-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RWAiO2E3/EUHU+/KAumQKYIDcze+fRLicvbjZDWBbPhWJn1FwU5H/1CBLnB2lCOn i2YLkg6/UcVNpRkYhtVryw== 0000863437-97-000005.txt : 19970814 0000863437-97-000005.hdr.sgml : 19970814 ACCESSION NUMBER: 0000863437-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HECTOR COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000863437 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 411666660 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18587 FILM NUMBER: 97659160 BUSINESS ADDRESS: STREET 1: 211 S MAIN ST STREET 2: P O BOX 428 CITY: HECTOR STATE: MN ZIP: 55342 BUSINESS PHONE: 6128486611 MAIL ADDRESS: STREET 1: P O BOX 428 STREET 2: 211 S MAIN ST CITY: HECTOR STATE: MN ZIP: 55342 10-Q 1 HCCO FROM 10Q (6/30/97) ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 ------------------------------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-18587 HECTOR COMMUNICATIONS CORPORATION ................................................................................ (Exact name of registrant as specified in its charter) MINNESOTA 41-1666660 ................................................................................ (State or other jurisdiction of (Federal Employer incorporation or organization) Identification No.) 211 South Main Street, Hector, MN 55342 ................................................................................ (Address of principal executive offices) (Zip Code) (320) 848-6611 ................................................................................ Registrant's telephone number, including area code ................................................................................ (Former name, address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES NO --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. CLASS Outstanding at July 31, 1997 Common Stock, par value 1,892,257 $.01 per share Total Pages (15) Exhibit at Page 15 ================================================================================ HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information 13 2 PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) June 30 December 31 Assets: 1997 1996 ____________ ____________ Current assets: Cash and cash equivalents $ 12,443,174 $ 9,571,879 Temporary cash investments 200,000 1,079,900 Construction fund 74,556 74,337 Accounts receivable, net 4,030,864 3,965,754 Materials, supplies and inventories 1,054,932 512,114 Prepaid expenses 113,392 160,291 ____________ ____________ Total current assets 17,916,918 15,364,275 Property, plant and equipment 61,402,411 61,700,777 less accumulated depreciation (16,290,877) (14,661,825) ____________ ____________ Net property, plant and equipment 45,111,534 47,038,952 Other assets: Excess of cost over net assets acquired, net 51,818,106 52,510,459 Marketable securities 4,233,758 5,458,400 Cellular telephone investments 9,778,242 9,777,801 Other investments 6,809,451 5,693,906 Deferred debenture issue costs, net 874,645 969,201 Other assets 646,316 535,019 ____________ ____________ Total other assets 74,160,518 74,944,786 ____________ ____________ Total Assets $137,188,970 $137,348,013 ____________ ____________ ____________ ____________ Liabilities and Stockholders' Equity: Current liabilities: Notes payable and current portion of long-term debt $ 9,116,500 $ 10,047,000 Accounts payable 2,712,800 1,860,579 Accrued expenses 2,147,817 2,090,639 Income taxes payable 322,712 59,015 ____________ ____________ Total current liabilities 14,299,829 14,057,233 Long-term debt, less current portion 95,392,036 96,127,379 Deferred investment tax credits 438,001 526,347 Deferred income taxes 7,031,689 7,457,907 Deferred compensation 964,184 987,944 Minority stockholders interest in Alliance Telecommunications Corp. 8,444,408 8,245,365 Stockholders' Equity 10,618,823 9,945,838 ______________ ______________ Total Liabilities and Stockholders' Equity $137,188,970 $137,348,013 ______________ ______________ ______________ ______________ See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Six Months Ended June 30 Three Months Ended June 30 __________________________________ _________________________________ 1997 1996 1997 1996 _____________ ____________ ____________ ____________ Revenues: Local network $ 1,215,642 $ 927,963 $ 2,358,954 $ 1,283,639 Network access 3,762,127 2,781,984 7,747,700 3,667,598 Billing and collection 264,413 223,593 529,402 275,338 Nonregulated activities 993,072 773,897 1,918,118 852,541 Cable television revenues 619,959 457,841 1,183,130 752,080 _____________ ____________ ____________ ____________ Total revenues 6,855,213 5,165,278 13,737,304 6,831,196 Costs and expenses: Plant operations 826,958 703,894 1,819,528 910,552 Depreciation and amortization 1,821,333 1,349,074 3,643,950 1,797,005 Customer operations 443,453 284,997 937,246 354,661 General and administrative 1,064,301 843,020 2,244,705 1,206,692 Other operating expenses 508,732 386,912 922,032 592,461 _____________ ____________ ____________ ____________ Total costs and expenses 4,664,777 3,567,897 9,567,461 4,861,371 Operating income 2,190,436 1,597,381 4,169,843 1,969,825 Other income and (expenses): Investment income 168,375 200,504 337,212 364,204 Interest expense (1,851,522) (1,447,156) (3,598,465) (1,881,938) Gain on sales of marketable securities 1,495,999 1,495,999 687,947 Partnership and LLC income 115,145 99,192 230,291 130,692 _____________ ____________ ____________ ____________ Other expense, net (72,003) (1,147,460) (1,534,963) (699,095) Income before income taxes 2,118,433 449,921 2,634,880 1,270,730 Income taxes 934,000 292,000 1,225,000 619,000 _____________ ____________ ____________ ____________ Income before minority interest 1,184,433 157,921 1,409,880 651,730 Minority interest in earnings of Alliance Telecommunications Corporation 104,669 48,202 199,043 48,202 _____________ ____________ ____________ ____________ Net income $ 1,079,764 $ 109,719 $ 1,210,837 $ 603,528 _____________ ____________ ____________ ____________ _____________ ____________ ____________ ____________ Net income per common and common equivalent share $ .47 $ .05 $ .53 $ .27 _____________ ____________ _____________ ____________ _____________ ____________ _____________ ____________ Net income per common share - assuming full dilution $ .34 $ .05 $ .43 $ .27 _____________ ____________ ____________ ____________ _____________ ____________ ____________ ____________ Average common and common equivalent shares outstanding 2,290,000 2,264,000 2,284,000 2,261,000 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited) Unrealized Marketable Additional Unearned Securities Preferred Stock Common Stock Paid-in Retained ESOP Gains and Shares Amount Shares Amount Capital Earnings Shares (Losses) Total ________ ________ _________ _______ _______ __________ __________ _________ __________ BALANCE at December 31, 1995 389,487 $ 389,487 1,880,294 $ 18,803 $ 74,215 $ 7,797,098 $(145,256) $ 8,134,347 Net income 1,208,670 1,208,670 Issuance of common stock under Employee Stock Purchase Plan 3,563 36 21,732 21,768 ESOP shares allocated 6,056 43,944 50,000 Unrealized gain on marketable securities, net of deferred taxes $ 531,053 531,053 ________ ________ _________ _______ _______ __________ __________ _________ __________ BALANCE at December 31, 1996 389,487 389,487 1,883,857 18,839 102,003 9,005,768 (101,312) 531,053 9,945,838 Net income 1,210,837 1,210,837 Issuance of common stock under Employee Stock Option Plan 8,400 84 57,578 57,662 Change in unrealized gains and lossed on marketable securities, net of deferred taxes (595,514) (595,514) ________ ________ _________ _______ _______ __________ __________ _________ __________ BALANCE at June 30, 1997 389,487 $ 389,487 1,892,257 $ 18,923 $159,581 $10,216,605 $(101,312) $ (64,461) $10,618,823 ________ ________ _________ _______ _______ __________ __________ _________ __________ ________ ________ _________ _______ _______ __________ __________ _________ __________ See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended June 30 _________________________ 1997 1996 ___________ ___________ Cash Flows from Operating Activities: Net income $ 1,210,837 $ 603,528 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,738,506 1,891,561 Minority stockholders' interest in earnings of Alliance Telecommunications Corporation 199,043 48,202 Gain on sales of marketable securities (1,495,999) (687,947) Income from partnership and LLC investments (230,291) (130,692) Changes in assets and liabilities: Sales of marketable securities 1,499,072 Increase in accounts receivable (65,110) (214,773) Increase in materials, supplies and inventories (542,818) (361,924) Decrease in prepaid expenses 46,899 49,190 Increase (decrease) in accounts payable 852,221 (575,557) Increase in accrued expenses 57,178 870,240 Increase (decrease) in income taxes payable 263,697 (39,114) Decrease in deferred investment credits (88,346) (40,998) Increase (decrease) in deferred taxes (29,206) 132,923 Decrease in deferred compensation (23,760) (7,920) ___________ ___________ Net cash provided by operating activities 3,892,851 3,035,791 Cash Flows from Investing Activities: Capital expenditures, net (972,755) (1,065,641) Sales (purchases) of temporary cash investments 879,900 (350,676) Sales of marketable securities 1,728,115 553,645 Decrease (increase) in construction fund (219) 159,828 Proceeds from partnerships and LLCs 229,850 Purchases of other investments (1,115,545) (1,119,739) Sales of other investments 256,772 Increase in other assets (162,721) (467,011) Payment for purchase of Ollig Utilities Company, net of cash acquired (69,181,142) ___________ ___________ Net cash provided by (used in)investing activities 586,625 (71,213,964) Cash Flows from Financing Activities: Repayment of long-term debt (2,651,843) (441,700) Proceeds from issuance of notes payable and long-term debt 986,000 62,457,500 Minority interest in Alliance Telecommunications Corp. 7,920,000 Issuance of common stock 57,662 ___________ ___________ Net cash provided by (used in) financing activities (1,608,181) 69,935,800 ___________ ___________ Net Increase in Cash and Cash Equivalents 2,871,295 1,757,627 Cash and Cash Equivalents at Beginning of Period 9,571,879 9,040,138 ___________ ___________ Cash and Cash Equivalents at End of Period $ 12,443,174 $ 10,797,765 ___________ ___________ ___________ ___________ Supplemental disclosures of cash flow information: Interest paid during the period $ 3,511,537 $ 1,379,802 Income taxes paid during the period 1,078,994 707,342 See notes to consolidated financial statements.
6 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS The balance sheet and statement of stockholders' equity as of June 30, 1997 and the statements of income for the three and six month periods ended June 30, 1997 and 1996 and the statements of cash flows for the six month periods ended June 30, 1997 and 1996 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows at June 30, 1997 and 1996 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1996 Annual Report to Shareholders. The results of operations for the periods ended June 30 are not necessarily indicative of the operating results for the entire year. Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 financial statement presentation. These reclassifications had no effect on net income or stockholders equity as previously reported. NOTE 2 - ACQUISITION OF OLLIG UTILITIES COMPANY On April 25, 1996, a newly formed subsidiary of the Company, Alliance Telecommunications Corporation ("Alliance"), purchased Ollig Utilities Company ("Ollig") for $80,000,000 in cash. The Company owns 68% of Alliance with the remaining interest owned by Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota and Split Rock Telecom Cooperative, Inc. of Garretson, South Dakota. Alliance financed the acquisition using the combined equity investments of its shareholders and debt financing provided by St. Paul Bank for Cooperatives ("St. Paul Bank"). The Company's cash investment in Alliance is approximately $16,903,000. The acquisition is being accounted for as a purchase. The excess of cost over net assets acquired in the transaction was $51,948,000 (including $6,272,000 allocated to cellular telephone partnerships) which is being amortized on a straight line basis over 40 years. The results of operations of Ollig have been included in the Company's financial results subsequent to April 25, 1996. Unaudited consolidated results of operations on a pro forma basis as though Ollig was acquired January 1, 1996 are as follows: Three Months Ended Six Months Ended June 30, 1996 June 30, 1996 ------------------ ------------------ Revenues $ 6,847,695 $ 13,434,187 Income before minority interest 133,125 518,186 Net income 81,772 461,279 Net income per share $ .04 $ .20 Pro forma financial information is not necessarily indicative of the results of operations had the acquisition occurred at the beginning of the periods presented, nor are they necessarily indicative of the results of future operations. 7 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTE 3 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS Marketable securities consist principally of equity securities obtained by the Company in sales of its investments in cellular telephone partnerships and equity securities of other telecommunications companies. The Company's marketable securities portfolio is classified as available-for-sale. The cost and fair values of available-for-sale investment securities was as follows: Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value June 30, 1997 $ 4,448,776 $ 199,494 $ (414,512) $ 4,233,758 December 31, 1996 $ 4,680,892 $ 1,390,273 $ (612,765) $ 5,458,400 Stockholders' equity at June 30, 1997 includes a decrease of $992,527 net of deferred tax benefits of $397,013 for changes in net unrealized holding gains and losses on investments. These amounts have no cash effect and are not included in the statement of cash flows. In June, 1997, the Company sold 161,469 shares of Rural Cellular Corporation ("RCC") and 1,000 shares of First Bank Systems, Inc. in a series of transactions. Gross proceeds from the sales were $1,728,000 and gains on the sales were $1,496,000. In February, 1996, Rural Cellular Corporation completed an initial offering of its common stock to the public. As part of the offering, the Company sold 61,133 shares of RCC. Gross proceeds from the sale were $554,000 and gain on the sale was $485,000. In February, 1996, the Company sold its investment in Telephone and Data Systems, Inc. ("TDS") common stock in a series of cash transactions. Gross proceeds from the stock sales were $1,499,000 and the Company recognized a gain on sale of $203,000. NOTE 4 - INCOME TAXES AND INVESTMENT CREDITS Income taxes have been calculated in proportion to the earnings and tax credits generated by operations. Investment tax credits have been deferred and are included in income over the estimated useful lives of the related assets. The Company's effective income tax rate is higher than the U.S. rate due to the effect of state income taxes and non-deductible expenses. NOTE 5 - NET INCOME PER SHARE Net income per common and common equivalent share was computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the periods. Common equivalent shares include the dilutive effect of outstanding stock options, warrants and convertible preferred stock, which are common stock equivalents. Net income per common share - assuming full dilution for the three and six month periods ended June 30, 1997 was calculated assuming all outstanding convertible debentures were converted to common stock effective January 1, 1997. The effect of the convertible debentures on per share earnings in the 1996 periods was anti-dilutive. The calculation of the Company's earnings per share is included as Exhibit 11 to this Form 10-Q. 8 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES The Financial Accounting Standards Board (FASB) has issued SFAS 128, "Earnings per Share" which requires public companies to present basic earnings per share and, if applicable, diluted earnings per share instead of primary and fully diluted earnings per share. SFAS 128 is effective for interim and annual periods ending after December 15, 1997. The Company will restate its earnings per share numbers from prior periods to conform to the new standard when it goes into effect. Had the new standard been in effect currently, the Company's net income per share for the periods ended June 30, 1997 and 1996 would have been as follows:
Three Months Ended June 30 Six Months Ended June 30 _______________________________ _______________________________ Basic: 1997 1996 1997 1996 _______ _____________ _____________ _____________ _____________ Net income $ 1,079,764 $ 109,719 $ 1,210,837 $ 603,528 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Common shares: Weighted average number of common shares outstanding 1,884,503 1,880,294 1,884,182 1,880,294 Weighted average number of unallocated shares held by ESOP (11,817) (18,556) (11,817) (18,556) _____________ _____________ _____________ _____________ 1,872,686 1,861,738 1,872,365 1,861,738 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Net income per common share $ .58 $ .06 $ .65 $ .32 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Diluted: _____________ Net income $ 1,079,764 $ 109,719 $ 1,210,837 $ 603,528 Interest on convertible debentures, net of tax (1) 189,654 379,308 _____________ _____________ _____________ _____________ Adjusted net income $ 1,269,418 $ 109,719 $ 1,590,145 $ 603,528 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Common and common equivalent shares: Weighted average number of common shares outstanding 1,884,503 1,880,294 1,884,182 1,880,294 Assumed conversion of convertible debentures into common stock (1) 1,423,125 1,423,125 Dilutive effect of convertible preferred shares outstanding 389,487 389,487 389,487 389,487 Dilutive effect of stock options outstanding after application of treasury stock method 27,827 12,775 22,148 9,775 Weighted average number of unallocated shares held by ESOP (11,817) (18,556) (11,817) (18,556) _____________ _____________ _____________ _____________ 3,713,125 2,264,000 3,707,125 2,261,000 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Diluted net income per share $ .34 $ .05 $ .43 $ .27 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ (1) The effect of the convertible debentures on net income per share is anti-dilutive for the 1996 periods.
9 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Effective April 25, 1996, the Company's 68% owned subsidiary, Alliance Telecommunications Corporation ("Alliance") purchased Ollig Utilities Company ("Ollig"), a privately owned telecommunications company which served approximately 25,000 telephone access lines and 3,400 cable television customers in Minnesota, Iowa, North Dakota and South Dakota for $80,000,000. Prior to the acquisition, the Company served approximately 6,300 access lines and 4,200 cable television customers. The operations of Alliance, which are substantially larger than those of the Company prior to the acquisition, had a huge impact on the Company's operating results over the last eight months of 1996 and the first six months of 1997. The Company's 1997 consolidated revenues increased $6,906,000 or 101% from the 1996 period (which included just two months of Alliance's operating results). The following table shows revenues from Alliance's operations separate from those of the Company for the respective six month periods ended June 30:
Alliance Alliance Hector Communications Corp. 1997 1996 1997 1996 ____________ ____________ ____________ ____________ Revenues: Local network $ 1,614,333 $ 556,689 $ 744,621 $ 726,950 Network access 5,935,299 1,896,985 1,812,401 1,770,613 Billing and collection 433,234 169,571 96,168 105,767 Nonregulated activities 1,756,367 695,590 161,751 156,951 Cable television revenues 505,214 153,749 677,916 598,331 ____________ ____________ ____________ ____________ Total revenues $10,244,447 $ 3,472,584 $ 3,492,857 $ 3,358,612 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________
Revenues from the Company's existing operations increased $134,000 or 4%. Local network revenues increased $18,000 or 2% due to increases in the number of access lines served by the Company. Network access revenues increased $42,000 or 2%. The increase was due to increased use of the telephone network by customers, which offset decreases in the rates charged by the Company to long distance service providers. Cable television revenues increased $80,000 or 13% due to the acquisition of two cable systems in the fourth quarter of 1996. Billing and collection revenues declined $10,000 or 9%. Revenues from nonregulated activities increased $5,000 or 3%. Operating costs and administrative expenses for 1997 increased $4,706,000 or 97% from the 1996 period. Operating costs and administrative expenses for Alliance's operations and existing Company operations for the respective periods ended June 30 were as follows:
Alliance Alliance Hector Communications Corp. 1997 1996 1997 1996 ____________ ____________ ____________ ____________ Costs and expenses: Plant operations $ 1,367,323 $ 501,525 $ 452,205 $ 409,027 Depreciation and amortization 2,663,223 900,304 980,727 896,701 Customer operations 815,465 235,529 121,781 119,132 General and administrative 1,589,574 472,893 655,131 733,799 Nonregulated and miscellaneous 432,081 169,481 489,951 422,980 ____________ ____________ ____________ ____________ Total costs and expenses: $ 6,867,666 $ 2,279,732 $ 2,699,795 $ 2,581,639 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________
Operating costs and expenses for existing operations increased $118,000 or 5%. Plant operations expenses increased $43,000 or 11% due to increased buried cable maintenance expenses. Depreciation and amortization expenses increased $84,000 or 9% due to depreciation rate changes mandated by regulatory authorities. General and administrative expenses declined $79,000 or 11% due to cost sharing with Alliance. Nonregulated expenses increased $67,000 or 16% due to increased cable television expenses caused by the acquisition of additional systems. Operating income from existing operations increased $16,000 or 2%. Consolidated operating income increased $2,200,000 or 112%. 10 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Consolidated interest expense, net of investment income increased $1,744,000. Net interest expense for HCC increased $318,000, reflecting interest on $6,000,000 of short-term borrowing from St. Paul Bank used in the acquisition of Ollig and reduced investment income due to decreased cash available for investment. Interest expense on Alliance is mainly on a $55,250,000 acquisition loan from St. Paul Bank for Cooperatives associated with the purchase of Ollig Utilities Company, and interest on RUS and RTB loans existing prior to the acquisition. HCC's investment income benefited from gains on sales of marketable securities of $1,496,000 and $687,000 in 1997 and 1996, respectively. Income from investments in partnerships and LLCs increased $100,000 due to the Company's increased ownership percentages of these operations from the Ollig acquisition and also due to the increasing profitability of these operations. Consolidated income before income taxes was $2,635,000 compared to $1,271,000 in 1996. Income tax expense was $1,225,000 in the 1997 period compared to $619,000 in 1996. The Company's effective tax rate of 46% in 1997 is higher than the standard tax rate because the amortization expenses associated with excess of cost over net assets acquired in the acquisition of Ollig are not tax deductible. The 32% minority shareholders' interest in earnings of Alliance was $199,000 in the 1997 period compared to $48,000 in 1996. Net income was $1,211,000 compared to $604,000 in 1996. Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 Consolidated revenues increased $1,690,000 or 33% from the 1996 period (which included just two months of Alliance's operating results). The following table shows revenues from Alliance's operations separate from those of the Company for the respective three month periods ended June 30:
Alliance Alliance Hector Communications Corp. 1997 1996 1997 1996 ____________ ____________ ____________ ____________ Revenues: Local network $ 835,996 $ 556,689 $ 379,646 $ 371,274 Network access 2,857,024 1,896,985 905,103 884,999 Billing and collection 219,134 169,571 45,279 54,022 Nonregulated activities 902,118 695,590 90,954 78,307 Cable television revenues 277,171 153,749 342,788 304,092 ____________ ____________ ____________ ____________ Total revenues $ 5,091,443 $ 3,472,584 $ 1,763,770 $ 1,692,694 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________
Revenues from the Company's existing operations increased $71,000 or 4%. Local network revenues increased $8,000 or 2% due to increases in the number of access lines served by the Company. Network access revenues increased $20,000 or 2%. The increase was due to increased use of the telephone network by customers, which offset decreases in the rates charged by the Company to long distance service providers. Cable television revenues increased $39,000 or 13% due to the acquisition of two cable systems in the fourth quarter of 1996. Billing and collection revenues declined $9,000 or 16%. Revenues from nonregulated activities increased $13,000 or 16%. Operating costs and administrative expenses for 1997 increased $1,097,000 or 31% from the 1996 period. Operating costs and administrative expenses for Alliance's operations and existing Company operations for the respective periods ended June 30 were as follows: 11 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Alliance Alliance Hector Communications Corp. 1997 1996 1997 1996 ____________ ____________ ____________ ____________ Costs and expenses: Plant operations $ 617,883 $ 501,525 $ 209,075 $ 202,369 Depreciation and amortization 1,330,967 900,304 490,366 448,770 Customer operations 381,353 235,529 62,100 49,468 General and administrative 729,909 472,893 334,392 370,127 Nonregulated and miscellaneous 261,427 169,481 247,305 217,431 ____________ ____________ ____________ ____________ Total costs and expenses: $ 3,321,539 $ 2,279,732 $ 1,343,238 $ 1,288,165 ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________
Operating costs and expenses for existing operations increased $55,000 or 4%. Plant operations expenses increased $7,000 or 3%. Depreciation and amortization expenses increased $42,000 or 9% due to depreciation rate changes mandated by regulatory authorities. Nonregulated expenses increased $30,000 or 14% due to increased cable television expenses caused by the acquisition of additional systems. Operating income from existing operations increased $16,000 or 4%. Consolidated operating income increased $593,000 or 37%. Consolidated interest expense, net of investment income increased $436,000. Net interest expense for HCC increased $84,000, reflecting interest on $6,000,000 of short-term borrowing from St. Paul Bank used in the acquisition of Ollig and reduced investment income due to decreased cash available for investment. Interest expense on Alliance is mainly on a $55,250,000 acquisition loan from St. Paul Bank for Cooperatives associated with the purchase of Ollig Utilities Company, and interest on RUS and RTB loans existing prior to the acquisition. HCC's investment income benefited from gains on sales of marketable securities of $1,496,000 in the 1997 quarter. Income from investments in partnerships and LLCs increased $16,000 due to the increasing profitability of these operations. Consolidated income before income taxes was $2,118,000 compared to $450,000 in 1996. Income tax expense was $934,000 in the 1997 period compared to $292,000 in 1996. The 32% minority shareholders' interest in earnings of Alliance was $105,000 in the 1997 period compared to $48,000 in 1996. Net income was $1,080,000 compared to $110,000 in 1996. Liquidity and Capital Resources On April 25, 1996, a newly formed subsidiary of the Company, Alliance Telecommunications Corporation ("Alliance"), purchased Ollig Utilities Company ("Ollig") for $80,000,000 in cash. The Company owns 68% of Alliance with the remaining interest owned by Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota and Split Rock Telecom Cooperative, Inc. of Garretson, South Dakota. Alliance financed the acquisition using the combined equity investments of its shareholders and $55,250,000 of long-term debt financing provided by St. Paul Bank for Cooperatives ("St. Paul Bank"). The Company has locked in the interest rates on $30,000,000 of this debt for periods of 5 - 7 years at rates of 7.61% - 7.67%. Interest on the remaining $25,250,000 floats at St. Paul Bank's cost of money plus 130 basis points (6.88% at June 30, 1997). The Company's cash investment in Alliance is approximately $16,903,000, which included $6,000,000 of short term borrowing by the Company from St. Paul Bank, purchase price deposits made by the Company in 1995, and $73,000 of acquisition costs. The Company repaid $1,000,000 of short term debt in June, 1997 out of proceeds from its marketable securities sales and is exploring alternatives to repay or refinance the remaining debt. These alternatives could include additional asset sales, new debt borrowings if feasible, or public equity offerings. 12 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES The Company finances its telephone asset additions from internally generated funds and drawdowns of Rural Utilities Service ("RUS") and Rural Telephone Bank ("RTB") loan funds. Proceeds from long-term borrowings by the telephone companies from these sources were $986,000 in the 1997 period. Expected telephone and cable television plant additions for 1997 are $4,000,000. The Company's investment income has been derived almost exclusively from interest earned on its cash and cash equivalents. Interest income earned by the Company has fluctuated in relation to changes in interest rates and availability of cash for investment. In the first quarter of 1996, the Company received $1,499,000 from the sale of its remaining shares of Telephone and Data Systems, Inc., obtained in the 1994 sale of its Rochester, MN cellular MSA interest. The Company also sold 61,133 shares of Rural Cellular Corporation ("RCC") in that company's initial public offering of its common stock in February, 1996. Proceeds to the Company after selling expenses were $554,000. In June, 1997, the Company sold HCC's remaining shares of RCC as well as its investment in First Bank Systems, Inc. Proceeds from these sales totaled $1,728,000. At June 30, 1997, the Company's marketable securities portfolio consisted primarily of shares of Rural Cellular Corp., U.S. West Communications, Inc. and U.S. West Media, Inc. owned by Ollig Utilities Company prior to the acquisition. The Company produced cash from operating activities of $3,893,000 in the first six months of 1997 compared to $3,036,000 in the 1996 period. At June 30, 1997, the Company's cash, cash equivalents, temporary cash investments and marketable securities totaled $16,877,000 compared to $16,110,000 at December 31, 1996. Working capital at June 30, 1997 improved to $3,617,000 compared to $1,307,000 at December 31, 1996. Working capital is low due to the Company's need to refinance its remaining short-term debt with St. Paul Bank. 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. PART II. OTHER INFORMATION Items 1 - 3. Not Applicable Item 4. Submission of Matters to a Vote of Securities Holders The Annual Meeting of the Shareholders of the Registrant was held on May 22, 1997 in Minneapolis, MN. The total number of shares outstanding and entitled to vote at the meeting was 1,883,857 of which 1,805,119 were present either in person or by proxy. Shareholders reelected Board Members Charles R. Dickman, Paul A. Hoff and Edward E. Strickland to three year terms expiring at the 2000 Annual Meeting of Shareholders. The vote for these Board Members is summarized below: In Favor Abstaining Charles R. Dickman 1,704,516 100,603 Paul A. Hoff 1,704,891 100,228 Edward E. Strickland 1,704,591 100,528 Board Members continuing in office are James O. Ericson, Paul N. Hanson, and Wayne E. Sampson (whose terms expire at the 1998 Annual Meeting of Shareholders) and Curtis A. Sampson and Steven H. Sjogren (whose terms expire at the 1999 Annual Meeting of Shareholders). Shareholders also approved an amendment to the Company's 1990 Stock Plan increasing the number of shares of common stock available to grant stock options, restricted stock and stock appreciation rights to key employees from 250,000 to 500,000. The amendment also increases the number of stock options automatically granted annually to nonemployee directors of the Company from 500 to 1,000. The vote on the amendment was 1,232,147 in favor, 228,325 against, and 344,647 abstaining. 13 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Item 5. Not Applicable Item 6(a). Exhibits Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q. Item 6(b). Not Applicable. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Hector Communications Corporation By Charles A. Braun Charles A. Braun Chief Financial Officer Date: August 13, 1997 14
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 11 CALCULATION OF EARNINGS PER SHARE Three Months Ended June 30 Six Months Ended June 30 ________________________________ ________________________________ Primary: 1997 1996 1997 1996 _______ _____________ _____________ _____________ _____________ Net income $ 1,079,764 $ 109,719 $ 1,210,837 $ 603,528 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Common and common equivalent shares: Weighted average number of common shares outstanding 1,884,503 1,880,294 1,884,182 1,880,294 Dilutive effect of convertible preferred shares outstanding 389,487 389,487 389,487 389,487 Dilutive effect of stock options outstanding after application of treasury stock method 27,827 12,775 22,148 9,775 Weighted average number of unallocated shares held by employee stock ownership plan (11,817) (18,556) (11,817) (18,556) _____________ _____________ _____________ _____________ 2,290,000 2,264,000 2,284,000 2,261,000 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Net income per common and common equivalent share $ .47 $ .05 $ .53 $ .27 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Fully Diluted: _____________ Net income $ 1,079,764 $ 109,719 $ 1,210,837 $ 603,528 Interest on convertible debentures, net of tax (1) 189,654 379,308 _____________ _____________ _____________ _____________ Adjusted net income $ 1,269,418 $ 109,719 $ 1,590,145 $ 603,528 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Common and common equivalent shares: Weighted average number of common shares outstanding 1,884,503 1,880,294 1,884,182 1,880,294 Assumed conversion of convertible debentures into common stock (1) 1,423,125 1,423,125 Dilutive effect of convertible preferred shares outstanding 389,487 389,487 389,487 389,487 Dilutive effect of stock options outstanding after application of treasury stock method 35,598 12,775 35,598 9,775 Weighted average number of unallocated shares held by employee stock ownership plan (11,817) (18,556) (11,817) (18,556) _____________ _____________ _____________ _____________ 3,720,896 2,264,000 3,720,575 2,261,000 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ Net income per common share - assuming full dilution $ .34 $ .05 $ .43 $ .27 _____________ _____________ _____________ _____________ _____________ _____________ _____________ _____________ - ------------------------------------------------------------------------------------------- (1) The effect of the convertible debentures on net income per share is anti-dilutive for the 1996 periods. 15
EX-27 2 ARTICLE 5 FDS FOR JUNE 30, 1997 FORM 10-Q
5 0000863437 HECTOR COMMUNICATIONS CORPORATION 1 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 12,443,174 200,000 4,030,864 0 1,054,932 17,916,918 61,402,411 16,290,877 137,188,970 14,299,829 95,392,036 0 389,487 18,923 10,210,413 137,188,970 13,737,304 13,737,304 9,567,461 9,567,461 (2,063,502) 0 3,598,465 2,634,880 1,225,000 1,409,880 0 0 0 1,210,837 0.53 0.43
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