10-Q 1 hct2q01.txt HECTOR COMMUNICATIONS CORP. FORM 10-Q (6/30/01) -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2001 -------------------------------------------------- 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, 2001 ------------------------- ----------------------------- Common Stock, par value 3,445,512 $.01 per share Total Pages (17) Exhibit at Page 17 -------------------------------------------------------------------------------- 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 16 2 PART I. FINANCIAL INFORMATION HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (unaudited) June 30 December 31 Assets: 2001 2000 ------------ ------------ Current assets: Cash and cash equivalents $ 11,975,231 $ 13,834,110 Construction fund 299,149 317,837 Accounts receivable, net 5,148,914 5,548,622 Materials, supplies and inventories 1,678,662 825,673 Prepaid expenses 137,781 302,704 ------------ ------------ Total current assets 19,239,737 20,828,946 Property, plant and equipment 101,068,564 97,311,532 less accumulated depreciation (45,146,734) (41,085,007) ------------ ------------ Net property, plant and equipment 55,921,830 56,226,525 Other assets: Excess of cost over net assets acquired, net 54,568,530 55,475,430 Marketable securities 2,626,997 2,895,272 Wireless telephone investments 12,721,675 12,509,975 Other investments 11,787,388 10,527,727 Other assets 158,778 214,106 ------------ ------------ Total other assets 81,863,368 81,622,510 ------------ ------------ Total Assets $ 157,024,935 $ 158,677,981 ============ ============ Liabilities and Stockholders' Equity: Current liabilities: Notes payable and current portion of long-term debt $ 6,592,600 $ 6,337,200 Accounts payable 2,251,496 2,664,520 Accrued expenses 2,287,230 2,479,779 Income taxes payable 598,603 387,100 ------------ ------------ Total current liabilities 11,729,929 11,868,599 Long-term debt, less current portion 81,497,241 84,378,149 Deferred investment tax credits 38,897 79,668 Deferred income taxes 6,496,000 6,603,310 Deferred compensation 857,550 904,071 Minority stockholders interest in Alliance Telecommunications Corp. 16,402,138 15,736,317 Stockholders' Equity 40,003,180 39,107,867 ------------ ------------ Total Liabilities and Stockholders' Equity $ 157,024,935 $ 158,677,981 ============ ============ See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) Three Months Ended June 30 Six Months Ended June 30 ------------------------------- -------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: Local network $ 1,805,297 $ 1,666,845 $ 3,502,498 $ 3,158,229 Network access 5,710,695 5,317,658 11,334,185 10,169,162 Nonregulated activities 1,693,203 1,360,886 3,269,545 2,535,594 Cable television revenues 1,037,204 997,477 2,025,012 1,967,597 ------------ ------------ ------------ ------------ Total revenues 10,246,399 9,342,866 20,131,240 17,830,582 Costs and expenses: Plant operations 1,598,611 1,283,130 2,944,469 2,475,972 Depreciation and amortization 2,686,331 2,473,295 5,396,550 4,829,662 Customer operations 642,158 555,995 1,283,097 1,022,363 General and administrative 1,226,732 1,390,371 2,420,050 2,730,523 Other operating expenses 1,703,292 866,903 3,057,920 1,801,399 ------------ ------------ ------------ ------------ Total costs and expenses 7,857,124 6,569,694 15,102,086 12,859,919 Operating income 2,389,275 2,773,172 5,029,154 4,970,663 Other income and (expenses): Interest expense (1,392,445) (1,560,445) (2,787,304) (3,093,457) Gain on sales of marketable securities 1,323,145 1,323,145 1,622,191 Interest and dividend income 135,777 326,093 305,402 709,415 Income from investments in unconsolidated affiliates 344,877 455,023 740,361 728,082 ------------ ------------ ------------ ------------ Other income (expense), net 411,354 (779,329) (418,396) (33,769) Income before income taxes 2,800,629 1,993,843 4,610,758 4,936,894 Income tax expense 1,209,000 851,000 2,068,000 2,151,000 ------------ ------------ ------------ ------------ Income before minority interest 1,591,629 1,142,843 2,542,758 2,785,894 Minority interest in earnings of Alliance Telecommunications Corporation 454,190 292,129 711,653 730,364 ------------ ------------ ------------ ------------ Net income $ 1,137,439 $ 850,714 $ 1,831,105 $ 2,055,530 ------------ ------------ ------------ ------------ Other comprehensive loss: Unrealized holding gains (losses) on marketable securities 1,363,394 255,494 1,054,870 (606,507) Less: reclassification adjustment for gains included in net income (1,323,145) (1,323,145) (1,622,191) ------------ ------------ ------------ ------------ Other comprehensive income (loss) before income taxes 40,249 255,494 (268,275) (2,228,698) Income tax benefit related to unrealized holding gains (losses) on marketable securities 545,356 108,582 421,948 (236,793) Income tax benefit related to reclassification adjustment for gains included in net income (529,258) (529,258) (649,956) Minority interest in other comprehensive loss of Alliance Telecommunications Corporation 6,336 49,085 (45,830) (426,285) ------------ ------------ ------------ ------------ Other comprehensive income (loss) 17,815 97,827 (115,135) (915,664) ------------ ------------ ------------ ------------ Comprehensive income $ 1,155,254 $ 948,541 $ 1,715,970 $ 1,139,866 ============ ============ ============ ============ Basic net income per share $ .33 $ .24 $ .53 $ .58 Diluted net income per share $ .30 $ .22 $ .49 $ .53 See notes to consolidated financial statements.
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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 --------- -------- --------- --------- ----------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 1999 229,300 $229,300 3,574,712 $35,747 $13,274,444 $23,115,945 $3,326,482 $39,981,918 Net income 3,309,423 3,309,423 Issuance of common stock under Employee Stock Purchase Plan 10,742 108 115,167 115,275 Issuance of common stock under Employee Stock Option Plan 37,620 376 266,813 267,189 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 (221,950) (2,219) (1,672,908) (1,479,856) (3,154,983) Change in unrealized gains on marketable securities, net of deferred taxes (2,265,247) (2,265,247) --------- -------- --------- --------- ----------- ----------- ---------- ----------- BALANCE AT DECEMBER 31, 2000 221,300 221,300 3,504,363 35,044 12,844,776 24,945,512 1,061,235 39,107,867 Net income 1,831,105 1,831,105 Issuance of common stock under Employee Stock Option Plan 31,775 318 207,894 208,212 Issuance of common stock to ESOP 8,709 87 91,906 91,993 Purchase and retirement of common stock (99,335) (994) (368,322) (751,546) (1,120,862) Change in unrealized gains on marketable securities, net of deferred taxes (115,135) (115,135) --------- -------- --------- --------- ----------- ----------- ---------- ----------- BALANCE AT June 30, 2001 221,300 $221,300 3,445,512 $34,445 $12,776,254 $26,025,071 $ 946,100 $40,003,180 ========= ======== ========= ========= =========== =========== ========== =========== See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30 ----------------------------- 2001 2000 ----------- ----------- Cash Flows from Operating Activities: Net income $ 1,831,105 $ 2,055,530 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,396,550 4,829,662 Minority stockholders' interest in earnings of Alliance Telecommunications Corporation 711,653 730,364 Gain on sales of marketable securities (1,323,145) (1,622,191) Income from unconsolidated affiliates (740,361) (728,082) Proceeds from wireless telephone investments 413,161 742,691 Changes in assets and liabilities net of effects from the purchase of Hager TeleCom, Inc.: Decrease in accounts receivable 399,708 53,610 Increase in materials, supplies and inventories (852,989) (67,642) Decrease in prepaid expenses 164,923 107,493 Decrease in accounts payable (413,024) (446,873) Increase (decrease) in accrued expenses (100,556) 5,539 Increase (decrease) in income taxes payable 211,503 (3,121,116) Decrease in deferred investment credits (40,771) (46,384) Decrease in deferred taxes (479,406) Increase (decrease) in deferred compensation (46,521) 3,479 ----------- ----------- Net cash provided by operating activities 5,611,236 2,016,674 Cash Flows from Investing Activities: Capital expenditures, net (4,176,370) (3,736,267) Sales of marketable securities 1,323,145 9,910,447 Purchases of marketable securities (4,506,003) Decrease (increase) in construction fund 18,688 (1,170) Purchases of wireless telephone investments (16,876) (183,273) Purchases of other investments (1,127,286) (1,552,630) Decrease (increase) in other assets 46,742 (21,421) Payment for purchase of Hager Telecom, Inc., net of cash acquired (8,532,392) ----------- ----------- Net cash used in investing activities (3,931,957) (8,622,709) Cash Flows from Financing Activities: Repayment of long-term debt (3,095,508) (2,798,713) Proceeds from issuance of notes payable and long-term debt 470,000 Issuance of common stock 208,212 1,001,651 Purchase of stock (1,120,862) (2,942,884) ----------- ----------- Net cash used in financing activities (3,538,158) (4,739,946) ----------- ----------- Net Decrease in Cash and Cash Equivalents (1,858,879) (11,345,981) Cash and Cash Equivalents at Beginning of Period 13,834,110 27,055,772 ----------- ----------- Cash and Cash Equivalents at End of Period $ 11,975,231 $ 15,709,791 =========== =========== Supplemental disclosures of cash flow information: Interest paid during the period $ 2,795,324 $ 1,582,316 Income taxes paid during the period 1,897,232 5,348,598 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 June 30, 2001 and the statements of income and comprehensive income and the statements of cash flows for the periods ended June 30, 2001 and 2000 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 June 30, 2001 and 2000 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, 2000 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 2000 financial statements have been reclassified to conform to the 2001 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 June 30, 2001 $ 277,444 $ 2,363,683 $ (14,130) $ 2,626,997 December 31, 2000 277,444 2,630,212 (12,384) 2,895,272 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, 2001 $ 2,349,553 $ (970,576) $ (432,877) $ 946,100 December 31, 2000 2,617,828 (1,077,886) (478,707) 1,061,235 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 $1,323,000 and $9,910,000 in the six-month periods ended June 30, 2001 and 2000, respectively. Gross realized gains on sales of securities were $1,323,000 and $1,622,000 in the respective 2001 and 2000 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 $625,000 and $675,000 for the six-month periods ended June 30, 2001 and 2000 respectively. At June 30, 2001, the Company owned 10.4% of Midwest Wireless Holdings LLC. Losses from the Company's Wireless North LLC PCS investments were $17,000 in the first half of 2001 compared to income of $14,000 in the first half of 2000. The Company suspended use of the equity method of accounting for these investments when its recorded losses equaled the total of its cash investments and loan guarantees. As a result, the Company has unrecorded losses of approximately $2,000,000 on its investment. At June 30, 2001, the Company owned 10.4% of Wireless North LLC. The Company made additional cash investments of $17,000 and $183,000 in the respective 2001 and 2000 periods to support the operations of its wireless investments. Cash distributions received from wireless telephone investments were $413,000 and $743,000 in 2001 and 2000, 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 - ACQUISITIONS 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 $ 3,819,916 Excess of cost over net assets acquired 5,809,643 Wireless telephone investments 2,500,000 Long-term debt (3,612,396) Deferred income taxes (281,872) Other assets and liabilities 978,961 Net assets acquired 9,214,252 Less cash and cash equivalents acquired (681,860) -------------- Payment for Hager TeleCom, Inc. net of cash acquired $ 8,532,392 ============== 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. 8 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTE 6 - 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:
Hector Alliance Consolidated Six Months Ended June 30, 2001 ---------------- ---------------- ---------------- Revenues $ 4,720,013 $ 15,411,227 $ 20,131,240 Costs and expenses 4,001,093 11,100,993 15,102,086 ---------------- ---------------- Operating income 718,920 4,310,234 5,029,154 Interest expense (488,315) (2,298,989) (2,787,304) Interest and dividend income 136,426 168,976 305,402 Gain on sale of marketable securities 1,323,145 1,323,145 Income from unconsolidated affiliates 195,810 544,551 740,361 ---------------- ---------------- ---------------- Income before income taxes $ 562,841 $ 4,047,917 $ 4,610,758 ================ ================ ================ Depreciation and amortization $ 1,565,248 $ 3,831,302 $ 5,396,550 ================ ================ ================ Total assets $ 28,739,174 $ 128,285,761 $ 157,024,935 ================ ================ ================ Capital expenditures $ 1,223,811 $ 2,952,559 $ 4,176,370 ================ ================ ================ Hector Alliance Consolidated Six Months Ended June 30, 2000 Revenues $ 4,616,583 $ 13,213,999 $ 17,830,582 Costs and expenses 3,748,971 9,110,948 12,859,919 ---------------- ---------------- ---------------- Operating income 867,612 4,103,051 4,970,663 Interest expense (499,382) (2,594,075) (3,093,457) Interest and dividend income 167,973 541,442 709,415 Gain on sale of marketable securities 1,622,191 1,622,191 Income from unconsolidated affiliates 324,303 403,779 728,082 ---------------- ---------------- ---------------- Income before income taxes $ 860,506 $ 4,076,388 $ 4,936,894 ================ ================ ================ Depreciation and amortization $ 1,403,423 $ 3,426,239 $ 4,829,662 ================ ================ ================ Total assets $ 28,452,670 $ 134,222,992 $ 162,675,662 ================ ================ ================ Capital expenditures $ 525,070 $ 3,211,197 $ 3,736,267 ================ ================ ================
9 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Hector Alliance Consolidated Three Months Ended June 30, 2001 Revenues $ 2,404,772 $ 7,841,627 $ 10,246,399 Costs and expenses 2,051,160 5,805,964 7,857,124 ---------------- ---------------- ---------------- Operating income 353,612 2,035,663 2,389,275 Interest expense (240,538) (1,151,907) (1,392,445) Interest and dividend income 59,218 76,559 135,777 Gain on sale of marketable securities 1,323,145 1,323,145 Income from unconsolidated affiliates 130,993 213,884 344,877 ---------------- ---------------- ---------------- Income before income taxes $ 303,285 $ 2,497,344 $ 2,800,629 ================ ================ ================ Depreciation and amortization $ 782,624 $ 1,903,707 $ 2,686,331 ================ ================ ================ Capital expenditures $ 711,138 $ 2,323,262 $ 3,034,400 ================ ================ ================ Hector Alliance Consolidated Three Months Ended June 30, 2000 Revenues $ 2,346,131 $ 6,996,735 $ 9,342,866 Costs and expenses 1,955,890 4,613,804 6,569,694 ---------------- ---------------- ---------------- Operating income 390,241 2,382,931 2,773,172 Interest expense (241,692) (1,318,753) (1,560,445) Interest and dividend income 88,899 237,194 326,093 Income from unconsolidated affiliates 149,491 305,532 455,023 ---------------- ---------------- ---------------- Income before income taxes $ 386,939 $ 1,606,904 $ 1,993,843 ================ ================ ================ Depreciation and amortization $ 700,811 $ 1,772,484 $ 2,473,295 ================ ================ ================ Capital expenditures $ 235,491 $ 2,411,519 $ 2,647,010 ================ ================ ================
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------- Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 ------------------------------ Hector Communications Corporation ("HCC" or "Company") is a telecommunications holding company which, through its wholly-owned and majority-owned subsidiaries, primarily provides local telephone and cable television service. The Company also invests in other companies providing wireless telephone and other telecommunications related services. HCC operates five wholly-owned local exchange company subsidiaries (generally referred to as "local exchange carriers" or "LECs") which served 7,487 access lines in 9 rural communities in Minnesota and Wisconsin at June 30, 2001. HCC, through its subsidiaries, also provides cable television service to 4,805 subscribers in Minnesota and Wisconsin. HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns and operates six additional LEC subsidiaries which served 31,349 access lines in 28 rural communities in Minnesota, Wisconsin, Iowa and South Dakota at June 30, 2001. Alliance, through its subsidiaries, also served 8,923 cable television subscribers in Minnesota, North Dakota and South Dakota. Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota, and Split Rock Telecom Cooperative, Inc. of Garretson, South Dakota own the remaining interests in Alliance. 10 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Consolidated revenues increased 13% from $17,831,000 in 2000 to $20,131,000 in 2001. The revenue breakdown by operating group was as follows:
Hector Alliance ----------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- --------------- -------------- -------------- Local network $ 774,758 $ 860,292 $ 2,727,740 $ 2,297,937 Network access 2,690,133 2,545,407 8,644,052 7,623,755 Nonregulated activities 536,588 462,613 2,732,957 2,072,981 Cable television 718,534 748,271 1,306,478 1,219,326 --------------- --------------- -------------- -------------- $ 4,720,013 $ 4,616,583 $ 15,411,227 $ 13,213,999 --------------- --------------- -------------- --------------
Consolidated local service revenues increased $344,000 or 11%. The increase was due to growth in access lines served (38,836 at June 30, 2001). Access line growth was due to the acquisition of Hager TeleCom in June 2000, increased development within the Company's service areas and increased demand for telephone lines to provide advanced telephone services such as internet services. Hector's local network revenues declined due to rate reductions in Wisconsin exchanges mandated by the public service commission. Network access revenues increased $1,165,000 or 11% due to increased usage of the phone network and the acquisition of Hager TeleCom. Nonregulated revenues increased $734,000 or 29%. The Company's nonregulated revenues come from a variety of sources, including internet services, leases of fiber optic transport facilities, retail sales of telecommunications equipment, engineering fees, directory services, billing and collections services provided to IXCs and resale of long distance services. At June 30, 2001, the Company had 9,286 internet customers. Cable television revenues increased $57,000 or 3%. Consolidated operating costs and expenses grew from $12,860,000 in 2000 to $15,102,000 in 2001, an increase of $2,242,000 or 17%. Costs and expenses by operating group were as follows:
Hector Alliance ----------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- --------------- -------------- -------------- Plant operations $ 743,483 $ 600,123 $ 2,200,986 $ 1,875,849 Depreciation and amortization 1,565,248 1,403,423 3,831,302 3,426,239 Customer operations 178,012 152,651 1,105,085 869,712 General and administrative 775,691 884,001 1,644,359 1,846,522 Other operating expenses 738,659 708,773 2,319,261 1,092,626 --------------- --------------- -------------- -------------- $ 4,001,093 $ 3,748,971 $ 11,100,993 $ 9,110,948 --------------- --------------- -------------- --------------
Consolidated plant operations expenses increased $468,000 or 19%, due to increases in the Company's customer base. Depreciation and amortization increased $567,000 or 12% due to depreciation on new plant additions and shorter useful lives on telephone switching equipment. Customer operations expenses increased $261,000, or 26%. General and administrative expenses decreased $310,000 or 11%. Other operating expenses increased $1,231,000 or 70% due to the acquisition of Hager TeleCom. Consolidated operating income increased $58,000 or 1%. Interest expense decreased $306,000 due to patronage refunds accrued on interest payments made by the Company to CoBank. Interest expenses also decreased due to principal payments made which reduced the Company's long-term debt. Interest and dividend income decreased $404,000 due to lower cash balances available for investment. 11 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES The Company had income from its partnership and LLC investments of $740,000 for the 2001 period compared to income of $728,000 in 2000 (Note 3). Alliance had gains on sales of marketable securities of $1,323,000 and $1,622,000 in 2001 and 2000, respectively. Income before income taxes decreased to $4,611,000 in 2001 from $4,937,000 in 2000. The Company's effective income tax rate of 45% is higher than the standard U.S. tax rate due to state income taxes and the effect of nondeductible amortization expenses. Income before minority interest in Alliance's earnings decreased to $2,543,000 in 2001 from $2,786,000 in 2000. Minority interests in earnings of Alliance were $712,000 compared to $730,000 in 2000. Net income decreased 11% to $1,831,000 in 2001 compared to $2,056,000 in 2000. Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 -------------------------------- Consolidated revenues increased 10% from $9,343,000 in 2000 to $10,246,000 in 2001. The revenue breakdown by operating group was as follows:
Hector Alliance ----------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- --------------- -------------- -------------- Local network $ 392,941 $ 440,323 $ 1,412,356 $ 1,226,522 Network access 1,379,352 1,253,886 4,331,343 4,063,772 Nonregulated activities 270,650 278,426 1,422,553 1,082,460 Cable television 361,829 373,496 675,375 623,981 --------------- --------------- -------------- -------------- $ 2,404,772 $ 2,346,131 $ 7,841,627 $ 6,996,735 --------------- --------------- -------------- --------------
Consolidated local service revenues increased $138,000 or 8%. The increase was due to growth in access lines served (38,836 at June 30, 2001). Access line growth was due to the acquisition of Hager TeleCom, increased development within the Company's service areas and increased demand for telephone lines to provide advanced telephone services such as internet services. Hector's local network revenues declined due to rate reductions in Wisconsin exchanges mandated by the public service commission. Network access revenues increased $393,000 or 7% due to increased usage of the phone network and the acquisition of Hager TeleCom. Consolidated nonregulated revenues increased $332,000 or 24%. Hector's nonregulated revenues decreased slightly due to price competition for internet customers. Alliance's nonregulated revenues increased due to the acquisition of Hager TeleCom. Cable television revenues increased $40,000 or 4%. Hector's cable television revenues decreased slightly due to competition from satellite television suppliers in rural areas. Consolidated operating costs and expenses grew from $6,570,000 in 2000 to $7,857,000 in 2001, an increase of $1,287,000 or 20%. Costs and expenses by operating group were as follows:
Hector Alliance ----------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- --------------- -------------- -------------- Plant operations $ 395,066 $ 304,732 $ 1,203,545 $ 978,398 Depreciation and amortization 782,624 700,811 1,903,707 1,772,484 Customer operations 93,776 75,829 548,382 480,166 General and administrative 394,024 528,805 832,708 861,566 Other operating expenses 385,670 345,713 1,317,622 521,190 --------------- --------------- -------------- -------------- $ 2,051,160 $ 1,955,890 $ 5,805,964 $ 4,613,804 --------------- --------------- -------------- --------------
12 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Consolidated plant operations expenses increased $315,000 or 25%, due to increases in the Company's customer base. Depreciation and amortization increased $213,000 or 9% due to depreciation on new plant additions and shorter useful lives on telephone switching equipment. Customer operations expenses increased $86,000, or 15%. General and administrative expenses decreased $164,000 or 12%. Other operating expenses increased $836,000 or 96% due to the acquisition of Hager TeleCom. Consolidated operating income decreased $384,000 or 14%. Interest expenses decreased $168,000 due to patronage accruals on interest payments made by the Company to CoBank. Interest expenses also decreased due to principal payments made which reduced the Company's long-term debt. Interest and dividend income decreased $190,000 due to lower cash balances available for investment. The Company had income from its partnership and LLC investments of $345,000 for the 2001 period compared to income of $455,000 in 2000 (Note 3). Alliance had gains on sales of marketable securities of $1,323,000 in 2001. Income before income taxes increased to $2,801,000 in 2001 from $1,994,000 in 2000. The Company's effective income tax rate of 43% 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 to $1,592,000 in 2001 from $1,143,000 in 2000. Minority interests in earnings of Alliance were $454,000 compared to $292,000 in 2000. Net income increased 34% to $1,137,000 in 2001 compared to $851,000 in 2000. Liquidity and Capital Resources ------------------------------- Cash flows from consolidated operating activities for the six-month periods were $5,611,000 and $2,017,000 in 2001 and 2000, respectively. Cash flow from operations in the 2000 period was adversely affected by income tax payments on marketable securities sales made in the fourth quarter of 1999. The increase in operating cash flow was due to increased operating income and increased noncash expenses which offset increases in materials and supplies. At June 30, 2001, the Company's cash, cash equivalents and marketable securities totaled $14,602,000 compared to $16,729,000 at December 31, 2000. Alliance's cash and securities were $9,103,000 of this total. Working capital at June 30, 2001 was $7,510,000 compared to $8,960,000 at December 31, 2000. The current ratio was 1.6 to 1 at June 30, 2001. 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 2001 and 2000 six-month periods were $1,224,000 and $525,000, respectively. Alliance's plant additions in the same periods were $2,953,000 and $3,211,000, respectively. Alliance's plant additions for 2001 included the acquisition of 700 cable television customers in South Dakota. Plant additions for 2001 for Hector and Alliance are expected to total $4,530,000 and $7,109,000, respectively, and will provide customers with additional advanced telecommunications 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 2001 Alliance sold 41,000 shares of Illuminet Holdings for $1,323,000. In 2000, Alliance sold 51,000 shares of U.S. West Communications, Inc. for $3,652,000. 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 have incurred significant losses. At June 30, 2001, the Company had invested $2,090,000 of 13 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES cash and guaranteed $1,091,000 of debt in Wireless North. Due to the lack of success of Wireless North's operations, Wireless North's assets are in the process of being sold to a number of buyers. The Company believes it will be necessary to pay its loan guarantees to Wireless North's lender in cash. The Company is an investor in partnerships that provide fiber optic transport facilities to other telecommunications companies. The Company also leases some of its own fiber optic facilities to transport users. Due to lower than expected demand and an increased supply of fiber, the Company and its partners being pressured to renegotiate the prices charged for use of their facilities. The Company expects the results of these negotiations to negatively effect it financial results in future periods, but cannot presently estimate the effect price changes will have. The Company has been notified by Golden West Telecommunications Cooperative, Inc. and Split Rock Telecom Cooperative, Inc. that they would like to exchange their minority interest in Alliance Telecommunications Corporation for a share of Alliance's assets. The Company has entered into discussions with its partners as to how this could be done on an equitable basis. The Company does not expect any split-off from its partners to occur before the end of 2001. The Company also does not know what effect a split-off would have on its financial position. In August 2000, the Company's Board of Directors authorized the purchase and retirement of up to 335,000 shares of the Company's stock in open market transactions or in private transactions consistent with overall market and financial conditions. During the first six months of 2001, the Company purchased and retired 99,335 shares of common stock. At June 30, 2001, 46,715 shares could be purchased under the remaining authorization. The Company received $208,000 from issuances of common stock in the first half of 2001. Cash receipts were principally due to exercises of stock options issued to employees. 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 2000, the Company acquired Hager TeleCom, Inc. In 1998, the Company acquired Felton Telephone Company and eight cable television systems from Spectrum Cablevision Limited Partnership. The Company cannot predict if it will be successful in acquiring additional properties in the future and does not currently have financing plans in place to pay for possible acquisitions. 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. 14 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES New Accounting Principles ------------------------- In July 2001, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired. Under this statement goodwill as well as other intangibles determined to have an infinite life will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. Statement No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The Statement is effective for the Company on January 1, 2002. The Company is currently assessing but has not yet determined the impact of the Statement on its financial position and results of operations. At June 30, 2001 and 2000 the Company had net goodwill of $54,569,000 and $56,266,000, respectively. Amortization expense recorded during the six-month periods ended June 30, 2001 and 2000 was $915,000 and $833,000, respectively. -------------------------------------------------------------------------------- From time to time in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders and the investing public, the Company may make statements regarding the Company's future financial performance. Such forward looking statements are subject to risks and uncertainties, including but not limited to, the effects of the Telecommunications Act, new technological developments which may reduce barriers for competitors entering the Company's local exchange or cable television markets, higher than expected expenses and other risks involving the telecommunications industry generally. All such forward-looking statements should be considered in light of such risks and uncertainties. -------------------------------------------------------------------------------- 15 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES 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 17, 2001 in Eden Prairie, MN. The total number of shares outstanding and entitled to vote at the meeting was 3,494,962 of which 3,329,636 were present either in person or by proxy. Shareholders re-elected board members James O. Ericson, Paul N. Hanson and Wayne E. Sampson to three-year terms expiring at the 2004 Annual Meeting of Shareholders. The vote for these board members was as follows: In Favor Abstaining James O. Ericson 3,259,112 70,524 Paul N. Hanson 3,255,173 74,462 Wayne E. Sampson 3,256,982 72,654 Board members continuing in office are Curtis A. Sampson and Steven H. Sjogren (whose terms expire at the 2002 Annual Meeting of Shareholders) and Robert L. Hammond and Paul A. Hoff (whose terms expire at the 2003 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 -------------------------------------------- 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: August 14, 2001 16
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 11 CALCULATION OF EARNINGS PER SHARE Three Months Ended June 30 Six Months Ended June 30 ----------------------------- ----------------------------- Basic: 2001 2000 2001 2000 ------- ---------- ---------- ---------- ---------- Net income $ 1,137,439 $ 850,714 $ 1,831,105 $ 2,055,530 ========== ========== ========== ========== Common shares: Weighted average number of common shares outstanding 3,483,915 3,516,681 3,482,707 3,573,631 ========== ========== ========== ========== Net income per common share $ .33 $ .24 $ .53 $ .58 ========== ========== ========== ========== Diluted: ------------- Net income $ 1,137,439 $ 850,714 $ 1,831,105 $ 2,055,530 ========== ========== ========== ========== Common and common equivalent shares: Weighted average number of common shares outstanding 3,483,915 3,516,681 3,482,707 3,573,631 Dilutive effect of convertible preferred shares outstanding 221,300 221,700 221,300 224,570 Dilutive effect of stock options outstanding after application of treasury stock method 49,616 91,735 41,753 98,900 Dilutive effect of Employee Stock Purchase Plan shares subscribed 657 2,655 181 2,284 ---------- ---------- ---------- ---------- 3,755,488 3,832,771 3,745,941 3,899,385 ========== ========== ========== ========== Diluted net income per share $ .30 $ .22 $ .49 $ .53 ========== ========== ========== ==========
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