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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------------------------------------
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 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 October 31, 1996
- ------------------------- --------------------------------
Common Stock, par value 1,883,857
$.01 per share
Total Pages (13) Exhibit at Page 13
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<PAGE>
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 9
Part II. Other Information 12
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
Assets: 1996 1995
____________ ____________
Current assets:
<S> <C> <C>
Cash and cash equivalents $4,268,839 $9,040,138
Temporary cash investments 6,401,020
Marketable securities 1,459,266
Construction fund 54,693 108,828
Accounts receivable, net 4,089,615 723,081
Materials, supplies and inventories 1,027,137 120,641
Prepaid expenses 203,735 35,992
____________ ____________
Total current assets 16,045,039 11,487,946
Property, plant and equipment 59,004,978 24,647,253
less accumulated depreciation (12,783,699) (10,038,377)
____________ ____________
Net property, plant and equipment 46,221,279 14,608,876
Other assets:
Excess of cost over net assets acquired, net 51,926,411 906,950
Marketable securities 6,696,382
Acquisition costs - Ollig Utilities Company 2,790,236
Cellular telephone investments 9,800,553 1,260,448
Other investments 4,877,579 1,038,545
Deferred debenture issue costs, net 1,016,479 1,158,313
Other assets 1,135,019 267,130
____________ ____________
Total other assets 75,452,423 7,421,622
____________ ____________
Total Assets $137,718,741 $33,518,444
____________ ____________
____________ ____________
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of
long-term debt $7,962,167 $492,900
Accounts payable 2,195,886 530,248
Accrued expenses 1,786,506 653,681
Income taxes payable 448,332 132,522
____________ ____________
Total current liabilities 12,392,891 1,809,351
Long-term debt, less current portion 98,401,641 22,096,419
Deferred investment tax credits 568,719 128,339
Deferred income taxes 7,682,107 1,349,988
Deferred compensation 999,824
Minority stockholders interest in Alliance
Telecommunications Corp. 8,144,424
Stockholders' Equity 9,529,135 8,134,347
______________ ______________
Total Liabilities and Stockholders' Equity $137,718,741 $33,518,444
______________ ______________
______________ ______________
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
____________________________ ___________________________
1996 1995 1996 1995
____________ ____________ ____________ _____________
Revenues:
<S> <C> <C> <C> <C>
Local network $1,234,577 $272,609 $2,518,216 $781,907
Network access 3,904,765 820,222 7,572,363 2,510,893
Billing and collection 322,771 57,519 598,109 170,112
Nonregulated activities 1,211,550 66,568 2,064,091 213,582
Cable television revenues 544,058 220,944 1,296,138 505,289
____________ ____________ ____________ _____________
Total revenues 7,217,721 1,437,862 14,048,917 4,181,783
Costs and expenses:
Plant operations 898,753 207,747 1,809,305 631,671
Depreciation and amortization 1,829,554 391,979 3,626,559 1,127,285
Customer operations 419,485 58,475 774,146 227,705
General and administrative 1,188,885 340,009 2,395,577 1,023,803
Other operating expenses 383,621 142,427 976,082 398,027
____________ ____________ ____________ _____________
Total costs and expenses 4,720,298 1,140,637 9,581,669 3,408,491
Operating income 2,497,423 297,225 4,467,248 773,292
Other income and (expenses):
Investment income 142,352 119,838 506,556 451,103
Interest expense (1,860,785) (442,231) (3,742,723) (1,143,579)
Marketable securities
gains (losses) 195,057 687,947 (115,336)
Cellular partnership income 231,740 15,000 362,432 45,000
____________ ____________ ____________ _____________
Other income (expense), net (1,486,693) (112,336) (2,185,788) (762,812)
Income before income taxes 1,010,730 184,889 2,281,460 10,480
Income taxes (benefit) 541,000 70,000 1,160,000 (10,000)
____________ ____________ ____________ _____________
Income before minority interest 469,730 114,889 1,121,460 20,480
Minority interest in earnings of
Alliance Telecommunications
Corporation 176,222 224,424
____________ ____________ ____________ _____________
Net income $293,508 $114,889 $897,036 $20,480
____________ ____________ ____________ _____________
____________ ____________ ____________ _____________
Net income per common and
common equivalent share $ .13 $ .05 $ .40 $ .01
_____________ ____________ _____________ _____________
_____________ ____________ _____________ _____________
Net income per common share
- assuming full dilution $ .13 $ .05 $ .40 $ .01
____________ ____________ _____________ _____________
____________ ____________ _____________ _____________
Average common and common equivalent
shares outstanding 2,271,000 2,256,000 2,264,000 2,260,000
____________ ____________ _____________ _____________
____________ ____________ _____________ _____________
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Unrealized
Additional Unearned Marketable
Preferred Stock Common Stock _ Paid-in Retained ESOP Securities
Shares Amount Shares Amount Capital Earnings Shares Gains (Losses) Total
___________ ________ ___________ ________ ___________ ___________ _________ ___________ __________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at Dec. 31, 1994 392,287 $392,287 1,877,850 $18,778 $48,001 $7,903,703 ($132,800) $8,229,969
Net loss (76,539) (76,539)
Issuance of common stock
under Employee Stock
Purchase Plan 3,844 39 22,833 22,872
Purchase of common stock (4,200) (42) (164) (30,066) (30,272)
Issuance of common stock
in exchange for
preferred stock (2,800) (2,800) 2,800 28 2,772 0
ESOP shares purchased,
net of shares allocated 773 (12,456) (11,683)
___________ ________ ___________ ________ ___________ ___________ _________ ___________ ___________
BALANCE at Dec. 31, 1995 389,487 389,487 1,880,294 18,803 74,215 7,797,098 (145,256) 8,134,347
Net income 897,036 897,036
Issuance of common stock
under Employee Stock
Purchase Plan 3,563 36 21,732 21,768
Unrealized gain on
marketable securities,
net of deferred taxes $475,984 475,984
___________ ________ ___________ ________ ___________ ___________ _________ ___________ ___________
BALANCE at Sept. 30, 1996 389,487 $389,487 1,883,857 $18,839 $95,947 $8,694,134 ($145,256) $475,984 $9,529,135
___________ ________ ___________ ________ ___________ ___________ _________ ___________ ___________
___________ ________ ___________ ________ ___________ ___________ _________ ___________ ___________
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
___________________________
1996 1995
___________ ___________
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $897,036 $20,480
Adjustments to reconcile net income (loss
to net cash provided by operating activities:
Depreciation and amortization 3,768,393 1,245,480
Minority stockholders' interest in
Alliance Telecommunications Corp. 224,424
Loss (gain) on marketable securities (687,947) 115,336
Income from cellular partnerships (362,432) (45,000)
Changes in assets and liabilities net of
effects from the purchase of Ollig
Utilities, Inc.:
Sales of marketable securities 1,499,072
Decrease (increase) in accounts receivable (510,229) 232,026
Increase in prepaid income taxes (75,644)
Increase in prepaid expenses (49,501) (4,009)
Increase (decrease) in accounts payable (312,545) 127,147
Increase in accrued expenses 491,101 90,435
Decrease in income taxes payable (225,892) (692,853)
Decrease in deferred investment credits (86,628) (28,334)
Increase in deferred taxes 118,112
Decrease in deferred compensation (19,799)
___________ ___________
Net cash provided by operating activities 4,743,165 985,064
Cash Flows from Investing Activities:
Capital expenditures, net (2,918,843) (2,758,533)
Sales of temporary cash investments 1,011,145
Sales of marketable securities 553,645
Decrease in construction fund 120,037 86,484
Increase in inventories (440,332) (111,162)
Proceeds (investments in) from cellular
telephone partnerships 209,803 (161,637)
Purchases of other investments (1,141,562) (404,000)
Sales of other investments 256,772 215,533
Increase in other assets (439,469) (39,059)
Increase in excess of cost over net assets
acquired (139,495)
Utilization of Ollig Utilities acquisition
deposits 2,726,056
Payment for purchase of Ollig Utilities, Inc.
net of cash acquired (78,144,657)
___________ ___________
Net cash used in investing activities (78,207,405) (3,311,869)
Cash Flows from Financing Activities:
Repayment of long-term debt (1,706,327) (1,654,204)
Proceeds from issuance of notes payable and
long-term debt 62,457,500 12,923,900
Minority interest in Alliance
Telecommunications, Inc. 7,920,000
Proceeds from issuance of common stock 21,768 22,872
Purchase of Hector Communications Corp.
common stock (18,375)
Convertible debenture issue costs (1,323,787)
___________ ___________
Net cash provided by financing activities 68,692,941 9,950,406
___________ ___________
Net Increase (Decrease) in Cash and Cash Equivalents (4,771,299) 7,623,601
Cash and Cash Equivalents at Beginning of Period 9,040,138 3,654,748
___________ ___________
Cash and Cash Equivalents at End of Period $4,268,839 $11,278,349
___________ ___________
___________ ___________
Supplemental disclosures of cash flow information:
Interest paid during the period $3,444,313 $925,583
Income taxes paid during the period 1,458,981 786,694
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
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 September 30,
1996, the statements of income for the three and nine month periods ended
September 30, 1996 and 1995 and the statements of cash flows for the nine month
periods ended September 30, 1996 and 1995 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and changes in cash flows at September 30, 1996
and 1995 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, 1995 Annual Report to
Shareholders. The results of operations for the periods ended September 30 are
not necessarily indicative of the operating results for the entire year.
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, SD and Split Rock Telecom Cooperative, Inc. of Garretson, SD. Alliance
financed the acquisition using the combined equity investments of its
shareholders and debt financing provided by St. Paul Bank. The Company's
investment in Alliance is approximately $16,894,000, which includes $6,000,000
of short-term borrowing by the Company from St. Paul Bank and $2,830,000 of
purchase deposits and acquisition costs paid prior to the acquisition date.
The acquisition is being accounted for as a purchase. The Company is in the
process of appraising for financial statement purposes the assets acquired in
the purchase. Goodwill acquired in the transaction is estimated to be
$57,413,000 (including an estimated $6,272,000 allocated to cellular telephone
investments pending appraisal) which is being amortized on a straight-line basis
over 40 years. The results of operations of Ollig Utilities Company 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 Utilities Company was acquired January 1, 1995 are as follows:
<TABLE>
<CAPTION>
Three Months
Ended Sept. 30 Nine Months Ended Sept. 30
____________ ______________________________
1995 1996 1995
____________ ____________ _____________
<S> <C> <C> <C>
Revenues $6,517,269 $20,651,908 $18,946,186
Income (loss) before
minority interest (82,028) 987,916 (765,549)
Net income (loss) (59,811) 754,787 (631,047)
Net income (loss) per share ($.03) $.33 ($.28)
</TABLE>
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
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Ollig Utilities Company owns four local exchange telephone companies which serve
25,000 access lines in 25 communities in Minnesota, South Dakota and Iowa. Ollig
also owns eight cable television systems serving 1,700 customers in twelve
Minnesota communities and four systems serving 1,500 customers in South Dakota.
Ollig is also an investor in cellular telephone partnerships serving five rural
service areas in Minnesota and North Dakota and in the partnership providing
cellular service in the Sioux Falls, SD metropolitan area. Ollig is also an
investor in Minnesota Equal Access Network Services, Inc., South Dakota Network,
Iowa Network Services, Inc., Fibernet Communications LLC, Independent
Information Services and Val-Ed Joint Venture. These investments have been
included in cellular telephone investments and other investments on the
consolidated balance sheet at September 30, 1996. The Company also acquired
$7,412,000 of temporary cash investments in the purchase.
NOTE 3 - MARKETABLE SECURITIES AND GAINS ON SALES OF INVESTMENTS
In February, 1996, Rural Cellular Corporation ("RCC") completed an initial
offering of its common stock to the public. Prior to the offering, the Company
owned 3.72% of RCC, which was classified as an other investment. As part of the
offering, the Company sold 27% of its interest in RCC, with a book value of
$69,000 and recorded a gain on sale of $485,000. The balance of the Company's
investment in RCC has been transferred to marketable securities and classified
as available-for-sale. Rural Cellular Corporation trades on the Nasdaq National
Market System under the symbol RCCC.
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.
As part of the acquisition of Ollig Utilities Company, the Company acquired
marketable securities investments in U.S. West Communications, U.S. West Media,
and Rural Cellular Corp. with a market value at September 30, 1996 of
$4,834,000. These securities have been classified as available for sale.
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 on the Company's income
tax expense.
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 nine months ended September 30, 1996 was calculated
assuming all outstanding convertible debentures were converted to common stock
effective January 1, 1996. Fully diluted earnings per share and primary earnings
per share were essentially the same for these periods. The effect of the
convertible debentures on per share earnings in the 1995 periods was
anti-dilutive. The calculation of the Company's earnings per share is included
as Exhibit 11 to this Form 10-Q.
8
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 6 - ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURES
In February 1995 the Company completed a public offering of convertible
subordinated debentures. The debentures carry an interest rate of 8.5% and
mature February 15, 2002. The debentures are convertible into common stock of
the Company at a rate of 112.5 common shares per $1,000 par value debenture. The
debentures are callable under certain circumstances and include restrictions on
payment of dividends to the Company's shareholders. The Company may incur up to
$4,000,000 of senior indebtedness to which the debentures will be subordinated.
Total value of the offering was $12,650,000. Proceeds to the Company after
underwriting, accounting and legal expenses were approximately $11,300,000. The
offering's underwriters also received warrants to purchase 123,750 shares of the
Company's common stock at a price of $8.70 per share. The warrants are
exercisable beginning February 15, 1996 and expire February 15, 2000.
NOTE 7 - NEW DEBT FINANCING
The Company (through its Alliance Telecommunications Corp. subsidiary) financed
the purchase of Ollig using a combination of debt financing provided by St. Paul
Bank and equity capital provided by Alliance's owners. Borrowing by Alliance
from St. Paul Bank was $55,250,000 which is in the form of a term loan, with
installment payments, maturing March 31, 2011. Interest on the loan is at St.
Paul Bank's cost of money plus 1.35% (currently 6.68%). Substantially all the
assets of Alliance and Ollig are pledged as collateral under the loan agreement.
The Company financed its investment using internally held funds and a $6,000,000
short-term bridge loan from St. Paul Bank. The bridge loan includes $4,000,000
of debt senior to the convertible debentures issued in 1995 and $2,000,000 of
junior debt. It bears interest at St. Paul Bank's base lending rate for similar
loans (currently 7.33%) and matures March 31, 1997. The loan is secured by a
pledge of the Company's cable television assets and the stock of one of its
local exchange carrier subsidiaries.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
On April 25, 1996, the Company's newly formed, 68% owned subsidiary, Alliance
Telecommunications Corporation, completed the acquisition of Ollig Utilities
Company ("Ollig"). Ollig's operations were considerably larger than those of the
Company prior to the acquisition. Ollig serves approximately 25,000 telephone
access lines and 3,200 cable television customers, compared to 6,300 telephone
access lines and 4,200 cable television customers served by the Company's
existing operations. As a result, the acquisition of Ollig will materially
distort the comparisons of the Company's operating results for the next several
periods.
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 30, 1995
Consolidated revenues increased $9,867,000 or 236%. The five months of Ollig
operations included in the Company's operating results contributed $9,003,000 of
additional revenue. Revenues from telephone operations increased $9,076,000, or
247%. Ollig telephone revenues for the period were $8,615,000. Local network
revenues increased $1,736,000, or 222% due to Ollig and a local service rate
increase granted the Company's Wisconsin telephone subsidiary in December, 1995.
The rate increase was required to offset the impact of regulatory changes on
this subsidiary. Network access revenues increased $5,061,000 or 202% due to
Ollig. Ollig received approximately 55% of its revenues from network access
during the period; the Company's existing operations receive 52% of revenues
from similar sources. Revenues from billing and collection services provided by
the Company to interexchange carriers increased $428,000 or 252%. Revenues from
nonregulated activities increased $1,851,000, or 866% due to Ollig's greater
range of nonregulated business. Cable television revenues increased $791,000 or
157%. The increase was due to Ollig and the Company's August, 1995 acquisition
of 22 cable television systems in south central Minnesota.
9
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Operating costs and expenses, excluding depreciation and amortization, increased
$3,674,000, or 161%. Ollig's operating costs and expenses included in the period
were $3,392,000, or 57% of the total. Depreciation and amortization expenses
increased $2,499,000, or 222%, due to additional depreciation expense and
goodwill amortization expense associated with the Ollig acquisition. Operating
income increased $3,694,000, or 477%. Ollig contributed $3,347,000 of operating
income in the period.
Interest expense increased $2,599,000, or 227%, due to interest expense on
Ollig's debts, interest expense incurred on borrowings to finance the purchase
of Ollig and interest on the Company's outstanding subordinated debentures
issued in February, 1995. Investment income increased $55,000 due to investment
of cash balances available prior to the acquisition. Income accrued on
investments in cellular telephone partnerships increased $317,000 due to income
from Ollig's substantial cellular investments. The Company recorded gains on
sales of marketable securities of $688,000 in the 1996 period due to sales of
investments in Rural Cellular Corporation and Telephone and Data Systems, Inc.
The 1995 period included an unrealized loss on marketable securities of $115,000
due to declines in marketable securities valuations in that period.
Income before income taxes was $2,281,000 in the 1996 period compared to $10,000
in the 1995 period. The Company's effective income tax rate was 51% for the 1996
period due to nondeductibility of goodwill amortization incurred due to the
acquisition. Income before minority interest was $1,121,000 in 1996. Net income
was $897,000 in 1996 compared to $20,000 in 1995.
Three Months Ended September 30, 1996 Compared to
Three Months Ended September 30, 1995
Consolidated revenues increased $5,880,000 or 402%. Ollig contributed $5,530,000
of revenue. Revenues from telephone operations increased $5,457,000, or 448%.
Ollig telephone revenues for the period were $5,296,000. Local network revenues
increased $962,000, or 353% due to Ollig and a local service rate increase
granted the Company's Wisconsin telephone subsidiary in December, 1995. Network
access revenues increased $3,085,000 or 376% due to Ollig. Revenues from billing
and collection services provided by the Company to interexchange carriers
increased $265,000 or 461%. Revenues from nonregulated activities increased
$1,145,000 due to Ollig's greater range of nonregulated business. Cable
television revenues increased $323,000 or 146%. The increase was due to Ollig
and the Company's August, 1995 acquisition of 22 cable television systems in
south central Minnesota.
Operating costs and expenses, excluding depreciation and amortization, increased
$2,142,000, or 286%. Ollig's operating costs and expenses included in the period
were $2,012,000, or 70% of the total. Depreciation and amortization expenses
increased $1,438,000, or 367%, due to additional depreciation expense and
goodwill amortization expense associated with the Ollig acquisition. Operating
income increased $2,200,000, or 740%. Ollig contributed $2,154,000 of operating
income in the period.
Interest expense increased $1,419,000, or 321%, due to interest expense on
Ollig's debts and interest expense incurred on borrowings to finance the
purchase of Ollig. Investment income increased $23,000 due to interest on Ollig
cash balances available for investment. Income accrued on investments in
cellular telephone partnerships increased $217,000 due to income from Ollig's
substantial cellular investments. The 1995 period included an unrealized gain on
marketable securities of $195,000 due to increases in marketable securities
valuations.
10
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Income before income taxes was $1,011,000 in the 1996 period compared to
$185,000 in the 1995 period. The Company's effective income tax rate was 54% for
the 1996 period compared to 38% in the 1995 period due to nondeductibility of
goodwill amortization incurred due to the acquisition. Income before minority
interest was $470,000 in 1996. Net income was $294,000 in 1996 compared to
$115,000 in 1995.
Liquidity and Capital Resources
On April 25, 1996, the Company, in association with two co-investors (Golden
West Telecommunications Cooperative, Inc. and Split Rock Telecom Cooperative,
Inc.), acquired Ollig Utilities Company ("Ollig"), a privately owned
telecommunications firm for $80 million in cash. The purchase was accomplished
through a newly formed subsidiary, Alliance Telecommunications Corporation
("Alliance"). The Company owns 68% of Alliance.
Alliance financed the purchase of Ollig using a combination of debt financing
provided by St. Paul Bank and equity capital provided by Alliance's owners.
Borrowing by Alliance from St. Paul Bank was $55,250,000 which is in the form of
a term loan, with installment payments, maturing March 31, 2011. Interest on the
loan is at St. Paul Bank's cost of money plus 1.35% (currently 6.68%).
Substantially all the assets of Alliance and Ollig are pledged as collateral
under the loan agreement.
The Company's equity investment in Alliance, including legal and purchase costs,
is approximately $16,894,000. The Company financed its investment using
internally held funds and a $6,000,000 short-term bridge loan from St. Paul
Bank. The bridge loan includes $4,000,000 of debt senior to the convertible
debentures issued in 1995 and $2,000,000 of junior debt. It bears interest at
St. Paul Bank's base lending rate for similar loans (currently 7.33%) and
matures March 31, 1997. The loan is secured by a pledge of the Company's cable
television assets and the stock of one of its local exchange carrier
subsidiaries. The Company is exploring various alternatives to refinance the
bridge loan, including use of public debt or equity markets.
The Company's telephone subsidiaries serve its telephone customers with a
100%-digital switching network and almost 100% buried outside plant. Telephone
and cable television plant additions totaled $2,919,000 in the first nine months
of 1996. Telephone plant additions for the remainder of 1996 are expected to
total $500,000 and will provide customers with additional advanced switching
services as well as expand the Company's use of high capacity fiber optics in
its telephone network.
The Company has financed its telephone asset additions from internally generated
funds and drawdowns of Rural Utilities Service ("RUS") and Rural Telephone Bank
("RTB") loan funds. Substantially all of the Company's telephone assets are
pledged or are subject to mortgages to secure obligations of its telephone
subsidiaries to the RUS and RTB. In addition, the amount of dividends on common
stock that may be paid by the Company's LEC subsidiaries is limited by covenants
in the mortgages. The Company is currently applying to the RUS and RTB for new
loans, some of which have received preliminary approval.
In 1994, the Wisconsin public service commission ("WPSC") implemented a rule for
interexchange calls to nearby communities (Extended Community Calling or "ECC")
which significantly reduced the Company's intrastate access revenues in
Wisconsin. To compensate for the revenue loss, the Company applied for and
received a local service rate increase for its Wisconsin exchanges, which went
into effect in December, 1995. The Company's local network revenues in the first
nine months of 1996 were $287,000 more than in the comparable 1995 period as a
result of the rate increase.
11
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
In February, 1995, the Company completed a public offering of convertible
subordinated debentures. Total value of the offering was $12,650,000. Through
March 31, 1996, the Company utilized the offering proceeds to pay down debt
associated with its cable television operation, finance cable television plant
additions, purchase additional cable television systems and for general
corporate purposes. The Company employed the remaining offering funds in the
Ollig acquisition.
In August, 1995, the Company acquired 22 rural Minnesota cable systems, serving
approximately 2,000 customers, from Lake Cable Partnership for $2.2 million.
Cable television capital additions for the balance of 1996 are estimated at
$50,000.
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. At December 31, 1995, the Company's marketable
securities portfolio consisted primarily of 32,802 shares of Telephone and Data
Systems, Inc. ("TDS") common stock acquired in the sale of the Rochester,
Minnesota MSA. The Company sold its TDS stock in the first quarter of 1996.
Gross proceeds from the stock sales were $1,499,000 and the Company recorded a
gain on sale of $203,000. In February, 1996, Rural Cellular Corporation ("RCC")
completed an initial offering of its common stock to the public. Prior to the
offering, the Company owned 3.72% of RCC. As part of the offering, the Company
sold 27% of its interest in RCC, with a book value of $69,000 and recorded a
gain on sale of $485,000.
The Company produced cash from operating activities of $4,743,000 in the first
nine months of 1996, including $2,112,000 of cash from operating activities
produced by Ollig. At September 30, 1996, the Company had cash, cash equivalents
and temporary cash investments of $10,670,000 and working capital of $3,652,000.
By utilizing committed loan funds, cash flow from operations and current cash
balances, the Company feels it has adequate resources to meet its liquidity and
capital expenditure requirements.
PART II. OTHER INFORMATION
Items 1 - 5. Not Applicable
Item 6(a). Exhibits
Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q.
Item 6(b). Reports on Form 8-K.
On July 9, 1996, the Company filed Amendment No. 1 to its Form 8-K dated April
25, 1996, regarding financial statements and pro forma financial information
concerning the acquisition of Ollig Utilities Company.
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: November 13, 1996
12
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended Sept.30 Nine Months Ended Sept.30
___________________________ ____________ _____________
Primary: 1996 1995 1996 1995
_______ _____________ _____________ ____________ _____________
<S> <C> <C> <C> <C>
Net income $293,108 $114,889 $896,636 $20,480
_____________ _____________ ____________ _____________
_____________ _____________ ____________ _____________
Common and common equivalent shares:
Weighted average number of common
shares outstanding 1,881,417 1,879,476 1,880,671 1,878,398
Dilutive effect of convertible
preferred shares outstanding 389,487 390,704 389,487 391,754
Dilutive effect of stock option
outstanding after application
of treasury stock method 18,652 2,232 12,398 6,260
Weighted average number of
unallocated shares held by
employee stock ownership plan (18,556) (16,412) (18,556) (16,412)
_____________ _____________ ____________ _____________
2,271,000 2,256,000 2,264,000 2,260,000
_____________ _____________ ____________ _____________
_____________ _____________ ____________ _____________
Net income per common and
common equivalent shar$ .13 $.05 $.40 $.01
_____________ _____________ ____________ _____________
_____________ _____________ ____________ _____________
Fully Diluted (1):
_____________
Net income $293,108 $114,889 $896,636 $20,480
Interest on convertible
debentures, net of tax (2) 189,654 568,962
_____________ __________________________ _____________
Adjusted net income $482,762 $114,889 $1,465,598 $20,480
_____________ _____________ ____________ _____________
_____________ _____________ ____________ _____________
Common and common equivalent shares:
Weighted average number of common
shares outstanding 1,881,417 1,879,476 1,880,671 1,878,398
Assumed conversion of convertible
debentures into common stock (2) 1,423,125 1,423,125
Dilutive effect of convertible
preferred shares outstanding 389,487 390,704 389,487 391,754
Dilutive effect of stock options
outstanding after application
of treasury stock method 18,652 2,232 12,890 6,260
Weighted average number of
unallocated shares held by
employee stock ownership plan (18,556) (16,412) (18,556) (16,412)
_____________ __________________________ _____________
3,694,125 2,256,000 3,687,617 2,260,000
_____________ _____________ ____________ _____________
_____________ _____________ ____________ _____________
Net income per common share
- assuming full dilution $.13 $.05 $.40 $.01
_____________ _____________ ____________ _____________
_____________ _____________ ____________ _____________
- ------------------------------------------------------------------------------------------
(1) Primary and fully diluted earnings per share for the 1996 periods are
substantially the same.
(2) The effect of the convertible debentures on net income per share is
anti-dilutive for the 1995 periods.
</TABLE>
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000863437
<NAME> HECTOR COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,268,839
<SECURITIES> 6,401,020
<RECEIVABLES> 4,095,961
<ALLOWANCES> 6,346
<INVENTORY> 1,027,137
<CURRENT-ASSETS> 16,045,039
<PP&E> 59,004,978
<DEPRECIATION> 12,783,699
<TOTAL-ASSETS> 137,718,741
<CURRENT-LIABILITIES> 12,392,891
<BONDS> 98,401,641
0
389,487
<COMMON> 18,839
<OTHER-SE> 9,120,809
<TOTAL-LIABILITY-AND-EQUITY> 137,718,741
<SALES> 14,048,917
<TOTAL-REVENUES> 14,048,917
<CGS> 9,581,669
<TOTAL-COSTS> 9,581,669
<OTHER-EXPENSES> (1,556,935)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,742,723
<INCOME-PRETAX> 2,281,460
<INCOME-TAX> 1,160,000
<INCOME-CONTINUING> 1,121,460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 897,036
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
