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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 MARCH 31, 2000
------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18587
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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 April 30, 2000
- ------------------------ -----------------------------
Common Stock, par value 3,680,051
$.01 per share
Total Pages (13) Exhibit at Page 13
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<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 9
Part II. Other Information 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 2000 1999
------------- -------------
Current assets:
Cash and cash equivalents $ 19,266,025 $ 27,055,772
Construction fund 265,497 283,604
Accounts receivable, net 7,608,779 4,854,365
Materials, supplies and inventories 657,761 616,985
Prepaid expenses 112,244 171,432
------------- -------------
Total current assets 27,910,306 32,982,158
Property, plant and equipment 85,709,692 84,620,435
less accumulated depreciation (35,163,063) (33,210,402)
------------- -------------
Net property, plant and equipment 50,546,629 51,410,033
Other assets:
Excess of cost over net assets acquired, net 51,011,187 51,405,010
Marketable securities 12,210,031 12,218,303
Wireless telephone investments 9,563,145 9,688,981
Other investments 9,621,453 8,768,797
Other assets 374,834 323,405
------------- -------------
Total other assets 82,780,650 82,404,496
------------- -------------
Total Assets $ 161,237,585 $ 166,796,687
============= =============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion
of long-term debt $ 5,694,100 $ 5,607,100
Accounts payable 3,827,370 2,481,507
Accrued expenses 1,982,254 2,184,626
Income taxes payable 1,815,046 3,973,019
------------- -------------
Total current liabilities 13,318,770 14,246,252
Long-term debt, less current portion 84,818,792 86,281,656
Deferred investment tax credits 115,362 140,386
Deferred income taxes 7,782,635 9,435,515
Deferred compensation 873,853 897,113
Minority stockholders interest in Alliance
Telecommunications Corp. 15,776,712 15,813,847
Stockholders' Equity 38,551,461 39,981,918
------------- -------------
Total Liabilities and Stockholders' Equity $ 161,237,585 $ 166,796,687
============= =============
See notes to consolidated financial statements.
3
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended March 31
------------------------------
2000 1999
------------- -------------
Revenues:
Local network $ 1,491,384 $ 1,345,549
Network access 4,851,504 4,879,818
Billing and collection 141,717 193,898
Nonregulated activities 1,032,991 972,915
Cable television revenues 970,120 927,379
------------- -------------
Total revenues 8,487,716 8,319,559
Costs and expenses:
Plant operations 1,192,842 1,104,755
Depreciation and amortization 2,356,367 1,993,646
Customer operations 466,368 478,250
General and administrative 1,340,152 1,222,519
Other operating expenses 934,496 694,262
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Total costs and expenses 6,290,225 5,493,432
Operating income 2,197,491 2,826,127
Other income and (expenses):
Interest expense (1,533,012) (1,672,708)
Gain on sales of marketable securities 1,622,191 803,364
Interest and dividend income 383,322 194,426
Partnership and LLC income (loss) 273,059 (165,028)
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Other income (expense), net 745,560 (839,946)
Income before income taxes 2,943,051 1,986,181
Income tax expense 1,300,000 850,000
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Income before minority interest 1,643,051 1,136,181
Minority interest in earnings of
Alliance Telecommunications Corporation 438,235 380,757
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Net income $ 1,204,816 $ 755,424
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Other comprehensive income:
Unrealized holding gains (losses)
on marketable securities (862,001) 1,037,917
Less: reclassification adjustment for gains
included in net income (1,622,191) (803,364)
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Other comprehensive income (loss) before
income taxes and minority interest (2,484,192) 234,553
Income tax expense (benefit) related to
unrealized holding gains (losses)
on marketable securities (345,375) 415,167
Income tax expense (benefit) related to
reclassification adjustment for gains
included in net income (649,956) (321,346)
Minority interest in other comprehensive loss
of Alliance Telecommunications Corporation (475,370)
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Other comprehensive income (loss) (1,013,491) 140,732
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Comprehensive income $ 191,325 $ 896,156
============= =============
Basic net income per share $ .33 $ .28
Diluted net income per share $ .30 $ .22
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Preferred Stock Common Stock Additional Other
---------------- ----------------- Paid-in Retained Treasury Comprehensive
Shares Amount Shares Amount Capital Earnings Stock Income Total
------- -------- --------- ------- ----------- ----------- ----------- ---------- -----------
<S> <C> <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
debetures 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 1,204,816 1,204,816
Issuance of common stock under
Employee Stock Option Plan 1,400 14 9,574 9,588
Issuance of common stock in
exchange for preferred stock (7,600) (7,600) 7,600 76 7,524 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
Investment by Alliance subsidiary
in Hector common stock (171,425
shares) (2,485,662) (2,485,662)
Change in unrealized gains on
marketable securities, net of
deferred taxes (1,013,491) (1,013,491)
------- -------- --------- ------- ----------- ----------- ----------- ---------- -----------
BALANCE at March 31, 2000 221,700 $221,700 3,678,951 $36,789 $14,144,882 $24,320,761 $(2,485,662) $2,312,991 $38,551,461
======= ======== ========= ======= =========== =========== =========== ========== ===========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
------------------------------
2000 1999
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Cash Flows from Operating Activities:
Net income $ 1,204,816 $ 755,424
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,356,367 2,023,351
Minority stockholders' interest in earnings
of Alliance Telecommunications Corporation 438,235 380,757
Gain on sales of marketable securities (1,622,191) (803,364)
Loss (income) from partnership and
LLC investments (273,059) 165,028
Proceeds from wireless telephone investments 198,096 160,924
Changes in assets and liabilities:
Increase in accounts receivable 301,664 (1,254,116)
Increase in materials, supplies
and inventories (40,776) (51,982)
Decrease in prepaid expenses 59,188 35,257
Increase in accounts payable 1,345,863 765,759
Increase (decrease) in accrued expenses (105,380) 9,978
Decrease in income taxes payable (2,157,973) (1,201,696)
Decrease in deferred investment credits (25,024) (40,293)
Decrease in deferred taxes (657,549) (37,199)
Decrease in deferred compensation (23,260) (23,261)
------------- -------------
Net cash provided by operating activities 999,017 884,567
Cash Flows from Investing Activities:
Capital expenditures, net (1,089,257) (681,368)
Sales of marketable securities 1,005,042 1,133,597
Purchases of marketable securities (4,506,003)
Decrease (increase) in construction fund 18,107 (2,854,119)
Purchases of wireless telephone investments (183,273) (667,953)
Purchases of other investments (877,431) (605,860)
Increase in other assets (61,311) (108,729)
------------- -------------
Net cash used in investing activities (5,694,126) (3,784,432)
Cash Flows from Financing Activities:
Repayment of long-term debt (1,375,864) (3,198,129)
Proceeds from issuance of notes payable
and long-term debt 3,241,634
Issuance of common stock 766,888 3,750
Treasury stock purchased by Alliance subsidiary (2,485,662)
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Net cash provided by (used in)
financing activities (3,094,638) 47,255
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Net Decrease in Cash and Cash Equivalents (7,789,747) (2,852,610)
Cash and Cash Equivalents at Beginning of Period 27,055,772 14,686,034
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Cash and Cash Equivalents at End of Period $ 19,266,025 $ 11,833,424
============= =============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,555,068 $ 1,743,968
Income taxes paid during the period 3,477,240 2,101,550
See notes to consolidated financial statements.
6
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of stockholders' equity as of March 31, 2000 and
the statements of income and comprehensive income and the statements of cash
flows for the periods ended March 31, 2000 and 1999 have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows at March
31, 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 March 31 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.
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
March 31, 2000 $6,550,273 $5,681,528 $ (21,770) $12,210,031
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
March 31, 2000 $5,659,758 $(2,262,250) $(1,084,517) $2,312,991
March 31, 2000 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 (including receivable
amounts of $2,647,000 at March 31, 2000) were $3,652,000 and $1,134,000 in the
three-month periods ended March 31, 2000 and 1999, respectively. Gross realized
gains on sales of these securities were $1,622,000 and $803,000 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.
7
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 $283,000 and $265,000 for the three-month periods ended March
31, 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 March 31, 2000, the Company owned 8.5% of Midwest Wireless Communications
LLC.
Income from the Company's Wireless North LLC PCS investments was $14,000 in the
first quarter of 2000 compared to a loss of $446,000 in the first quarter 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 March 31, 2000, the Company owned 10.7% of
Wireless North LLC.
The Company made additional cash investments of $183,000 and $668,000 in the
respective 2000 and 1999 periods to support the operations of its wireless
investments. Cash distributions received from cellular telephone investments
were $198,000 and $161,000 in 2000 and 1999, respectively.
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 is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999
Hector Alliance Consolidated Hector Alliance Consolidated
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,270,452 $ 6,217,264 $ 8,487,716 $ 2,005,440 $ 6,314,119 $ 8,319,559
Costs and expenses 1,793,081 4,497,144 6,290,225 1,637,751 3,855,681 5,493,432
----------- ------------ ------------ ----------- ------------ ------------
Operating income 477,371 1,720,120 2,197,491 367,689 2,458,438 2,826,127
Interest expense (257,690) (1,275,322) (1,533,012) (396,006) (1,276,702) (1,672,708)
Interest and dividend income 79,074 304,248 383,322 40,874 153,552 194,426
Gain on sale of marketable securities 1,622,191 1,622,191 803,364 803,364
Partnership and LLC income (loss) 174,812 98,247 273,059 (92,228) (72,800) (165,028)
----------- ------------ ------------ ----------- ------------ ------------
Income before income taxes $ 473,567 $ 2,469,484 $ 2,943,051 $ (79,671) $ 2,065,852 $ 1,986,181
=========== ============ ============ =========== ============ ============
Depreciation and Amortization $ 702,612 $ 1,653,755 $ 2,356,367 $ 607,805 $ 1,385,841 $ 1,993,646
=========== ============ ============ ============ ============ ============
Capital Expenditures $ 289,579 $ 799,678 $ 1,089,257 $ 255,530 $ 425,838 $ 681,368
=========== ============ ============ =========== ============ ============
Total Assets $29,326,117 $132,706,880 $162,032,997 $26,186,764 $125,384,231 $151,570,995
=========== ============ ============ =========== ============ ============
</TABLE>
8
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000 Compared to
Three Months Ended March 31, 1999
Hector Communications Corporation ("HCC") owns a 100% interest in five local
exchange telephone subsidiaries and one cable television subsidiary. At March
31, 2000, these subsidiaries provided telephone service to 7,281 customers in 9
rural communities in Minnesota and Wisconsin. They also owned 30 cable
television systems serving 4,912 customers in 36 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. (formerly MEANS).
HCC owns a 68% interest in Alliance Telecommunications Corporation ("Alliance").
At March 31, 2000, Alliance, through its five local exchange telephone
subsidiaries, provided telephone service to 28,767 customers in 26 rural
communities in Minnesota, South Dakota and Iowa. Alliance's 16 cable television
systems provided cable television services to 8,180 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.
Consolidated revenues increased 2% from $8,320,000 in 1999 to $8,488,000 in
2000. The revenue breakdown by operating group was as follows:
Alliance Hector
Three Months Ended March 31 Three Months Ended March 31
2000 1999 2000 1999
---------- ---------- ---------- ----------
Local network $1,071,415 $ 954,762 $ 419,969 $ 390,787
Network access 3,559,983 3,766,263 1,291,521 1,113,555
Billing and collection 103,841 153,874 37,876 40,024
Nonregulated activities 886,680 863,882 146,311 109,033
Cable television 595,345 575,338 374,775 352,041
---------- ---------- ---------- ----------
$6,217,264 $6,314,119 $2,270,452 $2,005,440
========== ========== ========== ==========
Consolidated local service revenues increased $146,000 or 11%. The increase was
due to growth in access lines served (36,048 at March 31, 2000) and increased
extended area service (EAS) revenues. 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 and increased demand for
telephone lines to provide advanced telephone services such as internet
services. Network access revenues decreased $28,000 or 1%. 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.
Access revenues for Hector's wholly owned subsidiaries benefited from increased
universal service funds.
Nonregulated revenues increased $60,000 or 6% due to increased internet
subscriber revenues. The Company now has more than 2,500 internet customers.
Cable television revenues increased $43,000 or 5% due to rate increases charged
to customers. Billing and collection revenues decreased $52,000.
Consolidated operating costs and expenses grew from $5,493,000 in 1999 to
$6,290,000 in 2000, an increase of $797,000 or 15%. Costs and expenses by
operating group were as follows:
9
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Alliance Hector
Three Months Ended March 31 Three Months Ended March 31
2000 1999 2000 1999
---------- ---------- ---------- ----------
Plant operations $ 897,451 $ 827,573 $ 295,391 $ 277,182
Depreciation and amortization 1,653,755 1,385,841 702,612 607,805
Customer operations 389,546 401,323 76,822 76,927
General and administrative 984,956 856,571 355,196 365,948
Other operating expenses 571,436 384,373 363,060 09,889
---------- ---------- ---------- ----------
$4,497,144 $3,855,681 $1,793,081 $1,637,751
========== ========== ========== ==========
Consolidated plant operations expenses increased $88,000 or 8%, due to increases
in the Company's customer base. Depreciation and amortization increased $363,000
or 18% due to depreciation on new plant additions and shorter useful lives on
telephone switching equipment. Customer operations expenses decreased $12,000,
or 2%. General and administrative expenses increased $118,000 or 10%. Other
operating expenses increased $240,000 or 35% due to increased cable television
expenses and increased internet service expenses. Consolidated operating income
decreased $629,000 or 22%.
Interest expenses decreased $140,000 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
which reduced the Company's long-term debt.
Alliance had gains on sales of marketable securities of $1,622,000 and $803,000
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 $189,000 due to investment of the
proceeds from the marketable securities sales. The Company had income from
partnership and LLC investments of $273,000 for the 2000 period compared to
losses of $165,000 in 1999 (Note 3).
Income before income taxes increased from $1,986,000 in 1999 to $2,943,000 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 45% from $1,136,000 in 1999 to $1,643,000 in 2000. Minority interests
in earnings of Alliance were $438,000 compared to $381,000 in 1999. Net income
increased 59% to $1,205,000 in 2000 compared to $755,000 in 1999.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the three-month periods
were $999,000 and $885,000 in 2000 and 1999, respectively. The increase in
operating cash flow was due to increased net income, increased noncash expenses
and increased accounts payable which offset increases in accounts receivable and
decreases in income taxes payable and deferred income taxes. At March 31, 2000,
the Company's cash, cash equivalents, short-term investments and marketable
securities totaled $31,476,000 compared to $39,274,000 at December 31, 1999.
Alliance's cash and securities were $24,334,000 of this total. Working capital
at March 31, 2000 was $14,592,000 compared to $18,736,000 at December 31, 1999.
The current ratio was 2.1 to 1 at March 31, 2000.
10
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 three-month periods were $290,000 and $255,000,
respectively. Alliance's plant additions in the same periods were $800,000 and
$426,000, 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 ($2,647,000 of which was receivable at March 31, 2000). In
the first quarter of 1999, Alliance received $1,134,000 from sales of Media One
Group, Inc. common stock. Proceeds from these sales have been invested in mutual
funds and interest bearing bank accounts, pending the need for funds in the
Company's operations.
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 $767,000 from issuances of common stock in the first
quarter 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 as of March 31, 2000. In March 2000, a subsidiary
of Alliance purchased 171,425 shares of the Company's common stock at market
price of $2,486,000.
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
1998, the Company acquired Felton Telephone Company and eight cable television
systems from Spectrum Cablevision Limited Partnership. 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.
- --------------------------------------------------------------------------------
11
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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). Exhibits and Reports on Form 8-K.
- ---------------------------------------------
None.
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: May 15, 2000
12
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended March 31
-------------------------------
Basic: 2000 1999
- ------- ----------- ----------
Net income $ 1,204,816 $ 755,424
=========== ==========
Common shares:
Weighted average number of commo
shares outstanding 3,630,584 2,662,756
=========== ==========
Net income per common share $ .33 $ .28
=========== ==========
Diluted:
- -------------
Net income $ 1,204,816 $ 755,424
Interest on convertible debentures 119,160
----------- ----------
Adjusted net income $ 1,204,816 $ 874,584
=========== ==========
Common and common equivalent shares:
Weighted average number of common
shares outstanding 3,630,584 2,662,756
Assumed conversion of convertible
debentures into common stock 894,150
Dilutive effect of convertible preferred
shares outstanding 221,700 342,800
Dilutive effect of stock options outstanding
after application of treasury stock method 112,800 32,577
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 2,517 3,402
Dilutive effect of warrants outstanding 1,173
----------- ----------
3,967,601 3,936,858
=========== ==========
Diluted net income per share $ .30 $ .22
=========== ==========
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000863437
<NAME> HECTOR COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 19,260,025
<SECURITIES> 0
<RECEIVABLES> 7,608,779
<ALLOWANCES> 0
<INVENTORY> 657,761
<CURRENT-ASSETS> 27,910,306
<PP&E> 85,709,692
<DEPRECIATION> 35,163,063
<TOTAL-ASSETS> 161,237,585
<CURRENT-LIABILITIES> 13,318,770
<BONDS> 84,818,656
0
221,700
<COMMON> 36,789
<OTHER-SE> 38,292,972
<TOTAL-LIABILITY-AND-EQUITY> 161,237,585
<SALES> 8,487,716
<TOTAL-REVENUES> 8,487,716
<CGS> 6,290,225
<TOTAL-COSTS> 6,290,225
<OTHER-EXPENSES> (2,278,572)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,533,012
<INCOME-PRETAX> 2,943,051
<INCOME-TAX> 1,300,000
<INCOME-CONTINUING> 1,643,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,204,816
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.30
</TABLE>
