Cable television revenues 1,001,070 984,035 2,968,667 2,856,855
------------- ------------ ------------- ------------
Total revenues 9,758,393 8,934,636 27,588,975 25,977,752
Costs and expenses:
Plant operations 1,140,274 741,647 3,616,246 2,895,173
Depreciation and amortization 2,608,883 2,171,382 7,438,545 6,210,761
Customer operations 586,872 580,267 1,609,235 1,580,775
General and administrative 1,279,058 1,206,379 4,009,581 3,550,237
Other operating expenses 965,278 1,105,432 2,766,677 2,438,416
------------- ------------ ------------- ------------
Total costs and expenses 6,580,365 5,805,107 19,440,284 16,675,362
Operating income 3,178,028 3,129,529 8,148,691 9,302,390
Other income and (expenses):
Interest expense (1,383,498) (1,469,347) (4,476,955) (4,943,817)
Gain on sales of marketable securities 3,472,200 1,622,191 4,454,474
Interest and dividend income 234,741 438,234 944,156 775,396
Partnership and LLC income (loss) 443,886 141,494 1,171,968 (78,012)
------------- ------------ ------------- ------------
Other income (expense), net (704,871) 2,582,581 (738,640) 208,041
Income before income taxes 2,473,157 5,712,110 7,410,051 9,510,431
Income tax expense 1,093,000 2,427,000 3,244,000 4,065,000
------------- ------------ ------------- ------------
Income before minority interest 1,380,157 3,285,110 4,166,051 5,445,431
Minority interest in earnings of
Alliance Telecommunications Corporation 353,107 1,053,285 1,083,471 1,739,512
------------- ------------ ------------- ------------
Net income $ 1,027,050 $ 2,231,825 $ 3,082,580 $ 3,705,919
------------- ------------ ------------- ------------
Other comprehensive income:
Unrealized holding gains (losses)
on marketable securities (2,407,365) 5,782,597 (3,013,872) 9,433,705
Less: reclassification adjustment for gains
included in net income (3,472,200) (1,622,191) (4,454,474)
------------- ------------ ------------- ------------
Other comprehensive income (loss) before income taxes
and minority interest (2,407,365) 2,310,397 (4,636,063) 4,979,231
Income tax expense (benefit) related to unrealized
holding gains (losses) on marketable securities (962,947) 2,313,637 (1,199,740) 3,773,936
Income tax benefit related to reclassification
adjustment for gains included in net income (1,389,239) (649,956) (1,782,004)
Minority interest in other comprehensive income (loss)
of Alliance Telecommunications Corporation (477,194) 1,076,686 (903,479) 1,076,686
------------- ------------ ------------- ------------
Other comprehensive income (loss) (967,224) 309,313 (1,882,888) 1,910,613
------------- ------------ ------------- ------------
Comprehensive income $ 59,826 $ 2,541,138 $ 1,199,692 $ 5,616,532
============= ============ ============= ============
Basic net income per share $ .29 $ .65 $ .87 $ 1.26
Diluted net income per share $ .27 $ .57 $ .80 $ 1.01
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Preferred Stock Common Stock Additional Other
------------------- -------------------- Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income Total
-------- --------- --------- --------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1998 342,800 $ 342,800 2,661,062 $ 26,611 $ 6,326,441 $15,636,764 $ 387,705 $22,720,321
Net income 7,479,181 7,479,181
Issuance of common stock under
Employee Stock Purchase Plan 14,890 149 104,267 104,416
Issuance of common stock under
Employee Stock Option Plan 43,675 437 361,475 361,912
Issuance of common stock in
exchange for preferred stock (113,500) (113,500) 113,500 1,135 112,365 0
Issuance of common stock from
exercise of outstanding warrants 8,742 87 (87) 0
Conversion of convertible debentures
into common stock 730,438 7,304 6,350,007 6,357,311
Issuance of common stock to ESOP 2,405 24 19,976 20,000
Change in unrealized gains on
marketable securities, net of
deferred taxes 2,938,777 2,938,777
-------- --------- --------- --------- ----------- ----------- ---------- -----------
BALANCE at December 31, 1999 229,300 229,300 3,574,712 35,747 13,274,444 23,115,945 3,326,482 39,981,918
Net income 3,082,580 3,082,580
Issuance of common stock under
Employee Stock Purchase Plan 10,754 108 115,296 115,404
Issuance of common stock under
Employee Stock Option Plan 37,620 376 256,282 256,658
Issuance of common stock in
exchange for preferred stock (8,000) (8,000) 8,000 80 7,920 0
Issuance of common stock from
exercise of outstanding warrants 88,311 883 756,417 757,300
Issuance of common stock to ESOP 6,928 69 96,923 96,992
Purchase and retirement of
common stock (205,925) (2,059) (1,614,218) (1,354,311) (2,970,588)
Change in unrealized gains on
marketable securities, net of
deferred taxes (1,882,888) (1,882,888)
-------- --------- --------- --------- ----------- ----------- ---------- -----------
BALANCE at September 30, 2000 221,300 $ 221,300 3,520,400 $ 35,204 $12.893.064 $24,844,214 $1,443,594 $39,437,376
======== ========= ========= ========= =========== =========== ========== ===========
See notes to
consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
------------------------------
2000 1999
----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 3,082,580 $ 3,705,919
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,438,545 6,325,921
Minority stockholders' interest in earnings of
Alliance Telecommunications Corporation 1,083,471 1,739,512
Gain on sales of marketable securities (1,622,191) (4,454,474)
Loss (income) from partnership and LLC investments (1,171,968) 78,012
Proceeds from wireless telephone investments 991,029 491,805
Changes in assets and liabilities net of effects of the
acquisition of Hager Telecom, Inc.:
Decrease (increase) in accounts receivable 303,114 (1,059,077)
Increase in materials, supplies and inventories (164,087) (486,355)
Increase in prepaid expenses (23,572) (3,865)
Increase (decrease) in accounts payable\ (914,817) 151,642
Increase (decrease) in accrued expenses 43,244 (7,111)
Increase (decrease) in income taxes payable (3,440,700) 798,486
Decrease in deferred investment credits (67,370) (119,860)
Decrease in deferred taxes (479,406) (984,057)
Increase (decrease) in deferred compensation 219 (69,781)
----------- -----------
Net cash provided by operating activities 5,058,091 6,106,717
Cash Flows from Investing Activities:
Capital expenditures, net (5,850,544) (5,626,659)
Proceeds from short term investments 20,464
Sales of marketable securities 9,910,447 6,596,921
Purchases of marketable securities (4,506,003)
Increase in construction fund (2,257) (84,044)
Purchases of wireless telephone investments (183,273) (825,800)
Purchases of other investments (1,606,484) (737,925)
Decrease (increase) in other assets 51,106 (103,001)
Payment for purchase of Hager Telecom, Inc., net of cash acquired (8,562,640)
----------- -----------
Net cash used in investing activities (10,729,184) (780,508)
Cash Flows from Financing Activities:
Repayment of long-term debt (4,013,922) (7,513,873)
Proceeds from issuance of notes payable and long-term debt 3,992,634
Issuance of common stock 1,129,362 435,947
Purchase and retirement of common stock (2,970,588)
----------- -----------
Net cash used in financing activities (5,855,148) (3,085,292)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (11,526,241) 2,240,917
Cash and Cash Equivalents at Beginning of Period 27,055,772 14,686,034
----------- -----------
Cash and Cash Equivalents at End of Period $ 15,529,531 $ 16,926,951
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 4,500,899 $ 4,845,841
Income taxes paid during the period 6,789,005 3,383,475
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of stockholders' equity as of September 30, 2000
and the statements of income and comprehensive income and the statements of cash
flows for the periods ended September 30, 2000 and 1999 have been prepared by
the Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments except where indicated) necessary to
present fairly the financial position, results of operations, and changes in
cash flows at September 30, 2000 and 1999 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1999 Annual Report to
Shareholders. The results of operations for the periods ended September 30 are
not necessarily indicative of the operating results for the entire year.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity as previously reported.
Effective June 9, 2000, Alliance Telecommunications Corporation acquired all of
the outstanding common stock of Hager Telecom, Inc. for $9,124,500 of cash plus
acquisition costs. In the acquisition, the following assets were acquired and
liabilities assumed:
Property, plant and equipment $ 3,849,893
Excess of cost over net assets acquired 5,693,038
Wireless telephone investments 2,500,000
Long-term debt (3,612,396)
Deferred income taxes (281,872)
Other assets and liabilities 1,095,837
-----------
Net assets acquired 9,244,500
Less cash and cash equivalents acquired (681,860)
-----------
Payment for Hager Telecom, Inc. net of cash acquired $ 8,562,640
===========
The acquisition is being accounted for as a purchase. The excess of cost over
net assets acquired is being amortized over 25 years. The operations of Hager,
which are not material to the Company's operations, have been included in
consolidated results since the acquisition date.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
SAB No. 101 is to be implemented by the Company no later than the fourth quarter
of 2000. Based on an initial review, the Company does not expect it to have a
significant effect on the financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The FASB subsequently issued SFAS No. 137
delaying the effective date for one year, to fiscal years beginning after June
15, 2000. The Company will adopt this standard no later than January 1, 2001.
Although the Company expects that this standard will not materially affect its
financial position and results of operations, it has not yet determined the
impact of this standard on its financial statements.
7
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 2 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS
Marketable securities consist principally of equity securities of other
telecommunications companies. The Company's marketable securities portfolio is
classified as available-for-sale. The cost and fair value of available-for-sale
investment securities was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ------------ -----------
September 30, 2000 $ 292,100 $ 3,520,324 $ (12,437) $ 3,799,987
December 31, 1999 4,074,353 8,174,811 (30,861) 12,218,303
Net unrealized gains on marketable securities, net of related deferred taxes,
are included in accumulated other comprehensive income as follows:
Accumulated
Net Deferred Other
Unrealized Income Minority Comprehensive
Gains Taxes Interest Income
---------- ----------- ------------ -----------
September 30, 2000 $3,507,887 $(1,407,885) $ (656,408) $ 1,443,594
December 31, 1999 8,143,950 (3,257,581) (1,559,887) 3,326,482
These amounts have no cash effect and are not included in the statement of cash
flows.
Proceeds from sales of available-for-sale securities were $9,910,000 and
$7,592,000 (including $995,000 receivable at September 30, 1999) in the
nine-month periods ended September 30, 2000 and 1999, respectively. Gross
realized gains on sales of these securities were $1,622,000 and $4,454,000 in
the respective 2000 and 1999 periods. Realized gains on sales are based on the
difference between net sales proceeds and the book value of securities sold,
using the specific identification method.
NOTE 3 - WIRELESS TELEPHONE INVESTMENTS
The Company's investments in wireless telephone partnerships and limited
liability companies are recorded on the equity method of accounting, which
reflects original cost and recognition of the Company's share of income or
losses.
Income recognized on the Company's investment in Midwest Wireless LLC, net of
amortization, was $956,000 and $1,182,000 for the nine-month periods ended
September 30, 2000 and 1999 respectively. During the first quarter of 2000,
Midwest Wireless LLC acquired additional cellular properties expanding its
service territory into Iowa and Wisconsin and increasing its population base by
520,000. At September 30, 2000, the Company owned 9.3% of Midwest Wireless
Communications LLC.
Income from the Company's Wireless North LLC PCS investments was $14,000 in the
first nine months of 2000 compared to a loss of $1,237,000 in the first nine
months of 1999. During the first quarter of 2000, Touch America, Inc. purchased
a 25% interest in Wireless North LLC, which is expected to grow to 100% by 2002.
As a result of Touch America's investment, the Company's loan guarantees of
Wireless North LLC's debt were reduced and any obligations to make future
capital contributions were eliminated. At September 30, 2000, the Company owned
10.7% of Wireless North LLC.
The Company made additional cash investments of $183,000 and $826,000 in the
respective 2000 and 1999 periods to support the operations of its wireless
investments. Cash distributions received from wireless telephone investments
were $991,000 and $492,000 in 2000 and 1999, respectively.
8
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 4 - INCOME TAXES AND INVESTMENT CREDITS
Income taxes have been calculated in proportion to the earnings and tax credits
generated by operations. Investment tax credits have been deferred and are
included in income over the estimated useful lives of the related assets. The
Company's effective income tax rate is higher than the U.S. rate due to the
effect of state income taxes and non-deductible expenses.
NOTE 5 - SEGMENT INFORMATION
The Company is organized into two business segments: Hector Communications
Corporation and its wholly owned subsidiaries, and Alliance Telecommunications
Corporation and its subsidiaries. Segment information for the nine-month periods
ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999
--------------------------------------- ---------------------------------------
Hector Alliance Consolidated Hector Alliance Consolidated
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 6,980,911 $ 20,608,064 $ 27,588,975 $ 6,407,411 $ 19,570,341 $ 25,977,752
Costs and expenses 5,691,150 13,749,134 19,440,284 5,273,526 11,401,836 16,675,362
----------- ------------ ------------ ----------- ------------ ------------
Operating income 1,289,761 6,858,930 8,148,691 1,133,885 8,168,505 9,302,390
Interest expense (748,075) (3,728,880) (4,476,955) (1,103,667) (3,840,150) (4,943,817)
Interest and dividend income 260,507 683,649 944,156 138,733 636,663 775,396
Gain on sale of marketable securities 1,622,191 1,622,191 4,454,474 4,454,474
Partnership and LLC income (loss) 508,011 663,957 1,171,968 (125,495) 47,483 (78,012)
----------- ------------ ------------ ----------- ------------ ------------
Income before income taxes $ 1,310,204 $ 6,099,847 $ 7,410,051 $ 43,456 $ 9,466,975 $ 9,510,431
=========== ============ ============ =========== ============ ============
Depreciation and Amortization $ 2,102,189 $ 5,336,356 $ 7,438,545 $ 1,916,171 $ 4,294,590 $ 6,210,761
=========== ============ ============ =========== ============ ============
Capital Expenditures $ 944,188 $ 4,906,356 $ 5,850,544 $ 2,179,344 $ 3,447,315 $ 5,626,659
=========== ============ ============ =========== ============ ============
Total Assets $28,608,069 $131,139,342 $159,747,411 $25,447,215 $132,085,111 $157,532,326
=========== ============ ============ =========== ============ ============
</TABLE>
Segment information for the three-month periods ended September 30, 2000 and
1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
--------------------------------------- --------------------------------------
Hector Alliance Consolidated Hector Alliance Consolidated
----------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,364,328 $ 7,394,065 $ 9,758,393 $ 2,202,480 $ 6,732,156 $ 8,934,636
Costs and expenses 1,942,179 4,638,186 6,580,365 1,971,973 3,833,134 5,805,107
----------- ------------ ------------ ----------- ------------ -----------
Operating income 422,149 2,755,879 3,178,028 230,507 2,899,022 3,129,529
Interest expense (248,693) (1,134,805) (1,383,498) (240,515) (1,228,832) (1,469,347)
Interest and dividend income 92,534 142,207 234,741 47,003 391,231 438,234
Gain on sale of marketable securities 3,472,200 3,472,200
Partnership and LLC income (loss) 183,708 260,178 443,886 (36,163) 177,657 141,494
----------- ------------ ------------ ----------- ------------ -----------
Income before income taxes $ 449,698 $ 2,023,459 $ 2,473,157 $ 832 $ 5,711,278 $ 5,712,110
=========== ============ ============ =========== ============ ===========
Depreciation and Amortization $ 698,766 $ 1,910,117 $ 2,608,883 $ 700,413 $ 1,470,969 $ 2,171,382
=========== ============ ============ =========== ============ ===========
Capital Expenditures $ 419,118 $ 1,695,159 $ 2,114,277 $ 861,343 $ 1,933,071 $ 2,794,414
=========== ============ ============ =========== ============ ===========
</TABLE>
9
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
Hector Communications Corporation ("HCC") owns a 100% interest in five local
exchange telephone subsidiaries and one cable television subsidiary. At
September 30, 2000, these subsidiaries provided telephone service to 7,408
customers in 9 rural communities in Minnesota and Wisconsin. They also owned 29
cable television systems serving 4,828 customers in 35 communities in Minnesota
and Wisconsin. HCC also directly owns substantial investments in other
telecommunications ventures, including, Midwest Wireless LLC, Wireless North LLC
and Onvoy, Inc.
HCC owns a 68% interest in Alliance Telecommunications Corporation ("Alliance").
At September 30, 2000, Alliance, through its six local exchange telephone
subsidiaries, provided telephone service to 31,309 customers in 28 rural
communities in Minnesota, South Dakota, Wisconsin and Iowa. Alliance's 16 cable
television systems provided cable television services to 8,026 subscribers in
Minnesota, South Dakota and North Dakota. Alliance's subsidiaries also own
substantial investments in Midwest Wireless LLC, Wireless North LLC and Onvoy,
own marketable securities portfolios with investments in mutual funds and
telecommunications providers Illuminet Holdings, Inc. and Rural Cellular
Corporation, and have other investments.
Effective June 9, 2000, Alliance acquired Hager Telecom, Inc. for $9,274,500.
Hager provides local telephone service to 2,084 access lines in Hager City,
Wisconsin. Hager also provides internet service to 2,688 customers, most of them
in Red Wing, Minnesota. Hager also owns eight-tenths of one percent of Midwest
Wireless, LLC and is an investor in other telecommunications ventures.
Consolidated revenues increased 6% from $25,978,000 in 1999 to $27,589,000 in
2000. The revenue breakdown by operating group was as follows:
<TABLE>
<CAPTION>
Alliance Hector
Nine Months Ended September 30 Nine Months Ended September 30
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Local network $ 3,626,580 $ 3,178,637 $ 1,315,517 $ 1,245,686
Network access 11,516,606 11,400,648 3,846,520 3,431,807
Billing and collection 386,270 504,919 118,076 123,860
Nonregulated activities 3,228,762 2,724,965 581,977 510,375
Cable television 1,849,846 1,761,172 1,118,821 1,095,683
------------ ------------ ----------- -----------
$ 20,608,064 $ 19,570,341 $ 6,980,911 $ 6,407,411
============ ============ =========== ===========
</TABLE>
Consolidated local service revenues increased $518,000 or 12%. The increase was
due to growth in access lines served (38,717 at September 30, 2000), increased
extended area service (EAS) revenues and the acquisition of Hager. Alliance's
South Dakota exchanges added EAS to Sioux Falls in March 1999. Access line
growth was due to increased development within the Company's service areas,
increased demand for telephone lines to provide advanced telephone services such
as internet services and the acquisition of Hager. Network access revenues
increased $531,000 or 4%. Revenue growth was due to increased special access
revenues and increased universal service fund support for high-cost companies.
Alliance's access revenues were negatively affected by the addition of EAS to
Sioux Falls. The Company also believes that many communications formerly made
via long distance services are now occurring over the internet, which depresses
access revenues.
10
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Nonregulated revenues increased $575,000 or 18% due to increased internet
subscriber revenues and increased revenues from facilities leases. With the
acquisition of Hager, the Company now has 7,662 internet customers. Cable
television revenues increased $112,000 or 4% due to rate increases charged to
customers. Billing and collection revenues decreased $124,000.
Consolidated operating costs and expenses grew from $16,675,000 in 1999 to
$19,440,000 in 2000, an increase of $2,765,000 or 17%. Costs and expenses by
operating group were as follows:
<TABLE>
<CAPTION>
Alliance Hector
Nine Months Ended September 30 Nine Months Ended September 30
2000 1999 2000 1999
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Plant operations $ 2,715,844 $ 2,042,503 $ 900,402 $ 852,670
Depreciation and amortization 5,336,356 4,294,590 2,102,189 1,916,171
Customer operations 1,378,299 1,331,192 230,936 249,583
General and administrative 2,628,154 2,377,847 1,381,427 1,172,390
Other operating expenses 1,690,481 1,355,704 1,076,196 1,082,712
------------ ------------ ------------ -----------
$ 13,749,134 $ 11,401,836 $ 5,691,150 $ 5,273,526
============ ============ ============ ===========
</TABLE>
Consolidated plant operations expenses increased $721,000 or 25%, due to
increases in the Company's customer base. Depreciation and amortization
increased $1,228,000 or 20% due to depreciation on new plant additions and
shorter useful lives on telephone switching equipment and depreciation and
goodwill amortization from the acquisition of Hager. Customer operations
expenses increased $28,000, or 2%. General and administrative expenses increased
$459,000 or 13%. Administrative expenses in 2000 include the write-off
underwriting fees associated with a possible stock offering by the Company.
Other operating expenses increased $328,000 or 13% due to increased cable
television expenses and increased internet service expenses. Consolidated
operating income decreased $1,154,000 or 12%.
Interest expenses decreased $467,000 due to interest reductions on convertible
debentures that were retired or converted into common stock in the second
quarter of 1999. Interest expenses also decreased due to principal payments made
on the Company's long-term debt.
Alliance had gains on sales of marketable securities of $1,622,000 and
$4,454,000 in 2000 and 1999, respectively. During the first three months of
2000, Alliance sold 51,000 shares of US West Communications, Inc. in open market
transactions. Interest and dividend income increased $169,000 due to investment
of the proceeds from the marketable securities sales. The Company had income
from partnership and LLC investments of $1,172,000 for the 2000 period compared
to losses of $78,000 in 1999 (Note 3).
Income before income taxes decreased from $9,510,000 in 1999 to $7,410,000 in
2000. The Company's effective income tax rate of 44% is higher than the standard
U.S. tax rate due to state income taxes and the effect of nondeductible
amortization expenses. Income before minority interest in Alliance's earnings
decreased 23% from $5,445,000 in 1999 to $4,166,000 in 2000. Minority interests
in earnings of Alliance were $1,083,000 compared to $1,740,000 in 1999. Net
income decreased 17% to $3,083,000 in 2000 compared to $3,706,000 in 1999.
11
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
Consolidated revenues increased 9% from $8,935,000 in 1999 to $9,758,000 in
2000. The revenue breakdown by operating group was as follows:
<TABLE>
<CAPTION>
Alliance Hector
Three Months Ended September 30 Three Months Ended September 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Local network $ 1,328,643 $ 1,121,829 $ 455,225 $ 434,199
Network access 3,892,851 3,868,420 1,301,113 1,128,055
Billing and collection 136,428 168,654 41,249 42,970
Nonregulated activities 1,405,623 968,478 196,191 217,996
Cable television 630,520 604,775 370,550 379,260
----------- ----------- ----------- -----------
$ 7,394,065 $ 6,732,156 $ 2,364,328 $ 2,202,480
=========== =========== =========== ===========
</TABLE>
Consolidated local service revenues increased $228,000 or 15%. The increase was
due to growth in access lines served (38,717 at September 30, 2000) and the
acquisition of Hager. Network access revenues increased $197,000 or 4%. Revenue
growth was due to increased special access revenues and increased universal
service fund support for high-cost companies.
Nonregulated revenues increased $415,000 or 35% due to increased income from
facilities leases and increased internet subscriber revenues. Cable television
revenues increased $17,000 or 2% due to rate increases charged to customers.
Billing and collection revenues decreased $34,000.
Consolidated operating costs and expenses grew from $5,805,000 in 1999 to
$6,580,000 in 2000, an increase of $775,000 or 13%. Costs and expenses by
operating group were as follows:
<TABLE>
<CAPTION>
Alliance Hector
Three Months Ended September 30 Three Months Ended September 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Plant operations $ 839,995 $ 440,703 $ 300,279 $ 300,944
Depreciation and amortization 1,910,117 1,470,969 698,766 700,413
Customer operations 508,587 485,347 78,285 94,920
General and administrative 781,632 788,480 497,426 417,899
Other operating expenses 597,855 647,635 367,423 457,797
----------- ----------- ----------- -----------
$ 4,638,186 $ 3,833,134 $ 1,942,179 $ 1,971,973
=========== =========== =========== ===========
</TABLE>
Consolidated plant operations expenses increased $399,000 or 54%, due to
increases in the Company's customer base, changes in capitalized plant expense
levels and the acquisition of Hager. Depreciation and amortization increased
$438,000 or 20% due to depreciation on new plant additions and shorter useful
lives on telephone switching equipment and depreciation and goodwill
amortization from the acquisition of Hager. Customer operations expenses
increased $7,000, or 1%. General and administrative expenses increased $73,000
or 6%. Other operating expenses decreased $140,000 or 13%. Consolidated
operating income increased $48,000 or 2%.
Interest expenses decreased $86,000 due to principal payments made on the
Company's long-term debt. Alliance had gains on sales of marketable securities
of $3,472,000 in the 1999 period. Interest and dividend income decreased
$203,000 due to lower cash balances available to invest following the purchase
of Hager. The Company had income from partnership and LLC investments of
$444,000 for the 2000 period compared to $141,000 in 1999 (Note 3).
12
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Income before income taxes decreased from $5,712,000 in 1999 to $2,473,000 in
2000. Income before minority interest in Alliance's earnings decreased from
$3,285,000 in 1999 to $1,380,000 in 2000. Minority interests in earnings of
Alliance were $353,000 compared to $1,053,000 in 1999. Net income decreased to
$1,027,000 in 2000 from $2,232,000 in 1999.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the nine-month periods
were $5,058,000 and $6,107,000 in 2000 and 1999, respectively. The decrease in
operating cash flow was due to lower operating income and income tax payments
made on 1999 marketable securities gains. At September 30, 2000, the Company's
cash, cash equivalents, short-term investments and marketable securities totaled
$19,548,000 compared to $39,274,000 at December 31, 1999. Alliance's cash and
securities were $13,646,000 of the September 30, 2000 total. These balances are
lower than at year-end due to funds used to acquire Hager Telecom, Inc. Working
capital at September 30, 2000 was $11,344,000 compared to $18,736,000 at
December 31, 1999. The current ratio was 2.1 to 1 at September 30, 2000.
Following a rate of return review by the Wisconsin Public Service Commission's
staff, the Company agreed to reduce the local service rates it charges to its
Wisconsin residential and business customers. The effect of the agreement will
be to reduce the Company's local service revenue by $240,000 annually. The
agreement goes into effect November 1, 2000.
The Company makes periodic improvements to its facilities to provide up-to-date
services to its telephone and cable television customers. Hector's plant
additions in the 2000 and 1999 nine-month periods were $944,000 and $2,179,000,
respectively. Alliance's plant additions in the same periods, excluding the
acquisition of Hager, were $4,906,000 and $3,447,000, respectively. Plant
additions for 2000 for Hector and Alliance are expected to total $1,894,000 and
$5,500,000, respectively, and will provide customers with additional advanced
switching services, expand usage of high capacity fiber optics in the telephone
network and install NEXT level telecommunications equipment in the Company's
Pine Island, MN telephone exchanges. NEXT level equipment utilizes a fiber optic
"backbone" to make it possible to deliver telephone, video and high-speed data
services to customers over existing copper wire distribution systems.
Interest and dividend income has been derived almost exclusively from interest
earned on the Company's cash and cash equivalents. Interest income has
fluctuated in relation to changes in interest rates and availability of cash for
investment. In 2000, Alliance sold 51,000 shares of U.S. West Communications,
Inc. for $3,652,000. In 1999, Alliance received $7,592,000 from sales of Media
One Group, Inc. and Rural Cellular Corporation common stock. Proceeds from these
sales were invested in mutual funds and interest bearing bank accounts, until
being utilized in the acquisition of Hager Telecom, Inc.
The Company is an investor in Wireless North, a limited liability corporation
that has acquired licenses to operate PCS systems in 13 markets in Minnesota,
Wisconsin, North Dakota and South Dakota. The PCS systems are in start-up mode
and have incurred significant losses. From its inception through February 2000,
the Company invested $2,486,000 of cash and guaranteed $1,373,000 of debt in
Wireless North. In March 2000, Touch America, Inc. purchased a 25% interest in
Wireless North which is expected to grow to 100% by 2002. Under terms of the
agreement with Touch America, Inc., the Company's liability for guarantees of
Wireless North's debt have been reduced, and will be eliminated when ownership
of all the PCS licenses have been transferred. The Company has no obligation to
make future capital contributions to support Wireless North.
13
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
The Company received $1,129,000 from issuances of common stock in the first nine
months of 2000. Cash receipts were principally due to exercises of warrants
issued to the underwriters of the Company's 1995 convertible debenture offering.
No warrants remain outstanding. During the first nine months of 2000 the Company
repurchased 205,925 shares of its common stock at market prices totaling
$2,971,000.
The Company is always looking to acquire properties that advance its plan to be
a provider of top quality telecommunications services to rural customers. In
addition to the acquisition of Hager Telecom, Inc., the Company acquired Felton
Telephone Company and eight cable television systems from Spectrum Cablevision
Limited Partnership in 1998. The Company was a member of investor groups, which
unsuccessfully sought to acquire rural telephone properties offered for sale by
GTE and U.S. West Communications in 1999. The Company cannot predict if it will
be successful in acquiring additional properties in the future.
By utilizing cash flow from operations, current cash and investment balances,
and other available financing sources, the Company feels it has adequate
resources to meet its anticipated operating, debt service and capital
expenditure requirements.
--------------------------------------------------------------------------------
Statements regarding the Company's anticipated performance in future periods are
forward looking and involve risks and uncertainties, including but not limited
to: changes in government rules and regulations, new technological developments,
and other risks involving the telecommunications industry generally.
--------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Items 1 - 5. Not Applicable
Item 6(a). Exhibits
Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q.
Item 6(b). Not Applicable.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Hector Communications Corporation
By /s/Charles A. Braun
--------------------------------------
Charles A. Braun
Chief Financial Officer
Date: November 14, 2000
14
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended Sept. 30 Nine Months Ended Sept 30
---------------------------- ----------------------------
Basic: 2000 1999 2000 1999
------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,027,050 $ 2,231,825 $ 3,082,580 $ 3,705,919
=========== =========== =========== ===========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,512,856 3,439,952 3,553,225 2,945,669
=========== =========== =========== ===========
Basic net income per share $ .29 $ .65 $ .87 $ 1.26
=========== =========== =========== ===========
Diluted:
-------------
Net income $ 1,027,050 $ 2,231,825 $ 3,082,580 $ 3,705,919
Interest on convertible debentures 327,811
Amortization of debenture issue costs 115,160
Income tax effect (177,188)
----------- ----------- ----------- -----------
Adjusted net income $ 1,027,050 $ 2,231,825 $ 3,082,580 $ 3,971,702
=========== =========== =========== ===========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,512,856 3,439,952 3,553,225 2,945,669
Assumed conversion of convertible debentures
into common stock (1) 576,448
Dilutive effect of convertible preferred shares outstanding 221,700 340,648 223,606 341,807
Dilutive effect of warrants outstanding 31,387 16,276
Dilutive effect of stock options outstanding after
application of treasury stock method 88,812 93,057 94,745 56,347
Dilutive effect of Employee Stock Purchase Plan
shares subscribed 1,668 1,522 1,297
----------- ----------- ----------- -----------
3,825,036 3,906,566 3,872,873 3,936,547
=========== =========== =========== ===========
Diluted net income per share $ .27 $ .57 $ .80 $ 1.01
=========== =========== =========== ===========
</TABLE>
15
<PAGE>
