===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18587
HECTOR COMMUNICATIONS CORPORATION
...............................................................................
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
...............................................................................
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K (Date
of Report: April 25, 1996) as set forth in the pages attached hereto:
Item 7: Financial Statements and Pro Forma Financial Information.
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 thereunto duly authorized.
HECTOR COMMUNICATIONS CORPORATION
by /s/Charles A. Braun
Charles A. Braun
Chief Financial Officer
July 9, 1996
Total Pages (33)
<PAGE>
Item 7: Financial Statements and Pro Forma Financial Information.
(a) Consolidated Financial Statements of Ollig Utilities Company
The following Consolidated Financial Statements of Ollig Utilities Company
and Subsidiaries appear at pages 3 to 20 herein: Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
The following unaudited Quarterly Consolidated Financial Statements of
Ollig Utilities Company and Subsidiaries appear at pages 21 to 25 herein:
Consolidated Balance Sheets as of March 31, 1996
Consolidated Statements of Income for the three month periods ended March
31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the period ended March
31, 1996
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1996 and 1995
Notes to unaudited Quarterly Consolidated Financial Statements
(b) Pro forma Financial Information (unaudited) Page Herein
Pro forma Condensed Combined Balance Sheet as of
March 31, 1996 27
Notes to Pro forma Condensed Combined Balance Sheet 28
Pro forma Condensed Combined Income Statement for the year
ended December 31, 1995 29
Notes to 1995 Pro forma Condensed Combined Income Statement 30
Pro forma Condensed Combined Income Statement for the three
months ended March 31, 1996 31
Notes to 1996 Pro forma Condensed Combined Income Statement 32
Calculation of Pro forma Earnings Per Share 33
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ollig Utilities Company
Ada, Minnesota
We have audited the accompanying consolidated balance sheet of Ollig
Utilities Company and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ollig
Utilities Company and subsidiaries as of December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Olsen Thielen & Co., Ltd.
March 7, 1996
St. Paul, Minnesota
3
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 AND 1994
ASSETS - Note 6
1995 1994
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 6,513,500 $ 8,310,822
Temporary Cash Investments 1,221,800 1,226,107
Cash - RUS Construction Fund 65,897 65,897
Due from Customers 172,882 118,709
Other Accounts Receivable 2,874,821 2,129,128
Income Taxes Receivable 13,566 -
Accounts Receivable from Shareholders - Note 5 363,476 -
Note Receivable from Affiliated Company 120,000 -
Current Portion of Note Receivable 6,800 6,400
Inventories 423,346 430,700
Prepaid Expenses 109,547 112,747
Total Current Assets 11,885,635 12,400,510
INVESTMENTS AND OTHER ASSETS:
Cost in Excess of Net Assets Acquired Less
Amortization of $1,984,068 and $1,769,418 6,877,552 7,092,607
Note Receivable 95,490 104,432
Rural Telephone Bank Stock - Note 6 647,250 647,250
Marketable Equity Securities - Note 2 1,850,148 1,206,618
Other Investments - Note 3 4,857,807 4,005,179
Nonregulated Plant, Net of Accumulated
Depreciation of $1,969,324 and $1,864,208 703,001 713,274
Intangible Assets Less Amortization of
$1,214,416 and $954,149 - Note 4 189,259 464,026
Other Assets 251,842 261,235
Total Investments and Other Assets 15,472,349 14,494,621
PROPERTY, PLANT AND EQUIPMENT:
Telecommunications Plant In Service 55,135,557 51,317,807
Other Property and Equipment 5,460,138 5,161,523
Under Construction 42,675 205,924
Acquisition Adjustment 385,787 385,787
Total 61,024,157 57,071,041
Less Accumulated Depreciation
and Amortization 29,397,886 26,745,859
Net Property, Plant
and Equipment 31,626,271 30,325,182
TOTAL ASSETS $58,984,255 $57,220,313
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
CURRENT LIABILITIES:
<S> <C> <C>
Current Portion of Long-Term Debt $ 1,658,467 $ 1,522,830
Notes Payable - 21,500
Accounts Payable 1,238,472 1,249,758
Construction Contracts Payable 59,916 410,747
Accrued Income Taxes 458,247 219,924
Accrued Interest 117,348 132,650
Other Accrued Taxes 280,461 245,643
Other Accrued Liabilities 376,513 401,573
Customer Deposits 54,938 50,524
Total Current Liabilities 4,244,362 4,255,149
LONG-TERM DEBT - Note 6 22,395,140 24,011,814
MINORITY STOCKHOLDERS' INTEREST
IN CONSOLIDATED SUBSIDIARIES 164,929 138,790
OTHER LIABILITIES:
Deferred Investment Tax Credits - Note 9 576,965 731,563
Deferred Income Taxes - Note 9 4,690,313 4,231,062
Deferred Compensation - Note 7 1,035,463 1,039,834
Total Other Liabilities 6,302,741 6,002,459
STOCKHOLDERS' EQUITY:
Common Stock - Nonvoting, $1 Par Value,
1,280,000 Shares Authorized, 1,261,575
Shares Issued and Outstanding - Note 8 1,261,575 1,261,575
Common Stock - Voting, $1 Par Value,
20,000 Shares Authorized, 17,000
Shares Issued and Outstanding - Note 8 17,000 17,000
Paid in Capital 110,592 110,592
Retained Earnings 24,170,364 21,488,512
Unrealized Gain (Loss) on Investments - Note 2 317,552 (65,578)
Total Stockholders' Equity 25,877,083 22,812,101
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $58,984,255 $57,220,313
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
OPERATING REVENUES:
<S> <C> <C> <C>
Local Network $ 3,087,293 $ 3,106,577 $ 3,033,535
Network Access 10,943,817 10,365,091 9,962,391
Billing and Collection 943,271 934,860 901,628
Miscellaneous, Net 3,989,305 3,315,464 2,932,901
Uncollectibles, Net (41,429) (30,580) (15,246)
Total Operating Revenues 18,922,257 17,691,412 16,815,209
OPERATING EXPENSES:
Plant Specific 3,328,753 2,895,826 2,722,795
Depreciation 3,627,954 3,656,224 3,582,510
Amortization 545,453 529,281 473,846
Plant Nonspecific 800,762 595,838 488,025
Customer 1,877,950 1,599,679 1,643,869
General and Administrative 1,883,240 2,057,168 1,884,318
Other Taxes 323,195 232,699 304,999
Total Operating Expenses 12,387,307 11,566,715 11,100,362
OPERATING INCOME 6,534,950 6,124,697 5,714,847
OTHER INCOME AND EXPENSES:
Investment Income, Net 527,962 406,343 412,163
Cellular Partnership Income - Note 3 474,053 371,177 51,221
Gain on Sale of Cellular
Investments - Note 2 - - 1,047,035
Interest Expense (1,532,566) (1,558,915) (1,693,523)
Net Other Income and Expenses (530,551) (781,395) (183,104)
INCOME BEFORE INCOME TAX
EXPENSE AND MINORITY INTEREST 6,004,399 5,343,302 5,531,743
INCOME TAX EXPENSE - Note 9 2,423,540 1,928,555 2,028,194
INCOME BEFORE MINORITY INTEREST 3,580,859 3,414,747 3,503,549
MINORITY INTEREST IN NET
INCOME OF SUBSIDIARIES 31,611 26,005 22,252
NET INCOME $ 3,549,248 $ 3,388,742 $ 3,481,297
NET INCOME PER COMMON SHARE (Note 1) $ 2.78 $ 2.65 $ 2.72
AVERAGE COMMON SHARES OUTSTANDING 1,278,575 1,278,575 1,278,575
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Unrealized
Nonvoting Common Stock Voting Common Stock Paid in Retained Gain (Loss) on
Shares Amount Shares Amount Capital Earnings Investments
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1992 1,261,575 $1,261,575 17,000 $17,000 $110,592 $15,701,864 $ -
Net Income 3,481,297
Cash Dividends (409,144)
BALANCE - December 31, 1993 1,261,575 1,261,575 17,000 17,000 110,592 18,774,017 -
Net Income 3,388,742
Cash Dividends (575,359)
Increase in Annuity Payable - Note 6 (98,888)
Unrealized Holding Loss, Net of
Taxes - Note 2 (65,578)
BALANCE - December 31, 1994 1,261,575 1,261,575 17,000 17,000 110,592 21,488,512 (65,578)
Net Income 3,549,248
Cash Dividends (805,502)
Increase in Annuity Payable - Note 6 (61,894)
Unrealized Holding Gain, Net of
Taxes - Note 2 383,130
BALANCE - December 31, 1995 1,261,575 $1,261,575 17,000 $17,000 $110,592 $24,170,364 $317,552
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income $ 3,549,248 $ 3,388,742 $ 3,481,297
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities:
Depreciation of Telecommunications
Plant 2,953,942 2,912,570 2,851,330
Depreciation of Other Equipment 674,012 743,654 731,180
Amortization 545,454 529,281 473,846
Write-off Franchise Fee - - 5,000
Cellular Partnership Income (474,053) (371,177) (51,221)
Gain on Sale of Cellular Investments - - (1,047,035)
Minority Stockholders' Interest in
Consolidated Affiliates 31,611 26,005 22,252
Val-Ed Joint Venture Income (43,012) (34,383) (36,155)
(Increase) Decrease
Due from Customers (54,173) (32,874) 10,614
Other Accounts Receivable (746,693) (4,373) 99,848
Income Taxes Receivable (13,566) 28,261 (28,261)
Inventories 18,389 5,769 92,802
Prepaid Expenses 3,200 4,495 2,448
Increase (Decrease) in:
Accounts Payable (11,285) 261,511 (147,453)
Accrued Interest (14,303) (14,772) (16,219)
Accrued Income Taxes 238,323 219,924 (247,149)
Other Accrued Taxes 34,818 (54,648) 52,986
Deferred Revenue - - (2,979)
Other Accrued Liabilities (24,576) 28,550 104,088
Deferred Compensation (4,371) (35,640) -
Deferred Investment Tax Credits (154,598) (155,595) (156,903)
Deferred Income Taxes 198,851 79,381 540,341
Net Cash Provided By
Operating Activities 6,707,218 7,524,681 6,734,657
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Telecommunications Plant
<S> <C> <C> <C>
In Service and Under Construction $(4,805,018) $(3,445,797) $(2,239,411)
Additions to Nonregulated Plant (95,142) (91,655) -
Purchase of Other Equipment (373,326) (731,142) (372,878)
Salvage, Net of Cost of Plant Removal (21,834) 58,894 62,952
Increase in Cash - RUS Construction Fund - (51,001) -
Proceeds from Sale of Land - 28,928 -
Proceeds from Sale of Equipment - 33,500 -
Increase in Materials and Supplies (11,035) (29,569) (1,749)
Purchase of Temporary Cash Investments (1,785,693) (2,123,595) (1,422,512)
Sale of Temporary Cash Investments 1,790,000 2,320,000 -
Increase in Accounts Receivable
from Shareholders (363,476) - -
Purchase of Other Investments (326,120) (177,508) (106,486)
Sale of Other Investments - - 510,905
Purchase of Cellular Partnership (233,752) - -
Distribution from Cellular Partnerships 174,309 38,134 40,000
Distribution from Val-Ed Joint Venture 50,000 50,000 -
Purchase of Hastad Engineering,
Net of Cash Acquired - (410,738) -
Purchase of Aurora Cable TV, Inc.,
Net of Cash Acquired - - (224,400)
Loans Made (120,000) (38,703) (79,684)
Loans Collected 8,542 48,292 42,687
Purchase of Intangible Assets (9,595) (100,000) (24,500)
(Increase) Decrease in Other Assets (11,409) (11,828) 25,063
Net Cash Used In Investing Activities (6,133,549) (4,633,788) (3,790,013)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Customer Deposits 4,414 3,320 5,765
Principal Payments of Long-Term Debt (1,542,931) (1,545,709) (2,659,675)
Payments of Notes Payable (21,500) (101,005) (75,000)
Proceeds from Issuance of Long-Term Debt - 160,000 -
Dividends Paid (805,502) (575,359) (409,144)
Dividends Paid Minority Stockholders
of Subsidiaries (5,472) (5,582) (34,005)
Net Cash Used In Financing Activities (2,370,991) (2,064,335) (3,172,059)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,797,322) 826,558 (227,415)
CASH AND CASH EQUIVALENTS
at Beginning of Year 8,310,822 7,484,264 7,711,679
CASH AND CASH EQUIVALENTS
at End of Year $ 6,513,500 $ 8,310,822 $ 7,484,264
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
9
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations - The Company's subsidiary operations include four
telephone companies, two cable television companies, an engineering company, a
financing company and a credit card communications company. These subsidiary
operations are located in Minnesota, South Dakota, Iowa and North Dakota. In
addition, the Company operates cable television properties in several
communities in Minnesota and South Dakota, and operates Radio Shack retail
franchises at three of its subsidiary company locations.
B. Basis of Accounting- The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles including certain
accounting practices prescribed by the Federal Communications Commission (FCC)
and the state regulatory commissions in the states where the telephone
subsidiaries operate.
C. Accounting Estimates - The presentation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities as of the date of the financial statements. Actual results could
differ from those estimates.
D. Consolidation - The consolidated financial statements include the accounts of
the Company and its subsidiaries: Hills Telephone Co., Inc., Valley Cablevision
of S.D., Inc., Aurora Cable TV, Inc., Hastad Engineering Co., OU Connections,
Inc., Loretel Systems, Inc. and its wholly owned subsidiary, Loretel Financial
Systems, Inc., which are all wholly owned, and Sleepy Eye Telephone Company and
Sioux Valley Telephone Company which are 99.1% and 97% owned, respectively. All
significant intercompany transactions and accounts have been eliminated.
E. Cash Equivalents - The Company considers all highly liquid debt instruments
with a maturity of three months or less when purchased to be cash equivalents.
Cash equivalents are stated at cost, which approximates market value.
F. Temporary Cash Investments - The Company considers cash investments with a
maturity of less than one year but greater than three months when purchased to
be temporary cash investments. These investments are readily convertible to cash
and are stated at cost, which approximates market value.
G. Uncollectibles - Uncollectibles are expensed as accounts become
worthless. Substantial losses are not anticipated from present receivable
balances.
H. Inventories - Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Merchandise Inventory $ 205,893 $ 224,282
Materials and Supplies 217,453 206,418
Total $ 423,346 $ 30,700
</TABLE>
Materials and supplies are recorded at average cost. Merchandise inventory is
recorded at the lower of average cost or market.
10
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
I. Property and Depreciation - Property and equipment are recorded at original
cost. Additions, improvements or major renewals are capitalized. For subsidiary
companies, if the assets are sold, retired or otherwise disposed of, the cost
plus removal costs less salvage is charged to accumulated depreciation. The
parent company gains or losses on equipment sales are reflected currently in
operations. Depreciation is computed using the straight-line method at rates
based on estimated service lives of the assets as follows:
Assets Service Lives
Buildings 40 - 50 years
Telephone Plant and Equipment 6 - 50 years
CATV Plant and Equipment 10 - 15 years
Furniture, Fixtures and Vehicles 3 - 10 years
J. Acquisition Adjustment - The excess of purchase price over original cost
of telecommunications plant acquired is expensed equally over 15 years.
K. Cost in Excess of Net Assets Acquired - The excess of the acquisition cost
over the fair value of net assets of telephone and cable television properties
and an engineering company acquired since November 1, 1970, of $8,326,852 is
being expensed equally over twenty and forty years. Costs in excess of the
underlying book value relating to acquisitions before November 1, 1970, of
$535,173 are not being amortized. Amortization of goodwill was $214,650 in 1995,
$219,346 in 1994 and $200,792 in 1993.
L. Investment Securities - Certain readily marketable investments in debt and
equity securities are classified as either Trading, Available-for-Sale, or
Held-to-Maturity. Investments classified as Trading are reported at fair value
with unrealized gains and losses included in income. Investments classified as
Available-for-Sale are reported at fair value with unrealized gains and losses
recorded in a separate component of stockholders' equity. Investments classified
as Held-to-Maturity are recorded at amortized cost. Investments accounted for
using the equity method of accounting and investments which do not have readily
determinable fair market values are not affected by this accounting principle.
As of December 31, 1995 and 1994, all Company investment securities are
classified as Available-For-Sale.
Realized gains and losses on dispositions are based on the net proceeds and the
adjusted book value of the securities sold, using the specific identification
method.
M. Other Investments - Long-term investments in companies that are not intended
for resale or are not readily marketable and other assets are recorded at cost,
which does not exceed net realizable value. Investments in joint ventures or
partnerships are recorded on the equity method of accounting which reflects
original cost and recognition of the Company's share of operating income or
losses from these entities.
11
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) N. Financial
Instruments - Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The Statement extends existing fair value disclosure
practices by requiring all entities to disclose the fair value of financial
instruments, both assets and liabilities, recognized and not recognized in the
consolidated balance sheets, for which it is practicable to estimate fair value.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
The fair value of the Company's financial instruments approximates carrying
value except for long-term investments in other companies. Fair values of cash
and cash equivalents, temporary cash investments, and marketable securities were
estimated based on quoted market prices. Fair values of long-term debt were
estimated based on current rates for debt with similar terms and maturities.
Long-term investments in other companies are not intended for resale and are not
readily marketable, and thus a reasonable estimate of fair value is not
practicable.
O. Revenue Recognition - Revenues are recognized when earned. Interstate
telecommuni-cations access service is based on average schedule or cost based
settlements with the National Exchange Carrier Association. Local and intrastate
telecommunications access services are based on tariffs filed with the state
regulatory commissions. Access revenues based on cost are estimated pending
completion of final cost studies.
P. Income Taxes and Investment Tax Credits - The provision for income taxes
consists of an amount for taxes currently payable and a provision for tax
consequences deferred to future periods. Deferred income taxes are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The major temporary differences that gave rise to the net deferred tax
liability are depreciation, which for tax purposes is determined based on
accelerated methods and shorter lives, a nontaxable gain on sale of investments,
and deferred compensation.
For financial statement purposes, deferred investment tax credits and excess
deferred income taxes relating to depreciation of regulated assets are being
amortized as a reduction of the provision for income taxes over the estimated
useful or remaining lives of the related property, plant and equipment.
Q. Credit Risk - Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, temporary cash
investments and trade receivables. The Company places its cash and temporary
cash investments with high credit quality financial institutions and, by policy,
generally limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different industries. As of December 31, 1995, the Company had no significant
concentrations of credit risk.
12
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
R. Net Income Per Share - Net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. There are no common share equivalents.
S. Reclassifications - Certain amounts in the 1994 and 1993 financial
statements and notes have been reclassified to conform with the 1995
presentation.
NOTE 2 - MARKETABLE EQUITY SECURITIES
On January 18, 1993, the Company exchanged Fargo-Moorhead Systems, Inc. stock
for shares of U S West, Inc. stock. A non-cash gain of $1,008,495 was recognized
in net income and included as an adjustment to reconcile net income to net cash
provided by operating activities in the statement of cash flows. In 1993, the
Company also recorded a $38,540 gain on the sale of Cellular, Inc. stock.
The cost and fair values of investment securities available-for-sale at
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
December 31, 1995: Cost Gains Losses Value
<S> <C> <C> <C> <C>
U S West Communications Stock $ 789,328 $ 417,290 $ - $ 1,206,618
U S West Media Group Stock 527,368 116,162 643,530
Total $ 1,316,696 $ 533,452 $ - $ 1,850,148
December 31, 1994:
U S West Communications Stock $ 1,316,696 $ - $(110,078) $ 1,206,618
</TABLE>
On November 1, 1995, U S West Communications spun off U S West Media Group, Inc.
and issued separate stock certificates to present U S West Communications
stockholders equal to their holdings prior to the spin-off. The basis for these
investments was allocated based on November 1, 1995 stock values. Stockholders'
equity at December 31, 1995 and 1994 includes a change of $643,530 and
($110,078) less deferred taxes of $260,400 and ($44,500) in the net unrealized
holding gain (loss) on investments. These transactions have no cash effect and
therefore are not presented in the statement of cash flows. As of December 31,
1995 and 1994, the amount of unrealized gain (loss) on available-for-sale
securities included in stockholders' equity is shown net of deferred income
taxes (tax benefits) of $215,900 and ($44,500).
13
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - OTHER INVESTMENTS
Other investments consist of the following:
<TABLE>
<CAPTION>
Percent Cumulative
of Profit Distri- 1995 1994
Ownership Cost (Loss) bution Total Total
Investments Recorded on
the Equity Basis:
<S> <C> <C> <C> <C> <C> <C>
Val-Ed Joint Venture 16.67% $ 196,019 $ 169,831 $(199,000) $ 166,850 $ 173,838
Fibernet Communications 12.82 183,102 - - 183,102 151,052
MSA's:
Sioux Falls Cellular
Limited 11.25 580,156 110,665 - 690,821 266,584
Dakota Systems, Inc. 25.00 57,651 4,123 - 61,774 23,696
RSA's:
Marshall Cellular
Partnership (MN
RSA No. 8) 11.43 249,990 87,804 (123,429) 214,365 232,907
Minnesota RSA 9
Limited Partnership 8.00 207,724 142,897 (11,056) 339,565 262,696
Minnesota RSA 10
Limited Partnership 6.90 226,655 273,618 (117,958) 382,315 348,393
Hiawathaland Cellular
Limited Partnership
(MN RSA No. 11) 9.53 598,664 19,467 - 618,131 353,794
Total $ 2,299,961 $ 808,405 $(451,443) 2,656,923 1,812,960
Not Readily Marketable Stock Investments:
Minnesota Equal Access Network Services, Inc. 958,005 958,005
Rural Cellular Corporation 633,269 633,269
South Dakota Network, Inc. 170,923 170,923
Iowa Network Services, Inc. 94,595 94,595
Independent Information Services Corporation 118,600 118,600
U.S. Intelco Networks, Inc. 49,616 49,616
Other:
Cash Surrender Value of Life Insurance 108,360 98,620
Miscellaneous 67,516 68,591
Total $ 4,857,807 $ 4,005,179
</TABLE>
The Val-Ed Joint Venture owns, maintains and leases an interactive fiber optic
cable network to Valley & Lakes Education District. The lease is for a period of
ten years, with the Joint Venture retaining ownership. The Company's share of
operating income in 1995, 1994 and 1993 was $43,012, $34,383 and $36,155
respectively.
The MSA entities were formed to build and operate cellular systems serving the
Sioux Falls area. The Company's share of income was $176,910 in 1995, $143,098
in 1994 and $12,648 in 1993. In 1995, an additional ownership percentage was
purchased from an unrelated company for $285,405.
14
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - OTHER INVESTMENTS (Continued)
The RSA entities are partnerships formed to build and operate rural
cellular franchises. The Company's share of operating income for the RSA's was
$297,143 in 1995, $228,079 in 1994 and $38,573 in 1993. These partnerships may
require future capital contributions.
NOTE 4 - INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets, net of amortization consist of the following:
1995 1994
Halstad and Ada Cablevision Asset Purchase:
<S> <C> <C>
Covenant Not to Compete $ 27,400 $ 191,800
Franchises 108,109 178,309
Montrose CATV Asset Purchase:
Covenant Not to Compete 5,417 -
Radio Shack Franchises 15,000 15,000
Aurora Cable Television, Inc. Purchase:
Covenant Not to Compete - 12,250
Hastad Engineering Co. Purchase:
Covenant Not to Compete 33,333 66,667
Total Intangible Assets $ 189,259 $ 464,026
</TABLE>
The covenants not to compete relate to the purchase of five cable television
systems and an engineering company and are being expensed over two to five years
from the purchase dates.
The cable television systems franchises consist of individual franchises and the
related customer lists. The original franchises were issued in 1983 for a
fifteen year period and will be expensed over the remaining term of the
franchises.
Due to the terms of the franchise agreements, the Company has not amortized any
of the Radio Shack franchise costs while the franchise is still in operation.
Amortization for these items and the subsidiary acquisitions referred to at Note
1(K) for 1995, 1994 and 1993 is $545,453, $528,983 and $473,247.
NOTE 5 - ACCOUNTS RECEIVABLE FROM SHAREHOLDERS
The Company will be reimbursed by the shareholders for costs and attorney fees
incurred in 1995 relating to the sale of the outstanding shares of the Ollig
Utilities Company stock (Note 13).
15
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
1995 1994
Lifetime annuity payable to former stockholder,
discounted at 6%, payable in monthly installments
<S> <C> <C>
of $2,113, plus interest. $ 139,200 $ 111,566
Note payable to St. Paul Bank for Cooperatives by
Loretel Systems, Inc. 600,000 1,200,000
RUS 2% and 5% and RTB 7.5% to 8.5% mortgage notes:
Loretel Systems, Inc. 10,054,515 10,389,818
Sioux Valley Telephone Company 5,966,316 6,153,991
Sleepy Eye Telephone Company 4,880,713 5,015,213
Hills Telephone Company, Inc. 1,983,440 2,043,559
Notes Payable to Siemens Stromberg-Carlson 429,423 620,497
Total 24,053,607 25,534,644
Less Amount Due Within One Year 1,658,467 1,522,830
Net Long-Term Debt $ 22,395,140 $ 24,011,814
</TABLE>
The mortgage notes payable to the Rural Utilities Service (RUS) and to the Rural
Telephone Bank (RTB) are secured by the respective subsidiaries' assets. These
notes are payable in equal monthly and quarterly installments of principal and
interest beginning three years after the date of the issue and will be fully
repaid at various times from 1996 to 2022. Advance payments of $466,425 may be
applied to the RUS installments of Sioux Valley Telephone Company.
Unadvanced loan funds on RUS and RTB loan commitments of $4,515,500 are
available to the Company as of December 31, 1995.
All loan funds are deposited in the RUS Construction Fund and disbursements are
restricted to construction costs and other expenditures authorized by the loan
agreement, subject to RUS approval.
Rural Telephone Bank Class B stock of $632,250 was purchased pursuant to terms
of mortgage loan contracts with the Rural Telephone Bank. Class C stock of
$15,000 was purchased in 1983. The Class B and C stock will not be redeemed by
the Rural Telephone Bank until all Class A stock has been redeemed.
Long-term debt agreements contain restrictions on dividends and redemptions of
subsidiaries' equity capital. Of the underlying retained earnings of the
subsidiaries, $5,236,800 was available for dividend distribution at December 31,
1995.
16
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM DEBT (Continued)
The promissory note payable to the St. Paul Bank for Cooperatives is guaranteed
by Ollig Utilities Company. The note is payable in quarterly installments of
$150,000 plus interest accrued at 2.25% above the Federal Farm Credit Bank's
six-month bond rate adjusted semi-annually and is due in 1996. The interest rate
at December 31, 1995 was 7.95%.
The Siemens Stromberg-Carlson unsecured notes are payable in annual installments
of $231,943 including 7.26% imputed interest to October, 1997. The annuity was
increased $98,888 in 1994 based on the life expectancy of the annuitant. The
annuity was increased $61,894 in 1995 based on an expected settlement as stated
in the purchase agreement for the sale of the Company (Note 13). These increases
are shown as adjustments to retained earnings. The transactions have no cash
effect and are not reflected on the statement of cash flows.
Principal payments required during the next five years are: 1996 - $1,658,467;
1997 - $960,700; 1998 - $768,400; 1999 - $809,500; and 2000 - $851,800.
NOTE 7 - DEFERRED COMPENSATION
During 1980, the Company entered into a deferred compensation agreement with two
of its officers. The agreement requires a continuance of their salaries upon
retirement based on a formula stated in the agreement. Expense relating to the
future liability was $43,148 in 1995 and $0 in 1994 and 1993. Payments made to a
retired officer were $47,519 in 1995, $35,640 in 1994 and $0 in 1993.
NOTE 8 - STOCK REDEMPTION AGREEMENT
The Company has a stock redemption agreement whereupon the death of any
shareholder, the Company is required to purchase a portion of their stock if
their personal representative offers the stock to the Company. The redemption
value of the stock is based on a formula set forth in the agreement. The Company
is required to redeem stock only up to the maximum dollar amount allowed under
Section 303 of the Internal Revenue Code of 1954.
NOTE 9 - INCOME TAXES AND INVESTMENT CREDIT
The Company files a consolidated federal income tax return, including all
subsidiary companies and a consolidated Minnesota state income tax return that
excludes subsidiaries based in other states. Income tax expense consists of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current payable $ 2,379,287 $ 2,004,769 $ 1,644,756
Deferred 198,851 79,381 540,341
Amortization of investment tax credits (154,598) (155,595) (156,903)
Income Tax Expense $ 2,423,540 $ 1,928,555 $ 2,028,194
</TABLE>
17
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES AND INVESTMENT CREDIT (Continued)
The Company's tax returns for the years 1992, 1993 and 1994 are currently under
examination by the Internal Revenue Service (IRS). The main issues raised by the
IRS include the deductibility of intangible assets related to cable television
acquisitions and legal fees. Management believes adequate provision has been
made for income tax liabilities, and any tax liability arising from the proposed
IRS adjustments will not have a material effect on the financial condition or
results of operations of the Company.
Net deferred tax liabilities and (assets) as of December 31, 1995 and 1994,
related to the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Depreciation $ 4,389,259 $ 4,302,416
Investments 792,163 389,625
Deferred Compensation (419,031) (420,800)
Other (72,078) (40,179)
Total $ 4,690,313 $ 4,231,062
</TABLE>
The provision for income taxes varied from the federal statutory tax rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax at Statutory Rate 35.0% 35.0% 35.0%
Surtax Exemption (1.0) (1.0) (1.0)
State Income Taxes Net of Federal Benefit 4.8 5.6 5.6
Goodwill Amortization 2.1 1.7 1.4
Nondeductible Expenses .3 .2 -
Investment Tax Credits (2.6) (2.9) (2.8)
Dividend Exclusion (.6) (.6) (.6)
Other 2.4 (1.9) (.9)
Effective Tax Rate 40.4% 36.1% 36.7%
</TABLE>
NOTE 10 - RETIREMENT PLAN
The Company has a profit sharing plan in effect for its employees who meet
certain age and service requirements. Contributions are determined annually by
the Board of Directors and are allocated proportionately to the participants in
each allocation group. Company expense for the profit sharing plan was $232,253
in 1995, $215,322 in 1994 and $238,898 in 1993.
The Company also has a 401(k) Employee Savings Plan. Employees who meet certain
age and service requirements may elect to contribute up to the maximum
percentage allowable. The Company contributes 100% of the participants first 3%
of contributions. Company expense for the savings plan was $97,485 in 1995,
$92,009 in 1994 and $85,182 in 1993.
18
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
Cash payments for:
<S> <C> <C> <C>
Interest $ 1,554,930 $ 1,573,689 $ 1,709,742
Income Taxes 2,167,187 1,727,860 1,920,210
</TABLE>
In 1994 and 1993, the Company acquired $1,250,940 and $74,302 of equipment by
incurring directly related debt obligations. These investing and financing
transactions have no cash effect and therefore are not presented in the
statement of cash flows.
The Company acquired the stock of Aurora Cable TV, Inc. in December of 1993 for
$225,500. The acquisition was accounted for as a purchase and was not
significant to operations. Components of cash used for the acquisition in the
statement of cash flows are summarized as follows:
<TABLE>
<S> <C>
Fair Value of Assets Acquired $ 277,748
Liabilities Assumed 52,248
Cash Paid 225,500
Less Cash Acquired 1,100
Net Cash Paid for Acquisition $ 224,400
</TABLE>
The Company acquired the stock of Hastad Engineering Co. in January, 1994 for
$433,479. The acquisition was accounted for as a purchase and was not
significant to operations. Components of cash used for the acquisition in the
statement of cash flows are summarized as follows:
<TABLE>
<S> <C>
Fair Value of Assets Acquired $ 545,354
Liabilities Assumed 111,875
Cash Paid 433,479
Less Cash Acquired 22,741
Net Cash Paid for Acquisition $ 410,738
</TABLE>
19
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SEGMENT INFORMATION
The Company operates in one primary business segment, local exchange telephone
service. Industry segment information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
Revenues:
<S> <C> <C> <C>
Telephone $ 16,810,780 $ 15,874,009 $ 15,351,146
Other 2,111,477 1,817,403 1,464,063
Total $ 18,922,257 $ 17,691,412 $ 16,815,209
Operating Income:
Telephone $ 5,968,850 $ 5,814,611 $ 5,548,621
Other 566,100 310,086 166,226
Total $ 6,534,950 $ 6,124,697 $ 5,714,847
Identifiable Assets:
Telephone $ 51,578,903 $ 50,121,088 $ 47,711,534
Other 7,405,352 7,099,225 6,551,919
Total $ 58,984,255 $ 57,220,313 $ 54,263,453
Depreciation and Amortization:
Telephone $ 3,260,092 $ 3,190,267 $ 3,132,097
Other 913,315 995,238 924,259
Total $ 4,173,407 $ 4,185,505 $ 4,056,356
Capital Expenditures:
Telephone $ 4,900,160 $ 3,537,452 $ 2,262,852
Other 373,326 731,142 349,437
Total $ 5,273,486 $ 4,268,594 $ 2,612,289
</TABLE>
NOTE 13 - SALE OF COMPANY
In November 1995, the Company's shareholders signed a definitive agreement to
sell all outstanding shares of their Ollig Utilities Company stock. The sale is
expected to be completed in the second quarter of 1996.
20
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 1996 1995
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $5,941,861 $6,513,500
Temporary cash investments 3,010,850 1,221,800
Construction fund 65,902 65,897
Receivables, net 3,289,578 3,551,545
Materials, supplies and inventories 450,382 423,346
Prepaid expenses 109,629 109,547
------------ ------------
Total current assets 12,868,202 11,885,635
Property, plant and equipment 61,661,534 61,024,157
less accumulated depreciation (30,328,115) (29,397,886)
------------ ------------
Net property, plant and equipment 31,333,419 31,626,271
Other assets:
Excess of cost over net assets acquired, net 6,827,791 6,877,552
Marketable securities 5,410,778 1,850,148
Other investments 5,114,538 5,505,057
Nonregulated plant 677,173 703,001
Other assets 511,752 536,591
------------ ------------
Total other assets 18,542,032 15,472,349
------------ ------------
Total Assets $62,743,653 $58,984,255
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $1,767,955 $1,298,388
Accrued expenses 748,463 829,260
Income taxes payable 807,291 458,247
Current portion of long-term debt 1,694,928 1,658,467
------------ ------------
Total current liabilities 5,018,637 4,244,362
Long-term debt, less current portion 21,580,963 22,395,140
Minority stockholders' interest in consolidated subsidiaries 172,751 164,929
Deferred investment tax credits 539,498 576,965
Deferred income taxes 5,846,446 4,690,313
Deferred compensation 1,023,583 1,035,463
Stockholders' Equity 28,561,775 25,877,083
-------------- --------------
Total Liabilities and Stockholders' Equity $62,743,653 $58,984,255
============== ==============
See notes to consolidated financial statements.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31
-------------------------------
1996 1995
------------ ------------
Revenues:
<S> <C> <C>
Local network $ 741,544 $ 719,960
Network access 2,803,074 2,547,607
Billing and collection 229,081 230,915
Miscellaneous 1,146,875 857,475
------------ ------------
Total revenues 4,920,574 4,355,957
Costs and expenses:
Plant operations 948,729 969,738
Depreciation and amortization 1,054,144 1,078,242
Customer operations 464,009 482,974
General and administrative 730,741 784,442
Other operating expenses 72,307 32,986
------------ ------------
Total costs and expenses 3,269,930 3,348,382
Operating income 1,650,644 1,007,575
Other income and (expenses):
Investment income 145,036 139,936
Interest expense (379,732) (392,007)
Cellular partnership income 109,539 12,669
------------ ------------
Other income (expense), net (125,157) (239,402)
Income before income taxes 1,525,487 768,173
Income taxes 589,390 310,422
------------ ------------
Income before minority interest 936,097 457,751
Minority interest in earnings of subsidiaries 7,822 3,951
------------ ------------
Net income 928,275 453,800
============ ============
Net income per common share $ .73 $ .35
============= =============
Average common shares outstanding 1,278,575 1,278,575
============ ============
See notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Additional Unrealized
Nonvoting Common Stock Voting Common Stock Paid-in Retained Gains (Losses)
Shares Amount Shares Amount Capital Earnings on Investments Total
----------- ---------- --------- -------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1994 1,261,575 $1,261,575 17,000 $17,000 $110,592 $21,488,512 ($65,578) $22,812,101
Net income 3,549,248 3,549,248
Cash dividends (805,502) (805,502)
Increase in annuity payable (61,894) (61,894)
Unrealized holding gain,
net of income tax 383,130 383,130
----------- ---------- --------- -------- -------- ----------- ----------- ------------
BALANCE at December 31, 1995 1,261,575 1,261,575 17,000 17,000 110,592 24,170,364 317,552 25,877,083
Net income 928,275 928,275
Unrealized holding gain,
net of income tax 1,756,417 1,756,417
----------- ---------- --------- -------- -------- ----------- ----------- ------------
BALANCE at March 31, 1996 1,261,575 $1,261,575 17,000 $17,000 $110,592 $25,098,639 $2,073,969 $28,561,775
=========== ========== ========= ======== ======== =========== =========== ============
See notes to consolidated financial statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
-----------------------------
1996 1995
------------- -------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $928,275 $453,800
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,054,144 1,078,242
Income from cellular operations (109,539) (12,669)
Minority stockholders' interest in consolidated subsidiaries 7,822 3,951
Changes in assets and liabilities:
Decrease in accounts receivable 261,967 301,537
Decrease (increase) in prepaid expenses (82) 35,224
Increase in prepaid income taxes (250,478)
Increase (decrease) in accounts payable 469,567 (24,269)
Decrease in accrued expenses (80,797) (117,798)
Increase (decrease) in income taxes payable 349,044 (219,924)
Decrease in deferred investment credits (37,467) (37,468)
Decrease in deferred taxes (14,811) (620)
Decrease in deferred compensation (11,880) (11,880)
------------- -------------
Net cash provided by operating activities 2,816,243 1,197,648
Cash Flows from Investing Activities:
Capital expenditures, net (615,640) (355,010)
Increase in temporary cash investments (1,789,050) (1,443,557)
Increase in construction fund (5) (5)
Decrease (increase) in inventories (27,036) 8,041
Decrease (increase) in nonregulated plant (8,252) 1,122
Decrease (increase) in other investments (133,211) 30,235
Increase in other assets (36,972) (33,470)
------------- -------------
Net cash used in investing activities (2,610,166) (1,792,644)
Cash Flows from Financing Activities:
Repayment of long-term debt (777,716) (933,532)
Cash dividends (805,502)
------------- -------------
Net cash used in financing activities (777,716) (1,739,034)
------------- -------------
Net Decrease in Cash and Cash Equivalents (571,639) (2,334,030)
Cash and Cash Equivalents at Beginning of Period 6,513,500 8,310,822
------------- -------------
Cash and Cash Equivalents at End of Period $5,941,861 $5,976,792
============= =============
Supplemental disclosures of cash flow information:
Interest paid during the period $446,558 $443,674
Income taxes paid during the period 292,624 780,824
See notes to consolidated financial statements.
</TABLE>
24
<PAGE>
OLLIG UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of stockholders' equity as of March 31, 1996,
the statements of income for the three month periods ended March 31, 1996 and
1995 and the statements of cash flows for the three month periods ended March
31, 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 March 31, 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 audited financial
statements. The results of operations for the periods ended March 31 are not
necessarily indicative of the operating results for the entire year.
NOTE 2 - MARKETABLE SECURITIES
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 309,620 shares of RCC, which was classified as an other investment. The
Company's investment in RCC has been transferred to marketable securities and
classified as available-for-sale. The unrealized gain on securities at March 31,
1996 was $1,756,000 (net of deferred taxes of $1,171,000) which is accounted for
as a component of stockholders' equity. Rural Cellular Corporation trades on the
Nasdaq National Market System under the symbol RCCC.
NOTE 3 - 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 4 - NET INCOME PER SHARE
Net income per common share was computed by dividing net income by the weighted
average number of common shares outstanding during the periods.
NOTE 5 - SALE OF COMPANY
On April 25, 1996, the Company was sold to Alliance Telecommunications
Corporation ("Alliance"), for $80,000,000 in cash. Alliance is 68% owned by
Hector Communications Corporation of Hector, MN with the remaining interest
owned by Golden West Telecommunications Cooperative, Inc. of Wall, SD and Split
Rock Telecom Cooperative, Inc. of Garretson, SD.
25
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements of income and explanatory notes
show the pro forma effect on the operating results of Hector Communications
Corporation as if the acquisition of Ollig Utilities Company occurred January 1,
1995. The acquisition was accounted for under the purchase method of accounting
and was completed April 25, 1996.
The pro forma balance sheet and explanatory notes show the effect on Hector
Communications Corporation's financial position as if the acquisition of Ollig
Utilities Company occurred March 31, 1996.
The pro forma financial information and explanatory notes are unaudited and
include adjustments which are based on management's assumptions. The Company is
in the process of appraising for financial statement purposes the assets
acquired in the purchase of Ollig Utilities Company. The results of the
appraisal were not available at the time of filing this Form 8 and are not
included in the pro forma financial statements. The Company did revalue for pro
forma purposes Ollig Utilities Company's investments in cellular telephone
partnerships based on other information available to Company management. This
revaluation may not reflect the value placed on cellular partnership investments
by the appraisal process. Management believes these statements provide a
reasonable basis for presenting the significant effects of the acquisition and
the pro forma adjustments are properly applied in the pro forma statements.
The pro forma financial statements are 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.
26
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET (unaudited)
The following unaudited pro forma condensed balance sheet as of March 31, 1996
sets forth the effect of the business combination between Hector Communications
Corporation and Ollig Utilities Company which was completed April 25, 1996. The
combination was accounted for using the purchase method of accounting. The
assumptions described in the accompanying notes should be read in conjunction
with the historical consolidated financial statements and the related notes
thereto of Hector Communications Corporation and Ollig Utilities Company.
<TABLE>
<CAPTION>
Hector
Communications Ollig Utilities
Corporation Company Pro forma Pro forma
March 31, 1996 March 31, 1996 Adjustments Combined
------------ ----------- ----------- ------------
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 11,234,952 $ 1,486,146 $(8,282,751)[a][b][c][d][e] $ 4,438,347
Temporary cash investments 7,466,565 7,466,565
Construction fund 19,198 65,902 85,100
Receivables, net 678,180 3,289,578 3,967,758
Materials, supplies and inventories 129,650 450,382 580,032
Prepaid expenses 33,289 109,629 142,918
------------ ----------- ----------- ------------
12,095,269 12,868,202 (8,282,751) 16,680,720
Property, plant and equipment, net 14,417,094 31,333,419 45,750,513
Investments and other assets:
Excess of cost over net assets
acquired, net 886,969 6,827,791 45,275,849 [h] 52,990,609
Acquisition costs - Ollig Utilities Company 2,829,624 (2,829,624) [d][f][g][h] -
Marketable securities 2,021,969 5,410,778 7,432,747
Cellular telephone investments 1,040,365 2,306,971 6,272,000 [f] 9,619,336
Other investments 785,188 2,807,567 3,592,755
Deferred debenture issue costs, net 1,111,035 1,111,035
Other assets 644,686 1,188,925 1,833,611
------------ ----------- ----------- ------------
Total investments and other assets 9,319,836 18,542,032 48,718,225 76,580,093
------------ ----------- ----------- ------------
Total Assets $ 35,832,199 $62,743,653 $40,435,474 $139,011,326
============ =========== =========== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion
of long-term debt $ 492,900 $ 1,694,928 $ 8,035,000 [a][b] $ 10,222,828
Accounts payable 479,950 1,767,955 2,247,905
Accrued expenses 384,353 748,463 1,132,816
Income taxes payable 169,375 807,291 976,666
------------ ----------- ----------- ------------
1,526,578 5,018,637 8,035,000 14,580,215
Long-term debt, less current portion 22,388,101 1,580,963 53,215,000 [a] 97,184,064
Minority stockholders' interest in Ollig 172,751 (172,751) [e] -
Minority stockholders' interest in Alliance 7,920,000 [c] 7,920,000
Deferred investment tax credits 120,486 539,498 659,984
Deferred income taxes 2,162,988 5,846,446 8,009,434
Deferred compensation 1,023,583 1,023,583
Stockholders' Equity 9,634,046 28,561,775 (28,561,775) [g] 9,634,046
------------ ----------- ----------- ------------
Total Liabilities and Stockholders' Equity $ 35,832,199 $62,743,653 $40,435,474 $139,011,326
============ =========== =========== ============
</TABLE>
27
<PAGE>
Notes to Proforma Condensed Combined Balance Sheet (unaudited)
March 31, 1996
Pro forma adjustments reflect Hector Communications Corporation's ("HCC")
purchase of a 68% interest in the common stock of Ollig Utilities Company
("Ollig"). The purchase was accomplished through the formation of a new
subsidiary company, Alliance Telecommunications Corporation ("Alliance"), which
was used to purchase Ollig. HCC owns 68% of Alliance. The remaining 32% interest
is owned by Golden West Telecommunications Cooperative, Inc. of Wall, South
Dakota and Split Rock Telecom Cooperative, Inc. of Garretson, South Dakota.
Purchase price was $80,000,000. The purchase was financed through a $55,250,000
borrowing by Alliance from St. Paul Bank for Cooperatives and equity
contributions from HCC, Golden West and Split Rock.
The following is a summary of the adjustments required in accordance with
generally accepted accounting principles:
<TABLE>
[a] Record acquisition loan from St. Paul Bank to Alliance, including
<S> <C>
current portion of $2.035,000 $55,250,000
[b] Record bridge loan from St. Paul Bank to HCC 6,000,000
[c] Record equity investment by Golden West and Split Rock 7,920,000
[d] Purchase of Ollig common stock, net of purchase price deposits
of $2,720,000 77,280,000
[e] Purchase by Ollig of minority interest in Ollig subsidiaries 172,751
[f] Revaluation of Ollig cellular investments 6,272,000
[g] Eliminate stockholders' equity in Ollig 28,561,775
[h] Record goodwill, including $109,624 of acquisition costs 45,275,849
</TABLE>
28
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (unaudited)
The following unaudited pro forma condensed income statement sets forth the
effect of the business combination using the purchase method of accounting and
the assumptions described in the accompanying notes between Hector
Communications Corporation and and Ollig Utilities Company as if it had occurred
effective January 1, 1995. The pro forma condensed combined income statement
should be read in conjunction with the historical consolidated financial
statements and the related notes thereto of Hector Communications Corporation
and Ollig Utilities Company.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1995
Hector
Communications Ollig Utilities Pro forma Pro forma
Corporation Company Adjustments Combined
---------------- ---------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 1,076,801 $ 3,087,293 $ 4,164,094
Network access 3,474,738 10,943,817 14,418,555
Billing and collection 228,038 943,271 1,171,309
Miscellaneous 1,064,746 3,947,876 5,012,622
--------------- --------------- --------------- -------------
Total revenues 5,844,323 18,922,257 - 24,766,580
Costs and expenses:
Plant operations 825,263 4,129,515 4,954,778
Depreciation and amortization 1,706,495 4,173,407 1,250,956 [d][e][f] 7,130,858
Customer operations 287,185 1,877,950 2,165,135
General and administrative 1,520,370 1,883,240 3,403,610
Other operating expenses 652,609 323,195 975,804
--------------- --------------- --------------- -------------
Total costs and expenses 4,991,922 12,387,307 1,250,956 18,630,185
Operating income 852,401 6,534,950 (1,250,956) 6,136,395
Other income (expenses):
Interest expense (1,554,042) (1,532,566) (4,130,500)[a][b] (7,217,108)
Cellular partnership income 125,924 474,053 599,977
Investment income 645,781 527,962 (414,138)[c] 759,605
Unrealized loss on holding
marketable securiites (197,603) (197,603)
--------------- --------------- --------------- -------------
Other income (expenses), net (979,940) (530,551) (4,544,638) (6,055,129)
Income (loss) before income taxes (127,539) 6,004,399 (5,795,594) 81,266
Income tax expense (benefit) (51,000) 2,423,540 (1,817,855)[h][i] 554,685
--------------- --------------- --------------- -------------
Income (loss) before minority interest (76,539) 3,580,859 (3,977,739) (473,419)
Minority interest in earnings of Ollig
subsidiaries 31,611 (31,611) [g] -
Minority interest in income of Alliance 36,955 [j] 36,955
--------------- --------------- --------------- -------------
Net income (loss) $ (76,539) $ 3,549,248 $ (3,983,083) $ (510,374)
=============== =============== =============== =============
Net income (loss) per share $ (.04) $ (.27)
=============== =============
Average common shares outstanding 1,866,000 1,866,000
=============== =============
</TABLE>
29
<PAGE>
Notes to Pro Forma Condensed Combined Income Statement (unaudited)
Twelve Months Ended December 31, 1995
<TABLE>
<CAPTION>
The following is a summary of the adjustments required in accordance with
generally accepted accounting principles:
[a] Interest on acquisition loan from St. Paul Bank to Alliance using current
<S> <C>
interest rate (6.68%) $(3,690,700)
[b] Interest on bridge loan from St. Paul Bank to HCC using current interest
rate (7.33%) (439,800) [c] Eliminate investment income on HCC cash
expenditures (5% return) (414,138) [d] Amortization of goodwill acquired -
Alliance (40 year amortization) 1,131,896 [e] Adjustment of amortization of
previously acquired goodwill - Ollig (37,740) [f] Amortization of goodwill
acquired - cellular partnerships
(40 year amortization) 156,800
[g] Eliminate minority interest in Ollig subsidiaries (31,611)
[h] Income tax effect of above adjustments - Alliance (40% tax rate) (1,476,280)
[i] Income tax effect of above adjustments - HCC (40% tax rate) (341,575)
[j] Minority interest in Alliance operations, as adjusted 36,955
</TABLE>
30
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT (unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
Hector
Communications Ollig Utilities Pro forma Pro forma
Corporation Company Adjustments Combined
--------------- --------------- --------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 355,676 $ 741,544 $ 1,097,220
Network access 885,614 2,803,074 3,688,688
Billing and collection 51,745 229,081 280,826
Miscellaneous 372,883 1,146,875 1,519,758
--------------- --------------- --------------- -------------
Total revenues 1,665,918 4,920,574 - 6,586,492
Costs and expenses:
Plant operations 206,658 948,729 1,155,387
Depreciation and amortization 447,931 1,054,144 $ 316,742 [d][e][f] 1,818,817
Customer operations 69,664 464,009 533,673
General and administrative 363,672 730,741 1,094,413
Other operating expenses 205,549 72,307 277,856
--------------- --------------- --------------- -------------
Total costs and expenses 1,293,474 3,269,930 316,742 4,880,146
Operating income 372,444 1,650,644 (316,742) 1,706,346
Other income (expenses):
Interest expense (434,782) (379,732) (1,032,625) [a][b] (1,847,139)
Cellular partnership income 31,500 109,539 141,039
Investment income 163,700 145,036 (103,534) [c] 205,202
Marketable securities gains (losses) 687,947 687,947
--------------- --------------- --------------- -------------
Other income (expenses), net 448,365 (125,157) (1,136,159) (812,951)
Income (loss) before income taxes 820,809 1,525,487 (1,452,901) 893,395
Income tax expense 327,000 589,390 (454,464) [h][i] 461,926
--------------- --------------- --------------- -------------
Income before minority interest 493,809 936,097 (998,437) 431,469
Minority interest in earnings of Ollig
subsidiaries 7,822 (7,822)[g] -
Minority interest in earnings
of Alliance 21,040 [j] 21,040
--------------- --------------- --------------- -------------
Net income $ 493,809 $ 928,275 $ (1,011,655) $ 410,429
=============== =============== =============== =============
Net income per common and common
equivalent share $ .22 $ .18
=============== =============
Net income per common share -
assuming full dilution $ .19 $ .16
=============== =============
Average common and common
equivalent shares outstanding 2,256,000 2,256,000
=============== =============
</TABLE>
31
<PAGE>
Notes to Pro Forma Condensed Combined Income Statement (unaudited)
Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
The following is a summary of the adjustments required in accordance with
generally accepted accounting principles:
[a] Interest on acquisition loan from St. Paul Bank to Alliance using current
<S> <C>
interest rate (6.68%) $(922,675)
[b] Interest on bridge loan from St. Paul Bank to HCC using current interest
rate (7.33%) (109,950) [c] Eliminate investment income on HCC cash
expenditures (5% return) (103,534) [d] Amortization of goodwill acquired -
Alliance (40 year amortization) 282,974 [e] Adjustment of amortization of
previously acquired goodwill - Ollig (5,432) [f] Amortization of goodwill
acquired - cellular partnerships
(40 year amortization) 39,200
[g] Eliminate minority interest in Ollig subsidiaries (7,822)
[h] Income tax effect of above adjustments - Alliance (40% tax rate) (369,070)
[i] Income tax effect of above adjustments - HCC (40% tax rate) (85,394)
[j] Minority interest in Alliance operations, as adjusted 21,040
</TABLE>
32
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CALCULATION OF PROFORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, 1996 December 31, 1995
--------------- ---------------
Primary:
- -------
<S> <C> <C>
Net income (loss) $410,429 ($510,374)
============= =============
Common and common equivalent shares:
Weighted average number of common
shares outstanding 1,880,294 1,879,083
Dilutive effect of convertible preferred
shares outstanding (1) 389,487
Dilutive effect of stock options outstanding after
application of treasury stock method (1) 4,775
Weighted average number of unallocated shares
held by employee stock ownership plan (18,556) (13,083)
------------- -------------
2,256,000 1,866,000
============= =============
Net income (loss) per common and common equivalent share $.18 ($.27)
============= =============
Fully Diluted (2):
- -------------
Net income (loss) $410,429 ($510,374)
Interest on convertible debentures, net of tax 189,654
------------- -------------
Adjusted net income (loss) $600,083 ($510,374)
============= =============
Common and common equivalent shares:
Weighted average number of common
shares outstanding 1,880,294 1,879,083
Assumed conversion of convertible debentures
into common stock 1,423,125
Dilutive effect of convertible preferred
shares outstanding (1) 389,487
Dilutive effect of stock options outstanding after
application of treasury stock method (1) 4,775
Weighted average number of unallocated shares
held by employee stock ownership plan (18,556) (13,083)
------------- -------------
3,679,125 1,866,000
============= =============
Net income (loss) per common share - assuming full dilution $.16 ($.27)
============= =============
- ------------------------------------------------------------------------------------------------------
(1) The effect of preferred stock and 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 1995 period.
</TABLE>
33
<PAGE>
