-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EGtL7vxHem7dc5tliKQ8IdKnmez/7rCr7yxlbHElzjhFaVoCCPFNs6aMH7L+cRXn TpGYpkekSyB/JKF/n9CO0Q== 0000863437-00-000002.txt : 20000516 0000863437-00-000002.hdr.sgml : 20000516 ACCESSION NUMBER: 0000863437-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HECTOR COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000863437 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 411666660 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13891 FILM NUMBER: 634117 BUSINESS ADDRESS: STREET 1: 211 S MAIN ST STREET 2: P O BOX 428 CITY: HECTOR STATE: MN ZIP: 55342 BUSINESS PHONE: 6128486611 MAIL ADDRESS: STREET 1: P O BOX 428 STREET 2: 211 S MAIN ST CITY: HECTOR STATE: MN ZIP: 55342 10-Q 1 HCT FORM 10Q (3/31/00) - -------------------------------------------------------------------------------- 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 ----------------- --------------------- 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 April 30, 2000 - ------------------------ ----------------------------- Common Stock, par value 3,680,051 $.01 per share Total Pages (13) Exhibit at Page 13 - -------------------------------------------------------------------------------- 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 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 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 ------------- ------------- 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) ------------- ------------- 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 ------------- ------------- Income before minority interest 1,643,051 1,136,181 Minority interest in earnings of Alliance Telecommunications Corporation 438,235 380,757 ------------- ------------- Net income $ 1,204,816 $ 755,424 ------------- ------------- 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) ------------- ------------- 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) ------------- ------------- Other comprehensive income (loss) (1,013,491) 140,732 ------------- ------------- 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
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 ------- -------- --------- ------- ----------- ----------- ----------- ---------- ----------- 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.
5 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31 ------------------------------ 2000 1999 ------------- ------------- 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) ------------- ------------- Net cash provided by (used in) financing activities (3,094,638) 47,255 ------------- ------------- 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 ------------- ------------- 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 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 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:
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999 Hector Alliance Consolidated Hector Alliance Consolidated ----------- ------------ ------------ ----------- ------------ ------------ 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 =========== ============ ============ =========== ============ ============
8 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 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 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 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 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 EX-27.1 2 ARTICLE 5 FDS FOR MARCH 31, 2000 FORM 10-Q
5 0000863437 HECTOR COMMUNICATIONS CORPORATION 1 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-1999 MAR-31-2000 1 19,260,025 0 7,608,779 0 657,761 27,910,306 85,709,692 35,163,063 161,237,585 13,318,770 84,818,656 0 221,700 36,789 38,292,972 161,237,585 8,487,716 8,487,716 6,290,225 6,290,225 (2,278,572) 0 1,533,012 2,943,051 1,300,000 1,643,051 0 0 0 1,204,816 0.33 0.30
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