===============================================================================
UNITED STATES
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, 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 July 31, 1996
Common Stock, par value 1,880,294
$.01 per share
Total Pages (13) Exhibit at Page 13
===============================================================================
<PAGE>
<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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
Assets: 1996 1995
____________ ____________
Current assets:
<S> <C> <C>
Cash and cash equivalents $4,560,306 $9,040,138
Temporary cash investments 7,762,841
Marketable securities 1,459,266
Construction fund 14,902 108,828
Accounts receivable, net 3,794,159 723,081
Materials, supplies and inventories 948,729 120,641
Prepaid expenses 105,044 35,992
____________ ____________
Total current assets 17,185,981 11,487,946
Property, plant and equipment 57,232,948 24,647,253
less accumulated depreciation (11,493,745) (10,038,377)
____________ ____________
Net property, plant and equipment 45,739,203 14,608,876
Other assets:
Excess of cost over net assets acquired, net 52,295,609 906,950
Marketable securities 7,875,053
Acquisition costs - Ollig Utilities Company 2,790,236
Cellular telephone investments 9,817,816 1,260,448
Other investments 4,855,756 1,038,545
Deferred debenture issue costs, net 1,063,757 1,158,313
Other assets 1,212,591 267,130
____________ ____________
Total other assets 77,120,582 7,421,622
____________ ____________
Total Assets $140,045,766 $33,518,444
____________ ____________
____________ ____________
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of
long-term debt $8,719,667 $492,900
Accounts payable 1,932,874 530,248
Accrued expenses 2,165,645 653,681
Income taxes payable 635,110 132,522
____________ ____________
Total current liabilities 13,453,296 1,809,351
Long-term debt, less current portion 98,908,768 22,096,419
Deferred investment tax credits 614,349 128,339
Deferred income taxes 8,169,439 1,349,988
Deferred compensation 1,011,703
Minority stockholders interest in Alliance
Telecommunications Corp. 7,968,202
Stockholders' Equity 9,920,009 8,134,347
______________ ______________
Total Liabilities and Stockholders' Equity $140,045,766 $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 June 30 Six Months Ended June 30
______________________________ ________________________________
1996 1995 1996 1995
____________ ____________ ____________ _____________
Revenues:
<S> <C> <C> <C> <C>
Local network $927,963 $266,518 $1,283,639 $509,298
Network access 2,781,984 857,698 3,667,598 1,690,671
Billing and collection 223,593 57,082 275,338 112,593
Nonregulated activities 773,897 82,147 852,541 147,014
Cable television revenues 457,841 146,587 752,080 284,345
____________ ____________ ____________ _____________
Total revenues 5,165,278 1,410,032 6,831,196 2,743,921
Costs and expenses:
Plant operations 703,894 219,170 910,552 423,924
Depreciation and amortization 1,349,074 367,219 1,797,005 735,306
Customer operations 284,997 82,174 354,661 169,230
General and administrative 843,020 395,340 1,206,692 683,794
Other operating expenses 386,912 140,491 592,461 255,600
____________ ____________ ____________ _____________
Total costs and expenses 3,567,897 1,204,394 4,861,371 2,267,854
Operating income 1,597,381 205,638 1,969,825 476,067
Other income and (expenses):
Investment income 200,504 236,363 364,204 331,265
Interest expense (1,447,156) (406,631) (1,881,938) (701,348)
Marketable securities gains (losses) (92,960) 687,947 (310,393)
Cellular partnership income 99,192 15,000 130,692 30,000
____________ ____________ ____________ _____________
Other income (expense), net (1,147,460) (248,228) (699,095) (650,476)
Income before income taxes 449,921 (42,590) 1,270,730 (174,409)
Income taxes (benefit) 292,000 (25,000) 619,000 (80,000)
____________ ____________ ____________ _____________
Income before minority interest 157,921 (17,590) 651,730 (94,409)
Minority interest in earnings of
Alliance Telecommunications Corporation 48,202 48,202
____________ ____________ ____________ _____________
Net income 109,719 (17,590) 603,528 (94,409)
____________ ____________ ____________ _____________
____________ ____________ ____________ _____________
Net income (loss) per common and
common equivalent share $ .05 ($ .01) $ .27 ($ .04)
_____________ ____________ _____________ _____________
_____________ ____________ _____________ _____________
Net income (loss) per common share
- assuming full dilution $ .05 ($ .01) $ .27 ($ .04)
____________ ____________ _____________ _____________
____________ ____________ _____________ _____________
Average common and common equivalent
shares outstanding 2,264,000 2,254,000 2,261,000 2,254,000
____________ ____________ _____________ _____________
____________ ____________ _____________ _____________
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 Total
_________ ________ ___________ ________ _______ ___________ _________ _________ __________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 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 December 31, 1995 389,487 389,487 1,880,294 18,803 74,215 7,797,098 (145,256) 8,134,347
Net income 603,528 603,528
Unrealized gain on marketable
securities, net
deferred taxes $1,182,134 1,182,134
_________ ________ ___________ ________ _______ ___________ _________ __________ __________
BALANCE at June 30, 1996 389,487 $389,487 1,880,294 $18,803 $74,215 $8,400,626 ($145,256) $1,182,134 $9,920,009
_________ ________ ___________ ________ _______ ___________ _________ __________ __________
_________ ________ ___________ ________ _______ ___________ _________ __________ __________
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
_____________________________
1996 1995
___________ ___________
Cash Flows from Operating Activities:
<S> <C> <C>
Net income (loss) $603,528 ($94,409)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,891,561 806,223
Minority stockholders' interest in Alliance Telecommunications Corp. 48,202
Loss (gain) on marketable securities (687,947) 310,393
Income from cellular partnerships (130,692) (30,000)
Changes in assets and liabilities net of effects from the purchase
of Ollig Utilities, Inc.:
Sales of marketable securities 1,499,072
Decrease in accounts receivable (214,773) 361,339
Increase in prepaid income taxes (143,018)
Decrease in prepaid expenses 49,190 25,217
Increase (decrease) in accounts payable (575,557) 75,900
Increase in accrued expenses 870,240 292,316
Decrease in income taxes payable (39,114) (692,853)
Decrease in deferred investment credits (40,998) (19,893)
Increase in deferred taxes 132,923
Decrease in deferred compensation (7,920)
___________ ___________
Net cash provided by operating activities 3,397,715 891,215
Cash Flows from Investing Activities:
Capital expenditures, net (1,065,641) (525,276)
Purchases of temporary cash investments (350,676)
Sales of marketable securities 553,645
Decrease in construction fund 159,828 80,964
Increase in inventories (361,924) (72,708)
Investment in cellular telephone partnerships (161,637)
Purchases of other investments (1,119,739) (404,000)
Sales of other investments 256,772 7,935
Decrease (increase) in other assets (467,011) 75,405
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 (77,813,347) (999,317)
Cash Flows from Financing Activities:
Repayment of long-term debt (441,700) (1,541,557)
Proceeds from issuance of notes payable and long-term debt 62,457,500 12,879,850
Minority interest in Alliance Telecommunications, Inc. 7,920,000
Convertible debenture issue costs (1,323,787)
___________ ___________
Net cash provided by financing activities 69,935,800 10,014,506
___________ ___________
Net Increase (Decrease) in Cash and Cash Equivalents (4,479,832) 9,906,404
Cash and Cash Equivalents at Beginning of Period 9,040,138 3,654,748
___________ ___________
Cash and Cash Equivalents at End of Period $4,560,306 $13,561,152
___________ ___________
___________ ___________
Supplemental disclosures of cash flow information:
Interest paid during the period $1,379,802 $291,473
Income taxes paid during the period 707,342 774,669
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 June 30, 1996, the
statements of income for the three and six month periods ended June 30, 1996 and
1995 and the statements of cash flows for the six month periods ended June 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 June 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 June 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 price deposits and acquisition costs incurred 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 June 30 Six Months Ended June 30
_______________________________ _______________________________
1996 1995 1996 1995
____________ ____________ ____________ _____________
<S> <C> <C> <C> <C>
Revenues $ 6,847,695 $ 6,739,071 $ 13,434,187 $ 12,428,917
Income before minority interest 133,125 (112,959) 518,186 (765,549)
Net income 81,772 (122,794) 461,279 (631,047)
Net income (loss) per share $ .04 ($ .05) $ .20 ($ .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.
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.
7
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 June 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 June 30, 1996 of $5,650,000.
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.
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 six months ended June 30, 1996 was calculated assuming all
outstanding convertible debentures were converted to common stock effective
January 1, 1996. The effect of the convertible debentures on per share earnings
in the 1995 periods and in the three month period ended June 30, 1996 was
anti-dilutive. The calculation of the Company's earnings per share is included
as Exhibit 11 to this Form 10-Q.
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
8
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 6.76%). 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 7.42%) 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
Six Months Ended June 30, 1996 Compared to
Six Months Ended June 30, 1995
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.
Consolidated revenues increased $4,087,000 or 149%. The two months of Ollig
operations included in the Company's operating results contributed $3,473,000 of
additional revenue. Revenues from telephone operations increased $3,620,000, or
147%. Ollig telephone revenues for the period were $3,319,000. Local network
revenues increased $774,000, or 152% 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 $1,977,000 or 117% due to
Ollig. Ollig received approximately 55% of its revenues from network access
during the period; the Company's existing operations receive 52% or revenues
from similar sources. Revenues from billing and collection services provided by
the Company to interexchange carriers increased $163,000 or 145%. Revenues from
nonregulated activities increased $706,000, or 480% due to Ollig's greater range
of nonregulated business. Cable television revenues increased $468,000 or 164%.
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
$1,532,000, or 100%. Ollig's operating costs and expenses included in the period
were $1,379,000, or 45% of the total. Depreciation and amortization expenses
increased $1,062,000, or 144%, due to additional depreciation expense and
goodwill amortization expense associated with the Ollig acquisition. Operating
income increased $1,494,000, or 314%. Ollig contributed $1,193,000 of operating
income in the period.
Interest expense increased $1,181,000, or 168%, 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 $33,000 due to investment
of cash balances available prior to the acquisition. Income accrued on
investments in cellular telephone partnerships increased $101,000 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 $310,000
due to declines in marketable securities valuations in that period.
Income before income taxes was $1,271,000 in the 1996 period compared to a loss
before income taxes of $174,000 in the 1995 period. The Company's effective
income tax rate was 49% for the 1996 period due to nondeductibility of goodwill
amortization incurred due to the acquisition. Income before minority interest
was $652,000 in 1996. Net income was $604,000 in 1996 compared to a net loss of
$94,000 in 1995.
Three Months Ended June 30, 1996 Compared to
Three Months Ended June 30, 1995
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.
Consolidated revenues increased $3,755,000 or 266%. The two months of Ollig
operations included in the Company's operating results contributed $3,473,000 of
additional revenue. Revenues from telephone operations increased $3,444,000, or
273%. Ollig telephone revenues for the period were $3,319,000. Local network
revenues increased $661,000, or 248% due to Ollig and a local service rate
increase granted the Company's Wisconsin telephone subsidiary in December, 1995.
Network access revenues increased $1,924,000 or 224% due to Ollig. Revenues from
billing and collection services provided by the Company to interexchange
carriers increased $167,000 or 292%. Revenues from nonregulated activities
increased $692,000, or 842% due to Ollig's greater range of nonregulated
business. Cable television revenues increased $311,000 or 212%. 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
$1,382,000, or 165%. Ollig's operating costs and expenses included in the period
were $1,379,000, or 62% of the total. Depreciation and amortization expenses
increased $982,000, or 267%, due to additional depreciation expense and goodwill
amortization expense associated with the Ollig acquisition. Operating income
increased $1,392,000, or 677%. Ollig contributed $1,193,000 of operating income
in the period.
10
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Interest expense increased $1,040,000, or 255%, due to interest expense on
Ollig's debts and interest expense incurred on borrowings to finance the
purchase of Ollig. Investment income decreased $36,000 due to reduction of cash
balances available for investment. Income accrued on investments in cellular
telephone partnerships increased $84,000 due to income from Ollig's substantial
cellular investments. The 1995 period included an unrealized loss on marketable
securities of $93,000 due to declines in marketable securities valuations in
that period.
Income before income taxes was $450,000 in the 1996 period compared to a loss
before income taxes of $43,000 in the 1995 period. The Company's effective
income tax rate was 65% for the 1996 period due to nondeductibility of goodwill
amortization incurred due to the acquisition. Income before minority interest
was $158,000 in 1996. Net income was $110,000 in 1996 compared to a net loss of
$18,000 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 6.76%).
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 7.42%) 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
plant additions were $1,066,000 in the first half of 1996. Telephone plant
additions for the remainder of 1996 are expected to total $2,200,000 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.
11
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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
half of 1996 were $184,000 more than in the comparable 1995 period as a result
of the rate increase.
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
$250,000.
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 $3,398,000 in the first
half of 1996, including $1,105,000 of cash provided by Ollig. At June 30, 1996,
the Company had cash, cash equivalents and temporary cash investments of
$12,323,000 and working capital of $3,733,000. 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 - 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of the Registrant was held on May 14,
1996 in Minneapolis, MN. The total number of shares outstanding and entitled to
vote at the meeting was 1,880,296 of which 1,811,903 were present either in
person or by proxy. By a vote of 1,804,078 in favor, 7,825 abstaining,
shareholders reelected Board Members Curtis A. Sampson and Steven H. Sjogren to
three year terms expiring at the 1999 Annual Meeting of Shareholders.
Board Members continuing in office are Charles R. Dickman, Paul A. Hoff and
Edward E. Strickland (whose terms expire at the 1997 Annual Meeting of
Shareholders) and James O. Ericson, Paul N. Hanson, and Wayne E. Sampson (whose
terms expire at the 1998 Annual Meeting of Shareholders).
12
<PAGE>
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). Reports on Form 8-K.
On May 2, 1996, the Company filed a Form 8-K dated April 25, 1996 reporting the
acquisition of Ollig Utilities, Company under Item 5, "Other Events".
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: August 14, 1996
13
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended June 30 Six Months Ended June 30
_______________________________ _______________________________
Primary: 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income (loss) $109,719 ($17,590) $603,528 ($94,409)
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
Common and common equivalent shares:
Weighted average number of common
shares outstanding 1,880,294 1,877,850 1,880,294 1,877,850
Dilutive effect of convertible preferred
shares outstanding 389,487 392,287 389,487 392,287
Dilutive effect of stock options outstanding after
application of treasury stock method (1) 12,775 9,775
Weighted average number of unallocated shares
held by employee stock ownership plan (18,556) (16,137) (18,556) (16,137)
_____________ _____________ _____________ _____________
2,264,000 2,254,000 2,261,000 2,254,000
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
Net income (loss) per common and common equivalent share $.05 ($.01) $.27 ($.04)
_____________ _____________ _____________ _____________
____________ _____________ _____________ _____________
Fully Diluted (2):
Net income (loss) $109,719 ($17,590) $603,528 ($94,409)
Interest on convertible debentures, net of tax 379,308
_____________ _____________ _____________ _____________
Adjusted net income (loss) $109,719 ($17,590) $982,836 ($94,409)
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
Common and common equivalent shares:
Weighted average number of common
shares outstanding 1,880,294 1,877,850 1,880,294 1,877,850
Assumed conversion of convertible debentures
into common stock 1,423,125
Dilutive effect of convertible preferred
shares outstanding 389,487 392,287 389,487 392,287
Dilutive effect of stock options outstanding after
application of treasury stock method (1) 26,775 26,650
Weighted average number of unallocated shares
held by employee stock ownership plan (18,556) (16,137) (18,556) (16,137)
_____________ _____________ _____________ _____________
2,278,000 2,254,000 3,701,000 2,254,000
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
Net income (loss) per common share - assuming full dilution $.05 ($.01) $.27 ($.04)
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
- ----------------------------------------------------------------------------------------------------
(1) The effect of outstanding stock options on net income per share is anti-dilutive for the 1995 period.
(2) The effect of the convertible debentures on net income per share is anti-dilutive for the 1996
three month period and both 1995 periods.
</TABLE>
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000863437
<NAME> HECTOR COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,560,306
<SECURITIES> 7,762,841
<RECEIVABLES> 3,799,839
<ALLOWANCES> 5,680
<INVENTORY> 948,729
<CURRENT-ASSETS> 17,185,981
<PP&E> 57,232,948
<DEPRECIATION> 11,493,745
<TOTAL-ASSETS> 140,045,766
<CURRENT-LIABILITIES> 13,453,296
<BONDS> 98,908,768
0
389,487
<COMMON> 18,803
<OTHER-SE> 9,511,719
<TOTAL-LIABILITY-AND-EQUITY> 140,045,766
<SALES> 6,831,196
<TOTAL-REVENUES> 6,831,196
<CGS> 4,861,371
<TOTAL-COSTS> 4,861,371
<OTHER-EXPENSES> (1,182,843)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,881,938
<INCOME-PRETAX> 1,270,730
<INCOME-TAX> 619,000
<INCOME-CONTINUING> 651,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 603,528
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
