================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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 fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
CLASS Outstanding at October 31, 1997
Common Stock, par value 1,907,939
$.01 per share
Total Pages (15) Exhibit at Page 15
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<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
Assets: 1997 1996
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,582,914 $ 9,571,879
Temporary cash investments 300,000 1,079,900
Construction fund 159,787 74,337
Accounts receivable, net 4,616,348 3,965,754
Materials, supplies and inventories 984,703 512,114
Prepaid expenses 124,659 160,291
------------ ------------
Total current assets 16,768,411 15,364,275
Property, plant and equipment 63,103,846 61,700,777
less accumulated depreciation (17,511,418) (14,661,825)
------------ ------------
Net property, plant and equipment 45,592,428 47,038,952
Other assets:
Excess of cost over net assets acquired, net 51,473,748 52,510,459
Marketable securities 4,644,306 5,458,400
Cellular telephone investments 10,091,203 9,777,801
Other investments 7,014,255 5,693,906
Deferred debenture issue costs, net 827,367 969,201
Other assets 635,029 535,019
------------ ------------
Total other assets 74,685,908 74,944,786
------------ ------------
Total Assets $ 137,046,747 $ 137,348,013
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of
long-term debt $ 8,158,200 $ 10,047,000
Accounts payable 2,724,374 1,860,579
Accrued expenses 1,738,494 2,090,639
Income taxes payable 715,217 59,015
------------ ------------
Total current liabilities 13,336,285 14,057,233
Long-term debt, less current portion 94,834,523 96,127,379
Deferred investment tax credits 393,965 526,347
Deferred income taxes 7,182,367 7,457,907
Deferred compensation 952,305 987,944
Minority stockholders interest in Alliance
Telecommunications Corp. 8,760,180 8,245,365
Stockholders' Equity 11,587,122 9,945,838
-------------- --------------
Total Liabilities and Stockholders' Equity $ 137,046,747 $ 137,348,013
============== ==============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 1,290,906 $ 1,234,577 $ 3,649,860 $ 2,518,216
Network access 4,748,418 3,904,765 12,496,118 7,572,363
Billing and collection 267,868 322,771 797,270 598,109
Nonregulated activities 1,060,338 1,211,550 2,978,456 2,064,091
Cable television revenues 607,145 544,058 1,790,275 1,296,138
------------- ------------ ------------ ------------
Total revenues 7,974,675 7,217,721 21,711,979 14,048,917
Costs and expenses:
Plant operations 891,070 898,753 2,710,598 1,809,305
Depreciation and amortization 1,818,967 1,829,554 5,462,917 3,626,559
Customer operations 424,667 419,485 1,361,913 774,146
General and administrative 1,069,093 1,188,885 3,313,798 2,395,577
Other operating expenses 527,392 383,621 1,449,424 976,082
------------- ------------ ------------ ------------
Total costs and expenses 4,731,189 4,720,298 14,298,650 9,581,669
Operating income 3,243,486 2,497,423 7,413,329 4,467,248
Other income and (expenses):
Investment income 182,521 142,352 519,733 506,556
Interest expense (1,879,565) (1,860,785) (5,478,030) (3,742,723)
Gain on sales of marketable securities 1,495,999 687,947
Partnership and LLC income 410,096 231,740 640,387 362,432
------------- ------------ ------------ ------------
Other expense, net (1,286,948) (1,486,693) (2,821,911) (2,185,788)
Income before income taxes 1,956,538 1,010,730 4,591,418 2,281,460
Income taxes 945,000 541,000 2,170,000 1,160,000
------------- ------------ ------------ ------------
Income before minority interest 1,011,538 469,730 2,421,418 1,121,460
Minority interest in earnings of
Alliance Telecommunications Corporation 315,772 176,222 514,815 224,424
------------- ------------ ------------ ------------
Net income $ 695,766 $ 293,508 $ 1,906,603 $ 897,036
============= ============ ============ ============
Net income per common and
common equivalent share $ .30 $ .13 $ .83 $ .40
============= ============ ============= ============
Net income per common share
- assuming full dilution $ .24 $ .13 $ .66 $ .40
============= ============ ============ ============
Average common and common equivalent
shares outstanding 2,313,000 2,271,000 2,295,000 2,264,000
============ ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Unrealized
Additional Unearned Marketable
_Preferred Stock Common Stock __ Paid-in Retained ESOP Securities
Shares Amount Shares Amount Capital Earnings Shares Gains(Losses) Total
-------- -------- ---------- ------- -------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE at 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 1,906,603 1,906,603
Issuance of common stock under
Employee Stock Option Plan 9,000 90 61,884 61,974
Issuance of common stock under
Employee Stock Purchase Plan 3,695 37 23,126 23,163
Conversion of preferred stock
into common stock (11,387) (11,387) 11,387 113 11,274 0
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes (350,456) (350,456)
-------- -------- ---------- ------- -------- ----------- ---------- ----------- ------------
BALANCE at September 30, 1997 378,100 $378,100 1,907,939 $19,079 $198,287 $10,912,371 $(101,312) $ 180,597 $11,587,122
======== ======== ========== ======= ======== =========== ========== =========== ============
See notes to consolidated
financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
-------------------------
1997 1996
----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 1,906,603 $ 897,036
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,604,751 3,768,393
Minority stockholders' interest in earnings
of Alliance Telecommunications Corporation 514,815 224,424
Gain on sales of marketable securities (1,495,999) (687,947)
Income from partnership and LLC investments (640,387) (362,432)
Changes in assets and liabilities:
Sales of marketable securities 1,499,072
Increase in accounts receivable (650,594) (510,229)
Increase in materials, supplies and inventories (472,589) (440,332)
Decrease (increase) in prepaid expenses 35,632 (49,501)
Increase (decrease) in accounts payable 863,795 (312,545)
Increase (decrease) in accrued expenses (352,145) 491,101
Increase (decrease) in income taxes payable 656,202 (225,892)
Decrease in deferred investment credits (132,382) (86,628)
Increase (decrease) in deferred taxes (44,019) 118,112
Decrease in deferred compensation (35,639) (19,799)
----------- -----------
Net cash provided by operating activities 5,758,044 4,302,833
Cash Flows from Investing Activities:
Capital expenditures, net (2,904,056) (2,918,843)
Sales of temporary cash investments 779,900 1,011,145
Sales of marketable securities 1,728,115 553,645
Decrease (increase) in construction fund (85,450) 120,037
Proceeds from partnerships and LLCs 326,985 209,803
Purchases of other investments (1,320,349) (1,141,562)
Sales of other investments 256,772
Increase in other assets (175,635) (439,469)
Payment for purchase of Ollig Utilities Company,
net of cash acquired (69,181,142)
----------- -----------
Net cash used in investing activities (1,650,490) (71,529,614)
Cash Flows from Financing Activities:
Repayment of long-term debt (4,711,656) (1,706,327)
Proceeds from issuance of notes payable
and long-term debt 1,530,000 62,457,500
Minority interest in Alliance
Telecommunications Corp. 7,920,000
Issuance of common stock 85,137 21,768
----------- -----------
Net cash provided by (used in)
financing activities (3,096,519) 68,692,941
----------- -----------
Net Increase in Cash and Cash Equivalents 1,011,035 1,466,160
Cash and Cash Equivalents at Beginning of Period 9,571,879 9,040,138
----------- -----------
Cash and Cash Equivalents at End of Period $10,582,914 $10,506,298
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 5,653,724 $ 3,444,313
Income taxes paid during the period 1,690,331 1,458,981
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The balance sheet and statement of stockholders' equity as of September 30, 1997
and the statements of income for the three and nine month periods ended
September 30, 1997 and 1996 and the statements of cash flows for the nine month
periods ended September 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 September 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 September 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 was 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:
Nine Months Ended
September 30, 1996
Revenues $ 20,651,908
Income before minority interest 987,916
Net income 754,787
Net income per share $ .33
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 of other
telecommunications companies. The Company's marketable securities portfolio is
classified as available-for-sale. The cost and fair value of available-for-sale
investment securities was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
September 30, 1997 $ 4,448,776 $ 300,401 $ (104,871) $ 4,644,306
December 31, 1996 $ 4,680,892 $ 1,390,273 $ (612,765) $ 5,458,400
Stockholders' equity at September 30, 1997 includes a decrease of $584,094 and
deferred tax benefits of $233,638 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 nine month periods ended September 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 September 30, 1997 and 1996 would have been as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- -------------------------------
Basic: 1997 1996 1997 1996
- ------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 695,766 $ 293,508 $ 1,906,603 $ 897,036
============= ============= ============= =============
Common shares:
Weighted average number of common shares outstanding 1,904,900 1,881,417 1,898,713 1,880,671
Weighted average number of unallocated shares held by ESOP (11,817) (18,556) (11,817) (18,556)
------------- ------------- ------------- -------------
1,893,083 1,862,861 1,886,896 1,862,115
============= ============= ============= =============
Net income per common share $ .37 $ .16 $ 1.01 $ .48
============= ============= ============= =============
Diluted:
- -------------
Net income $ 695,766 $ 293,508 $ 1,906,603 $ 897,036
Interest on convertible debentures, net of tax (1) 189,654 568,962
------------- ------------- ------------- -------------
Adjusted net income $ 885,420 $ 293,508 $ 2,475,565 $ 897,036
============= ============= ============= =============
Common and common equivalent shares:
Weighted average number of common shares outstanding 1,904,900 1,881,417 1,898,713 1,880,671
Assumed conversion of convertible debentures into
common stock (1) 1,423,125 1,423,125
Dilutive effect of convertible preferred shares outstanding 378,100 389,487 378,100 389,487
Dilutive effect of stock options outstanding after application
of treasury stock method 40,581 18,652 30,004 12,398
Dilutive effect of warrants outstanding 1,236
Weighted average number of unallocated shares held by ESOP (11,817) (18,556) (11,817) (18,556)
------------- ------------- ------------- -------------
3,736,125 2,271,000 3,718,125 2,264,000
============= ============= ============= =============
Diluted net income per share $ .24 $ .13 $ .67 $ .40
============= ============= ============= =============
(1) The effect of the convertible debentures on net income per share is anti-dilutive for the 1996 periods.
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 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
nine months of 1997. The Company's 1997 consolidated revenues increased
$7,663,000 or 55% from the 1996 period (which included just five months of
9
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Alliance's operating results). The following table shows revenues from
Alliance's operations separate from those of the Company for the respective nine
month periods ended September 30:
<TABLE>
<CAPTION>
Alliance Alliance Hector Communications Corp.
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 2,516,377 $ 1,413,570 $ 1,133,483 $ 1,104,646
Network access 9,668,809 4,923,639 2,827,309 2,648,724
Billing and collection 647,405 440,535 149,865 157,574
Nonregulated activities 2,735,177 1,836,766 243,279 227,325
Cable television revenues 764,600 388,470 1,025,675 907,668
------------ ------------ ------------ ------------
Total revenues $ 16,332,368 $ 9,002,980 $ 5,379,611 $ 5,045,937
============ ============ ============ ============
</TABLE>
Revenues from the Company's existing Hector Communications Corporation
("Hector") operations increased $334,000 or 7%. Local network revenues increased
$29,000 or 3% due to increases in the number of access lines served by the
Company. Network access revenues increased $179,000 or 7%. The increase was
principally due to receipts of prior years' access settlements from NECA which
were greater than the Company had estimated. The access rates charged by the
Company to long distance service providers in 1997 are lower than in 1996.
However, increased use of the telephone network by customers has offset the
decreases in the rates. Cable television revenues increased $118,000 or 13% due
to the acquisition of two cable systems in the fourth quarter of 1996. Billing
and collection revenues declined $8,000 or 5%. Revenues from nonregulated
activities increased $16,000 or 7%.
Operating costs and administrative expenses for 1997 increased $4,717,000 or 49%
from the 1996 period. Operating costs and administrative expenses for Alliance's
operations and existing Company operations for the respective periods ended
September 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 $ 2,015,574 $ 1,192,094 $ 695,024 $ 617,211
Depreciation and amortization 3,994,888 2,264,322 1,468,029 1,362,237
Customer operations 1,174,701 596,951 187,212 177,195
General and administrative 2,289,344 1,290,262 1,024,454 1,105,315
Nonregulated and miscellaneous 701,918 312,330 747,506 663,752
------------ ------------ ------------ ------------
Total costs and expenses: $ 10,176,425 $ 5,655,959 $ 4,122,225 $ 3,925,710
============ ============ ============ ============
</TABLE>
Operating costs and expenses for Hector operations increased $197,000 or 5%.
Plant operations expenses increased $78,000 or 13% due to maintenance expenses
associated with public highway maintenance projects in Hector's telephone
service areas. Depreciation and amortization expenses increased $106,000 or 8%
due to depreciation rate changes mandated by regulatory authorities. General and
administrative expenses declined $81,000 or 7% due to cost sharing with
Alliance. Nonregulated expenses increased $84,000 or 13% due to increased cable
television expenses caused by the acquisition of additional systems. Operating
income from Hector operations increased $137,000 or 12%. Consolidated operating
income increased $2,946,000 or 66%.
10
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Consolidated interest expense, net of investment income increased $1,722,000.
Net interest expense for HCC increased $286,000, reflecting interest on
short-term borrowing from St. Paul Bank used in the capitalization of Alliance
and reduced investment income due to decreased cash available for investment.
Interest expense on Alliance is mainly on the acquisition loan (original balance
of $55,250,000) 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. Income from investments in partnerships and LLCs increased
$278,000 due to above plan performance by investments in Midwest Wireless LLC,
which offset start-up losses on the Company's personal communications services
("PCS") partnership investments. Hector also benefited from gains on sales of
marketable securities of $1,496,000 and $688,000 in 1997 and 1996, respectively.
Consolidated income before income taxes was $4,591,000 compared to $2,281,000 in
1996. Income tax expense was $2,170,000 in the 1997 period compared to
$1,160,000 in 1996. The Company's effective tax rate of 47% in 1997 is higher
than the standard tax rate because the amortization expenses associated with
excess of cost over net assets acquired in the purchase of Ollig Utilities
Company are not tax deductible. The 32% minority shareholders' interest in
earnings of Alliance was $515,000 in the 1997 period compared to $224,000 in
1996. Net income was $1,907,000 compared to $897,000 in 1996.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Consolidated revenues increased $757,000 or 10% from the 1996 period. The
following table shows revenues from Alliance's operations separate from those of
the Company for the respective three month periods ended September 30:
<TABLE>
<CAPTION>
Alliance Alliance Hector Communications Corp.
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 902,044 $ 856,881 $ 388,862 $ 377,696
Network access 3,733,510 3,026,654 1,014,908 878,111
Billing and collection 214,171 270,964 53,697 51,807
Nonregulated activities 978,810 1,141,176 81,528 70,374
Cable television revenues 259,386 234,721 347,759 309,337
------------ ------------ ------------ ------------
Total revenues $ 6,087,921 $ 5,530,396 $ 1,886,754 $ 1,687,325
============ ============ ============ ============
</TABLE>
Revenues from the Company's Hector operations increased $199,000 or 12%. Local
network revenues increased $11,000 or 3% due to increases in the number of
access lines served by the Company. Network access revenues increased $137,000
or 16%. The increase was principally due to receipts of prior years' access
settlements from NECA which were greater than the Company had estimated. Cable
television revenues increased $38,000 or 12% due to the acquisition of two cable
systems in the fourth quarter of 1996. Billing and collection revenues increased
$2,000 or 4%. Revenues from nonregulated activities increased $11,000 or 16%.
Revenues from Alliance's operations increased $558,000 or 10%. Local network
revenues increased $45,000 or 5% due to increases in the number of access lines
served by the Company. Network access revenues increased $707,000 or 23%. The
increase was principally due to a one-time retroactive network access settlement
of $560,000 received from NECA by one of Alliance's telephone subsidiaries. This
settlement included $390,000 related to 1995 and 1996 settlements and $170,000
related to the first six months of 1997. Cable television revenues increased
$25,000 or 11%. Billing and collection revenues decreased $57,000 or 21%.
Revenues from nonregulated activities decreased $162,000 or 14%.
11
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Operating costs and administrative expenses for 1997 increased $11,000 from the
1996 period. Operating costs and administrative expenses for Alliance's
operations and Hector operations for the respective periods ended September 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 $ 648,251 $ 690,569 $ 242,819 $ 208,184
Depreciation and amortization 1,331,665 1,364,018 487,302 465,536
Customer operations 359,236 361,422 65,431 58,063
General and administrative 699,770 817,369 369,323 371,516
Nonregulated and miscellaneous 269,837 142,849 257,555 240,772
------------ ------------ ------------ ------------
Total costs and expenses: $ 3,308,759 $ 3,376,227 $ 1,422,430 $ 1,344,071
============ ============ ============ ============
</TABLE>
Operating costs and expenses for Hector's operations increased $78,000 or 6%.
Plant operations expenses increased $35,000 or 17% due to maintenance expenses
associated with public highway maintenance projects in Hector's telephone
service areas. Depreciation and amortization expenses increased $22,000 or 5%
due to depreciation rate changes mandated by regulatory authorities.
Nonregulated expenses increased $17,000 or 7% due to increased cable television
expenses caused by the acquisition of additional systems. Operating income from
Hector operations increased $121,000 or 35%.
Operating costs and expenses for Alliance's operations decreased $67,000 or 2%.
Plant operations expenses increased $42,000 or 6%. Depreciation and amortization
expenses increased $32,000 or 2%. Nonregulated expenses increased $127,000.
General and administrative expenses decreased $118,000. Operating income from
Alliance's operations increased $625,000 or 29%. Consolidated operating income
increased $746,000 or 30%.
Consolidated interest expense, net of investment income decreased $21,000. Net
interest expense for Hector decreased $31,000, due to principal repayments on
short-term borrowing from St. Paul Bank used in the capitalization of Alliance.
Net interest expense for Alliance increased $10,000 due to higher interest rates
paid on the acquisition loan from St. Paul Bank. Income from investments in
partnerships and LLCs increased $178,000 due to above plan performance by
investments in Midwest Wireless LLC, which offset start-up losses on the
Company's personal communications services ("PCS") partnership investments.
Consolidated income before income taxes was $1,957,000 compared to $1,011,000 in
1996. Income tax expense was $945,000 in the 1997 period compared to $541,000 in
1996. The 32% minority shareholders' interest in earnings of Alliance was
$316,000 in the 1997 period compared to $176,000 in 1996. Net income was
$696,000 compared to $294,000 in 1996.
12
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 (6.89% at September 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 paid down an additional
$1,000,000 in the third quarter of 1997. Alternatives being considered to repay
or refinance the remaining debt include additional asset sales, new debt
borrowings if feasible, or public equity offerings.
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. The Company's telephone subsidiaries have received new
long-term loan commitments for future plant addition financing from RUS and RTB
in 1997 totaling $14,889,000. Loan drawdowns by the telephone companies against
these commitments were $1,530,000 in the 1997 period. Expected telephone and
cable television plant additions for 1997 are $4,000,000 of which $2,904,000 had
been spent to date.
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 September
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.
Alliance Telecommunications Corporation is currently negotiating the acquisition
of additional telephone and cable television properties in and adjacent to areas
it presently serves. If completed, the acquisitions would add approximately 700
telephone customers and 4,400 cable customers to the Company's operations.
Purchase prices for these acquisitions would be approximately $8,300,000. The
Company would finance these acquisitions with a combination of internally
generated funds and seller financing. The acquisitions are expected to be
completed in the fourth quarter of 1997.
The Company produced cash from operating activities of $5,758,000 in the first
nine months of 1997 compared to $4,303,000 in the 1996 period. At September 30,
1997, the Company's cash, cash equivalents, temporary cash investments and
marketable securities totaled $15,527,000 compared to $16,110,000 at December
31, 1996. Working capital at September 30, 1997 improved to $3,432,000 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.
13
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Subsequent to the end of the quarter, the Company received an unsolicited
proposal from Lynch Interactive Corporation, a subsidiary of Lynch Corporation
(AMEX: LGL) whereby Lynch Interactive would gain a 51% ownership position in the
Company by buying newly issued shares of the Company at a minimum price of
$10.00 per share in a negotiated transaction. Lynch Corporation has disclaimed
any interest in acquiring any currently outstanding shares of the Company's
stock from existing shareholders. The Company is evaluating the merits of this
unsolicited proposal but has not reached any conclusions.
PART II. OTHER INFORMATION
Items 1 - 5. Not Applicable
Item 6(a). Exhibits
Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q.
Item 6(b). 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: November 13, 1997
14
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended September 30 Nine Months Ended September 30
------------------------------ -----------------------------
Primary: 1997 1996 1997 1996
- ------- ------------- ------------- ------------- -------------
Net income $ 695,766 $ 293,508 $ 1,906,603 $ 897,036
============= ============= ============= =============
Common and common equivalent shares:
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 1,904,900 1,881,417 1,898,713 1,880,671
Dilutive effect of convertible preferred shares outstanding 378,100 389,487 378,100 389,487
Dilutive effect of warrants outstanding after
application of treasury stock method 1,236
Dilutive effect of stock options outstanding after
application of treasury stock method 40,581 18,652 30,004 12,398
Weighted average number of unallocated shares
held by employee stock ownership plan (11,817) (18,556) (11,817) (18,556)
------------- ------------- ------------- -------------
2,313,000 2,271,000 2,295,000 2,264,000
============= ============= ============= =============
Net income per common and common equivalent share $ .30 $ .13 $ .83 $ .40
============= ============= ============= =============
Fully Diluted:
- -------------
Net income $ 695,766 $ 293,508 $ 1,906,603 $ 897,036
Interest on convertible debentures, net of tax (1) 189,654 568,962
------------- ------------- ------------- -------------
Adjusted net income $ 885,420 $ 293,508 $ 2,475,565 $ 897,036
============= ============= ============= =============
Common and common equivalent shares:
Weighted average number of common shares outstanding 1,904,900 1,881,417 1,898,713 1,880,671
Assumed conversion of convertible debentures
into common stock (1) 1,423,125 1,423,125
Dilutive effect of convertible preferred shares outstanding 378,100 389,487 378,100 389,487
Dilutive effect of warrants outstanding after
application of treasury stock method 10,421 10,421
Dilutive effect of stock options outstanding after
application of treasury stock method 54,464 18,652 54,464 12,398
Weighted average number of unallocated shares
held by employee stock ownership plan (11,817) (18,556) (11,817) (18,556)
------------- ------------- ------------- -------------
3,759,193 2,271,000 3,753,006 2,264,000
============= ============= ============= =============
Net income per common share - assuming full dilution $ .24 $ .13 $ .66 $ .40
============= ============= ============= =============
- ---------------------------------------------------------------------------------------------
(1) The effect of the convertible debentures on net income per share is
anti-dilutive for the 1996 periods.
</TABLE>
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000863437
<NAME> HECTOR COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,582,914
<SECURITIES> 300,000
<RECEIVABLES> 4,616,348
<ALLOWANCES> 0
<INVENTORY> 984,703
<CURRENT-ASSETS> 16,768,411
<PP&E> 63,103,846
<DEPRECIATION> 17,511,418
<TOTAL-ASSETS> 137,046,747
<CURRENT-LIABILITIES> 13,336,285
<BONDS> 94,834,523
0
378,100
<COMMON> 19,079
<OTHER-SE> 11,189,943
<TOTAL-LIABILITY-AND-EQUITY> 137,046,747
<SALES> 21,711,979
<TOTAL-REVENUES> 21,711,979
<CGS> 14,298,650
<TOTAL-COSTS> 14,298,650
<OTHER-EXPENSES> (2,656,119)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,478,030
<INCOME-PRETAX> 4,591,418
<INCOME-TAX> 2,170,000
<INCOME-CONTINUING> 2,421,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,906,603
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.66
</TABLE>
