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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number: 0-18587
HECTOR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1666660
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(State or other jurisdiction (Federal Employer
of incorporation or organization) Identification No.)
211 South Main Street
Hector, MN 55342
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (320) 848-6611
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
----------------------------
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $27,836,000 based upon the closing sale price of
the Company's common stock on the American Stock Exchange on March 23, 2001.
As of March 23, 2001 there were outstanding 3,494,962 shares of the Registrant's
common stock.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held on May 17, 2001 is incorporated by
reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
Item Page
PART I
1. Business 3
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Company's Common Equity and Related
Stockholder Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
PART III
10. Directors and Executive Officers of the Registrant 42
11. Executive Compensation 42
12. Security Ownership of Certain Beneficial Owners and Management 42
13. Certain Relationships and Related Transactions 42
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 43
2
PART I.
ITEM 1. BUSINESS
[a] GENERAL DEVELOPMENT OF BUSINESS
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
7,422 access lines in 9 rural communities in Minnesota and Wisconsin at December
31, 2000. HCC, through its subsidiaries, also provides cable television service
to 4,853 subscribers in Minnesota and Wisconsin.
HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns
and operates six additional LEC subsidiaries which served 31,323 access lines in
28 rural communities in Minnesota, Wisconsin, Iowa and South Dakota at December
31, 2000. Alliance, through its subsidiaries, also served 8,318 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.
Effective June 9, 2000, Alliance acquired all the outstanding common
stock of Hager TeleCom, Inc. ("Hager"); a rural telephone company located in
southwestern Wisconsin. Hager serves approximately 2,100 access lines, provides
internet service to 2,700 customers in Hager, WI and Red Wing, MN and has an
ownership interest in Midwest Wireless Holdings, LLC. Purchase price was
$9,124,500 of cash plus acquisition costs.
[b] FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is organized in two business segments, Hector Communications
Corporation and its wholly-owned subsidiaries, and Alliance Telecommunications
Corporation and its subsidiaries. Information regarding segment operations is
provided in Note 11 to the financial statements found under Item 8 of this
report.
[c] NARRATIVE DESCRIPTION OF BUSINESS
(1) Telephone
The Company's LEC subsidiaries provide basic local telephone services to
residential and business customers in Minnesota, Wisconsin, South Dakota, North
Dakota and Iowa. Local service revenues are earned by providing customers with
local service to connecting points within the local exchange boundaries and, in
certain cases, to nearby local exchanges under extended area service ("EAS")
plans that eliminate long distance charges to the neighboring exchanges. Monthly
rates for telephone service differ among the LECs depending upon the cost of
providing service, the type and grade of service, the number of customers and
calling patterns within the toll free calling area and other factors. The
following chart presents the number of access lines served by Hector's and
Alliance's LEC subsidiaries at December 31, 2000, 1999 and 1998:
Access Lines*
---------------------------------------------------------
December 31
--------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Hector Communications Corporation:
Arrowhead Communications Corporation 806 817 780
Eagle Valley Telephone Company 731 734 676
Granada Telephone Company 288 289 274
Pine Island Telephone Company 3,263 3,154 3,019
Indianhead Telephone Company 2,334 2,234 2,109
---------- ---------- ----------
Total Hector Access Lines 7,422 7,228 6,858
---------- ---------- ----------
3
Access Lines*
---------------------------------------------------------
December 31
--------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Alliance Telecommunications Corporation:
Loretel Systems, Inc. 13,234 12,967 12,675
Sleepy Eye Telephone Company 6,511 6,467 6,197
Sioux Valley Telephone Company 5,939 5,756 5,679
Hills Telephone Company 2,788 2,706 2,618
Felton Telephone Company 764 743 735
Hager TeleCom, Inc. 2,087
---------- ---------- ----------
Total Alliance Access Lines 31,323 28,639 27,904
---------- ---------- ----------
Total Access Lines 38,745 35,867 34,762
========== ========== ==========
* An "access line" is a single or multi-party circuit between the customer's
establishment and the central switching office.
The Company's LEC subsidiaries offer their customers a number of enhanced
telecommunications services, including custom calling features like call
waiting, caller identification and voice mail. Charges for custom calling
services are generally billed monthly together with the customers' local service
bill. Internet access is also available, through local dial-up telephone
numbers, to all of the Company's local service customers. The Company provided
internet services to 7,876 customers at December 31, 2000. Digital subscriber
lines ("DSL") permit high-speed Internet access and are available in many of the
Company's service areas.
The Company maintains a local presence in each of its LEC subsidiaries.
The Company provides its LEC subsidiaries with various services, including
finance, accounting and treasury services, marketing, customer service,
purchasing, engineering and construction, customer billing, rate administration,
credit and collection, and development of administrative and procedural
practices.
Access revenues are received by LECs for intrastate and interstate
exchange services provided to long distance carriers (generally referred to as
interexchange carriers or "IXCs"). These services enable IXCs to provide long
distance service to end users in the local exchange network.
Access revenues are determined, in the case of interstate calls,
according to rules promulgated by the Federal Communications Commission ("FCC")
and administered by the National Exchange Carriers Association ("NECA"). In the
case of intrastate calls, access revenues are determined by state regulatory
agencies. A relatively small portion of the Company's access revenues are
derived from subscriber line fees determined by the FCC and billed directly to
end users for access to long distance carriers. The balance of the Company's
interstate access revenues is received from NECA, which collects payments from
IXCs and distributes settlement payments to LECs.
Settlement payments are based on a number of factors, including the cost
of providing service and the amount of time the local network is utilized to
provide long distance services. Since 1984, a variety of factors, including
increased subscriber counts, cultural and technological changes, and rate
reductions by IXCs, have resulted in a consistent pattern of increasing use of
the nation's telephone network. This growth has produced higher revenues for
NECA and increased settlements for its participating LECs. The Company's
settlements from NECA have increased every year since the pool was established
in 1984, but there can be no assurance that this trend will continue.
A portion of the Company's access revenues is received from universal
service funds based upon the high cost of providing service to rural areas.
Interstate universal service fund support accounted for $1,264,000, $1,040,000
and $951,000 of the Company's network access revenues in 2000, 1999 and 1998,
respectively.
HCC's LECs also sell and lease customer premise telephone equipment,
provide inside wiring services and custom calling features, provide Internet
access and sell and lease other facilities for private line, teletype, data
transmission and other communications services. They also provide billing and
collection services for certain IXCs in lieu of such IXCs directly billing
customers within the LEC's service areas.
4
The following table presents the percentage of revenues derived from
local service revenues, access revenues, billing and collection services,
nonregulated telephone activities and cable television operations for the last
three years:
Year Ended December 31
--------------------------------
2000 1999 1998
------- ------- -------
Local network 17.6% 17.3% 16.6%
Network access 55.1 56.9 55.6
Billing and collection 1.8 2.4 2.7
Nonregulated telephone activities 15.0 12.3 15.0
Cable television 10.5 11.1 10.1
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
(2) Cable Television
The Company, through its cable television and LEC subsidiaries, owns and
operates 45 cable television systems serving 13,171 subscribers in Minnesota,
North Dakota, South Dakota and Wisconsin. Cable television revenues are derived
almost exclusively from monthly fees for basic and premium programming. Fees for
basic services range from $9.75 to $26.50 per month. Basic service generally
includes the major television networks, non-network independent stations, sports
programming, news services and automated information channels, children's
programming, access channels for public, governmental, educational and leased
use, senior citizens' programming and religious programming. Premium programming
services, such as the HBO or ShowTime movie services, are provided to
subscribers for an additional fee of $1.75 to $11.00 per month per channel.
Approximately one-third of the Company's cable television customers subscribe to
a premium channel. Premium programming is obtained from suppliers for a flat
monthly fee per subscriber and/or a fee based on the monthly charge to
subscribers for the service.
(3) Investments in Unconsolidated Affiliates
Wireless Telephone Services
- ---------------------------
The Company is the largest shareholder of Midwest Wireless Holdings, LLC,
with a 10.4% ownership stake. Midwest Wireless acquired additional wireless
operations in Wisconsin and Iowa in 2000, which significantly increased Midwest
Wireless' service area, but reduced the Company's percentage ownership of the
operation. Midwest Wireless now serves eleven rural service areas and one
metropolitan service area in Minnesota, Wisconsin and Iowa. Population of the
service areas is approximately 1,590,000. Midwest Wireless offers complete
wireless service, including custom calling features, facsimile and data
transmission and presently has 200,000 customers. The Company accounts for its
investment in Midwest Wireless using the equity method. Income recognized was
$1,248,000, $1,481,000, and $1,508,000 in 2000, 1999 and 1998, respectively.
The Company owns 10.4% of Wireless North, which provides personal
communications services ("PCS") to parts of Minnesota, Wisconsin, Iowa, North
Dakota and South Dakota. Wireless North has secured FCC licenses to provide PCS
services in 13 basic trading areas in these states, encompassing 110,000 square
miles and a population of 2.4 million. Wireless North is in its start-up phase,
and is building infrastructure in four markets, where it presently serves 11,000
customers. Its operations have not been profitable to date. Losses recorded by
the Company on this investment were $1,597,000 and $1,066,000 in 1999 and 1998,
respectively. At December 31, 2000, the Company had invested $2,073,000 of cash
and had outstanding loan guarantees of $1,091,000 in Wireless North.
The Company has had a significant investment in Rural Cellular
Corporation ("RCC"), a publicly traded company providing cellular telephone
services in Minnesota and New England. The Company obtained its investment in
RCC through its ownership interests in the RSAs serving northern Minnesota and
through the acquisitions of Ollig Utilities Company and Felton Telephone
Company. Company sales of RCC stock were 326,707 shares and 40,000 shares in
1999 and 1998, respectively. Gains on sales of these securities were $11,600,000
and $179,000 in 1999 and 1998, respectively. At December 31, 2000, the Company
owned approximately 10,700 shares of RCC's common stock.
5
In December 1998, an Alliance subsidiary sold its interest in a cellular
telephone partnership serving the Sioux Falls, South Dakota MSA. Proceeds from
the sale were $6,725,000. Gain on the sale was $4,817,000. Income recognized
from the Company's investment in this partnership was $334,000 in 1998.
Onvoy, Inc.
- -----------
Onvoy, Inc. is a privately held company that provides integrated voice,
data, and network services through its fiber optic communications network
linking communities throughout Minnesota, including all major metropolitan
areas. Onvoy, Inc. is also Minnesota's largest Internet service provider and is
a leading provider of long distance, video- conferencing and high-speed data
networking services. Onvoy's customers include the majority of Minnesota based
Fortune 500 companies and many small-to-medium sized businesses. Onvoy also
serves most of the state's higher education institutions, nearly all of the
state's K-12 schools, public libraries, state and county governments, more than
70 regional Internet service providers and more than two-thirds of the state's
independent local telephone companies.
The Company is presently the second largest common shareholder of
Onvoy. During 2000 the Company also purchased $446,000 of debt issued by Onvoy
to provide additional working capital to Onvoy's operations. However, at the end
of 2000 the Company determined that due to losses incurred by Onvoy's
operations, the value of the Company's investment in Onvoy's common stock was
impaired. Accordingly, the Company established a valuation reserve of $1,273,000
against its investment in Onvoy common stock during the fourth quarter of 2000.
Fiber Optic Transport Facilities
- --------------------------------
The Company has invested approximately $1,341,000 in five companies that
build and lease fiber optic transport facilities. These facilities afford
high-quality, high-capacity communications links and generally are used to carry
long-distance traffic. Through these investments, the Company owns pieces of
fiber routes serving the Twin Cities, Duluth-Superior, Sioux Falls,
Fargo-Moorhead, Rochester, St. Cloud and Grand Forks, and extending into Iowa
and Wisconsin.
Bank Stocks
- -----------
As part of its borrowing agreements, the Company has investments in
CoBank, Rural Telephone Finance Cooperative and the Rural Telephone Bank that
totaled $4,694,000, $4,644,000 and $4,365,000 at December 31, 2000, 1999 and
1998, respectively.
Other Investments
- -----------------
The Company has a small ownership interest in South Dakota Network
Services and Iowa Network Services, each of which provide integrated voice, data
and network services within their respective states. The Company is also an
investor in Fibercom LLC, a CLEC that has been established to provide local
communications services to business customers in the Sioux City, Iowa area.
(4) Competition
Telephone
- ---------
LECs may be subject to many forms of competition. Among potential
competitors are:
- - Facilities-based competition from providers with their own local service
network;
- - Resale competition from resale interconnection (providers who purchase local
services from the LEC at wholesale rates and resell the services to their
customers);
- - Competition from unbundled network element interconnection (providers who
lease some of the network elements from the LEC)
- - Wireless providers who may charge a competitive fee for services that could
compete with wireline based local service.
6
Rural areas like those served by the Company are less likely to
experience competition from facilities-based competitors due to the significant
investment in plant and equipment required in relation to the lower customer
density in rural markets. Competition from resale interconnection or unbundled
network element interconnection is more likely. Under the Telecommunications Act
of 1996, the Company's LECs are not currently required to lease facilities to
competitors seeking to interconnect with our network. However, there is no
assurance that interconnection may not be required in the future.
Most customers currently see wireless telephone service as a
complementary service to traditional wireline based local service. Wireless
service does directly compete with traditional local service among certain
classes of customers, principally customers with seasonal or lake homes.
Developments in technology related to cellular, PCS, digital microwave, coaxial
cable, fiber optics and other wireline or wireless services could also lead to
greater competition for traditional local services.
LECs are increasingly subject to competition from competing access
providers ("CAPs") which construct, modify or lease facilities that enable high
volume long distance users to bypass the local telephone network. Cable
television companies may also be able to modify their networks to carry
telephone messages that bypass the local telephone network. The Company believes
its LEC subsidiaries have experienced only a small loss of traffic due to
bypass.
Cable Television
- ----------------
In addition to competition from off-air television, other technologies
also supply services that compete with cable television. These include low power
television stations, multi-point distribution systems, over-the-air subscription
television and direct broadcast satellite ("DBS"). Cable television also
competes for customers in local markets with providers of other forms of
entertainment, news and information. These competitors include radio,
newspapers, magazines, motion picture theaters, video cassettes and Internet
service providers.
All of the Company's cable television franchises are non-exclusive. The
1992 Cable Act prohibits franchising authorities from unreasonably refusing to
grant franchises to competing cable television systems. The Company competes
with a municipally owned cable system in one community it serves. The degree of
competition from other cable providers will be dependent upon the state and
federal regulations concerning entry, interconnection requirements and the
degree of unbundling of the LECs' networks. Competition will be based upon
product, service quality, breadth of services offered and, to a lesser extent,
on price.
Maintaining and expanding the Company's cable television subscriber base
depends on numerous factors, including the quality and quantity of signals
available from "off-air" television stations, demand for satellite and premium
television channels and average household income in the cable service area.
Promotional efforts for cable television include telephone and door-to-door
selling and local media advertising.
(5) Regulation
The Company's LECs and cable television systems are subject to federal,
state and local regulation. The Communications Act of 1934 and the
Telecommunications Act of 1996 govern Federal regulations. Under these federal
statutes, the FCC exercises jurisdiction over all interstate telecommunications
activities. Intrastate activities are governed by rules and regulations set by
the respective state public utility commissions.
Federal Regulations
- -------------------
Under federal regulations, incumbent local exchange carriers ("ILECs")
are required to comply with the Communications Act of 1934 and rules issued by
the FCC. While the Telecommunications Act of 1996 amended the earlier law to
reduce regulatory burdens and promote competition, ILECs remain subject to
extensive regulatory requirements. ILECs are required to maintain accounting
records according to Uniform System of Accounts, to structure access charges
according to FCC rules and to reflect their charges for interstate services at a
rate of return prescribed by the FCC. The FCC also regulates transfer of control
and assignments of operating authorizations and construction licenses. The FCC
requires carriers providing access services to file tariffs with the FCC
reflecting rates, terms and conditions of the services. Tariffs filed are
subject to review and potential objection by third parties.
7
Regulation of Cost Recovery and Nonregulated Revenue Allocation
- ---------------------------------------------------------------
As a regulated common carrier, the Company's LEC subsidiaries can set
maximum rates at a level that allows recovery of reasonable costs incurred to
provide regulated service and earns a reasonable return on the investment
required to provide these services.
Costs are recovered through:
- - Monthly charges to end users for basic local telephone services and enhanced
services;
- - Access charges to interexchange carriers for originating and terminating
interstate and intrastate interexchange calls; and
- - Payments from the federal Universal Service Fund and the state universal
service funds (where applicable) that offset the high cost of providing
service in certain rural markets.
Rates for regulated services and the amount of universal service fund
support are set forth by the FCC with respect to interstate services and by
state regulatory agencies with respect to intrastate services.
In conjunction with the recovery of costs and establishment of rates, a
LEC must first determine its aggregate costs and then allocate those costs
between regulated and nonregulated services. After identifying the regulated
costs of providing local telephone service, a LEC must allocate those costs
among its various local exchange and interstate and intrastate interexchange
services and between state and federal jurisdictions. Allocating costs is
complicated because the same pieces of a LEC's plant and equipment are utilized
for different services, such as local telephone and interstate and intrastate
access services. The allocation process is called "separation" and is governed
primarily by FCC regulations. The purpose of separation is to determine how a
carrier's expenses are allocated and recovered from federal and state
jurisdictions. The FCC is considering whether to change or eliminate this
process. Any change in separation rules by the FCC could reduce or increase the
LEC's revenues.
Interstate End-User Rates
- -------------------------
The part of the local telephone network running from the switching
facility to the customer is called the "local loop." Costs to construct, operate
and maintain the loop are among the most significant costs incurred by a local
exchange carrier. The FCC has established a rate structure that provides for the
recovery of a portion of the cost of the local loop allocated to interstate
jurisdiction directly from end-users through the assessment of a subscriber line
charge. The remaining portions of the interstate local loop costs are recovered
from interstate access charges to interexchange carriers.
Due to demographic and geographic conditions, costs to provide local loop
and switching services are often higher, on a per customer basis, in rural areas
compared to urban areas. Absent a regulatory framework to permit recovery of
these costs, rural LECs would be compelled to charge considerably higher rates
for local network services. Consequently, the FCC provides for additional
interstate recovery by eligible telecommunications carriers through the federal
Universal Service Fund. Funds from the federal Universal Service Fund are
available to local exchange carriers whose local loop costs are significantly
above the national average as determined by FCC rules.
Interstate Access Rates
- -----------------------
Interstate access rates are developed on the basis of a LEC's measurement
of its interstate costs to provide access service to IXCs divided by its
projected demand for service. The resulting rates are published in the LEC's
interstate access tariff and filed with the FCC, at which time they are subject
to challenge by third parties and to review by the FCC.
The FCC recognized that the rate making and tariff filing process is
administratively burdensome for small local exchange carriers. In 1983, the FCC
established the National Exchange Carriers Association ("NECA") to develop and
administer interstate access service rates, terms and conditions. NECA develops
interstate access rates on the basis of data provided by participating local
exchange carriers and blended to yield average rates. These rates are intended
to generate revenue equal to the aggregate costs plus a return on the investment
of all of the participants.
8
Individual LECs are likely to have service costs that differ from the
revenues generated by applying the overall NECA tariff rates. To allow for this,
revenues generated by participating LECs are pooled and redistributed on the
basis of each individual company's costs. This process eliminates the burden of
individual tariff filing and produces a system in which small companies can
share and spread risk. For example, if a small local exchange carrier filed its
own tariff and subsequently suffered the loss of major customers that utilize
interstate access service, the local exchange carrier could suffer significant
under-recovery of its costs. In the NECA pool environment, the impact of this
loss is reduced because it is spread over all of the pool participants.
NECA operates separate pools for traffic sensitive costs (primarily
switching costs) and non-traffic sensitive costs (primarily loop costs). LECs
can choose to develop and administer their own interstate access charges and not
participate in the NECA pools. HCC's LECs located in Minnesota and Wisconsin
participate in the traffic sensitive NECA pools. HCC's LECs located in Iowa and
South Dakota do not participate in the traffic sensitive NECA pools. All of
HCC's LECs participate in the non-traffic sensitive NECA pools.
The FCC is reviewing its rates and policies governing interstate access
and the rate of return applicable to incumbent local exchange carriers who are
subject to rate-of-return, rather than price cap, regulation. The outcome of
this review could directly affect HCC's earnings. The outcome of this proceeding
cannot be predicted at this time.
The Telecommunications Act
- --------------------------
The Telecommunications Act was enacted to promote competition without
jeopardizing the availability of nationwide universal service at affordable
rates. These two objectives have resulted in a complex set of rules intended to
promote competitive entry in the provision of local telephone services, except
where entry would adversely effect the provision of universal service or the
public interest.
- Promotion of Local Service Competition and the Rural Exemptions
---------------------------------------------------------------
The Telecommunications Act made competitive entry into the local
telephone business more attractive to other carriers by removing barriers to
competition. In order to promote competition the Telecommunications Act
established new interconnection rules, generally requiring local exchange
carriers to allow competing carriers to interconnect with their local networks.
Congress recognized, however, that the desire to promote competition conflicted
with the ability of some existing LECs to provide universal service to high cost
customers. Congress exempted these LECs (classified as "Rural Telephone
Companies") from interconnection requirements until the continuation of the
exemption was no longer required by the public interest, as defined in the
Telecommunications Act.
Under the Telecommunications Act, all local exchange carriers, including
both incumbent local exchange carriers and new competitive carriers, are
required to:
- - Offer reasonable and nondiscriminatory resale of their telecommunications
services,
- - Ensure that customers can keep their telephone numbers when changing carriers,
- - Ensure that competitors' customers can use the same number of digits when
dialing and receive nondiscriminatory access to telephone numbers, operator
service, directory assistance and directory listing,
- - Ensure access to telephone poles, ducts, conduits and rights of way and
- - Compensate competitors for the costs of terminating traffic.
The Telecommunications Act also requires incumbent local exchange
carriers to:
- - Negotiate in good faith the terms and conditions of interconnection with any
competitive carrier making a bona fide request for same,
9
- - Interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point,
- - Unbundle and provide nondiscriminatory access to unbundled network elements,
such as local loops, switches and transport facilities, at nondiscriminatory
rates and on nondiscriminatory terms and conditions,
- - Offer resale interconnection at wholesale rates,
- - Provide reasonable notice of changes in the information necessary for
transmission and routing of services over the incumbent local exchange
carrier's facilities or in the information necessary for interoperability and
- - Provide for the physical collocation of equipment necessary for
interconnection or access to unbundled network elements at the premises of
the incumbent local exchange carrier, at rates, terms and conditions that are
just, reasonable and nondiscriminatory.
In order to implement interconnection requirements, local exchange
carriers generally enter into negotiated interconnection arrangements with
competing carriers. Local exchange carriers may also offer interconnection
tariffs, available to all competitors.
Competitors are required to compensate a local exchange carrier for the
cost of providing interconnection services. In the case of resale
interconnection, the rules provide that the rates charged should be on a
wholesale basis and reflect the current retail rates of the incumbent local
exchange carrier, excluding the portion of costs avoided by the incumbent local
exchange carrier. In the case of unbundled network element interconnection,
rates are based on costing methodologies that employ a forward-looking economic
cost pricing methodology known as total element long run incremental cost. The
Telecommunications Act specifies that resale and unbundled network element rates
are to be negotiated among the parties, or, if the parties fail to reach an
agreement, arbitrated by the relevant state regulatory authority. Once the
parties have come to agreement, the proposed rates are subject to final approval
by the state regulatory commission.
The Company's LEC subsidiaries are defined as "rural telephone companies"
under the Telecommunications Act. As rural telephone companies, they were
granted rural exemptions from the requirements relating to both resale
interconnection and unbundled network element interconnections. The rural
exemptions are continued until regulatory authorities determine that
interconnection is technically feasible, not unduly economically burdensome and
consistent with the Telecommunications Act's universal service provisions.
- Promotion of Universal Service
------------------------------
While the Telecommunications Act promoted Congress' policy of ensuring
that affordable service is provided to consumers universally in rural, high-cost
areas of the country, the Telecommunications Act altered the framework for
providing universal service by:
- - Providing for the identification of those services eligible for universal
service support,
- - Requiring the FCC to make implicit subsidies explicit,
- - Expanding the types of communications carriers required to pay universal
service support and
- - Allowing competitive local exchange carriers to be eligible for funding.
These and other provisions were intended to make provision of universal
service support compatible with a competitive market.
10
Pursuant to the Telecommunications Act, federal Universal Service Fund
payments are only available to carriers that are designated as eligible
telecommunications carriers by a state public utilities commission. In areas
served by rural LECs, the Telecommunications Act provides that a state public
utilities commission may designate more than one eligible telecommunications
carrier, in addition to the incumbent local exchange carrier, only after
determining that the designation of an additional eligible telecommunications
carrier will serve the public interest. As a result, an incumbent rural LEC has
an opportunity to maintain its status as the sole recipient of federal Universal
Service Fund payments in its service area, even if it is subsequently subjected
to competition. HCC's rural LEC subsidiaries are currently the sole designated
eligible telecommunications carriers in their respective service areas except in
one area where a wireless competitor was approved as an eligible provider. The
addition of a second eligible telecommunications carrier in these service areas
could have the effect of reducing the amount of funds available to HCC's LECs
from the federal Universal Service Fund. Such a reduction could materially
adversely affect HCC's ability to achieve a reasonable rate of return on the
capital invested in its network.
In May 1997, the FCC implemented new rules for interstate universal
service support. The new rules provide for separate federal Universal Service
Fund programs for rural and non-rural telephone companies. The new rules for
non-rural companies base support upon "forward-looking costs" derived from cost
proxy models. It is uncertain whether these models will fully compensate local
exchange carriers for the cost of providing local service in high-cost areas.
The FCC set the implementation date for the new system as January 1, 1999, which
was postponed to January 1, 2000 for non-rural telephone companies. The FCC
established a Rural Task Force, which investigated how to adapt the proxy cost
models approved for larger carriers for rural telephone companies. The Rural
Task Force has proposed that revenues for small rural telephone companies be
based on embedded costs rather than forward looking costs. Such a plan has been
proposed by a multi-association group ("MAG"). The MAG plan is currently in the
comment phase and has not been agreed to by any of the interested parties. The
Company does not expect a new plan to be put in effect before January 1, 2002
and cannot predict the effect of any new plan on operations. In the interim,
support mechanisms for rural carriers remain unchanged.
State Regulation of Rural LECs
- ------------------------------
HCC's LEC subsidiaries are subject to regulation by Minnesota, South
Dakota, Iowa and Wisconsin regulatory agencies with respect to:
- - Intrastate toll rates,
- - Intrastate access charges billed to intrastate IXCs, - Service areas, -
Service standards, - Accounting and related matters, and - The use of radio
frequencies in telephone operations
In some cases state regulations also apply to local service rates, rate
of return, depreciation rates, construction plans and borrowings, and certain
other financial transactions.
Local service rates are not directly determined by regulatory
authorities, but are limited by regulation of these other areas. The Company has
sought appropriate increases in local and other service rates and approval for
changes in rate structures necessary to achieve reasonable rates and earnings.
The bulk of the Company's access lines are located in Minnesota. A bill
passed by the 1995 Minnesota legislature allows telephone companies serving
fewer than 50,000 access lines to elect to provide service under an alternate
form of regulation. Companies choosing alternative regulation agree not to
increase rates for two years, other than in extraordinary circumstances. These
companies are not subject to rate of return review by the Public Utilities
Commission for the same two years. All of HCC's Minnesota-based LEC subsidiaries
elected alternative rate regulation election effective January 1, 1996. Local
rate increases after January 1, 1998 are not subject to review by the Minnesota
Public Utilities Commission unless the lower of 500 or five percent of customers
file a petition requesting such review.
The Minnesota Public Utilities Commission is investigating intrastate
access rates charged by local telephone companies to IXCs. The commission has
proposed a plan reducing intrastate access charges and implementing a state
universal service fund to compensate high cost companies. The Company cannot
predict the outcome of the rate investigation or if any part of the proposed
plan will be adopted.
11
Where applicable, HCC's LECs also participate in intrastate access
tariffs approved by state regulatory authorities for intrastate intra-LATA
(Local Access Transport Area) and inter-LATA services. These intrastate
arrangements are intended to compensate LECs for the costs, including a fair
rate of return, of facilities provided in originating and terminating intrastate
long distance services.
Cable Television System Regulation
- ----------------------------------
The FCC regulates the providers of satellite communications services and
facilities for the transmission of programming services, the cable television
systems that carry such services, and, to some extent, the availability of the
programming services themselves through its regulation of program licensing.
Municipalities and other state and local government authorities also regulate
cable television systems. FCC regulations contain many detailed provisions
including:
o "Must carry" rules regarding the broadcast television and translator signals
that must be included in channel offerings to subscribers, o Exclusivity
provisions which require the deletion of certain programming carried by
out-of-area stations where it would duplicate programming
carried by local stations,
o Technical standards and performance testing requirements, and o
Franchise fees applicable to state and local cable television franchises.
Thus far, HCC's cable systems have not experienced any difficulty in complying
with the FCC rules.
In Minnesota, the award of cable franchises and certain aspects of cable
operations are subject to rules of the Minnesota Cable Communications Board.
Cable television systems are operated under 15 year, non-exclusive franchises
granted by local government authorities. Franchises contain many conditions,
including time limitations on commencement or completion of construction,
approval of initial fees charged to subscribers for basic service, the number of
channels offered and the types of programming. HCC does not anticipate
difficulty in obtaining renewal of its franchises at the expiration of their
current terms.
The regulation of cable television at the federal, state and local levels
is subject to the political process and has been in constant flux over the past
decade. This process continues in the context of legislative proposals for new
laws and the adoption or deletion of administrative regulations and policies.
The Company anticipates further material developments in these areas, but cannot
anticipate their direction and impact on its cable television operations.
(6) Business Strategy
The Company is focused on business opportunities in rural
telecommunications. Its three-part strategy is to:
- - Expand its existing operations through internal growth
- - Pursue acquisitions of attractive properties, particularly the acquisition of
additional rural telephone exchanges and cable television properties
- - Participate in opportunities afforded by new telecommunications technologies
Future growth in existing telephone and cable operations is expected to
come from providing service to new or presently unserved homes and businesses,
from sales of enhanced services to existing customers and from providing new
services made possible by improvements in technology.
The Company continually assesses acquisition opportunities. Competition
to acquire attractive telephone or cable television properties is intense.
Acquisitions of rural telephone exchanges are subject to the approval of
regulatory agencies in some states and, in some cases, to federal waivers that
may affect the form of regulation or amount of interstate cost recovery of
acquired telephone exchanges. The Company will aggressively pursue acquisitions
of telephone exchanges, but there is no assurance that acquisitions can be made
on acceptable terms or that regulatory approval, where required, will be
received.
12
The Company has aggressively invested in new telecommunications
technologies, primarily through investments in partnerships and limited
liability companies. The Company has substantial investments in wireless
communications companies, fiber optic transport groups, CLECs and Internet
service providers. The Company intends to pursue additional investment
opportunities in the future.
(7) Employees
At March 1, 2001, the Company had 168 full-time and part-time employees,
of which 118 employees work in the Alliance operations and 50 work in Hector
operations. None of the Company's employees are represented under collective
bargaining agreements. HCC believes its employee relations to be good.
(8) Executive Officers of Registrant
The executive officers of the Company and their ages at March 1, 2001
were as follows:
Name Age Position
Curtis A. Sampson 67 Chairman of the Board and Chief
Executive Officer
Steven H. Sjogren 58 President and Chief Operating
Officer
Paul N. Hanson 54 Vice President and Treasurer
Charles A. Braun 43 Chief Financial Officer
Executive officers serve at the pleasure of the Board of Directors and
are elected annually for one-year terms. Each officer above has served the
Company in the indicated capacity since 1990.
Mr. Sjogren devotes his full time to the Company's business. Messrs.
Sampson, Hanson and Braun each devote approximately 40% of their working time to
the Company's business with the balance devoted to management responsibilities
at Communications Systems, Inc. ("CSI"), a diversified telecommunications
holding company also located in Hector, Minnesota, for which they are separately
compensated by CSI.
[d] FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
Not Applicable.
13
ITEM 2. PROPERTIES
The Company's telephone property consists mainly of central office
switching equipment, the land and buildings in which the equipment is housed,
and connecting lines consisting of aerial and underground cable, conduit, and
poles and wires which connect customers' premises with central offices.
Connecting lines are generally located under or above public rights of way or
land owned, for the most part, by others, pursuant to consents of various
governmental bodies or private leases, permits, easements, agreements or
licenses. The Company also owns customer-leased telephones and related terminal
equipment and a small amount of connecting lines that are located on customers'
premises.
The connecting lines constitute approximately 56% of the Company's
telephone property in service. Central office switching equipment represents
approximately 33%. Telephones and related equipment constitute approximately 1%.
Land, buildings, data processing equipment, service vehicles and construction
equipment constitute the remaining 10%. The Company owns substantially all the
land and buildings in which its central office equipment is located. HCC's
principal general offices, administrative services department and business
office are located in Hector, Minnesota and leased to HCC from CSI. Alliance
owns the building in Ada, Minnesota where its general offices are located.
The physical assets of the Company's cable television systems consist of
signal reception equipment and distribution electronics and cables. The
receiving equipment is comprised of a tower and antennas for reception of
broadcast television signals and one or more satellite dishes for reception of
satellite signals. The Company owns or leases the land on which the towers for
its cable systems and the buildings containing other receiving equipment are
located. Pole attachment space is leased from utilities serving the community.
See Note 6 of "Notes to Consolidated Financial Statements" for additional
information regarding pledged assets.
ITEM 3. LEGAL PROCEEDINGS
No material litigation or other claims are presently pending against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
[a] MARKET INFORMATION
The Company's common stock is traded on the American Stock Exchange
("AMEX"). The table below presents the range of high and low trading prices for
the Company's stock for each period as reported by AMEX:
2000 1999
------------------------ -------------------------
Quarter High Low High Low
First $ 15.75 $ 11.63 $ 9.63 $ 8.06
Second 14.88 11.38 11.13 8.00
Third 14.25 12.38 14.88 10.00
Fourth 13.25 10.00 17.25 12.00
[b] HOLDERS
At March 1, 2001 there were 561 holders of record of Hector
Communications Corporation common stock.
[c] DIVIDENDS
HCC has not paid cash dividends on its common stock or preferred stock
since it began operating as a public company in 1990, nor does HCC have any
obligations to pay dividends on its preferred stock. The financing agreements
between HCC's subsidiaries and their lenders, and HCC and its lenders restrict
the ability of HCC to pay dividends. At the present time, HCC intends to retain
earnings to finance the expansion of its business, and does not anticipate any
cash dividends will be paid in the foreseeable future. See Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
also Note 6 to the Consolidated Financial Statements under Item 8 herein for a
description of restrictions on dividends.
15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands except per share amounts)
Year Ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Selected Income Statement Information
Revenues $ 37,790 $ 34,117 $ 31,839 $ 28,866 $ 20,658
Costs and Expenses 26,799 23,063 21,192 19,113 14,066
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income 10,991 11,054 10,647 9,753 6,592
Other Income (Expenses), net (2,471) 7,401 (40) (3,367) (3,518)
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 8,520 18,455 10,606 6,386 3,074
Income Tax Expense 4,207 7,513 4,949 2,867 1,540
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Minority Interest 4,313 10,942 5,657 3,519 1,534
Minority Interest in Earnings of Alliance
Telecommunications Corporation 1,004 3,463 1,747 798 325
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,309 $ 7,479 $ 3,910 $ 2,721 $ 1,209
================================================================================================================================
Basic Net Income Per Common Share $ .93 $ 2.42 $ 1.63 $ 1.44 $ .65
Diluted Net Income Per Common Share $ .86 $ 1.96 $ 1.15 $ .93 $ .53
Average Shares Outstanding:
Common shares only 3,544 3,095 2,403 1,893 1,870
Common and potential common shares 3,851 3,945 3,937 3,732 3,694
===============================================================================================================================
Selected Balance Sheet Information
Working Capital $ 8,960 $ 18,736 $ 6,554 $ 8,504 $ 1,307
Property, Plant and Equipment, net 56,227 51,410 50,810 45,927 47,039
Excess of Cost Over Net Assets Acquired, net 55,475 51,405 53,004 51,170 52,510
Total Assets 158,678 166,797 150,680 139,291 137,348
Long-Term Debt 84,378 86,282 94,232 97,793 96,127
Stockholders' Equity 39,108 39,982 22,720 14,447 9,946
- --------------------------------------------------------------------------------------------------------------------------------
Operating results for 1996 include the operations of Ollig Utilities Company
from the April 25, 1996 purchase date.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Hector Communications Corporation ("HCC") owns a 100% interest in five
LEC subsidiaries and one cable television subsidiary. At December 31, 2000,
these subsidiaries provided telephone service to 7,422 customers in 9 rural
communities in Minnesota and Wisconsin. They also owned cable television systems
serving 4,853 customers in Minnesota and Wisconsin. HCC's 100%-owned
subsidiaries also have substantial investments in other telecommunications
ventures, including, Midwest Wireless Holdings, LLC and Wireless North LLC.
HCC also owns a 68% interest in Alliance Telecommunications Corporation
("Alliance"). At December 31, 2000, Alliance, through its six LEC subsidiaries,
provided telephone service to 31,323 customers in 28 rural communities in
Minnesota, Wisconsin, South Dakota and Iowa. Alliance's subsidiaries also
provided cable television services to 8,318 subscribers in Minnesota, South
Dakota and North Dakota. Alliance's subsidiaries also own substantial
investments in Midwest Wireless Holdings, LLC, and Wireless North LLC, own
marketable securities portfolios with investments in telecommunications
providers Illuminet Holdings, Inc. and Rural Cellular Corporation, and have
other investments. The minority interest in Alliance is owned by Golden West
Telecommunications Cooperative and Split Rock Telecom Cooperative.
Results of Operations
- ---------------------
2000 Compared to 1999
- ---------------------
Consolidated revenues increased 11% to $37,790,000 in 2000 from
$34,117,000 in 1999. The following table shows revenues by operating group for
2000 compared to 1999:
Alliance Hector
Year Ended December 31 Year Ended December 31
2000 1999 2000 1999
Local network $ 4,934,548 $ 4,250,474 $ 1,715,694 $ 1,664,204
Network access 15,299,095 14,587,083 5,513,268 4,831,878
Billing and collection 527,740 650,839 166,431 173,700
Nonregulated activities 4,879,785 3,527,645 800,130 647,415
Cable television 2,469,407 2,306,786 1,484,004 1,477,292
--------------- ---------------- ---------------- -----------------
$ 28,110,575 $ 25,322,827 $ 9,679,527 $ 8,794,489
--------------- ---------------- ---------------- -----------------
Consolidated local service revenues grew to $6,650,000 in 2000 from
$5,915,000 in 1999, an increase of $735,000 or 12%. Revenue growth was due to
the acquisition of Hager TeleCom, Inc. in June 2000, which added $348,000 to
local service revenues in 2000 and also due to increased demand for telephone
lines to provide advanced telecommunications services such as Internet services.
Network access revenues rose to $20,812,000 in 2000 from $19,419,000 in
1999, an increase of $1,393,000 or 7%. The acquisition of Hager TeleCom, Inc.
accounted for $523,000 of the increase. Increased universal service support
payments accounted for $224,000. The balance was due to increased use of the
telephone network by customers and increased settlements payments from NECA.
Nonregulated revenues grew to $5,680,000 in 2000 from $4,175,000 in 1999,
an increase of $1,505,000 or 36%. The acquisition of Hager TeleCom, Inc.
accounted for $762,000 of the increase. The Company's deregulated revenues
consist mainly of internet service fees, rents from leased of fiber-optic cable
facilities, sales of telecommunications equipment, engineering fees, directory
revenues and sales commissions. Cable television revenues rose to $3,953,000 in
2000 from $3,784,000 in 1999, an increase of $169,000 or 4% due to increased
customer service rates. Billing and collection revenues declined to $694,000 in
2000 from $825,000 in 1999, a decrease of $131,000 or 16% as IXCs continued the
trend toward self-billing of customers.
17
Consolidated operating costs and expenses grew to $26,799,000 in 2000
from $23,063,000 in 1999, an increase of $3,736,000 or 16%. The acquisition of
Hager TeleCom, Inc. accounted for $1,265,000 of the increase. The following
table shows costs and expenses by operating group for 2000 compared to 1999:
Alliance Hector
Year Ended December 31 Year Ended December 31
2000 1999 2000 1999
Plant operations $ 3,586,255 $ 2,944,902 $ 1,224,546 $ 1,142,021
Depreciation and amortization 7,354,503 5,930,740 2,821,781 2,616,879
Customer operations 1,641,054 1,583,327 310,304 329,191
General and administrative 3,842,955 3,149,918 1,772,180 1,544,670
Other operating expenses 2,791,331 2,295,122 1,454,337 1,526,310
--------------- ---------------- ---------------- -----------------
$ 19,216,098 $ 15,904,009 $ 7,583,148 $ 7,159,071
--------------- ---------------- ---------------- -----------------
Consolidated plant operations expenses increased to $4,811,000 in 2000
from $4,087,000 in 1999, an increase of $724,000 or 18% due to the acquisition
of Hager, increased labor costs and increased charges from suppliers.
Depreciation and amortization increased to $10,176,000 in 2000 from $8,548,000
in 1999, an increase of $1,628,000 or 19% due to increased depreciation on new
telephone switching equipment and the acquisition of Hager. Customer operations
expenses increased 2% to $1,951,000 in 2000 from $1,913,000 in 1999 due largely
to growth in the number of customers served. General and administrative expenses
increased to $5,615,000 in 2000 from $4,695,000 in 1999, an increase of $920,000
or 20% due to the acquisition of Hager and increased cable television
administrative fees. Other operating expenses increased $424,000 or 11%.
Consolidated operating income decreased $63,000 or 1% to $10,991,000 in
2000 from $11,054,000 in 1999.
Consolidated interest expenses decreased $628,000 to $5,955,000 in 2000
from $6,583,000 in 1999. The decrease was due to expense reductions on
convertible debentures that were retired or converted into common stock in 1999.
In 2000, the Company had income from unconsolidated affiliates of
$611,000 compared to a loss of $336,000 in 1999. The Company recorded income on
its Wireless North PCS investment (due to adjustments in its debt guarantee) of
$15,000 in 2000 compared to a loss of $1,597,000 in 1999. Income from the
Company's investments in Northern Transport Group and South Dakota Networks
totaled $535,000 in the 2000 period. The Company took a charge against earnings
of $1,273,000 in 2000 based on its revaluation of its investment in Onvoy, Inc.
Income from Midwest Wireless Holdings, LLC decreased to $1,248,000 in 2000 from
$1,481,000,in 1999. The decrease was due to price competition from other
wireless service providers and costs associated with its acquisition of
additional service areas in Iowa and Wisconsin.
Alliance had gains on sales of marketable securities totaling $1,622,000
in 2000 compared to gains on sales of $13,203,000 in 1999. Most of the gains
were on sales of US West (now Qwest) stock sold in 2000 and sales of Rural
Cellular Corporation in 1999. Alliance continues to hold a significant portfolio
of marketable securities. Interest and dividend income increased to $1,251,000
in 2000 from $1,116,000 in 1999 due to investments of the cash proceeds from the
marketable securities sales.
Consolidated income before income taxes decreased to $8,520,000 in 2000
from $18,455,000 in 1999. The Company's effective income tax rate of 49.4% is
higher than the standard U.S. tax rate due to state income taxes and because the
goodwill amortization expenses from the Company's acquisitions cannot be
deducted. Income before the minority interest in Alliance's earnings decreased
to $4,313,000 in 2000 from $10,942,000 in 1999. Minority interest on earnings of
Alliance was $1,004,000 in 2000 compared to $3,463,000 in 1999. Net income
decreased to $3,309,000 in 2000 compared to $7,479,000 in 1999.
18
1999 Compared to 1998
- ---------------------
Consolidated revenues increased 7% from $31,839,000 in 1998 to
$34,117,000 in 1999. The following table shows revenues by operating group for
1999 compared to 1998:
Alliance Hector
Year Ended December 31 Year Ended December 31
1999 1998 1999 1998
Local network $ 4,250,474 $ 3,730,079 $ 1,664,204 $ 1,560,732
Network access 14,587,083 13,480,391 4,831,878 4,229,530
Billing and collection 650,839 683,132 173,700 182,635
Nonregulated activities 3,527,645 4,283,839 647,415 489,528
Cable television 2,306,786 1,774,495 1,477,292 1,424,333
--------------- ---------------- ---------------- -----------------
$ 25,322,827 $ 23,951,936 $ 8,794,489 $ 7,886,758
--------------- ---------------- ---------------- -----------------
Consolidated local service revenues grew from $5,291,000 in 1998 to
$5,915,000 in 1999, an increase of $624,000 or 12%. Revenue growth was due to:
- - Addition of extended area service to Sioux Falls from Alliance's South Dakota
telephone exchanges
- - Increased demand for telephone lines to provide advanced telecommunications
services such as Internet services
- - Increased development within the LECs' service areas, and - The full year
effect of Alliance's acquisition of Felton Telephone Company
("Felton").
The number of access lines served by the LECs increased 3% from 34,762 to
35,867.
Network access revenues rose from $17,710,000 in 1998 to $19,419,000 in
1999, an increase of $1,709,000 or 10%. The increase was chiefly due to
increased use of the telephone network by customers, increased settlements
payments from NECA and increased universal service support funds.
Nonregulated revenues fell from $4,773,000 in 1998 to $4,175,000 in 1999,
a decrease of $598,000 or 13%. Revenue decreases from equipment leases in 1999
more than offset increased Internet revenues. Cable television revenues rose
from $3,199,000 in 1998 to $3,784,000 in 1999, an increase of $585,000 or 18%
due to rate increases and the full-year effect of the June 1998 acquisition by
Alliance of additional cable systems from Spectrum Cablevision Limited
Partnership. Billing and collection revenues declined from $866,000 in 1998 to
$825,000 in 1999, a decrease of $41,000 or 5% as IXCs continued the trend toward
self-billing of customers.
Consolidated operating costs and expenses grew from $21,192,000 in 1998
to $23,063,000 in 1999, an increase of $1,871,000 or 9%. The following table
shows costs and expenses by operating group for 1999 compared to 1998:
Alliance Hector
Year Ended December 31 Year Ended December 31
1999 1998 1999 1998
Plant operations $ 2,944,902 $ 2,821,318 $ 1,142,021 $ 933,994
Depreciation and amortization 5,930,740 5,712,509 2,616,879 2,068,701
Customer operations 1,583,327 1,549,019 329,191 254,649
General and administrative 3,149,918 2,575,215 1,544,670 1,375,954
Other operating expenses 2,295,122 2,646,862 1,526,310 1,253,586
--------------- ---------------- ---------------- -----------------
$ 15,904,009 $ 15,304,923 $ 7,159,071 $ 5,886,884
--------------- ---------------- ---------------- -----------------
Consolidated plant operations expenses increased from $3,755,000 in 1998
to $4,087,000 in 1999, an increase of $332,000 or 9%, due to training and
maintenance contracts associated with new telephone switches and offerings of
enhanced telephone services. Depreciation and amortization increased from
$7,781,000 in 1998 to $8,548,000 in 1999, an increase of $767,000 or 10% due to
increased depreciation on new telephone switching equipment. Customer operations
expenses increased 6% from $1,804,000 in 1998 to $1,913,000 in 1999 due largely
to growth in the number of customers served. General and administrative expenses
increased from $3,951,000 in 1998 to $4,695,000 in 1999, an increase of $744,000
or 19% due to increased cable television selling and administrative expenses.
Other operating expenses decreased $79,000 or 2%.
19
Consolidated operating income increased $407,000 or 4% from $10,647,000
in 1998 to $11,054,000 in 1999.
Consolidated interest expenses decreased $732,000 from $7,315,000 in 1998
to $6,583,000 in 1999. The decrease was due to expense reductions on convertible
debentures that were retired or converted into common stock in 1998 and 1999.
In 1999, the Company had a loss from investments in unconsolidated
affiliates of $336,000 compared to income of $883,000 in 1998. The Company's
share of loss from its Wireless North PCS investment was $1,597,000 in 1999
compared to $1,066,000 in 1998. Income from Midwest Wireless Holdings, LLC
decreased from $1,508,000 in 1998 to $1,481,000,in 1999. The decrease was due to
price competition from other wireless service providers. The Company had income
in 1998 from the Sioux Falls, South Dakota MSA, prior to its sale by Alliance,
of $334,000 in 1998 compared to no income in 1999.
Alliance had gains on sales of marketable securities totaling $13,203,000
in 1999 compared to gains on sales of $965,000 in 1998. Most of the gains were
on sales of Rural Cellular Corporation stock that Alliance sold over the course
of 1999. Alliance continues to hold a significant portfolio of marketable
securities. Consolidated investment income increased $507,000 from $609,000 in
1998 to $1,116,000 in 1999 due to investments of the cash proceeds from the
marketable securities sales. Alliance's 1998 income included a gain before
income taxes of $4,817,000 from the sale of its 12.25% interest in a cellular
telephone partnership serving the Sioux Falls, South Dakota MSA to CommNet
Cellular, Inc.
Consolidated income before income taxes increased from $10,606,000 in
1998 to $18,455,000 in 1999. The Company's effective income tax rate of 40.7% is
higher than the standard U.S. tax rate due to state income taxes and because the
goodwill amortization expenses from the acquisition of Ollig Utilities cannot be
deducted. Income before the minority interest in Alliance's earnings increased
93% from $5,657,000 in 1998 to $10,942,000. Minority interest on earnings of
Alliance were $3,463,000 in 1999 compared to $1,747,000 in 1998. Net income
increased 91% to $7,479,000 in 1999 compared to $3,910,000 in 1998.
Liquidity and Capital Resources
- -------------------------------
Operations
----------
Cash flows from consolidated operating activities were $7,981,000,
$6,693,000 and $9,623,000 in 2000, 1999 and 1998, respectively. The increase in
cash flows from operations in 2000 was due to higher levels of noncash expenses
in 2000. At December 31, 2000, the Company's cash, cash equivalents and
marketable securities totaled $16,729,000 compared to $39,274,000 at December
31, 1999. Alliance's cash and securities were $10,225,000 of this total at
December 31, 2000. Working capital at December 31, 2000 was $8,960,000 compared
to $18,736,000 at December 31, 1999. The current ratio was 1.8 to 1 at December
31, 2000 compared to 2.3 to 1 at December 31, 1999. Most of the decrease in
working capital was due to cash payments made to acquire Hager TeleCom, Inc.
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 2000, 1999 and 1998 were $3,111,000, $2,902,000 and
$2,652,000, respectively. Alliance's plant additions in 2000 (excluding the
acquisition of Hager TeleCom, Inc.), 1999 and 1998 (excluding the acquisitions
of Felton and Spectrum) were $6,335,000, $4,640,000 and $5,163,000,
respectively. Plant additions for 2001 for Hector and Alliance are expected to
total $4,530,000 and $7,109,000, respectively. These plant additions will
provide customers with additional advanced telecommunications services and
expand usage of high capacity fiber optics in the telephone network. The Company
has contracted with Next Level Communications to provide $1,433,000 of broadband
equipment as part of these additions.
20
Investments
-----------
Investment income has been derived almost exclusively from interest
earned on the Company's cash and cash equivalents. Interest income has
fluctuated in relation to changes in interest rates and availability of cash for
investment. In 2000, Alliance received $5,421,000 from sales of marketable
securities, principally USWest common stock. In 1999, Alliance received
$18,920,000 from sales of marketable securities, principally Rural Cellular
Corporation common stock. In 1998, Alliance received $1,820,000 from sales of
interests in Rural Cellular Corporation, MediaOne Group, Inc., Comnet Cellular,
Inc. and Illuminet Holdings, Inc. At December 31, 2000, Alliance continued to
maintain a significant marketable securities portfolio consisting primarily of
shares of Illuminet Holdings, Inc. and Rural Cellular Corporation.
The Company is an investor in Wireless North LLC, a limited liability
corporation that has licenses to operate PCS systems in 13 markets in Minnesota,
Wisconsin, North Dakota and South Dakota. The Company invested cash of $183,000,
$1,032,000 and $761,000 in Wireless North in 2000, 1999 and 1998, respectively.
Cash received as return of capital in 2000 due to investment by Touch America,
Inc. in Wireless North were $409,000. Investments in Wireless North prior to
1998 consisted of $510,000 of cash and debt guarantees which have been reduced
by $282,000 to $1,091,000. The PCS systems are in start-up mode and continue to
incur significant losses. Wireless North is currently up for sale and
expressions of interest have been received from other investors. The Company has
accrued losses on Wireless North up to the total of its cash investments and
loan guarantees. It cannot predict the effect a sale of Wireless North would
have on its future financial results.
The Company continues to maintain its ownership in Midwest Wireless
Holdings, LLC through acquisition of additional partnership interests. The
acquisition of Hager TeleCom, Inc. added .8% to the Company's ownership
interest. Cash expended to purchase Midwest Wireless Holdings, LLC interests was
$380,000 in 1998. At December 31, 2000, the Company's ownership percentage
totaled 10.4%. In December, 1998, the Company sold its 12.25% interest in Sioux
Falls Cellular, Ltd., which provides cellular service in the Sioux Falls, South
Dakota MSA to CommNet Cellular, Inc. for $6,725,000.
The Company's Alliance subsidiary has committed to invest $600,000 in
2001 to support the CLEC operations in Breckenridge, MN and Wahpeton, ND of 702
Communications (Val Ed Co.). The Company cannot predict if additional funds
beyond this amount will be required.
Debt and Loan Commitments
-------------------------
As part of financing its 68% ownership interest in Alliance, the Company
borrowed $6,000,000 from CoBank (St. Paul Bank for Cooperatives before its 1999
merger with CoBank). In 1998, the Company replaced the loan with a 15-year term
loan from Rural Telephone Finance Cooperative ("RTFC"). The interest rate on the
loan varies according to the rate RTFC charges for similar loans. The interest
rate was 8.4% at December 31, 2000.
The Company carries a significant amount of debt due to Alliance`s
borrowing to finance the acquisition of Ollig Utilities Company. Interest rates
on Alliance's acquisition loan from CoBank have been locked for periods of one
to ten years at rates averaging 7.5%. The outstanding balance on this loan at
December 31, 2000 was $44,902,300. CoBank is a cooperative, owned and controlled
by its customers. Each customer borrowing from the bank on a patronage basis
shares in the bank's net income through payment of patronage refunds. As a
condition of maintaining the loan, Alliance invested $344,000 and $509,000 of
cash in the bank in 1999 and 1998, respectively. The Company recorded a loss of
$200,000 in 1999 due to writedown of the value of this bank stock in the merger
between CoBank and St. Paul Bank for Cooperatives.
In 1995 the Company made a public offering of 8.5% convertible
subordinated debentures. Value of the offering was $12,650,000. Proceeds to the
Company, after underwriting, accounting and legal expenses were $11,300,000.
During 1999 and 1998, the Company issued calls to retire the debentures, which
resulted in $10,757,000 of debentures being converted into stock and $1,893,000
of debentures being purchased and retired.
21
The Company's LEC subsidiaries borrow from the Rural Utilities Service
("RUS") and the Rural Telephone Bank ("RTB") to help finance asset additions.
Proceeds from long-term borrowings from RUS and RTB were $700,000, $6,156,000
and $737,000 in 2000, 1999 and 1998, respectively. The average interest rate on
outstanding RUS and RTB loans is 5.5%. At December 31, 2000 unadvanced loan
commitments from the RUS and RTB to Hector's and Alliance's LEC subsidiaries
totaled $11,498,000. Subsequent to year end, an Alliance subsidiary received
preliminary commitments from RUS & RTB for a new $13,000,000 loan.
The Company's loan agreements place significant restrictions on cash
distributions from the subsidiaries to the parent company. Substantially all of
the LEC's assets are pledged or are subject to mortgages to secure obligations
to the RUS and RTB. Alliance's loan covenants with CoBank also restrict dividend
payments at the Alliance level. A portion of any dividend payment from Alliance
to Hector would also be subject to federal and state income taxes. It is the
Company's plan, in so far as possible, to maintain its cash balances at the
subsidiary level to support their operations.
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.
Acquisitions
------------
Effective June 9, 2000, Alliance acquired all the outstanding common
stock of Hager TeleCom, Inc. ("Hager"); a rural telephone company located in
southwestern Wisconsin. Hager serves approximately 2,100 access lines, provides
internet service to 2,700 customers in Hager, WI and Red Wing, MN and has an
ownership interest in Midwest Wireless Holdings, LLC. Purchase price was
$9,124,500 of cash plus acquisition costs.
Effective April 1, 1998, Alliance acquired all the outstanding common
stock of Felton Telephone Company ("Felton"); a rural telephone company located
in northwestern Minnesota adjacent to areas already served by the Company's
telephone subsidiaries. Felton serves approximately 700 access lines and held a
significant portfolio of marketable securities, including investments in Rural
Cellular Corporation, U.S. West Communications, Inc. and MediaOne Group, Inc.
Purchase price was $3,650,000, which includes a cash downpayment and seller
financing of the balance through a $3,149,000 note payable bearing interest at
8.25%. The note matures April 1, 2005.
Effective June 9, 1998, Alliance acquired the assets of 8 cable
television systems serving 4,000 customers in 19 rural communities in Minnesota
and North Dakota from Spectrum Cablevision Limited Partnership ("Spectrum").
Several of these communities are also served by Alliance's telephone
subsidiaries. Purchase price was approximately $4,559,000. Financing for this
purchase included $2,000,000 from a new line of credit arrangement with Rural
Telephone Finance Cooperative. In 1997, Alliance acquired one small system for
$120,000.
The Company is always looking to acquire properties that advance its plan
to be a provider of top quality telecommunications services to rural customers.
In the past, the Company has been a member of investor groups that sought
unsuccessfully to acquire rural telephone properties offered for sale by GTE and
Qwest. The Company cannot predict if it will be successful in acquiring
additional properties and does not currently have financing plans in place to
pay for possible acquisitions.
Effects of Inflation
- --------------------
The Company's local exchange telephone companies are subject to the
jurisdiction of Minnesota, Iowa, South Dakota and Wisconsin regulatory
authorities with respect to a variety of matters, including rates for intrastate
access services, the conditions and quality of service, issuance of debt,
depreciation rates and accounting methods. Rates for local telephone service are
not established directly by regulatory authorities, but their authority over
other matters limits the Company's ability to implement rate increases. In
addition, the regulatory process inherently restricts the Company's ability to
immediately pass cost increases along to customers unless the cost increases are
anticipated and the rate increases implemented prospectively.
22
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (as amended) which was to be effective
January 1, 2000 but was deferred to fiscal years beginning after June 15, 2000.
The Company has not yet determined the impact of this pronouncement on its
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the staff's views regarding generally
accepted accounting principles for revenue recognition and deferred costs in the
financial statements. SAB 101 did not have a material effect on the Company's
financial statements.
Factors Affecting Future Performance
- ------------------------------------
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.
23
REPORT OF MANAGEMENT
The management of Hector Communications Corporation and its subsidiary companies
is responsible for the integrity and objectivity of the financial statements and
other financial information contained in the annual report. The financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial information,
management maintains accounting systems and related controls. These controls
provide reasonable assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use in preparing
financial statements. Management recognizes its responsibility for conducting
the Company's affairs according to the highest standards of personal and
corporate conduct.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with the independent auditors and management periodically to
review accounting, auditing, financial reporting and internal control matters.
The independent auditors have free access to this committee, without management
present to discuss the results of their audit work and their opinion on the
adequacy of internal financial controls and the quality of financial reporting.
/s/ Curtis A. Sampson
-----------------------------------
Curtis A. Sampson
Chairman and Chief Executive Officer
/s/ Charles A. Braun
-----------------------------------
Charles A. Braun
March 29, 2001 Chief Financial Officer
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Hector Communications Corporation
We have audited the accompanying consolidated balance sheets of Hector
Communications Corporation and subsidiaries as of December 31, 2000 and 1999 and
the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hector
Communications Corporation and subsidiaries as of December 31, 2000 and 1999 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ Olsen Thielen & Co., Ltd.
- -----------------------------
Olsen Thielen & Co., Ltd.
February 14, 2001
St. Paul, Minnesota
25
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
----------------------------------
2000 1999
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 13,834,110 $ 27,055,772
Construction fund (Note 6) 317,837 283,604
Accounts receivable (net of allowance for doubtful accounts of
$360,000 and $447,000, respectively) 5,548,622 4,854,365
Materials, supplies and inventories, at average cost 825,673 616,985
Other current assets 302,704 171,432
------------- -------------
TOTAL CURRENT ASSETS 20,828,946 32,982,158
PROPERTY, PLANT AND EQUIPMENT,net (Notes 1 and 5) 56,226,525 51,410,033
OTHER ASSETS:
Excess of cost over net assets acquired, less amortization
of $8,212,000 and $6,473,000 (Note 1) 55,475,430 51,405,010
Marketable securities (Note 3) 2,895,272 12,218,303
Wireless telephone investments (Note 4) 12,509,975 9,688,981
Other investments (Notes 1 and 6) 10,527,727 8,768,797
Other assets (Note 1) 214,106 323,405
------------- -------------
TOTAL OTHER ASSETS 81,622,510 82,404,496
------------- -------------
TOTAL ASSETS $ 158,677,981 $ 166,796,687
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt (Note 6) $ 6,337,200 $ 5,607,100
Accounts payable (Note 10) 2,664,520 2,481,507
Accrued expenses 2,479,779 2,184,626
Income taxes payable 387,100 3,973,019
------------- -------------
TOTAL CURRENT LIABILITES 11,868,599 14,246,252
LONG-TERM DEBT, less current portion (Note 6) 84,378,149 86,281,656
DEFERRED INVESTMENT TAX CREDITS (Note 7) 79,668 140,386
DEFERRED INCOME TAXES (Note 7) 6,603,310 9,435,515
DEFERRED COMPENSATION (Note 9) 904,071 897,113
COMMITMENTS AND CONTINGENCIES (Note 4)
MINORITY INTEREST IN ALLIANCE TELECOMMUNICATIONS, CORP. 15,736,317 15,813,847
STOCKHOLDERS' EQUITY: (Notes 1, 6 and 8)
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
Convertible Series A, 221,300 and 229,300 shares issued and outstanding 221,300 229,300
Common stock, par value $.01 per share; 10,000,000 shares authorized;
3,504,363 and 3,574,712 shares issued and outstanding 35,044 35,747
Additional paid-in capital 12,844,776 13,274,444
Retained earnings 24,945,512 23,115,945
------------- -------------
38,046,632 36,655,436
Accumulated other comprehensive income (Note 3) 1,061,235 3,326,482
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 39,107,867 39,981,918
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 158,677,981 $ 166,796,687
============= =============
See notes to consolidated financial statements.
26
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
REVENUES:
Local network $ 6,650,242 $ 5,914,678 $ 5,290,811
Network access 20,812,363 19,418,961 17,709,921
Billing and collection 694,171 824,539 865,767
Nonregulated activities 5,679,915 4,175,060 4,773,367
Cable television revenues 3,953,411 3,784,078 3,198,828
------------- ------------- -------------
TOTAL REVENUES 37,790,102 34,117,316 31,838,694
COSTS AND EXPENSES:
Plant operations 4,810,801 4,086,923 3,755,312
Depreciation and amortization 10,176,284 8,547,619 7,781,210
Customer operations 1,951,358 1,912,518 1,803,668
General and administrative 5,615,135 4,694,588 3,951,169
Other operating expenses 4,245,668 3,821,432 3,900,448
------------- ------------- -------------
TOTAL COSTS AND EXPENSES 26,799,246 23,063,080 21,191,807
------------- ------------- -------------
OPERATING INCOME 10,990,856 11,054,236 10,646,887
OTHER INCOME (EXPENSES):
Interest expense (5,954,603) (6,582,536) (7,315,153)
Income (loss) from investments in unconsolidated
affiliates (Note 4) 610,846 (335,537) 883,096
Interest and dividend income 1,250,748 1,116,098 609,071
Gain on sale of marketable securities (Note 3) 1,622,226 13,203,062 965,069
Gain on sale of cellular partnership (Note 4) 4,817,498
------------- ------------- -------------
OTHER INCOME (EXPENSES), net (2,470,783) 7,401,087 (40,419)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 8,520,073 18,455,323 10,606,468
INCOME TAX EXPENSE (Note 7) 4,207,000 7,513,000 4,949,000
------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST 4,313,073 10,942,323 5,657,468
MINORITY INTEREST IN EARNINGS OF
ALLIANCE TELECOMMUNICATIONS CORPORATION 1,003,650 3,463,142 1,747,225
------------- ------------- -------------
NET INCOME 3,309,423 7,479,181 3,910,243
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on marketable securities (3,903,896) 20,784,075 492,287
Reclassification adjustment for gains included in net income (1,622,226) (13,203,062) (965,069)
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS) BEFORE
INCOME TAXES (5,526,122) 7,581,013 (472,782)
------------- ------------- -------------
Income tax expense (benefit) related to unrealized
holding gains and losses on marketable securities (1,539,833) 8,450,555 189,519
Income tax benefit related to reclassification adjustment for
gains included in net income (639,862) (5,368,207) (371,529)
------------- ------------- -------------
Income tax expense (benefit) related to items of other
comprehensive income (loss) (2,179,695) 3,082,348 (182,010)
Minority interest in other comprehensive income (loss) of
Alliance Telecommunications Corporation (1,081,180) 1,559,887
------------- ------------- -------------
Other Comprehensive Income (Loss) (2,265,247) 2,938,778 (290,772)
------------- ------------- -------------
COMPREHENSIVE INCOME $ 1,044,176 $ 10,417,959 $ 3,619,471
============= ============= =============
BASIC NET INCOME PER COMMON SHARE (Note 1) $ .93 $ 2.42 $ 1.63
============= ============= =============
DILUTED NET INCOME PER COMMON SHARE (Note 1) $ .86 $ 1.96 $ 1.15
============= ============= =============
AVERAGE SHARES OUTSTANDING (Notes 1 and 8):
Common shares only 3,544,000 3,095,000 2,403,000
Common and potential common shares 3,851,000 3,945,000 3,937,000
See notes to consolidated financial statements.
27
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unearned
Employee Accumulated
Additional Stock Other
Preferred Stock Common Stock Paid-in Retained Ownership Comprehensive
Shares Amount Shares Amount Capital Earnings Shares Income Total
------- -------- --------- ------- ----------- ----------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 378,100 $378,100 2,079,364 $20,794 $ 1,712,954 $11,726,521 $ (69,724) $ 678,477 $14,447,122
Net income 3,910,243 3,910,243
Issuance of common stock under
Employee Stock Purchase Plan 10,753 107 73,013 73,120
Issuance of common stock under
Employee Stock Option Plan 48,200 482 354,931 355,413
Issuance of common stock in
exchange for preferred stock (35,300) (35,300) 35,300 353 34,947 0
Issuance of common stock from
exercise of outstanding warrants 7,876 79 61,091 61,170
Conversion of convertible
debentures into common stock 479,569 4,796 4,096,134 4,100,930
ESOP Shares Allocated (6,629) 69,724 63,095
Change in unrealized gains on
marketable securities, net of
deferred taxes (290,772) (290,772)
------- -------- --------- ------- ----------- ----------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1998 342,800 342,800 2,661,062 26,611 6,326,441 15,636,764 - 387,705 22,720,321
Net income 7,479,181 7,479,181
Issuance of common stock under
Employee Stock Purchase Plan 14,890 149 104,267 104,416
Issuance of common stock under
Employee Stock Option Plan 43,675 437 361,475 361,912
Issuance of common stock in
exchange for preferred stock (113,500) (113,500) 113,500 1,135 112,365 0
Issuance of common stock from
exercise of outstanding warrants 8,742 87 (87) 0
Conversion of convertible
debenturex into common stock 730,438 7,304 6,350,007 6,357,311
Issuance of common stock to ESOP 2,405 24 19,976 20,000
Change in unrealized gains on
marketable securities, net of
deferred taxes 2,938,777 2,938,777
------- -------- --------- ------- ----------- ----------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1999 229,300 229,300 3,574,712 35,747 13,274,444 23,115,945 - 3,326,482 39,981,918
Net income 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
======= ======== ========= ======= =========== =========== ========== ========== ===========
See notes to consolidated financial statements.
28
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
------------------------------------------------
2000 1999 1998
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,309,423 $ 7,479,181 $ 3,910,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,177,520 8,663,181 7,957,527
Minority stockholders' interest in earnings
of Alliance Telecommunications Corporation 1,003,650 3,463,142 1,747,225
Gain on sales of marketable securities (1,622,226) (13,203,062) (965,069)
Gain on sale of wireless partnership investment (4,817,498)
Loss (income) from unconsolidated affiliates (610,846) 335,537 (883,096)
Proceeds from wireless cellular investments 716,653 709,668 1,206,505
Noncash patronage refunds (8,780) (12,569)
Changes in assets and liabilities net of effects from
the purchase of Hager Telecom, Inc. and Felton Telephone Company:
Increase in accounts receivable (566,951) (727,508) (37,845)
Decrease (increase) in materials, supplies and inventories (172,847) (88,146) 21,188
Decrease in other current assets 111,795 8,702 46,455
Increase (decrease) in accounts payable (62,254) 7,981 866,321
Increase (decrease) in accrued expenses 121,137 477,147 (193,287)
Increase (decrease) in income taxes payable (3,426,965) 1,942,370 1,455,010
Decrease in deferred investment tax credits (60,718) (112,215) (136,016)
Decrease in deferred income taxes (934,383) (2,157,467) (604,706)
Increase (decrease) in deferred compensation 6,958 (93,042) 49,730
------------- ------------- -------------
Net cash provided by operating activities 7,981,166 6,692,900 9,622,687
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,446,190) (7,541,926) (9,716,135)
Sales of temporary cash investments 300,000
Sales of marketable securities 5,420,957 18,920,352 1,819,653
Purchases of marketable securities (1,768,648)
Investments in wireless telephone (183,276) (1,031,587) (1,140,457)
Proceeds from wireless PCS investments 408,846
Decrease (increase) in construction fund 8,169 (83,113) (122,801)
Purchases of other investments