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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 MARCH 31, 1998
------------------------------------------
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 April 30, 1998
Common Stock, par value 2,111,676
$.01 per share
Total Pages (13) Exhibit at Page 13
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<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income
and Comprehensive 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 8
Part II. Other Information 12
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 1998 1997
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 11,696,014 $ 12,455,399
Temporary cash investments 300,000 300,000
Construction fund 77,805 77,690
Accounts receivable, net 4,513,145 4,003,184
Materials, supplies and inventories 572,264 542,681
Prepaid expenses 132,044 216,351
------------ ------------
Total current assets 17,291,272 17,595,305
Property, plant and equipment 66,345,349 65,794,563
less accumulated depreciation (21,189,879) (19,867,410)
------------ ------------
Net property, plant and equipment 45,155,470 45,927,153
Other assets:
Excess of cost over net assets acquired, net 50,825,319 51,169,677
Marketable securities 6,525,657 5,485,698
Cellular telephone investments 11,041,736 10,680,655
Other investments 7,870,549 7,231,868
Deferred debenture issue costs, net 731,362 780,089
Other assets 564,718 420,511
------------ ------------
Total other assets 77,559,341 75,768,498
------------ ------------
Total Assets $ 140,006,083 $ 139,290,956
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 4,513,600 $ 4,770,000
Accounts payable 2,135,497 1,591,546
Accrued expenses 1,665,390 2,247,972
Income taxes payable 499,130 481,831
------------ ------------
Total current liabilities 8,813,617 9,091,349
Long-term debt, less current portion 96,776,406 97,793,195
Deferred investment tax credits 338,394 381,180
Deferred income taxes 8,091,481 7,594,092
Deferred compensation 917,164 940,425
Minority stockholders interest in Alliance
Telecommunications Corp. 9,271,545 9,043,593
Stockholders' Equity 15,797,476 14,447,122
------------ ------------
Total Liabilities and Stockholders' Equity $ 140,006,083 $ 139,290,95
============ ============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended March 31
------------------------------------
1998 1997
------------- ------------
Revenues:
<S> <C> <C>
Local network $ 1,199,969 $ 1,143,312
Network access 4,259,695 3,985,573
Billing and collection 194,562 264,989
Nonregulated activities 981,281 925,046
Cable television revenues 613,295 563,171
------------- ------------
Total revenues 7,248,802 6,882,091
Costs and expenses:
Plant operations 876,931 992,570
Depreciation and amortization 1,823,323 1,822,617
Customer operations 454,256 493,793
General and administrative 1,084,030 1,180,404
Other operating expenses 521,775 413,300
------------- ------------
Total costs and expenses 4,760,315 4,902,684
Operating income 2,488,487 1,979,407
Other income and (expenses):
Investment income 191,962 168,837
Interest expense (1,735,305) (1,746,943)
Gain on sales of marketable securities 91,854
Partnership and LLC income 175,912 115,146
------------- ------------
Other expense, net (1,275,577) (1,462,960)
Income before income taxes 1,212,910 516,447
Income tax expense 551,000 291,000
------------- ------------
Income before minority interest 661,910 225,447
Minority interest in earnings of
Alliance Telecommunications Corporation 227,952 94,374
------------- ------------
Net income $ 433,958 $ 131,073
------------- ------------
Other comprehensive income:
Unrealized holding gains on marketable securities 1,376,813 393,493
Less: reclassification adjustment for gains
included in net income (91,854)
------------- ------------
Other comprehensive income before income taxes 1,284,959 393,493
Income tax expense related to items of other
comprehensive income 513,983 157,397
------------- ------------
Other comprehensive income 770,976 236,096
------------- ------------
Comprehensive income $ 1,204,934 $ 367,169
============= ============
Basic net income per share $ .21 $ .07
Diluted net income per share $ .16 $ .06
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Other
Preferred Stock Common Stock Additional Unearned Compre-
----------------- -------------------- Paid-in Retained ESOP hensive
Shares Amount Shares Amount Capital Earnings Shares Income Total
-------- -------- ---------- -------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 2,720,753 2,720,753
Issuance of common stock 171,425 1,714 1,488,255 1,489,969
Issuance of common stock under
Employee Stock Option Plan 9,000 90 61,885 61,975
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) 11,387 114 11,273 0
ESOP Shares Allocated 26,412 31,588 58,000
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes 147,424 147,424
-------- -------- ---------- -------- ---------- ----------- --------- ---------- -----------
BALANCE at December 31, 1997 378,100 378,100 2,079,364 20,794 1,712,954 11,726,521 (69,724) 678,477 14,447,122
Net income 433,958 433,958
Issuance of common stock under
Employee Stock Option Plan 18,150 181 121,719 121,900
Conversion of convertible
debentures into common stock 2,812 28 23,492 23,520
Conversion of preferred stock into
common stock (4,000) (4,000) 4,000 40 3,960 0
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes 770,976 770,976
-------- -------- ---------- -------- ---------- ----------- --------- ---------- -----------
BALANCE at March 31, 1998 374,100 $374,100 2,104,326 $ 21,043 $1,862,125 $12,160,479 $ (69,724) $1,449,453 $15,797,476
======== ======== ========== ======== ========== =========== ========= ========== ===========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
-------------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 433,958 $ 131,073
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,870,570 1,869,895
Minority stockholders' interest in earnings of Alliance
Telecommunications Corporation 227,952 94,374
Gain on sales of marketable securities (91,854)
Income from partnership and LLC investments (175,912) (115,146)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (509,961) 324,661
Decrease (increase) in materials, supplies and inventories (29,583) 12,018
Decrease in prepaid expenses 84,307 28,375
Increase in accounts payable 543,951 756,262
Decrease in accrued expenses (582,582) (481,816)
Increase in income taxes payable 17,299 37,967
Decrease in deferred investment credits (42,786) (44,313)
Decrease in deferred taxes (16,594) (14,399)
Decrease in deferred compensation (23,261) (11,880)
----------- -----------
Net cash provided by operating activities 1,705,504 2,587,071
Cash Flows from Investing Activities:
Capital expenditures, net (704,486) (30,595)
Purchases of temporary cash investments (499,900)
Sales of marketable securities 336,854
Increase in construction fund (115) (110)
Purchases of wireless telephone investments (470,391) (14,424)
Proceeds from wireless telephone investments 285,222
Purchases of other investments (638,681) (356,687)
Increase in other assets (147,003) (190,281)
----------- -----------
Net cash used in investing activities (1,338,600) (1,091,997)
Cash Flows from Financing Activities:
Repayment of long-term debt (1,248,189) (722,568)
Proceeds from issuance of notes payable and long-term debt 986,000
Issuance of common stock 121,900
----------- -----------
Net cash provided by (used in) financing activities (1,126,289) 263,432
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (759,385) 1,758,506
Cash and Cash Equivalents at Beginning of Period 12,455,399 9,571,879
----------- -----------
Cash and Cash Equivalents at End of Period $ 11,696,014 $ 11,330,385
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,964,199 $ 1,721,082
Income taxes paid during the period 556,596 314,350
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 March 31, 1998 and
the statements of income and comprehensive income and statements of cash flows
for the three month periods ended March 31, 1998 and 1997 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, 1998 and 1997 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, 1997 Annual Report to
Shareholders. The results of operations for the periods ended March 31 are not
necessarily indicative of the operating results for the entire year.
Effective January 1, 1998, the Company has adopted the provisions of Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income"
(SFAS No. 130). This statement establishes standards for reporting and
presenting comprehensive income and its components in the financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Disclosures concerning items of comprehensive
income included in the Company's financial statements can be found in Note 2.
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 financial statement presentation. These reclassifications
had no effect on net income or stockholders equity as previously reported.
NOTE 2 - 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:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
March 31, 1998 $ 4,204,976 $ 2,320,681 $ -- $ 6,525,657
December 31, 1997 4,449,976 1,035,722 -- 5,485,698
</TABLE>
Net unrealized gains on marketable securities, net of related deferred taxes,
are included in accumulated other comprehensive income as follows:
Accumulated
Net Deferred Other
Unrealized Income Comprehensive
Gains Taxes Income
March 31, 1998 $ 2,320,681 $ (871,228) $ 1,449,453
December 31, 1997 1,035,722 (357,245) 678,477
These amounts have no cash effect and are not included in the statement of cash
flows.
7
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Gross proceeds from sales of available-for-sale securities were $336,854 in
1998. Gross realized gains on sales of these securities were $91,854. Income tax
expense related to these gains was $37,000. Realized gains on sales are based on
the difference between net sales proceeds and the book value of securities sold,
using the specific identification method.
NOTE 3 - WIRELESS TELEPHONE INVESTMENTS
The Company's investments in wireless telephone partnerships and limited
liability companies are recorded on the equity method of accounting which
reflects original cost and recognition of the Company's share of income or
losses. At March 31, 1998, the Company owned 9.8% of Midwest Wireless
Communications LLC, 12.25% of Sioux Falls Cellular, Ltd., and 11.7% of Wireless
North LLC, which provides personal communications services in Minnesota,
Wisconsin, North Dakota and South Dakota.
Income recognized on cellular telephone investments, net of amortization, was
$379,400 and $115,100 in the respective 1998 and 1997 periods. Losses from PCS
investments were $235,600 in the 1998 period. Income from other equity method
investments was $32,100 in the 1998 period.
The Company made additional cash investments of $470,000 in the 1998 period to
support the operations of its PCS investments. Cash distributions received from
cellular telephone investments were $285,000 in 1998.
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
Effective December 15, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share". The Statement
requires the Company to present its net income per share in basic and diluted
forms and to restate net income per share from prior periods to conform with the
new statement. Basic net income per common share is based on the weighted
average number of common shares outstanding during each year. Diluted net income
per common share takes into effect the dilutive effect of potential common
shares outstanding. The Company's potential common shares outstanding include
preferred stock, stock options, warrants and convertible debentures. The
calculation of the Company's net income per share is included in Exhibit 11 of
this form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Hector Communications Corporation owns a 100% interest in five local exchange
telephone subsidiaries and one cable television subsidiary. The Company also
owns a 68% interest in Alliance Telecommunications Corporation, which owns and
operates four local exchange telephone companies, two cable companies, an
8
<PAGE>
engineering company, and a credit card communications company. At March 31,
1998, the Company's wholly and majority owned subsidiaries provided telephone
service to 31,600 access lines in 34 rural communities in Minnesota, Wisconsin,
South Dakota and Iowa. Its cable television operations provided cable television
services to approximately 8,400 subscribers in Minnesota, South Dakota and
Wisconsin. The Company is also an investor in partnerships and corporations
providing wireless telephone and other telecommunications related services.
Revenues from the Company's Hector and Alliance operations for the respective
periods ending March 31 were as follows:
<TABLE>
<CAPTION>
Alliance Alliance Hector Communications Corp.
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
<S> <C> <C> <C> <C>
Local network $ 828,405 $ 778,337 $ 371,564 $ 364,975
Network access 3,296,393 3,078,275 963,302 907,298
Billing and collection 149,142 214,100 45,420 50,889
Nonregulated activities 875,448 854,249 105,833 70,797
Cable television revenues 263,779 228,043 349,516 335,128
---------- ---------- ---------- ----------
Total revenues $5,413,167 $5,153,004 $1,835,635 $1,729,087
========== ========== ========== ==========
</TABLE>
Revenues from the Company's 100% owned Hector Communications Corporation
("Hector") operations increased $107,000 or 6%. Local network revenues increased
$7,000 or 2% due to increases in the number of access lines served by the
Company. Network access revenues increased $56,000 or 6%. The increase was
principally due to increased interstate access settlements from NECA. Cable
television revenues increased $14,000 or 4%. Billing and collection revenues
declined $5,000 or 10%. Revenues from nonregulated activities increased $35,000
or 49% due to increased revenues from internet customers.
Revenues from the Company's 68% owned Alliance Telecommunications Corporation
("Alliance") operations increased $260,000 or 5%. Local network revenues
increased $50,000 or 6% due to increases in the number of access lines served by
the Company. Network access revenues increased $218,000 or 7% due to increased
interstate access settlements from NECA. Cable television revenues increased
$36,000 or 16% due to the acquisition of an additional cable system. Billing and
collection revenues declined $65,000 or 30% due to reduced payments from
interexchange carriers ("IXCs") associated with Company efforts to resell long
distance services directly to customers. Revenues from nonregulated activities
increased $21,000 or 2%.
Operating costs and administrative expenses for 1998 decreased $142,000 or 3%
from the 1997 period. Operating costs and administrative expenses for Alliance's
operations and existing Company operations for the respective periods ended
March 31 were as follows:
<TABLE>
<CAPTION>
Alliance Alliance Hector Communications Corp.
1998 1997 1998 1997
---------- ---------- ---------- ----------
Costs and expenses:
<S> <C> <C> <C> <C>
Plant operations $ 651,812 $ 749,440 $ 225,119 $ 243,130
Depreciation and amortization 1,312,621 1,332,256 510,702 490,361
Customer operations 379,949 434,112 74,307 59,681
General and administrative 735,780 859,665 348,250 320,739
Nonregulated and miscellaneous 248,056 170,654 273,719 242,646
---------- ---------- ---------- ----------
Total costs and expenses: $3,328,218 $3,546,127 $1,432,097 $1,356,557
========== ========== ========== ==========
</TABLE>
9
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Operating costs and expenses for Hector operations increased $76,000 or 6%.
Plant operations expenses decreased $18,000 or 7%. Buried cable maintenance
expenses were high in the 1997 period due to severe winter weather. Depreciation
and amortization expenses increased $20,000 or 4%. General and administrative
expenses increased $28,000 or 9% due to cost sharing with Alliance. Nonregulated
expenses increased $31,000 or 13% due to increased cable television maintenance
expenses. Operating income from Hector operations increased $31,000 or 8%.
Operating costs and expenses for Alliance operations decreased $218,000 or 6%.
Plant operations expenses decreased $98,000 or 13%. Maintenance expenses for
outside plant were high in the 1997 period due to severe winter weather.
Depreciation and amortization expenses decreased $20,000 or 2%. Customer
operations expenses decreased $54,000 or 12% due consolidation of certain job
functions with Hector. General and administrative expenses declined $124,000 or
14% due to cost sharing with Hector. Nonregulated expenses increased $77,000 or
45%. Operating income from Alliance operations increased $478,000 or 30%.
Consolidated operating income increased $509,000 or 26%.
Consolidated interest expense, net of investment income decreased $35,000 due to
principal payments made on outstanding borrowings. Income from investments in
partnerships and LLCs increased $61,000 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. The
Company also benefited from gains on sales of marketable securities of $92,000
in 1998.
Consolidated income before income taxes was $1,213,000 compared to $516,000 in
1997. Income tax expense was $551,000 in the 1998 period compared to $291,000 in
1997. The Company's effective tax rate of 45% in 1998 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 $228,000 in the 1998 period compared to $94,000 in 1997. Net income was
$434,000 compared to $131,000 in 1997.
Liquidity and Capital Resources
The Company produced cash from operating activities of $1,706,000 in the first
three months of 1998 compared to $2,587,000 in the 1997 period. The decrease was
due to the timing of accounts receivable collections from IXCs. At March 31,
1998, the Company's cash, cash equivalents, temporary cash investments and
marketable securities totaled $18,522,000 compared to $18,241,000 at December
31, 1997. Working capital at March 31, 1998 was $8,478,000 compared to
$8,504,000 at December 31, 1997.
The Company continues to carry a significant amount of debt associated with
Alliance's 1996 acquisition of Ollig Utilities Company. 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 this debt for periods of 1 - 10
years at rates averaging 7.4%. The outstanding balance on this loan at March 31,
1998 was $52,439,000.
The Company's cash investment in Alliance is approximately $16,903,000, which
included $6,000,000 of borrowing by the Company from St. Paul Bank. The Company
repaid $2,000,000 of this debt in 1997 paid down an additional $286,000 in the
10
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
first quarter of 1998. Subsequent to the end of the first quarter, the Company
refinanced the remaining debt through a fifteen year term loan from Rural
Telephone Financing Corporation ("RTFC").
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. At March 31, 1998, the Company's local exchange carrier
("LEC") subsidiaries had unadvanced loan commitments from RUS and RTB totaling
$17,478,000. Alliance's LEC subsidiaries are in the process of applying for
additional loans. Expected telephone and cable television plant additions for
1998 are $5,621,000 of which $704,000 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.
The Company has also derived substantial amounts of net income from sales of
securities held in its marketable securities portfolio, which continues to
appreciate significantly in value. In the first quarter of 1998, the Company
received $337,000 from the sales of marketable securities. Proceeds from
securities sales totaled $1,728,000 in fiscal 1997 and $2,053,000 in fiscal
1996. The Company believes sales of marketable securities will continue to be a
significant cash source in future periods. At March 31, 1998, 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 is an investor in Wireless North LLC, a consortium of three limited
partnerships and one limited liability corporation which have acquired licenses
to operate PCS systems in 13 markets in Minnesota, Wisconsin, North Dakota and
South Dakota. The Company invested $510,000 of cash and guaranteed debt of
$1,373,000 in these entities through December 31, 1997. Capital contributions in
the first quarter of 1998 totaled $470,000. The PCS systems are in start-up mode
and have not been profitable to date. The Company has committed to providing
$1,016,000 of additional capital to these entities. It cannot predict if
additional funding beyond this amount will be required.
Subsequent to the end of the quarter, the Company announced the redemption of
$2,000,000 of its outstanding 8.5% convertible subordinated debentures. The
Company will use borrowings from a new line of credit negotiated with RTFC to
finance the redemption. The Company believes that because its common stock is
currently trading at a considerable premium to the conversion price available to
debenture holders and the Company has sources of funds available at lower
interest rates than carried by the debentures, that it is in the best interest
of both the Company and the debenture holders that the debentures be replaced
with cheaper debt or converted to stock. The Company expects to continue to
redeem debentures as market conditions and funds availability permit.
Effective April 1, 1998, Alliance Telecommunications Corporation purchased all
the outstanding common stock of Felton Telephone Company ("Felton"), a rural
telephone company located in northwestern Minnesota adjacent to areas already
served by the Company's telephone subsidiaries. Felton serves approximately 700
access lines and holds significant portfolio of marketable securities, including
investments in Rural Cellular Corporation, U.S. West Communications, Inc. and
U.S. West Media, Inc. Purchase price is $3,650,000, which includes a cash
downpayment and seller financing of the balance.
Alliance has also entered into a definitive agreement to purchase Spectrum
Cablevision Limited Partnership ("Spectrum"). Spectrum serves 4,600 cable
11
<PAGE>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
television customers in 20 communities in Minnesota and North Dakota, including
several communities also served by the Company's telephone subsidiaries.
Purchase price is approximately $5,200,000. The Company expects to use its cash
reserves and obtain additional outside financing to make this purchase. The
Company expects to complete this acquisition in the second quarter of 1998.
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 - 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: May 14, 1998
12
<PAGE>
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Exhibit 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended March 31
---------------------------
Basic: 1998 1997
- ------- --------- ---------
<S> <C> <C>
Net income $ 433,958 $ 131,073
========= =========
Common shares:
Weighted average number of common shares outstanding 2,092,212 1,883,857
Number of unallocated shares held by ESOP (6,042) (11,817)
--------- ---------
2,086,170 1,872,040
========= =========
Net income per common share $ .21 $ .07
========= =========
Diluted:
- -------------
Net income $ 433,958 $ 131,073
Interest on convertible debentures, net of tax (1) 189,529
--------- ---------
Adjusted net income $ 623,487 $ 131,073
========= =========
Common and common equivalent shares:
Weighted average number of common shares outstanding 2,092,212 1,883,857
Assumed conversion of convertible debentures
into common stock (1) 1,420,313
Dilutive effect of convertible preferred
shares outstanding 374,556 389,487
Dilutive effect of stock options outstanding
after application of treasury stock method 63,003 16,200
Dilutive effect of Employee Stock Purchase Plan
shares subscribed 4,001 549
Dilutive effect of warrants outstanding 18,467
Weighted average number of unallocated shares
held by ESOP (6,042) (11,817)
--------- ---------
3,966,510 2,278,276
========= =========
Diluted net income per share $ .16 $ .06
========= =========
(1) The effect of the convertible debentures on net income is anti-dilutive for the 1997 period.
</TABLE>
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000863437
<NAME> HECTOR COMMUNICATIONS CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 11,696,014
<SECURITIES> 300,000
<RECEIVABLES> 4,513,145
<ALLOWANCES> 0
<INVENTORY> 572,264
<CURRENT-ASSETS> 17,291,272
<PP&E> 66,345,349
<DEPRECIATION> 21,189,879
<TOTAL-ASSETS> 14,006,083
<CURRENT-LIABILITIES> 8,813,617
<BONDS> 96,776,406
0
374,100
<COMMON> 21,043
<OTHER-SE> 15,402,333
<TOTAL-LIABILITY-AND-EQUITY> 140,006,083
<SALES> 7,248,802
<TOTAL-REVENUES> 7,248,802
<CGS> 4,760,315
<TOTAL-COSTS> 4,760,315
<OTHER-EXPENSES> (459,728)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,735,305
<INCOME-PRETAX> 1,212,910
<INCOME-TAX> 551,000
<INCOME-CONTINUING> 661,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,958
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.16
</TABLE>
