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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 MARCH 31, 2002
-------------------------------------------------
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
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HECTOR COMMUNICATIONS CORPORATION
..................................................................................
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1666660
................................. ....................
(State or other jurisdiction of (Federal Employer
incorporation or organization) Identification No.)
211 South Main Street, Hector, MN 55342
..................................................................................
(Address of principal executive offices) (Zip Code)
(320) 848-6611
..................................................................................
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at April 30, 2002
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share 3,511,424
Total Pages (16) Exhibit at Page 16
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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 11
Part II. Other Information 15
2
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 14,369,362 $ 13,083,481
Construction fund 1,238,601 759,934
Accounts receivable, net 5,009,010 4,736,131
Materials, supplies and inventories 1,562,062 1,249,109
Other current assets 110,990 186,451
------------ ------------
Total current assets 22,290,025 20,015,106
Property, plant and equipment 108,233,025 107,225,400
less accumulated depreciation (52,310,440) (49,863,075)
------------ ------------
Net property, plant and equipment 55,922,585 57,362,325
Other assets:
Excess of cost over net assets acquired, net 53,662,750 53,662,750
Marketable securities 224,173 419,004
Wireless telephone investments 14,835,027 14,174,179
Other investments 12,394,886 12,290,004
Other assets 357,001 327,685
------------ ------------
Total other assets 81,473,837 80,873,622
------------ ------------
Total Assets $ 159,686,447 $ 158,251,053
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 6,858,700 $ 6,752,100
Accounts payable 3,180,515 2,497,804
Accrued expenses 2,191,412 2,409,669
Income taxes payable 1,059,113 722,797
------------ ------------
Total current liabilities 13,289,740 12,382,370
Long-term debt, less current portion 78,753,548 79,641,269
Deferred investment tax credits 46,784 48,269
Deferred income taxes 5,858,950 5,975,119
Deferred compensation 938,269 931,529
Minority stockholders interest in Alliance
Telecommunications Corp. 17,393,197 17,031,204
Stockholders' Equity 43,405,959 42,241,293
------------ ------------
Total Liabilities and Stockholders' Equity $ 159,686,447 $ 158,251,053
============ ============
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
------------------------------------
2002 2001
------------- -------------
Revenues:
Local network $ 1,789,130 $ 1,697,201
Network access 5,420,254 5,623,490
Nonregulated:
Cable television 1,055,514 987,808
Internet 561,866 444,659
Billing and collection 101,103 140,210
Other 930,729 991,473
------------- -------------
Total revenues 9,858,596 9,884,841
Costs and expenses:
Plant operations 1,306,871 1,345,858
Customer operations 594,492 640,939
Other operating expenses:
Operating taxes 132,394 128,283
Cable television 839,778 624,188
Internet 332,375 341,197
Other 312,583 260,960
General and administrative 1,341,673 1,193,318
Depreciation and amortization 2,441,678 2,710,219
------------- -------------
Total costs and expenses 7,301,844 7,244,962
Operating income 2,556,752 2,639,879
Other income and (expenses):
Interest expense (1,129,466) (1,394,859)
Interest and dividend income 95,281 169,625
Income from investments in unconsolidated
affiliates 879,819 395,484
------------- -------------
Other expense, net (154,366) (829,750)
Income before income taxes 2,402,386 1,810,129
Income tax expense 920,000 859,000
------------- -------------
Income before minority interest 1,482,386 951,129
Minority interest in earnings of
Alliance Telecommunications Corporation 397,661 257,463
------------- -------------
Net income $ 1,084,725 $ 693,666
------------- -------------
Other comprehensive loss:
Unrealized holding losses on marketable securities (194,831) (308,524)
Income tax benefit related to items of
other comprehensive loss (77,933) (123,408)
Minority interest in other comprehensive loss of
Alliance Telecommunications Corporation (35,667) (52,226)
------------- -------------
Other comprehensive loss (81,231) (132,890)
------------- -------------
Comprehensive income $ 1,003,494 $ 560,776
============= =============
Basic net income per share $ .31 $ .20
Diluted net income per share $ .28 $ .19
See notes to consolidated financial statements.
4
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income Total
------- -------- --------- ------- ----------- ----------- ---------- -----------
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 4,616,154 4,616,154
Issuance of common stock under
Employee Stock Purchase Plan 11,626 116 136,998 137,114
Issuance of common stock under
Employee Stock Option Plan 52,375 524 412,351 412,875
Issuance of common stock in
exchange for preferred stock (1,200) (1,200) 1,200 12 1,188 0
Issuance of common stock to ESOP 16,709 167 225,026 225,193
Purchase and retirement of
common stock (109,704) (1,097) (407,369) (859,521) (1,267,987)
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes (989,923) (989,923)
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 2001 220,100 220,100 3,476,569 34,766 13,212,970 28,702,145 71,312 42,241,293
Net income 1,084,725 1,084,725
Issuance of common stock under
Employee Stock Option Plan 32,355 323 160,849 161,172
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes (81,231) (81,231)
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT MARCH 31, 2002 220,100 $220,100 3,508,924 $35,089 $13,373,819 $29,786,870 $ (9,919) $43,405,959
======= ======== ========= ======= =========== =========== ========== ===========
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
------------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net income $ 1,084,725 $ 693,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,441,678 2,710,219
Minority stockholders' interest in earnings of Alliance
Telecommunications Corporation 397,661 257,463
Income from unconsolidated affiliates (879,819) (395,484)
Proceeds from wireless telephone investments 132,500 169,100
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (272,879) 331,709
Increase in materials, supplies and inventories (312,953) (576,019)
Decrease in other current assets 75,461 138,597
Increase in accounts payable 682,711 534,409
Decrease in accrued expenses (218,257) (266,308)
Increase (decrease) in income taxes payable 336,316 (159,385)
Decrease in deferred investment credits (1,485) (20,385)
Decrease in deferred taxes (38,236) (34,680)
Increase (decrease) in deferred compensation 6,740 (23,260)
----------- -----------
Net cash provided by operating activities 3,434,163 3,359,642
Cash Flows from Investing Activities:
Capital expenditures, net (1,001,828) (1,141,970)
Increase in construction fund (478,667) (470,000)
Purchases of wireless telephone investments (16,876)
Purchases of other investments (18,411) (949,448)
(Increase) decrease in other assets (29,427) 31,868
----------- -----------
Net cash used in investing activities (1,528,333) (2,546,426)
Cash Flows from Financing Activities:
Repayment of long-term debt (1,406,297) (1,531,666)
Proceeds from issuance of notes payable and long-term debt 625,176 470,000
Issuance of common stock 161,172 204,588
Purchase of stock (570,262)
----------- -----------
Net cash used in financing activities (619,949) (1,427,340)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,285,881 (614,124)
Cash and Cash Equivalents at Beginning of Period 13,083,481 13,834,110
----------- -----------
Cash and Cash Equivalents at End of Period $ 14,369,362 $ 13,219,986
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,118,040 $ 1,385,580
Income taxes paid during the period 585,170 1,038,515
See notes to consolidated financial statements.
6
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements include the accounts of Hector
Communications Corporation and its wholly and majority owned subsidiaries. All
material intercompany transactions and accounts have been eliminated. Accounting
practices prescribed by regulatory authorities have been considered in the
preparation of the financial statements and formulation of accounting policies
for telephone subsidiaries. These policies conform to generally accepted
accounting principles as applied to regulated public utilities in accordance
with Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. Network access revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies and nationwide average
schedules. Revenues include estimates pending finalization of cost studies.
Network access revenues are based upon interstate tariffs filed with the Federal
Communications Commission by the National Exchange Carriers Association and
state tariffs filed with state regulatory agencies. Management believes recorded
revenues are reasonable based on estimates of cost separation studies, which are
typically settled within two years.
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.
The balance sheet and statement of stockholders' equity as of March 31, 2002 and
the statements of income and comprehensive income and the statements of cash
flows for the periods ended March 31, 2002 and 2001 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, 2002 and 2001 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, 2001 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 2001 financial statements have been reclassified to
conform to the 2002 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity as previously reported.
7
NOTE 2 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under the provisions of this accounting standard, goodwill
and intangible assets with indefinite useful lives are no longer amortized but
are instead tested for impairment on at least an annual basis.
At December 31, 2001 the Company had goodwill of $53,663,000, which was net of
an amortization reserve of $10,025,000. The Company also had an investment in
cable television franchises of $77,000, net of an amortization reserve of
$146,000. The Company determined that these assets have indefinite useful lives
and ceased amortization effective January 1, 2002. The Company has not completed
the impairment tests for these assets, but does not presently believe that they
have been materially impaired.
The Company owns 10.4% of Midwest Wireless Holdings, LLC. The Company accounts
for its investment in Midwest Wireless Holdings using the equity method, and
earnings from the investment are material to the Company's net income. At
December 31, 2001 Midwest Wireless Holdings LLC had investments in cellular,
LMDS and PCS licenses totaling $187,212,000, net of amortization of $9,922,000.
Midwest Wireless Holdings LLC has determined that these licenses have indefinite
useful lives and ceased amortization on January 1, 2002.
The following table provides, on a pro forma basis, financial information for
the periods ended March 31 as if the provisions of SFAS 142 had been effective
January 1, 2001. A calculation of pro forma earnings per share can be found in
Exhibit 11.
Three Months Ended March 31
-------------------------------
2002 2001
------------- -------------
Revenues $ 9,858,596 $ 9,884,841
Costs and expenses (7,301,844) (7,244,962)
Add back - Amortization expense 457,608
----------- -----------
Operating income 2,556,752 3,097,487
Other expenses, net (154,366) (829,750)
Add back - pro rata share of Midwest
Wireless Holdings LLC amortization 179,912
----------- -----------
Income before income taxes 2,402,386 2,447,649
Income tax expense (920,000) (859,000)
Tax effect of change in amortization (72,000)
----------- -----------
Income before minority interest 1,482,386 1,516,649
Minority interest in earnings of
Alliance Telecommunications Corporation (397,661) (257,463)
Change in minority interest due to
change in amortization (167,029)
----------- -----------
Adjusted net income $ 1,084,725 $ 1,092,157
=========== ===========
Adjusted basic net income per share $ .31 $ .31
Adjusted diluted net income per share $ .28 $ .29
8
NOTE 3 - MARKETABLE SECURITIES
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, 2002 $ 260,980 $ 60,467 $ (97,274) $ 224,173
December 31, 2001 260,980 172,159 (14,135) 419,004
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 (Losses) Taxes Interest Income (Loss)
-------------- ------------- ------------- --------------
March 31, 2002 $ (36,807) $ 11,142 $ 15,746 $ (9,919)
December 31, 2001 158,024 (66,791) (19,921) 71,312
These amounts have no cash effect and are not included in the statement of cash
flows.
NOTE 4 - 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 Holdings LLC,
net of amortization, was $793,000 and $241,000 for the three-month periods ended
March 31, 2002 and 2001 respectively. Cash distributions received from Midwest
Wireless Holdings LLC were $133,000 and $169,000 in 2002 and 2001, respectively.
At March 31, 2002, the Company owned 10.4% of Midwest Wireless Holdings LLC.
Income statement information for Midwest Wireless Holdings, LLC for the three
month periods ended March 31, 2002 and 2001 was as follows:
Three Months Ended March 31
2002 2001
------------ ------------
Revenues $ 35,399,181 $ 28,944,981
Expenses (26,839,734) (25,652,397)
Minority interest (965,506) (371,403)
Net income 7,593,941 2,921,181
Losses from the Company's Wireless North LLC PCS investments were $17,000 in the
first three months of 2001. 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.
9
NOTE 5 - OTHER INVESTMENTS
Other investments consist of Rural Telephone Bank stock, CoBank stock, long-term
certificates of deposit, and investments in stock companies and partnerships of
other telecommunications service providers. Long-term investments in companies
that are not intended for resale or are not readily marketable are valued at
cost, which does not exceed net realizable value. Investments in joint ventures,
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 operating income or losses from the respective operations. Other assets
are cable television franchises owned by the Company and other deferred charges.
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
--------------- --------------- ---------------
Three Months Ended March 31, 2002
Revenues $ 2,391,368 $ 7,467,228 $ 9,858,596
Costs and expenses 2,030,702 5,271,142 7,301,844
--------------- --------------- ---------------
Operating income 360,666 2,196,086 2,556,752
Interest expense (229,728) (899,738) (1,129,466)
Interest and dividend income 27,785 67,496 95,281
Income from unconsolidated affiliates 240,973 638,846 879,819
--------------- --------------- ---------------
Income before income taxes $ 399,696 $ 2,002,690 $ 2,402,386
=============== =============== ===============
Depreciation and amortization $ 775,256 $ 1,666,422 $ 2,441,678
=============== =============== ===============
Total assets $ 31,498,759 $ 128,187,688 $ 159,686,447
=============== =============== ===============
Capital expenditures $ 285,319 $ 716,509 $ 1,001,828
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended March 31, 2001
Revenues $ 2,315,241 $ 7,569,600 $ 9,884,841
Costs and expenses 1,949,933 5,295,029 7,244,962
--------------- --------------- ---------------
Operating income 365,308 2,274,571 2,639,879
Interest expense (247,777) (1,147,082) (1,394,859)
Interest and dividend income 77,208 92,417 169,625
Income from unconsolidated affiliates 64,817 330,667 395,484
--------------- --------------- ---------------
Income before income taxes $ 259,556 $ 1,550,573 $ 1,810,129
=============== =============== ===============
Depreciation and amortization $ 782,624 $ 1,927,595 $ 2,710,219
=============== =============== ===============
Total assets $ 30,018,343 $ 127,905,294 $ 157,923,637
=============== =============== ===============
Capital expenditures $ 512,673 $ 629,297 $ 1,141,970
=============== =============== ===============
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2002 Compared to
Three Months Ended March 31, 2001
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 7,522 access
lines in 9 rural communities in Minnesota and Wisconsin at March 31, 2002. HCC,
through its subsidiaries, also provides cable television service to 4,733
subscribers in Minnesota and Wisconsin.
HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns and
operates six additional LEC subsidiaries which served 31,270 access lines in 28
rural communities in Minnesota, Wisconsin, Iowa and South Dakota at March 31,
2002. Alliance, through its subsidiaries, also served 8,934 cable television
subscribers in Minnesota, North Dakota, South Dakota and Iowa. 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.
Consolidated revenues decreased to $9,859,000 in 2002 from $9,885,000 in 2001.
The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Local network $ 388,731 $ 381,817 $ 1,400,399 $ 1,315,384
Network access 1,336,558 1,310,781 4,083,696 4,312,709
Nonregulated activities:
Cable television 373,925 356,705 681,589 631,103
Internet 111,010 60,899 450,856 383,760
Billing and collection 25,494 36,443 75,609 103,767
Other 155,650 168,596 775,079 822,877
---------------- ---------------- --------------- ---------------
$ 2,391,368 $ 2,315,241 $ 7,467,228 $ 7,569,600
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $92,000 or 5%. The increase was
due to a local service rate increase in one of Alliance's telephone companies.
Access lines served were 38,792 at March 31, 2002 compared to 38,765 at March
31, 2001. Access line growth is being reduced by increasing customer acceptance
of digital subscriber line service ("DSL") as their internet platform. DSL
customers can access voice and data networks simultaneously over their telephone
lines, eliminating the need for many second lines. At March 31, 2002 the Company
had 1,455 DSL customers compared to 344 at March 31, 2001. Network access
revenues decreased $203,000 or 4%. Access revenues were negatively affected by
the bankruptcy of a large interexchange carrier and by lower intrastate access
revenues from the Company's Iowa and South Dakota exchanges.
11
Nonregulated revenues from all sources increased $85,000 or 3%. Cable television
revenues increased $68,000 or 7% due to the acquisition of additional cable
systems in the second quarter of 2001. Internet service revenues increased
$117,000 or 26% due to increases in the number of total customers and the
migration of dial-up customers to more expensive, higher speed DSL service.
Lower billing and collection revenues and lower revenues from leases of
fiber-optic transport facilities negatively affected nonregulated revenues.
Consolidated operating costs and expenses were $7,302,000 in 2002 compared to
$7,245,000 in 2001. If the provisions of SFAS 142 had been in effect at January
1, 2001, 2001 operating costs would have been $6,787,000. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Plant operations $ 383,594 $ 348,417 $ 923,277 $ 997,441
Customer operations 79,171 84,236 515,321 556,703
Other operating expenses:
Operating taxes 36,742 32,007 95,652 96,276
Cable television 267,480 229,157 572,298 395,031
Internet 50,465 56,507 281,910 284,690
Other 43,304 35,318 269,279 225,642
General and administrative 394,690 381,667 946,983 811,651
Depreciation and amortization 775,256 782,624 1,666,422 1,927,595
---------------- ---------------- --------------- ---------------
$ 2,030,702 $ 1,949,933 $ 5,271,142 $ 5,295,029
---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses decreased $39,000 or 3%. Customer
operations expenses decreased $46,000, or 7%. Other operating expenses increased
$263,000 or 19% due to higher cable television operating expenses. General and
administrative expenses increased $148,000 or 12%. Depreciation expense
increased $189,000 to $2,442,000 due to depreciation on new plant additions.
Amortization expense decreased $458,000 due to adoption of SFAS 142.
Consolidated operating income decreased to $2,557,000.
Interest expenses decreased $265,000 due to patronage accruals on interest
payments made by the Company to CoBank. Interest expenses also decreased due to
lower interest rates on floating portions of the Company's debt and due to
principal payments made which reduced the Company's long-term debt. Interest and
dividend income decreased $74,000 due to lower interest rates earned on invested
cash balances.
The Company had income from unconsolidated affiliates (its partnership and LLC
investments) of $880,000 for the 2002 period compared to income of $395,000 in
2001 (Note 4). Income recorded from the Company's investment in Midwest Wireless
Holdings LLC benefited from the adoption of SFAS 142 (Note 2).
Income before income taxes increased to $2,402,000 in 2002 from $1,810,000 in
2001. The Company's effective income tax rate decreased to 38% in 2002 from 47%
in 2001 due to elimination of the effect of non-deductible amortization
expenses. Income before minority interest in Alliance's earnings increased to
$1,482,000 in 2002 from $951,000 in 2001. Minority interests in earnings of
Alliance were $398,000 compared to $257,000 in 2001. Net income increased to
$1,085,000 compared to $694,000 in 2001.
12
Liquidity and Capital Resources
-------------------------------
Cash flows from consolidated operating activities for the three-month periods
were $3,434,000 and $3,360,000 in 2002 and 2001, respectively. At March 31,
2002, the Company's cash, cash equivalents and marketable securities totaled
$14,594,000 compared to $13,502,000 at December 31, 2001. Alliance's cash and
securities were $8,382,000 of this total. Working capital at March 31, 2002 was
$9,000,000 compared to $7,633,000 at December 31, 2001. The current ratio was
1.7 to 1 at March 31, 2002.
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 three-month periods were $285,000 and $513,000,
respectively. Alliance's plant additions in the same periods were $717,000 and
$629,000, respectively. Plant additions for 2002 for Hector and Alliance are
expected to total $2,993,000 and $7,165,000, respectively, and will provide
customers with additional advanced telecommunications services and expand usage
of high capacity fiber optics in the telephone network. The Company finances its
plant improvements using a combination of internal funds and borrowings from the
Rural Utilities Service ("RUS") and Rural Telephone Bank ("RTB"). Borrowings
from RUS and RTB in the three month periods ended March 31, 2002 and 2001 were
$625,000 and $470,000, respectively.
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 have
reduced the prices charged for use of their facilities. The Company expects the
reductions to negatively effect its financial results in future periods, but
cannot determine if competition will result in additional price changes.
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 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. 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. During 2001, the Company purchased and
retired 109,704 shares of common stock. No shares have been repurchased in 2002.
At March 31, 2001, 295,515 shares could be purchased under the remaining
authorization. The Company received $161,000 and $205,000 from exercises of
employee stock options in the first three months of 2002 and 2001, respectively.
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.
13
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.
New Accounting Principles:
--------------------------
Effective January 1, 2002, the Company adopted 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 indefinite 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. (See Note 2.)
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and an associated
asset retirement cost. The statement applies to tangible long-lived assets,
including individual assets, functional groups of related assets and significant
parts of assets. It covers a company's legal obligations resulting from the
acquisition, construction, development or normal operation of a capital asset.
The Company is currently evaluating the provisions of SFAS No. 143, but does not
expect its adoption to have a material impact on its financial position or
operating results.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 sets forth
requirements for measuring and recognizing impairment losses on long-lived
assets. The statement also establishes financial reporting requirements when
impairment losses are recognized. Adoption of SFAS No. 144 did not have a
material effect on the Company's financial statements.
Disclosures About Market Risk
-----------------------------
The Company does not use derivative financial instruments in its operations or
investment portfolio. Its operations are not subject to risks associated with
changes in the value of foreign currencies. Portions of the Company's long-term
debt have variable interest rates based on the lenders' cost of money. The
Company has investments in money market funds that earn interest at prevailing
market rates. In the opinion of management, the Company does not have a material
exposure to loss caused by market risk.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
14
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 14, 2002
15
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended March 31
-----------------------------------------------------
Basic: 2002 2001 2001 Pro forma
- ------- ---------- ---------- -------------
Net income $ 1,084,725 $ 693,666 $ 1,092,157
========== ========== ==========
Common shares:
Weighted average number of common shares outstanding 3,493,956 3,481,215 3,481,215
========== ========== ==========
Net income per common share $ .31 $ .20 $ .31
========== ========== ==========
Diluted:
- -------------
Net income $ 1,084,725 $ 693,666 $ 1,092,157
========== ========== ==========
Common and common equivalent shares:
Weighted average number of common shares outstandin 3,493,956 3,481,215 3,481,215
Dilutive effect of convertible preferred
shares outstanding 220,100 221,300 221,300
Dilutive effect of stock options outstanding after
application of treasury stock method 105,113 34,569 34,569
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 1,186 2,477 2,477
---------- ---------- ----------
3,820,355 3,739,561 3,739,561
========== ========== ==========
Diluted net income per share $ .28 $ .19 $ .29
========== ========== ==========
2001 Pro forma earnings per share are presented as if the provisions of SFAS No. 142 had been in effect January
1, 2001 (Note 2)
16