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