- --------------------------------------------------------------------------------
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 SEPTEMBER 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 October 31, 2001
- ----------------------------------- -------------------------------
Common Stock, par value 3,468,921
$.01 per share
Total Pages (17) Exhibit at Page 17
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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)
September 30 December 31
Assets: 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 10,371,309 $ 13,834,110
Construction fund 500,243 317,837
Accounts receivable, net 7,820,670 5,548,622
Materials, supplies and inventories 1,743,419 825,673
Prepaid expenses 375,910 302,704
------------ ------------
Total current assets 20,811,551 20,828,946
Property, plant and equipment 103,649,846 97,311,532
less accumulated depreciation (47,441,514) (41,085,007)
------------ ------------
Net property, plant and equipment 56,208,332 56,226,525
Other assets:
Excess of cost over net assets acquired, net 54,116,224 55,475,430
Marketable securities 436,591 2,895,272
Wireless telephone investments 13,973,144 12,509,975
Other investments 11,949,406 10,527,727
Other assets 250,534 214,106
------------ ------------
Total other assets 80,725,899 81,622,510
------------ ------------
Total Assets $ 157,745,782 $ 158,677,981
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 6,495,400 $ 6,337,200
Accounts payable 2,388,369 2,664,520
Accrued expenses 2,198,655 2,479,779
Income taxes payable 1,719,329 387,100
------------ ------------
Total current liabilities 12,801,753 11,868,599
Long-term debt, less current portion 80,387,558 84,378,149
Deferred investment tax credits 24,377 79,668
Deferred income taxes 5,560,723 6,603,310
Deferred compensation 834,289 904,071
Minority stockholders interest in Alliance
Telecommunications Corp. 16,803,531 15,736,317
Stockholders' Equity 41,333,551 39,107,867
------------ ------------
Total Liabilities and Stockholders' Equity $ 157,745,782 $ 158,677,981
============ ============
See notes to consolidated financial statements.
3
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------- --------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Local network $ 1,819,726 $ 1,783,868 $ 5,322,224 $ 4,942,097
Network access 5,686,479 5,193,964 17,020,664 15,363,126
Nonregulated activities 1,824,145 1,779,491 5,093,690 4,315,085
Cable television revenues 1,055,776 1,001,070 3,080,788 2,968,667
-------------- ------------- ------------- -------------
Total revenues 10,386,126 9,758,393 30,517,366 27,588,975
Costs and expenses:
Plant operations 1,212,395 1,157,420 4,156,864 3,555,791
Depreciation and amortization 2,849,433 2,608,883 8,245,983 7,438,545
Customer operations 631,169 586,872 1,914,266 1,609,235
General and administrative 1,031,634 1,139,414 3,451,684 3,390,598
Other operating expenses 1,632,521 1,087,776 4,690,441 3,446,115
------------- ------------- ------------- -------------
Total costs and expenses 7,357,152 6,580,365 22,459,238 19,440,284
Operating income 3,028,974 3,178,028 8,058,128 8,148,691
Other income and (expenses):
Interest expense (1,326,627) (1,383,498) (4,113,931) (4,476,955)
Gain on sales of marketable securities 2,335,909 3,659,054 1,622,191
Interest and dividend income 127,648 234,741 433,050 944,156
Income from investments in unconsolidated
affiliates 704,842 443,886 1,445,203 1,171,968
------------- ------------- ------------- -------------
Other income (expense), net 1,841,772 (704,871) 1,423,376 (738,640)
Income before income taxes 4,870,746 2,473,157 9,481,504 7,410,051
Income tax expense 2,093,000 1,093,000 4,161,000 3,244,000
------------- ------------- ------------- -------------
Income before minority interest 2,777,746 1,380,157 5,320,504 4,166,051
Minority interest in earnings of
Alliance Telecommunications Corporation 809,196 353,107 1,520,849 1,083,471
------------- ------------- ------------- -------------
Net income $ 1,968,550 $ 1,027,050 $ 3,799,655 $ 3,082,580
------------- ------------- ------------- -------------
Other comprehensive loss:
Unrealized holding gains (losses)
on marketable securities 161,968 (2,407,365) 1,216,838 (3,013,872)
Less: reclassification adjustment for gains
included in net income (2,335,909) (3,659,054) (1,622,191)
------------- ------------- ------------- -------------
Other comprehensive income (loss)
before income taxes (2,173,941) (2,407,365) (2,442,216) (4,636,063)
Income tax benefit related to unrealized holding
gains (losses) on marketable securities 64,787 (962,947) 486,735 (1,199,740)
Income tax benefit related to reclassification
adjustment for gains included in net income (965,118) (1,494,376) (649,956)
Minority interest in other comprehensive loss of
Alliance Telecommunications Corporation (407,804) (477,194) (453,634) (903,479)
------------- ------------- ------------- -------------
Other comprehensive income (loss) (865,806) (967,224) (980,941) (1,882,888)
------------- ------------- ------------- -------------
Comprehensive income $ 1,102,744 $ 59,826 $ 2,818,714 $ 1,199,692
============= ============= ============= =============
Basic net income per share $ .57 $ .29 $ 1.09 $ .87
Diluted net income per share $ .52 $ .27 $ 1.01 $ .80
See notes to consolidated financial statements.
4
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 3,799,655 3,799,655
Issuance of common stock under
Employee Stock Purchase Plan 11,659 117 137,386 137,503
Issuance of common stock under
Employee Stock Option Plan 44,725 447 317,659 318,106
Issuance of common stock to ESOP 8,709 87 91,906 91,993
Purchase and retirement of
common stock (100,535) (1,006) (372,826) (766,800) (1,140,632)
Change in unrealized gains on
marketable securities, net of
deferred taxes (980,941) (980,941)
--------- -------- --------- --------- ----------- ----------- ---------- -----------
BALANCE AT September 30, 2001 221,300 $221,300 3,468,921 $34,689 $13,018,901 $27,978,367 $ 80,294 $41,333,551
========= ======== ========= ========= =========== =========== ========== ===========
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
----------------------------
2001 2000
----------- -----------
Cash Flows from Operating Activities:
Net income $ 3,799,655 $ 3,082,580
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,245,983 7,438,545
Minority stockholders' interest in earnings of Alliance
Telecommunications Corporation 1,520,849 1,083,471
Gain on sales of marketable securities (3,659,054) (1,622,191)
Income from unconsolidated affiliates (1,445,203) (1,171,968)
Proceeds from wireless telephone investments 657,293 991,029
Changes in assets and liabilities net of effects from the
purchase of Hager TeleCom, Inc.:
Decrease in accounts receivable 80,325 303,114
Increase in materials, supplies and inventories (917,746) (164,087)
Decrease in prepaid expenses (73,206) (23,572)
Decrease in accounts payable (276,151) (945,065)
Increase (decrease) in accrued expenses (189,131) 43,244
Increase (decrease) in income taxes payable 1,332,229 (3,440,700)
Decrease in deferred investment credits (55,291) (67,370)
Decrease in deferred taxes (34,946) (479,406)
Increase (decrease) in deferred compensation (69,782) 219
----------- -----------
Net cash provided by operating activities 8,915,824 5,027,843
Cash Flows from Investing Activities:
Capital expenditures, net (6,855,705) (5,850,544)
Proceeds from short-term investments 20,464
Sales of marketable securities 1,323,145 9,910,447
Purchases of marketable securities (4,506,003)
Increase in construction fund (182,406) (2,257)
Purchases of wireless telephone investments (1,128,606) (183,273)
Purchases of other investments (968,332) (1,606,484)
Decrease (increase) in other assets (49,307) 51,106
Payment for purchase of Hager Telecom, Inc.,
net of cash acquired (8,532,392)
----------- -----------
Net cash used in investing activities (7,861,211) (10,698,936)
Cash Flows from Financing Activities:
Repayment of long-term debt (4,302,391) (4,013,922)
Proceeds from issuance of notes payable and long-term debt 470,000
Issuance of common stock 455,609 1,129,362
Purchase of stock (1,140,632) (2,970,588)
----------- -----------
Net cash used in financing activities (4,517,414) (5,855,148)
----------- -----------
Net Decrease in Cash and Cash Equivalents (3,462,801) (11,526,241)
Cash and Cash Equivalents at Beginning of Period 13,834,110 27,055,772
----------- -----------
Cash and Cash Equivalents at End of Period $ 10,371,309 $ 15,529,531
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 4,380,535 $ 4,500,899
Income taxes paid during the period 2,884,063 6,789,005
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 September 30, 2001
and the statements of income and comprehensive income and the statements of cash
flows for the periods ended September 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
September 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 September 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
---------- ----------- ---------- ----------
September 30, 2001 $ 260,980 $ 189,655 $ (14,044) $ 436,591
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 Minorit Comprehensive
Gains Taxes Interest Income
---------- ----------- ---------- --------
September 30, 2001 $ 175,612 $ (70,245) $ (25,073) $ 80,294
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.
Cash proceeds from sales of available-for-sale securities were $1,323,000 and
$9,910,000 in the nine-month periods ended September 30, 2001 and 2000,
respectively. Accounts receivable from sales of securities were $2,352,000 at
September 30, 2001. Gross realized gains on sales of securities were $3,659,000
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 $1,030,000 and $956,000 for the nine-month periods ended
September 30, 2001 and 2000 respectively. Cash distributions received from
Midwest Wireless were $657,000 and $582,000 in 2001 and 2000, respectively At
September 30, 2001, the Company owned 10.4% of Midwest Wireless Holdings LLC.
Losses from the Company's Wireless North LLC PCS investments were $38,000 in the
first nine months of 2001 compared to income of $14,000 in the first nine months
of 2000. During the third quarter of 2001, Wireless North LLC defaulted on its
loan payment obligations to its primary lender. As a result of this default, the
Company paid $1,091,000 plus interest to settle the loan guarantees it had made
to the bank on Wireless North's behalf. Wireless North is now being liquidated.
The Company does not expect to make additional expenditures or receive
additional income from this investment. Cash receipts from reductions in the
Company's ownership interest in Wireless North totaled $409,000 in 2000.
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
--------------- --------------- ---------------
Nine Months Ended September 30, 2001
Revenues $ 7,150,561 $ 23,366,805 $ 30,517,366
Costs and expenses 5,960,998 16,498,240 22,459,238
--------------- --------------- ---------------
Operating income 1,189,563 6,868,565 8,058,128
Interest expense (739,815) (3,374,116) (4,113,931)
Interest and dividend income 188,482 244,568 433,050
Gain on sale of marketable securities 3,659,054 3,659,054
Income from unconsolidated affiliates 354,622 1,090,581 1,445,203
--------------- --------------- ---------------
Income before income taxes $ 992,852 $ 8,488,652 $ 9,481,504
=============== =============== ===============
Depreciation and amortization $ 2,347,905 $ 5,898,078 $ 8,245,983
=============== =============== ===============
Total assets $ 29,075,075 $ 128,670,707 $ 157,745,782
=============== =============== ===============
Capital expenditures $ 1,994,723 $ 4,860,982 $ 6,855,705
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Nine Months Ended September 30, 2000
Revenues $ 6,980,911 $ 20,608,064 $ 27,588,975
Costs and expenses 5,691,150 13,749,134 19,440,284
--------------- --------------- ---------------
Operating income 1,289,761 6,858,930 8,148,691
Interest expense (748,075) (3,728,880) (4,476,955)
Interest and dividend income 260,507 683,649 944,156
Gain on sale of marketable securities 1,622,191 1,622,191
Income from unconsolidated affiliates 508,011 663,957 1,171,968
--------------- --------------- ---------------
Income before income taxes $ 1,310,204 $ 6,099,847 $ 7,410,051
=============== =============== ===============
Depreciation and amortization $ 2,102,189 $ 5,336,356 $ 7,438,545
=============== =============== ===============
Total assets $ 28,608,069 $ 131,139,342 $ 159,747,411
=============== =============== ===============
Capital expenditures $ 944,188 $ 4,906,356 $ 5,850,544
=============== =============== ===============
9
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended September 30, 2001
Revenues $ 2,430,548 $ 7,955,578 $ 10,386,126
Costs and expenses 1,959,905 5,397,247 7,357,152
--------------- --------------- ---------------
Operating income 470,643 2,558,331 3,028,974
Interest expense (251,500) (1,075,127) (1,326,627)
Interest and dividend income 52,056 75,592 127,648
Gain on sale of marketable securities 2,335,909 2,335,909
Income from unconsolidated affiliates 158,812 546,030 704,842
--------------- --------------- ---------------
Income before income taxes $ 430,011 $ 4,440,735 $ 4,870,746
=============== =============== ===============
Depreciation and amortization $ 782,657 $ 2,066,776 $ 2,849,433
=============== =============== ===============
Capital expenditures $ 770,912 $ 1,908,423 $ 2,679,335
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended September 30, 2000
Revenues $ 2,364,328 $ 7,394,065 $ 9,758,393
Costs and expenses 1,942,179 4,638,186 6,580,365
--------------- --------------- ---------------
Operating income 422,149 2,755,879 3,178,028
Interest expense (248,693) (1,134,805) (1,383,498)
Interest and dividend income 92,534 142,207 234,741
Income from unconsolidated affiliates 183,708 260,178 443,886
--------------- --------------- ---------------
Income before income taxes $ 449,698 $ 2,023,459 $ 2,473,157
=============== =============== ===============
Depreciation and amortization $ 698,766 $ 1,910,117 $ 2,608,883
=============== =============== ===============
Capital expenditures $ 419,118 $ 1,695,159 $ 2,114,277
=============== =============== ===============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Nine Months Ended September 30, 2001 Compared to
Nine Months Ended September 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 7,564 access
lines in 9 rural communities in Minnesota and Wisconsin at September 30, 2001.
HCC, through its subsidiaries, also provides cable television service to 4,710
subscribers in Minnesota and Wisconsin.
HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns and
operates six additional LEC subsidiaries which served 31,372 access lines in 28
rural communities in Minnesota, Wisconsin, Iowa and South Dakota at September
30, 2001. Alliance, through its subsidiaries, also served 9,204 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 11% from $27,589,000 in 2000 to $30,517,000 in
2001. The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
Local network $ 1,173,263 $ 1,315,517 $ 4,148,961 $ 3,626,580
Network access 4,066,616 3,846,520 12,954,048 11,516,606
Nonregulated activities 823,217 700,053 4,270,473 3,615,032
Cable television 1,087,465 1,118,821 1,993,323 1,849,846
---------------- ---------------- --------------- ---------------
$ 7,150,561 $ 6,980,911 $ 23,366,805 $ 20,608,064
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $380,000 or 8%. The increase was
due to growth in access lines served (38,936 at September 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 $1,658,000 or 11% due to increased usage of the phone network
and the acquisition of Hager TeleCom.
Nonregulated revenues increased $779,000 or 18%, due to the acquisition of Hager
TeleCom. 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 September 30, 2001, the Company had 9,607 internet customers. Cable
television revenues increased $112,000 or 4% due to the acquisition of
additional cable systems in South Dakota.
Consolidated operating costs and expenses grew from $19,440,000 in 2000 to
$22,459,000 in 2001, an increase of $3,019,000 or 16%. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
Plant operations $ 1,066,659 $ 900,402 $ 3,090,205 $ 2,655,389
Depreciation and amortization 2,347,905 2,102,189 5,898,078 5,336,356
Customer operations 268,165 230,936 1,646,101 1,378,299
General and administrative 1,144,078 1,381,427 2,307,606 2,009,171
Other operating expenses 1,134,191 1,076,196 3,556,250 2,369,919
---------------- ---------------- --------------- ---------------
$ 5,960,998 $ 5,691,150 $ 16,498,240 $ 13,749,134
---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses increased $601,000 or 17%, due to
increases in the Company's customer base. Depreciation and amortization
increased $807,000 or 11% due to depreciation on new plant additions and shorter
useful lives on telephone switching equipment. Customer operations expenses
increased $305,000, or 19%. General and administrative expenses increased
$61,000 or 2%. Other operating expenses increased $1,244,000 or 36% due to the
acquisition of Hager TeleCom. Consolidated operating income decreased $91,000 or
1%.
Interest expense decreased $363,000 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 $511,000 due to lower interest rates paid by financial
institutions and lower cash balances available for investment.
11
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
The Company had income from its partnership and LLC investments of $1,445,000
for the 2001 period compared to income of $1,172,000 in 2000 (Note 3). Alliance
had gains on sales of marketable securities of $3,659,000 and $1,622,000 in 2001
and 2000, respectively.
Income before income taxes increased to $9,482,000 in 2001 from $7,410,000 in
2000. The Company's effective income tax rate of 44% is higher than the standard
U.S. tax rate due to state income taxes and the effect of nondeductible
amortization expenses. Income before minority interest in Alliance's earnings
decreased to $5,321,000 in 2001 from $4,166,000 in 2000. Minority interests in
earnings of Alliance were $1,521,000 compared to $1,083,000 in 2000. Net income
increased 23% to $3,800,000 in 2001 compared to $3,083,000 in 2000.
Three Months Ended September 30, 2001 Compared to
Three Months Ended September 30, 2000
Consolidated revenues increased 10% from $9,758,000 in 2000 to $10,386,000 in
2001. The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
Local network $ 398,505 $ 455,225 $ 1,421,221 $ 1,328,643
Network access 1,376,483 1,301,113 4,309,996 3,892,851
Nonregulated activities 286,629 237,440 1,537,516 1,542,051
Cable television 368,931 370,550 686,845 630,520
---------------- ---------------- --------------- ---------------
$ 2,430,548 $ 2,364,328 $ 7,955,578 $ 7,394,065
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $36,000 or 2%. The increase was
due to growth in access lines served (38,936 at September 30, 2001). 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. Hector's local network revenues declined due to rate
reductions in Wisconsin exchanges mandated by the public service commission.
Network access revenues increased $493,000 or 9% due to increased usage of the
phone network and the acquisition of Hager TeleCom.
Consolidated nonregulated revenues increased $45,000 or 3%. Hector's
nonregulated revenues increased slightly due to increased internet revenues and
fiber optic transport fees. Cable television revenues increased $55,000 or 5%
due to the acquisition of additional cable systems in South Dakota. Hector's
cable television revenues decreased slightly due to competition from satellite
television suppliers in rural areas.
Consolidated operating costs and expenses grew from $6,580,000 in 2000 to
$7,357,000 in 2001, an increase of $777,000 or 12%. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2001 2000 2001 2000
---------------- ---------------- --------------- ---------------
Plant operations $ 323,176 $ 300,279 $ 889,219 $ 857,141
Depreciation and amortization 782,657 698,766 2,066,776 1,910,117
Customer operations 90,153 78,285 541,016 508,587
General and administrative 368,387 497,426 663,247 641,988
Other operating expenses 395,532 367,423 1,236,989 720,353
---------------- ---------------- --------------- ---------------
$ 1,959,905 $ 1,942,179 $ 5,397,247 $ 4,638,186
---------------- ---------------- --------------- ---------------
12
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Consolidated plant operations expenses increased $55,000 or 5%, due to increases
in the Company's customer base. Depreciation and amortization increased $241,000
or 9% due to depreciation on new plant additions and shorter useful lives on
telephone switching equipment. Customer operations expenses increased $44,000,
or 8%. General and administrative expenses decreased $108,000 or 9%. Hector's
general and administrative expenses in the 2000 period included $113,000 in
one-time charges for an unsuccessful common stock underwriting. Other operating
expenses increased $544,000 or 50% due to higher cable television expenses and
increased internet service costs. Consolidated operating income decreased
$149,000 or 5%.
Interest expenses decreased $57,000 due to patronage accruals on interest
payments made by the Company to CoBank. Interest and dividend income decreased
$107,000 due to lower interest rates paid by financial institutions and lower
cash balances available for investment.
The Company had income from its partnership and LLC investments of $705,000 for
the 2001 period compared to income of $444,000 in 2000 (Note 3). Alliance had
gains on sales of marketable securities of $2,336,000 in 2001.
Income before income taxes increased to $4,871,000 in 2001 from $2,473,000 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 $2,778,000 in 2001 from $1,380,000 in 2000. Minority interests in
earnings of Alliance were $809,000 compared to $353,000 in 2000. Net income
increased 92% to $1,969,000 in 2001 compared to $1,027,000 in 2000.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Cash flows from consolidated operating activities for the nine-month periods
were $8,916,000 and $5,028,000 in 2001 and 2000, respectively. Cash flow from
operations in the 2001 and 2000 periods were distorted by the timing of income
tax payments on marketable securities sales made in the fourth quarter of 1999
and the third quarter of 2001. Eliminating the effects of these income tax
payments would result in similar operating cash provided totals for the
respective periods. At September 30, 2001, the Company's cash, cash equivalents
and marketable securities totaled $10,808,000 compared to $16,729,000 at
December 31, 2000. Alliance's cash and securities were $5,526,000 of this total.
Working capital at September 30, 2001 was $8,010,000 compared to $8,960,000 at
December 31, 2000. The current ratio was 1.6 to 1 at September 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 nine-month periods were $1,995,000 and $944,000,
respectively. Alliance's plant additions in the same periods were $4,861,000 and
$4,906,000, 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 $2,530,000 and
$6,109,000, 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 103,600 shares of Illuminet Holdings for
$3,676,000. In 2000, Alliance sold 51,000 shares of U.S. West Communications,
Inc. for $3,652,000.
13
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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. Through June 30, 2001, the Company had invested $2,090,000
of 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. During the third quarter of 2001,
the Company paid its loan guarantees to Wireless North's lender in cash. The
Company does not expect to be able to recoup any of its investment after the
asset sales.
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 nine months of 2001, the Company
purchased and retired 100,535 shares of common stock. Following the events of
September 11, 2001, the Company's Board of Directors authorized the repurchase
of 250,000 additional shares of stock, if warranted by market conditions. At
September 30, 2001, 295,515 shares could be purchased under the remaining
authorization. The Company received $456,000 from issuances of common stock in
the first nine months of 2001. Cash receipts were principally due to exercises
of employee stock options and issuances of employee stock purchase plan shares.
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
2001, the Company acquired several small cable systems in South Dakota. 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
September 30, 2001 and 2000 the Company had net goodwill of $54,116,000 and
$55,832,000, respectively. Amortization expense recorded during the nine-month
periods ended September 30, 2001 and 2000 was $1,372,000 and $1,294,000,
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 - 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: November 14, 2001
16
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- ---------------------------------
Basic: 2001 2000 2001 2000
- ------- ------------ ------------ ------------ ------------
Net income $ 1,968,550 $ 1,027,050 $ 3,799,655 $ 3,082,580
============ ============ ============ ============
Common shares:
Weighted average number of
common shares outstanding 3,475,545 3,512,856 3,480,298 3,553,225
============ ============ ============ ============
Net income per common share $ .57 $ .29 $ 1.09 $ .87
============ ============ ============ ============
Diluted:
- -------------
Net income $ 1,968,550 $ 1,027,050 $ 3,799,655 $ 3,082,580
============ ============ ============ ============
Common and common equivalent shares:
Weighted average number of
common shares outstanding 3,475,545 3,512,856 3,480,298 3,553,225
Dilutive effect of convertible
preferred shares outstanding 221,300 221,700 221,300 223,606
Dilutive effect of stock options outstanding
after application of treasury stock method 100,817 88,812 56,310 94,745
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 657 1,668 181 1,297
------------ ------------ ------------ ------------
3,798,319 3,825,036 3,758,089 3,872,873
============ ============ ============ ============
Diluted net income per share $ .52 $ .27 $ 1.01 $ .80
============ ============ ============ ============
17