--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 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 July 31, 2000
----------------------------------- ----------------------------
Common Stock, par value 3,509,252
$.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>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
Assets: 2000 1999
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 15,709,791 $ 27,055,772
Short term investments 238,708
Construction fund 327,176 283,604
Accounts receivable, net 4,928,061 4,854,365
Materials, supplies and inventories 720,468 616,985
Prepaid expenses 68,476 171,432
------------ ------------
Total current assets 21,992,680 32,982,158
Property, plant and equipment 92,400,276 84,620,435
less accumulated depreciation (37,400,925) (33,210,402)
------------ ------------
Net property, plant and equipment 54,999,351 51,410,033
Other assets:
Excess of cost over net assets acquired, net 56,266,339 51,405,010
Marketable securities 6,207,352 12,218,303
Wireless telephone investments 12,319,861 9,688,981
Other investments 10,541,245 8,768,797
Other assets 348,834 323,405
------------ ------------
Total other assets 85,683,631 82,404,496
------------ ------------
Total Assets $ 162,675,662 $ 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 2,264,401 2,481,507
Accrued expenses 2,145,708 2,184,626
Income taxes payable 821,818 3,973,019
------------ ------------
Total current liabilities 11,188,327 14,246,252
Long-term debt, less current portion 86,746,039 86,281,656
Deferred investment tax credits 94,002 140,386
Deferred income taxes 8,351,233 9,435,515
Deferred compensation 900,592 897,113
Minority stockholders interest in Alliance
Telecommunications Corp. 16,117,926 15,813,847
Stockholders' Equity 39,277,543 39,981,918
------------ ------------
Total Liabilities and Stockholders' Equity $ 162,675,662 $ 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 June 30 Six Months Ended June 30
------------------------------ -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 1,666,845 $ 1,522,746 $ 3,158,229 $ 2,868,295
Network access 5,317,658 4,956,162 10,169,162 9,835,980
Billing and collection 184,952 223,257 326,669 417,155
Nonregulated activities 1,175,934 1,075,951 2,208,925 2,048,866
Cable television revenues 997,477 945,441 1,967,597 1,872,820
----------- ----------- ----------- -----------
Total revenues 9,342,866 8,723,557 17,830,582 17,043,116
Costs and expenses:
Plant operations 1,283,130 1,048,771 2,475,972 2,153,526
Depreciation and amortization 2,473,295 2,045,733 4,829,662 4,039,379
Customer operations 555,995 522,258 1,022,363 1,000,508
General and administrative 1,390,371 1,121,339 2,730,523 2,343,858
Other operating expenses 866,903 638,722 1,801,399 1,332,984
----------- ----------- ----------- -----------
Total costs and expenses 6,569,694 5,376,823 12,859,919 10,870,255
Operating income 2,773,172 3,346,734 4,970,663 6,172,861
Other income and (expenses):
Interest expense (1,560,445) (1,801,762) (3,093,457) (3,474,470)
Gain on sales of marketable securities 178,910 1,622,191 982,274
Interest and dividend income 326,093 142,736 709,415 337,162
Partnership and LLC income (loss) 455,023 (54,478) 728,082 (219,506)
----------- ----------- ----------- -----------
Other income (expense), net (779,329) (1,534,594) (33,769) (2,374,540)
Income before income taxes 1,993,843 1,812,140 4,936,894 3,798,321
Income tax expense 851,000 788,000 2,151,000 1,638,000
----------- ----------- ----------- -----------
Income before minority interest 1,142,843 1,024,140 2,785,894 2,160,321
Minority interest in earnings of
Alliance Telecommunications Corporation 292,129 305,470 730,364 686,227
----------- ----------- ----------- -----------
Net income $ 850,714 $ 718,670 $ 2,055,530 $ 1,474,094
----------- ----------- ----------- -----------
Other comprehensive income:
Unrealized holding gains (losses)
on marketable securities 255,494 2,613,191 (606,507) 3,651,108
Less: reclassification adjustment for gains
included in net income (178,910) (1,622,191) (982,274)
----------- ----------- ----------- -----------
Other comprehensive income (loss) before income taxes
and minority interest 255,494 2,434,281 (2,228,698) 2,668,834
Income tax expense (benefit) related to unrealized
holding gains (losses) on marketable securities 108,582 1,045,277 (236,793) 1,460,444
Income tax benefit related to reclassification
adjustment for gains included in net income (71,564) (649,956) (392,910)
Minority interest in other comprehensive loss of
Alliance Telecommunications Corporation 49,085 (426,285)
----------- ----------- ----------- -----------
Other comprehensive income (loss) 97,827 1,460,568 (915,664) 1,601,300
----------- ----------- ----------- -----------
Comprehensive income $ 948,541 $ 2,179,238 $ 1,139,866 $ 3,075,394
=========== =========== =========== ===========
Basic net income per share $ .24 $ .26 $ .58 $ .55
Diluted net income per share $ .22 $ .22 $ .53 $ .44
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 2,055,530 2,055,530
Issuance of common stock under
Employee Stock Option Plan 35,076 351 244,000 244,351
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 (204,425) (2,044) (1,608,375) (1,332,465) (2,942,884)
Change in unrealized gains on
marketable securities, net of
deferred taxes (915,664) (915,664)
-------- --------- --------- --------- ----------- ----------- ---------- -----------
BALANCE at June 30, 2000 221,300 $ 221,300 3,508,602 $ 35,086 $12.771.329 $23,839,010 $2,410,818 $39,277,543
======== ========= ========= ========= =========== =========== ========== ===========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
---------------------------
2000 1999
----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 2,055,530 $ 1,474,094
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,829,662 4,154,539
Minority stockholders' interest in earnings of Alliance
Telecommunications Corporation 730,364 686,227
Gain on sales of marketable securities (1,622,191) (982,274)
Loss (income) from partnership and LLC investments (728,082) 219,506
Proceeds from wireless telephone investments 742,691 299,859
Changes in assets and liabilities net of effects of the
acquisition of Hager Telecom, Inc.:
Decrease (increase) in accounts receivable 53,610 (816,468)
Increase in materials, supplies and inventories (67,642) (605,886)
Decrease in prepaid expenses 107,493 93,257
Increase (decrease) in accounts payable (386,625) 1,772,393
Increase in accrued expenses 5,539 185,805
Decrease in income taxes payable (3,121,116) (1,547,357)
Decrease in deferred investment credits (46,384) (80,075)
Decrease in deferred taxes (479,406) (149,498)
Increase (decrease) in deferred compensation 3,479 (46,521)
----------- -----------
Net cash provided by operating activities 2,076,922 4,657,601
Cash Flows from Investing Activities:
Capital expenditures, net (3,736,267) (2,832,245)
Sales of marketable securities 9,910,447 1,655,506
Purchases of marketable securities (4,506,003)
Increase in construction fund (1,170) (565,840)
Purchases of wireless telephone investments (183,273) (617,446)
Purchases of other investments (1,552,630) (841,533)
Increase in other assets (21,421) (7,363)
Payment for purchase of Hager Telecom, Inc.,
net of cash acquired (8,592,640)
----------- -----------
Net cash used in investing activities (8,682,957) (3,208,921)
Cash Flows from Financing Activities:
Repayment of long-term debt (2,798,713) (5,955,898)
Proceeds from issuance of notes payable and long-term debt 3,892,634
Issuance of common stock 1,001,651 266,625
Purchase and retirement of common stock (2,942,884)
----------- -----------
Net cash used in financing activities (4,739,946) (1,796,639)
----------- -----------
Net Decrease in Cash and Cash Equivalents (11,345,981) (347,959)
Cash and Cash Equivalents at Beginning of Period 27,055,772 14,686,034
----------- -----------
Cash and Cash Equivalents at End of Period $ 15,709,791 $ 14,338,075
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,582,316 $ 1,700,115
Income taxes paid during the period 5,348,598 3,414,839
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 June 30, 2000 and
the statements of income and comprehensive income and the statements of cash
flows for the periods ended June 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 June 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 June 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 5,674,384
Wireless telephone investments 2,500,000
Long-term debt (3,612,396)
Deferred income taxes (281,872)
Other assets and liabilities 1,144,491
------------
Total assets acquired 9,274,500
Less cash and cash equivalents acquired (681,860)
------------
Payment for Hager Telecom, Inc. net of cash acquired $ 8,592,640
============
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>
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
June 30, 2000 $ 292,100 $5,936,386 $ (21,134) $ 6,207,352
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
June 30, 2000 $5,915,252 $(2,370,832) $(1,133,602) $2,410,818
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
$1,656,000 in the six-month periods ended June 30, 2000 and 1999, respectively.
Gross realized gains on sales of these securities were $1,622,000 and $982,000
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 $675,000 and $681,000 for the six-month periods ended June 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 June 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 half of 2000 compared to a loss of $808,000 in the first half 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 79.5% 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 June 30, 2000, the Company owned 10.7% of Wireless North
LLC.
The Company made additional cash investments of $183,000 and $617,000 in the
respective 2000 and 1999 periods to support the operations of its wireless
investments. Cash distributions received from wireless telephone investments
were $743,000 and $300,000 in 2000 and 1999, respectively.
8
<PAGE>
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 six-month periods
ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
Hector Alliance Consolidated Hector Alliance Consolidated
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 4,616,583 $ 13,213,999 $ 17,830,582 $ 4,204,931 $ 12,838,185 $ 17,043,116
Costs and expenses 3,748,971 9,110,948 12,859,919 3,301,553 7,568,702 10,870,255
----------- ------------ ------------ ----------- ------------ ------------
Operating income 867,612 4,103,051 4,970,663 903,378 5,269,483 6,172,861
Interest expense (499,382) (2,594,075) (3,093,457) (863,152) (2,611,318) (3,474,470)
Interest and dividend income 167,973 541,442 709,415 91,730 245,432 337,162
Gain on sale of marketable securities 1,622,191 1,622,191 982,274 982,274
Partnership and LLC income (loss) 324,303 403,779 728,082 (89,332) (130,174) (219,506)
----------- ------------ ------------ ----------- ------------ ------------
Income before income taxes $ 860,506 $ 4,076,388 $ 4,936,894 $ 42,624 $ 3,755,697 $ 3,798,321
=========== ============ ============ =========== ============ ============
Depreciation and Amortization $ 1,403,423 $ 3,426,239 $ 4,829,662 $ 1,215,758 $ 2,823,621 $ 4,039,379
=========== ============ ============ =========== ============ ============
Capital Expenditures $ 525,070 $ 3,211,197 $ 3,736,267 $ 1,318,001 $ 1,514,244 $ 2,832,245
=========== ============ ============ =========== ============ ============
Total Assets $28,452,670 $134,222,992 $162,675,662 $25,861,988 $127,728,912 $153,590,900
=========== ============ ============ =========== ============ ============
</TABLE>
Segment information for the three-month periods ended June 30, 2000 and 1999 is
as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999
Hector Alliance Consolidated Hector Alliance Consolidated
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,346,131 $ 6,996,735 $ 9,342,866 $ 2,199,491 $ 6,524,066 $ 8,723,557
Costs and expenses 1,955,890 4,613,804 6,569,694 1,663,802 3,713,021 5,376,823
----------- ------------ ------------ ----------- ------------ ------------
Operating income 390,241 2,382,931 2,773,172 535,689 2,811,045 3,346,734
Interest expense (241,692) (1,318,753) (1,560,445) (467,146) (1,334,616) (1,801,762)
Interest and dividend income 88,899 237,194 326,093 50,856 91,880 142,736
Gain on sale of marketable securities 0 178,910 178,910
Partnership and LLC income (loss) 149,491 305,532 455,023 2,896 (57,374) (54,478)
----------- ------------ ------------ ----------- ------------ ------------
Income before income taxes $ 386,939 $ 1,606,904 $ 1,993,843 $ 122,295 $ 1,689,845 $ 1,812,140
=========== ============ ============ =========== ============ ============
Depreciation and Amortization $ 700,811 $ 1,772,484 $ 2,473,295 $ 607,953 $ 1,437,780 $ 2,045,733
=========== ============ ============ =========== ============ ============
Capital Expenditures $ 235,491 $ 2,411,519 $ 2,647,010 $ 1,062,471 $ 1,088,406 $ 2,150,877
=========== ============ ============ =========== ============ ============
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
------------------------------------------
Hector Communications Corporation ("HCC") owns a 100% interest in five local
exchange telephone subsidiaries and one cable television subsidiary. At June 30,
2000, these subsidiaries provided telephone service to 7,395 customers in 9
rural communities in Minnesota and Wisconsin. They also owned 29 cable
television systems serving 4,809 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 June 30, 2000, Alliance, through its six local exchange telephone
subsidiaries, provided telephone service to 30,800 customers in 28 rural
communities in Minnesota, South Dakota, Wisconsin and Iowa. Alliance's 16 cable
television systems provided cable television services to 8,220 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 2,000 access lines in Hager City,
Wisconsin. Hager also provides internet service to 2,500 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 5% from $17,043,000 in 1999 to $17,831,000 in
2000. The revenue breakdown by operating group was as follows:
<TABLE>
<CAPTION>
Alliance Hector
Six Months Ended June 30 Six Months Ended June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Local network $ 2,297,937 $ 2,056,808 $ 860,292 $ 811,487
Network access 7,623,755 7,532,228 2,545,407 2,303,752
Billing and collection 249,842 336,265 76,827 80,890
Nonregulated activities 1,823,139 1,756,487 385,786 292,379
Cable television 1,219,326 1,156,397 748,271 716,423
------------ ------------ ------------ ------------
$ 13,213,999 $ 12,838,185 $ 4,616,583 $ 4,204,931
============ ============ ============ ============
</TABLE>
Consolidated local service revenues increased $290,000 or 10%. The increase was
due to growth in access lines served (38,195 at June 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 $333,000 or 3%. 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>
Nonregulated revenues increased $160,000 or 8% due to increased internet
subscriber revenues. With the acquisition of Hager, the Company now has more
than 5,000 internet customers. Cable television revenues increased $95,000 or 5%
due to rate increases charged to customers. Billing and collection revenues
decreased $90,000.
Consolidated operating costs and expenses grew from $10,870,000 in 1999 to
$12,860,000 in 2000, an increase of $1,990,000 or 18%. Costs and expenses by
operating group were as follows:
<TABLE>
<CAPTION>
Alliance Hector
Six Months Ended June 30 Six Months Ended June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Plant operations $ 1,875,849 $ 1,601,800 $ 600,123 $ 551,726
Depreciation and amortization 3,426,239 2,823,621 1,403,423 1,215,758
Customer operations 869,712 845,845 152,651 154,663
General and administrative 1,846,522 1,589,367 884,001 754,491
Other operating expenses 1,092,626 708,069 708,773 624,915
------------ ------------ ------------ ------------
$ 9,110,948 $ 7,568,702 $ 3,748,971 $ 3,301,553
============ ============ ============ ============
</TABLE>
Consolidated plant operations expenses increased $322,000 or 15%, due to
increases in the Company's customer base. Depreciation and amortization
increased $790,000 or 20% due to depreciation on new plant additions and shorter
useful lives on telephone switching equipment. Customer operations expenses
increased $22,000, or 2%. General and administrative expenses increased $387,000
or 16%. Other operating expenses increased $468,000 or 35% due to increased
cable television expenses and increased internet service expenses. Consolidated
operating income decreased $1,202,000 or 19%.
Interest expenses decreased $381,000 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 $982,000
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 $372,000 due to investment of the
proceeds from the marketable securities sales. The Company had income from
partnership and LLC investments of $728,000 for the 2000 period compared to
losses of $220,000 in 1999 (Note 3).
Income before income taxes increased from $3,798,000 in 1999 to $4,937,000 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
increased 29% from $2,160,000 in 1999 to $2,786,000 in 2000. Minority interests
in earnings of Alliance were $730,000 compared to $686,000 in 1999. Net income
increased 39% to $2,055,000 in 2000 compared to $1,474,000 in 1999.
Three Months Ended June 30, 2000 Compared to
Three Months Ended June 30, 1999
Consolidated revenues increased 7% from $8,724,000 in 1999 to $9,343,000 in
2000. The revenue breakdown by operating group was as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Alliance Hector
Three Months Ended June 30 Three Months Ended June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Local network $ 1,226,522 $ 1,102,046 $ 440,323 $ 420,700
Network access 4,063,772 3,765,965 1,253,886 1,190,197
Billing and collection 146,001 182,391 38,951 40,866
Nonregulated activities 936,459 892,605 239,475 183,346
Cable television 623,981 581,059 373,496 364,382
------------ ------------ ------------ ------------
$ 6,996,735 $ 6,524,066 $ 2,346,131 $ 2,199,491
============ ============ ============ ============
</TABLE>
Consolidated local service revenues increased $144,000 or 9%. The increase was
due to growth in access lines served (38,195 at June 30, 2000) and the
acquisition of Hager. Network access revenues increased $361,000 or 7%. Revenue
growth was due to increased special access revenues and increased universal
service fund support for high-cost companies.
Nonregulated revenues increased $100,000 or 9% due to increased internet
subscriber revenues. Cable television revenues increased $52,000 or 6% due to
rate increases charged to customers. Billing and collection revenues decreased
$38,000.
Consolidated operating costs and expenses grew from $5,377,000 in 1999 to
$6,570,000 in 2000, an increase of $1,193,000 or 22%. Costs and expenses by
operating group were as follows:
<TABLE>
<CAPTION>
Alliance Hector
Three Months Ended June 30 Three Months Ended June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Plant operations $ 978,398 $ 774,227 $ 304,732 $ 274,544
Depreciation and amortization 1,772,484 1,437,780 700,811 607,953
Customer operations 480,166 444,522 75,829 77,736
General and administrative 861,566 732,796 528,805 388,543
Other operating expenses 521,190 323,696 345,713 315,026
------------ ------------ ------------ ------------
$ 4,613,804 $ 3,713,021 $ 1,955,890 $ 1,663,802
============ ============ ============ ============
</TABLE>
Consolidated plant operations expenses increased $234,000 or 22%, due to
increases in the Company's customer base. Depreciation and amortization
increased $428,000 or 21% due to depreciation on new plant additions and shorter
useful lives on telephone switching equipment. Customer operations expenses
increased $34,000, or 6%. General and administrative expenses increased $269,000
or 24%. Other operating expenses increased $228,000 or 36% due to increased
cable television expenses and increased internet service expenses. Consolidated
operating income decreased $574,000 or 17%.
Interest expenses decreased $241,000 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 $179,000 in the 1999
period. Interest and dividend income increased $183,000 due to investment of the
proceeds from marketable securities sales. The Company had income from
partnership and LLC investments of $455,000 for the 2000 period compared to
losses of $54,000 in 1999 (Note 3).
12
<PAGE>
Income before income taxes increased from $1,812,000 in 1999 to $1,994,000 in
2000. Income before minority interest in Alliance's earnings increased 12% from
$1,024,000 in 1999 to $1,143,000 in 2000. Minority interests in earnings of
Alliance were $292,000 compared to $305,000 in 1999. Net income increased 18% to
$851,000 in 2000 compared to $719,000 in 1999.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the six-month periods were
$2,077,000 and $4,658,000 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 June 30, 2000, the Company's cash,
cash equivalents, short-term investments and marketable securities totaled
$22,156,000 compared to $39,274,000 at December 31, 1999. Alliance's cash and
securities were $15,919,000 of the June 30, 2000 total. These balances are lower
than at year-end due to funds used to acquire Hager Telecom, Inc. Working
capital at June 30, 2000 was $11,804,000 compared to $18,736,000 at December 31,
1999. The current ratio was 2.1 to 1 at June 30, 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 six-month periods were $525,000 and $1,318,000,
respectively. Alliance's plant additions in the same periods, excluding the
acquisition of Hager, were $3,211,000 and $1,514,000, 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 and expand usage of high capacity fiber optics in the
telephone network.
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 the first quarter of 1999, Alliance received $1,134,000
from sales of Media One Group, Inc. 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 79.5% in 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 the Company has no obligation to
make future capital contributions. The Company expects its ownership interest in
Wireless North, which was 13.36% on December 31, 1999, to be reduced to 2.74% in
2002.
The Company received $1,002,000 from issuances of common stock in the first half
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 half of 2000, the Company
repurchased 204,425 shares of its common stock at market prices totaling
$2,943,000.
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 Partnershipin 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.
13
<PAGE>
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 - 3. Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders
--------------------------------------------------------------
The Annual Meeting of the Shareholders of the Registrant was held on May 18,
2000 in Minneapolis, MN. The total number of shares outstanding and entitled to
vote at the meeting was 3,555,454 of which 3,295,427 were present either in
person or by proxy. Shareholders re-elected board members Paul A. Hoff and
Edward E. Strickland to three-year terms expiring at the 2002 Annual Meeting of
Shareholders. The vote for these board members was as follows:
In Favor Abstaining
Paul A. Hoff 3,284,580 10,847
Edward E. Strickland 3,234,815 60,612
Board member Charles R. Dickman has retired and did not seek reelection to the
Board.
Board members continuing in office are James O. Ericson, Paul N. Hanson and
Wayne E. Sampson (whose terms expire at the 2001 Annual Meeting of Shareholders)
and Curtis A. Sampson and Steven H. Sjogren (whose terms expire at the 2001
Annual Meeting of Shareholders).
Item 5. Not Applicable
Item 6(a). Exhibits
Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q.
Item 6(b). Exhibits and Reports on Form 8-K.
On June 9, 2000, the Company filed a Form 8-K related to the acquisition of
Hager Telecom, Inc.
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: August 14, 2000
14
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended June 30 Six Months Ended June 30
------------------------ ------------------------
Basic: 2000 1999 2000 1999
------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 850,714 $ 718,670 $ 2,055,530 $ 1,474,094
========== ========== ========== ==========
Common and common equivalent shares-
Weighted average number of common shares outstanding 3,516,681 2,766,863 3,573,631 2,694,432
========== ========== ========== ==========
Basic net income per share $ .24 $ .26 $ .58 $ .55
========== ========== ========== ==========
Diluted:
-------------
Net income $ 850,714 $ 718,670 $ 2,055,530 $ 1,474,094
Interest on convertible debentures 158,916 327,811
Amortization of debenture issue costs 85,455 115,160
Income tax effect (97,748) (177,188)
---------- ---------- ---------- ----------
Adjusted net income $ 850,714 $ 865,293 $ 2,055,530 $ 1,739,877
========== ========== ========== ==========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,516,681 2,766,863 3,573,631 2,694,432
Assumed conversion of convertible debentures
into common stock 763,783 849,272
Dilutive effect of convertible preferred shares outstanding 221,700 341,997 224,570 342,397
Dilutive effect of warrants outstanding 10,545 6,141
Dilutive effect of stock options outstanding after
application of treasury stock method 91,735 45,076 98,900 36,955
Dilutive effect of Employee Stock Purchase Plan
shares subscribed 2,655 4,534 2,284 4,002
---------- ---------- ---------- ----------
3,832,771 3,932,798 3,899,385 3,933,199
========== ========== ========== ==========
Diluted net income per share $ .22 $ .22 $ .53 $ .44
========== ========== ========== ==========
</TABLE>
15
<PAGE>
