- --------------------------------------------------------------------------------
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, 2002
-------------------------------------------------
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
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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
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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at October 31, 2002
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 3,483,966
Total Pages (22)
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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 Comprehensive Income 5
Consolidated Statement 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 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 18
Part II. Other Information 18
Exhibits
Exhibit 11 - Calculation of Earnings Per Share 19
Exhibit 99.1 - Certification of Chief Executive Officer 21
Exhibit 99.2 - Certification of Chief Financial Officer 22
2
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
Assets: 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 11,743,449 $ 13,083,481
Construction fund 1,544,647 759,934
Accounts receivable, net 5,314,719 4,736,131
Materials, supplies and inventories 1,713,471 1,249,109
Other current assets 302,824 186,451
------------ ------------
Total current assets 20,619,110 20,015,106
Property, plant and equipment 113,681,634 107,225,400
less accumulated depreciation (56,857,176) (49,863,075)
------------ ------------
Net property, plant and equipment 56,824,458 57,362,325
Other assets:
Excess of cost over net assets acquired, net 49,074,993 53,662,750
Marketable securities 137,165 419,004
Wireless telephone investments 15,951,211 14,174,179
Other investments 12,428,267 12,290,004
Other assets 281,133 327,685
------------ ------------
Total other assets 77,872,769 80,873,622
------------ ------------
Total Assets $155,316,337 $158,251,053
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 7,071,900 $ 6,752,100
Accounts payable 2,827,818 2,497,804
Accrued expenses 2,620,674 2,409,669
Income taxes payable 547,116 722,797
------------ ------------
Total current liabilities 13,067,508 12,382,370
Long-term debt, less current portion 76,576,555 79,641,269
Deferred investment tax credits 18,457 48,269
Deferred income taxes 5,740,892 5,975,119
Deferred compensation 933,748 931,529
Minority stockholders interest in Alliance
Telecommunications Corp. 16,808,243 17,031,204
Stockholders' Equity:
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized:
Convertible Series A, 220,100 issued and outstanding 220,100 220,100
Common stock, par value $.01 per share; 10,000,000 shares authorized;
3,501,028 and 3,476,569 shares issued and outstanding 35,010 34,766
Additional paid-in capital 13,413,562 13,212,970
Retained earnings 28,557,493 28,702,145
Accumulated other comprehensive income (loss) (55,231) 71,312
------------ ------------
Total stockholders' equity 42,170,934 42,241,293
------------ ------------
Total Liabilities and Stockholders' Equity $155,316,337 $158,251,053
============ ============
See notes to consolidated financial statements.
3
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Revenues:
Local network $ 1,919,020 $ 1,819,726 $ 5,607,401 $ 5,322,224
Network access 5,627,354 5,686,479 15,953,756 17,020,664
Nonregulated:
Cable television 1,138,787 1,055,776 3,292,038 3,080,788
Internet 620,274 515,343 1,773,705 1,440,875
Billing and collection 91,708 142,504 290,813 416,355
Other 1,038,435 1,166,298 2,933,908 3,236,460
-------------- -------------- -------------- --------------
Total revenues 10,435,578 10,386,126 29,851,621 30,517,366
Costs and expenses:
Plant operations 1,221,951 1,212,395 3,825,319 4,156,864
Customer operations 590,433 631,169 1,869,526 1,914,266
Other operating expenses:
Operating taxes 150,543 158,605 412,652 425,641
Cable television 809,702 731,492 2,439,869 2,114,727
Internet 382,547 167,265 1,074,141 899,834
Other 329,561 575,159 1,087,014 1,250,239
General and administrative 1,194,603 1,031,634 3,882,587 3,451,684
Depreciation and amortization 2,405,214 2,849,433 7,246,478 8,245,983
-------------- -------------- -------------- --------------
Total costs and expenses 7,084,554 7,357,152 21,837,586 22,459,238
Operating income 3,351,024 3,028,974 8,014,035 8,058,128
Other income and (expenses):
Interest expense (1,224,001) (1,326,627) (3,570,734) (4,113,931)
Gain on sale of marketable securities 2,335,909 3,659,054
Interest and dividend income 77,852 127,648 246,386 433,050
Income from investments in
unconsolidated affiliates 908,973 704,842 2,536,122 1,445,203
-------------- -------------- -------------- --------------
Other expense, net (237,176) 1,841,772 (788,226) 1,423,376
Income before income taxes 3,113,848 4,870,746 7,225,809 9,481,504
Income tax expense 1,263,000 2,093,000 2,860,000 4,161,000
-------------- -------------- -------------- --------------
Income before minority interest 1,850,848 2,777,746 4,365,809 5,320,504
Minority interest in earnings of
Alliance Telecommunications Corporation 522,048 809,196 1,214,579 1,520,849
-------------- -------------- -------------- --------------
Income before cummulative effect of change
in accounting principle 1,328,800 1,968,550 3,151,230 3,799,655
Cumulative effect of change in accounting
principle, net of income taxes and
minority interest (3,146,569)
-------------- -------------- -------------- --------------
Net income $ 1,328,800 $ 1,968,550 $ 4,661 $ 3,799,655
============== ============== ============== ==============
Basic net income per share
Before cumulative effect of
change in accounting principle $ .38 $ .57 $ .90 $ 1.09
Cumulative effect of change
in accounting principle (.90)
-------------- -------------- -------------- --------------
$ .38 $ .57 $ - $ 1.09
============== ============== ============== ==============
Diluted net income per share
Before cumulative effect of
change in accounting principle $ .35 $ .52 $ .83 $ 1.01
Cumulative effect of change
in accounting principle (.83)
-------------- -------------- --------------- --------------
$ .35 $ .52 $ - $ 1.01
============== ============== =============== ==============
See notes to consolidated financial statements.
4
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net income $ 1,328,800 $ 1,968,550 $ 4,661 $ 3,799,655
Other comprehensive income (loss):
Unrealized holding gains (losses)
on marketable securities (29,803) 161,968 (281,839) 1,216,838
Less: Reclassification adjustment for
gains included in net income (2,335,909) (3,659,054)
-------------- -------------- -------------- --------------
Other comprehensive income (loss)
before income taxes (29,803) (2,173,941) (281,839) (2,442,216)
Income tax benefit related to unrealized
holding gains (losses) on
marketable securities (11,920) 64,787 (112,735) 486,735
Income taxes related to reclassification
adjustment for gains included in
net income (965,118) (1,494,376)
Minority interest in other comprehensive
income (loss) of Alliance
Telecommunications Corporation (741) (407,804) (42,561) (453,634)
-------------- -------------- -------------- --------------
Other comprehensive income (loss) (17,142) (865,806) (126,543) (980,941)
-------------- -------------- -------------- --------------
Comprehensive income (loss) $ 1,311,658 $ 1,102,744 $ (121,882) $ 2,818,714
============== ============== ============== ==============
See notes to consolidated financial statements.
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income Total
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 2001 220,100 220,100 3,476,569 $34,766 $13,212,970 $28,702,145 $ 71,312 $42,241,293
Net loss 4,661 4,661
Issuance of common stock under
Employee Stock Option Plan, net 37,159 371 196,794 197,165
Issuance of common stock under
Employee Stock Purchase Plan 11,578 116 96,827 96,943
Purchase and retirement of
common stock (24,278) (243) (93,029) (149,313) (242,585)
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes (126,543) (126,543)
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT SEPTEMBR 30, 2002 220,100 $220,100 3,501,028 $35,010 $13,413,562 $28,557,493 $ (55,231) $42,170,934
======= ======== ========= ======= =========== =========== ========== ===========
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
------------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net income $ 4,661 $ 3,799,655
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash cumulative effect of change in accounting principle 3,146,569
Depreciation and amortization 7,246,478 8,245,983
Minority stockholders' interest in earnings of Alliance
Telecommunications Corporation 1,214,579 1,520,849
Gain on sales of marketable securities (3,659,054)
Income from unconsolidated affiliates (2,536,122) (1,445,203)
Proceeds from wireless telephone investments 598,443 657,293
Changes in assets and liabilities:
Accounts receivable (578,588) 80,325
Materials, supplies and inventories (464,362) (917,746)
Other current assets (116,373) (73,206)
Accounts payable 330,014 (276,151)
Accrued expenses 211,005 (189,131)
Income taxes payable (175,681) 1,332,229
Deferred investment credits (29,812) (55,291)
Deferred taxes (34,946)
Deferred compensation 2,219 (69,782)
----------- -----------
Net cash provided by operating activities 8,853,030 8,915,824
Cash Flows from Investing Activities:
Capital expenditures, net (6,708,279) (6,855,705)
Sales of marketable securities 1,323,145
Increase in construction fund (784,713) (182,406)
Purchases of wireless telephone investments (1,128,606)
Proceeds from (purchases of) other investments 22,384 (968,332)
Increase in other assets (29,063) (49,307)
----------- -----------
Net cash used in investing activities (7,499,671) (7,861,211)
Cash Flows from Financing Activities:
Repayment of long-term debt (3,633,090) (4,302,391)
Proceeds from issuance of notes payable and long-term debt 888,176 470,000
Issuance of common stock 294,108 455,609
Purchase of stock (242,585) (1,140,632)
----------- -----------
Net cash used in financing activities (2,693,391) (4,517,414)
----------- -----------
Net Decrease in Cash and Cash Equivalents (1,340,032) (3,462,801)
Cash and Cash Equivalents at Beginning of Period 13,083,481 13,834,110
----------- -----------
Cash and Cash Equivalents at End of Period $ 11,743,449 $ 10,371,309
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 3,567,065 $ 4,380,535
Income taxes paid during the period 3,065,493 2,884,063
See notes to consolidated financial statements.
6
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The balance sheet and statement of stockholders' equity as of September 30, 2002
and the statements of income, comprehensive income and cash flows for the
periods ended September 30, 2002 and 2001 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, 2002
and 2001 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, 2001 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.
The consolidated financial statements include the accounts of Hector
Communications Corporation and its wholly and majority owned subsidiaries. All
material intercompany transactions and accounts have been eliminated. Accounting
practices prescribed by regulatory authorities have been considered in the
preparation of the financial statements and formulation of accounting policies
for telephone subsidiaries. These policies conform to generally accepted
accounting principles as applied to regulated public utilities in accordance
with Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. Network access revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies and nationwide average
schedules. Revenues include estimates pending finalization of cost studies.
Network access revenues are based upon interstate tariffs filed with the Federal
Communications Commission by the National Exchange Carriers Association and
state tariffs filed with state regulatory agencies. Access revenues have been
adjusted for the estimated effect of bad debt write-offs due to the bankruptcy
filings of two large interexchange carriers. Management believes recorded
revenues are reasonable based on estimates of cost separation studies, which are
typically settled within two years.
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.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity as previously reported.
7
NOTE 2 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under the provisions of this accounting standard, goodwill
and intangible assets with indefinite useful lives are no longer amortized but
are instead tested for impairment on at least an annual basis.
At December 31, 2001 the Company had excess of cost over net assets acquired or
"goodwill" of $53,663,000, which was net of an amortization reserve of
$10,025,000. The Company also had an investment in cable television franchises
of $77,000, net of an amortization reserve of $146,000. The Company determined
that these assets have indefinite useful lives and ceased amortization effective
January 1, 2002.
During the first half of 2002, the Company tested the beginning value of its
goodwill and intangible assets as required by SFAS No. 142. In valuing its
operating units, the Company used the same valuation methodology it is using to
negotiate the breakup of Alliance. The valuation is an average of access line
and customer valuations and cashflow multiple valuations considered appropriate
in the current marketplace. As a result of this test, the Company concluded that
the carrying value of the goodwill and intangible assets in certain of its
operating units exceeded the market value. Accordingly, the Company recognized
an impairment loss and reduced its goodwill and intangible assets by $4,663,000.
After income tax benefits of $121,000 and minority interest of $1,395,000, the
charge against earnings was $3,147,000 which was recognized as a cumulative
effect of change in accounting principle and carried back to the first quarter
of 2002. The impairment loss came principally from the Company's 2000
acquisition of Hager TeleCom, Inc. ($4,089,000 charge) but also included charges
from certain cable television acquisitions ($304,000 charge) as well as the
Company's 1996 acquisition of Ollig Utilities, Inc. ($270,000 charge).
Changes in the Company's goodwill and intangible assets by segment are as
follows:
Hector Alliance Consolidated
----------- ------------ ------------
Goodwill:
Balance December 31, 2001 $ 623,721 $ 53,039,029 $ 53,662,750
Impairment loss (228,448) (4,359,310) (4,587,758)
----------- ------------ ------------
Balance September 30, 2002 $ 395,273 $ 48,679,719 $ 49,074,992
=========== ============ ============
Intangible assets:
Balance December 31, 2001 $ 77,060 $ 250,625 $ 327,685
Additions 2,899 26,164 29,063
Amortization (333) (333)
Impairment loss (75,282) (75,282)
----------- ------------ ------------
Balance September 30, 2002 $ 4,344 $ 276,789 $ 281,133
=========== ============ ============
The Company owns 10.4% of Midwest Wireless Holdings, LLC. The Company accounts
for its investment in Midwest Wireless Holdings using the equity method, and
earnings from the investment are material to the Company's net income. At
December 31, 2001 Midwest Wireless Holdings LLC had investments in cellular,
LMDS and PCS licenses totaling $187,212,000, net of amortization of $9,922,000.
Midwest Wireless Holdings LLC has determined that these licenses have indefinite
useful lives and ceased amortization on January 1, 2002.
8
The following table provides, on a pro forma basis, financial information for
the periods ended September 30 as if the provisions of SFAS 142 had been
effective January 1, 2001. A calculation of pro forma earnings per share can be
found in Exhibit 11.
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Revenues $ 10,435,578 $ 10,386,126 $ 29,851,621 $ 30,517,366
Costs and expenses (7,084,554) (7,357,152) (21,837,586) (22,459,238)
Add back - Amortization expense 499,961 1,371,752
-------------- -------------- -------------- --------------
Operating income 3,351,024 3,528,935 8,014,035 9,429,880
Other income (expenses), net (237,176) 1,841,772 (788,226) 1,423,376
Add back - pro rata share of Midwest
Wireless Holdings LLC amortization 185,733 556,554
-------------- -------------- -------------- --------------
Income before income taxes 3,113,848 5,556,440 7,225,809 11,409,810
Income tax expense (1,263,000) (2,093,000) (2,860,000) (4,161,000)
Tax effect of change in amortization (75,000) (223,000)
-------------- -------------- -------------- --------------
Income before minority interest 1,850,848 3,388,440 4,365,809 7,025,810
Minority interest in earnings of
Alliance Telecommunications Corp. (522,048) (809,196) (1,214,579) (1,520,849)
Change in minority interest due to
change in amortization (181,465) (503,867)
-------------- -------------- -------------- --------------
Adjusted income before cumulative
effect of accounting change $ 1,328,800 $ 2,397,779 $ 3,151,230 $ 5,001,094
============== ============== ============== ==============
NOTE 3 - MARKETABLE SECURITIES
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, 2002 $ 260,980 $ 42,698 $ (166,513) $ 137,615
December 31, 2001 260,980 172,159 (14,135) 419,004
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 Minority Comprehensive
Gains (Losses) Taxes Interest Income (Loss)
--------------- ------------- ------------- -------------
September 30, 2002 $ (123,815) $ 45,944 $ 22,640 $ (55,231)
December 31, 2001 158,024 (66,791) (19,921) 71,312
These amounts have no cash effect and are not included in the statement of cash
flows.
9
Proceeds from sales of available-for-sale securities were $1,323,000 in the
nine-month period ended September 30, 2001. Accounts receivable from sales of
securities were $2,352,000 at September 30, 2001. Gross realized gains on sales
of securities were $3,659,000 in 2001. 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 4 - 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.
Income recognized on the Company's investment in Midwest Wireless Holdings LLC,
net of amortization, was $2,375,000 and $1,030,000 for the nine month periods
ended September 30, 2002 and 2001 respectively. Cash distributions received from
Midwest Wireless Holdings LLC were $598,000 and $657,000 in 2002 and 2001,
respectively. At September 30, 2002, the Company owned 10.4% of Midwest Wireless
Holdings LLC. Income statement information for Midwest Wireless Holdings, LLC
for the three and nine month periods ended September 30, 2002 and 2001 was as
follows:
Three Months Ended September 30 Nine Months Ended September 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 40,945,465 $ 35,643,457 $115,946,553 $ 96,792,397
Expenses (31,754,849 (29,472,900) (90,210,046) (82,184,468)
Minority interest (975,771) (696,038) (2,904,191) (1,647,774)
Net income 8,214,845 5,474,519 22,832,316 12,960,155
NOTE 5 - OTHER INVESTMENTS
Other investments consist of Rural Telephone Bank stock, CoBank stock and
investments in stock companies and partnerships of other telecommunications
service providers. Long-term investments in companies that are not intended for
resale or are not readily marketable are valued at cost, which does not exceed
net realizable value. Investments in joint ventures, 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 operating
income or losses from the respective operations. Other assets are cable
television franchises owned by the Company and other deferred charges.
NOTE 6 - SEGMENT INFORMATION
The Company is organized into two business segments: Hector Communications
Corporation and its subsidiaries, which are 100% owned, and Alliance
Telecommunications Corporation and its subsidiaries, which are 68% owned.
Segment information is as follows:
10
Hector Alliance Consolidated
--------------- --------------- ---------------
Nine Months Ended September 30, 2002
Revenues $ 7,089,140 $ 22,762,481 $ 29,851,621
Costs and expenses 6,241,710 15,595,876 21,837,586
--------------- --------------- ---------------
Operating income 847,430 7,166,605 8,014,035
Interest expense (691,334) (2,879,400) (3,570,734)
Interest and dividend income 78,235 168,151 246,386
Income from unconsolidated affiliates 715,919 1,820,203 2,536,122
--------------- --------------- ---------------
Income before income taxes $ 950,250 $ 6,275,559 $ 7,225,809
=============== =============== ===============
Depreciation and amortization $ 2,326,433 $ 4,920,045 $ 7,246,478
=============== =============== ===============
Total assets $ 31,238,176 $ 124,078,161 $ 155,316,337
=============== =============== ===============
Capital expenditures $ 1,692,128 $ 5,016,151 $ 6,708,279
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Nine Months Ended September 30, 2001
Revenues $ 7,150,561 $ 23,366,805 $ 30,517,366
Costs and expenses 5,960,998 16,498,240 22,459,238
--------------- --------------- ---------------
Operating income 1,189,563 6,868,565 8,058,128
Interest expense (739,815) (3,374,116) (4,113,931)
Interest and dividend income 188,482 244,568 433,050
Gain on sale of marketable securities 3,659,054 3,659,054
Income from unconsolidated affiliates 354,622 1,090,581 1,445,203
--------------- --------------- ---------------
Income before income taxes $ 992,852 $ 8,488,652 $ 9,481,504
=============== =============== ===============
Depreciation and amortization $ 2,347,905 $ 5,898,078 $ 8,245,983
=============== =============== ===============
Total assets $ 29,075,075 $ 128,670,707 $ 157,745,782
=============== =============== ===============
Capital expenditures $ 1,994,723 $ 4,860,982 $ 6,855,705
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended September 30, 2002
Revenues $ 2,335,483 $ 8,100,095 $ 10,435,578
Costs and expenses 2,021,667 5,062,887 7,084,554
--------------- --------------- ---------------
Operating income 313,816 3,037,208 3,351,024
Interest expense (231,162) (992,839) (1,224,001)
Interest and dividend income 26,860 50,992 77,852
Income from unconsolidated affiliates 255,933 653,040 908,973
--------------- --------------- ---------------
Income before income taxes $ 365,447 $ 2,748,401 $ 3,113,848
=============== =============== ===============
Depreciation and amortization $ 775,476 $ 1,629,738 $ 2,405,214
=============== =============== ===============
Capital expenditures $ 1,144,475 $ 2,218,143 $ 3,362,618
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended September 30, 2001
Revenues $ 2,430,548 $ 7,955,578 $ 10,386,126
Costs and expenses 1,959,905 5,397,247 7,357,152
--------------- --------------- ---------------
Operating income 470,643 2,558,331 3,028,974
Interest expense (251,500) (1,075,127) (1,326,627)
Interest and dividend income 52,056 75,592 127,648
Gain on sale of marketable securities 2,335,909 2,335,909
Income from unconsolidated affiliates 158,812 546,030 704,842
--------------- --------------- ---------------
Income before income taxes $ 430,011 $ 4,440,735 $ 4,870,746
=============== =============== ===============
Depreciation and amortization $ 782,657 $ 2,066,776 $ 2,849,433
=============== =============== ===============
Capital expenditures $ 770,912 $ 1,908,423 $ 2,679,335
=============== =============== ===============
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Hector Communications Corporation ("HCC" or "Company") is a telecommunications
holding company which, through its wholly-owned and majority-owned subsidiaries,
primarily provides local telephone and cable television service. The Company
also invests in other companies providing wireless telephone and other
telecommunications related services.
HCC operates five wholly-owned local exchange company subsidiaries (generally
referred to as "local exchange carriers" or "LECs") which served 7,639 access
lines in 9 rural communities in Minnesota and Wisconsin at September 30, 2002.
HCC, through its subsidiaries, also provides cable television service to 4,687
subscribers in Minnesota and Wisconsin.
HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns and
operates six additional LEC subsidiaries which served 31,373 access lines in 28
rural communities in Minnesota, Wisconsin, Iowa and South Dakota at September
30, 2002. Alliance, through its subsidiaries, also served 8,911 cable television
subscribers in Minnesota, North Dakota, South Dakota and Iowa. Golden West
Telecommunications Cooperative, Inc. of Wall, South Dakota, and Split Rock
Telecom Cooperative, Inc. of Garretson, South Dakota own the remaining interests
in Alliance.
Nine Months Ended September 30, 2002 Compared to
Nine Months Ended September 30, 2001
Consolidated revenues decreased to $29,852,000 in 2002 from $30,517,000 in 2001.
The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Local network $ 1,207,839 $ 1,173,263 $ 4,399,562 $ 4,148,961
Network access 3,859,226 4,066,616 12,094,530 12,954,048
Nonregulated activities:
Cable television 1,179,676 1,087,465 2,112,362 1,993,323
Internet 343,953 206,284 1,429,752 1,234,591
Billing and collection 69,985 107,576 220,828 308,779
Other 428,461 509,357 2,505,447 2,727,103
---------------- ---------------- --------------- ---------------
$ 7,089,140 $ 7,150,561 $ 22,762,481 $ 23,366,805
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $285,000 or 5%. The increase was
primarily due to a local service rate increase in one of Alliance's telephone
companies. Access lines served were 39,012 at September 30, 2002 compared to
38,936 at September 30, 2001. Access line growth is being reduced by increasing
customer acceptance of digital subscriber line service ("DSL") as their internet
platform. DSL customers can access voice and data networks simultaneously over
their telephone lines, eliminating the need for many second lines. At September
30, 2002 the Company had 1,767 DSL customers and 9,526 dial-up internet
customers, an 18% increase from 2001 in the number of customers subscribing to
some form of broadband service. Network access revenues decreased $1,067,000 or
6%. Access revenues were negatively affected by reserves established due to the
bankruptcy of two large interexchange carriers and by lower intrastate access
revenues from the Company's Iowa and South Dakota exchanges.
Nonregulated revenues from all sources increased $116,000 or 1%. Cable
television revenues increased $211,000 or 7% due to rate increases and the
acquisition of additional cable systems in the second quarter of 2001. Internet
service revenues increased $333,000 or 23% due to increases in the number of
total customers and the migration of dial-up customers to more expensive, higher
speed DSL service. Lower billing and collection revenues and lower revenues from
leases of fiber-optic transport facilities negatively affected nonregulated
revenues.
12
Consolidated operating costs and expenses were $21,838,000 in 2002 compared to
$22,459,000 in 2001. If the provisions of SFAS 142 had been in effect at January
1, 2001, 2001 operating costs would have been $21,087,000. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Plant operations $ 1,156,599 $ 1,066,659 $ 2,668,720 $ 3,090,205
Customer operations 288,696 268,165 1,580,830 1,646,101
Other operating expenses:
Operating taxes 123,438 114,062 289,214 311,579
Cable television 861,239 680,676 1,578,630 1,434,051
Internet 153,408 158,120 920,733 899,834
Other 172,311 181,333 914,703 910,786
General and administrative 1,159,586 1,144,078 2,723,001 2,307,606
Depreciation and amortization 2,326,433 2,347,905 4,920,045 5,898,078
---------------- ---------------- --------------- ---------------
$ 6,241,710 $ 5,960,998 $ 15,595,876 $ 16,498,240
---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses decreased $332,000 or 8% due to increased
capitalization of labor expenditures for new construction projects. Customer
operations expenses decreased $45,000 or 2%. Other operating expenses increased
$323,000 or 7% due to higher cable television and internet operating expenses.
General and administrative expenses increased $431,000 or 12%. Depreciation
expense increased $372,000 due to depreciation on new plant additions.
Amortization expense decreased $1,372,000 due to adoption of SFAS 142.
Consolidated operating income decreased $44,000 to $8,014,000.
Interest expenses decreased $543,000 due to patronage accruals on interest
payments made by the Company to CoBank, lower interest rates on floating
portions of the Company's debt and principal payments made which reduced the
Company's long-term debt. Interest and dividend income decreased $187,000 due to
lower interest rates earned on invested cash balances. Alliance recorded gains
on sales of marketable securities of $3,659,000 in the 2001 period.
The Company had income from unconsolidated affiliates (its partnership and LLC
investments) of $2,536,000 for the 2002 period compared to income of $1,445,000
in 2001 (Note 4). Income recorded from the Company's investment in Midwest
Wireless Holdings LLC benefited from the adoption of SFAS 142 (Note 2).
Income before income taxes decreased to $7,226,000 in 2002 from $9,482,000 in
2001. The Company's effective income tax rate decreased to 40% in 2002 from 44%
in 2001 due to elimination of the effect of non-deductible amortization
expenses. Income before minority interest in Alliance's earnings decreased to
$4,366,000 in 2002 from $5,321,000 in 2001. Minority interests in earnings of
Alliance were $1,215,000 compared to $1,521,000 in 2001. Income before change in
accounting principle decreased to $3,151,000 compared to $3,800,000 in 2001. In
2002, the Company took a charge against earnings related to the cumulative
effect of impairment of the value of its goodwill and intangible assets of
$3,147,000, net of income taxes and minority interest (Note 2). The Company had
net income of $5,000 in 2002 compared to net income of $3,800,000 in 2001.
13
Three Months Ended September 30, 2002 Compared to
Three Months Ended September 30, 2001
Consolidated revenues increased by less than 1% to $10,436,000 in 2002 from
$10,386,000 in 2001. The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Local network $ 410,014 $ 398,505 $ 1,509,006 $ 1,421,221
Network access 1,241,324 1,376,483 4,386,030 4,309,996
Nonregulated activities:
Cable television 420,788 368,931 717,999 686,845
Internet 121,766 74,525 498,508 440,818
Billing and collection 22,964 36,586 68,744 105,918
Other 118,627 175,518 919,808 990,780
---------------- ---------------- --------------- ---------------
$ 2,335,483 $ 2,430,548 $ 8,100,095 $ 7,955,578
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $99,000 or 5%. The increase was
primarily due to a local service rate increase in one of Alliance's telephone
companies. Network access revenues decreased $59,000 or 1%. Access revenues were
negatively affected by reserves established in the 2002 period due to the
bankruptcy of a large interexchange carrier. Alliance's access revenues
benefited from increased universal service support payments.
Nonregulated revenues from all sources increased $9,000. Cable television
revenues increased $83,000 or 8% due to rate increases. Internet service
revenues increased $105,000 or 20% due to increases in the number of total
customers and the migration of dial-up customers to more expensive, higher speed
DSL service. Lower billing and collection revenues and lower revenues from
leases of fiber-optic transport facilities negatively affected nonregulated
revenues.
Consolidated operating costs and expenses were $7,085,000 in 2002 compared to
$7,357,000 in 2001. If the provisions of SFAS 142 had been in effect at January
1, 2001, 2001 operating costs would have been $6,857,000. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Plant operations $ 377,563 $ 323,176 $ 844,388 $ 889,219
Customer operations 92,962 90,153 497,471 541,016
Other operating expenses:
Operating taxes 49,196 43,951 101,347 114,654
Cable television 296,103 229,968 513,599 501,524
Internet 58,133 56,568 324,414 268,817
Other 7,715 65,045 321,846 351,994
General and administrative 364,519 368,387 830,084 663,247
Depreciation and amortization 775,476 782,657 1,629,738 2,066,776
---------------- ---------------- --------------- ---------------
$ 2,021,667 $ 1,959,905 $ 5,062,887 $ 5,397,247
---------------- ---------------- --------------- ---------------
14
Consolidated plant operations expenses increased $10,000 or 1%. Customer
operations expenses decreased $41,000, or 6%. Other operating expenses increased
$40,000 or 2% due to higher cable television programming fees and higher
internet costs. General and administrative expenses increased $163,000 or 16%.
Depreciation expense increased $56,000 due to depreciation on new plant
additions. Amortization expense decreased $500,000 due to adoption of SFAS 142.
Consolidated operating income increased $322,000 to $3,351,000.
Interest expenses decreased $103,000 due to lower interest rates on floating
portions of the Company's debt and principal payments made which reduced the
Company's long-term debt. Interest and dividend income decreased $50,000 due to
lower interest rates earned on invested cash balances. Alliance recorded gains
on sales of marketable securities of $2,336,000 in the 2001 period.
The Company had income from unconsolidated affiliates (its partnership and LLC
investments) of $909,000 for the 2002 period compared to income of $705,000 in
2001 (Note 4). Income recorded from the Company's investment in Midwest Wireless
Holdings LLC benefited from the adoption of SFAS 142 (Note 2).
Income before income taxes decreased to $3,114,000 in 2002 from $4,871,000 in
2001. The Company's effective income tax rate decreased to 41% in 2002 from 43%
in 2001 due to elimination of the effect of non-deductible amortization
expenses. Income before minority interest in Alliance's earnings decreased to
$1,851,000 in 2002 from $2,778,000 in 2001. Minority interests in earnings of
Alliance were $522,000 compared to $809,000 in 2001. Net income decreased to
$1,329,000 in 2002 from $1,969,000 in 2001.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the nine-month periods
were $8,853,000 and $8,916,000 in 2002 and 2001, respectively. At September 30,
2002, the Company's cash, cash equivalents and marketable securities totaled
$11,881,000 compared to $13,502,000 at December 31, 2001. Alliance's cash and
securities were $5,567,000 of this total. Working capital at September 30, 2002
was $7,552,000 compared to $7,633,000 at December 31, 2001. The current ratio
was 1.6 to 1 at September 30, 2002.
The Company makes periodic improvements to its facilities to provide up-to-date
services to its telephone and cable television customers. Hector's plant
additions in the 2002 and 2001 nine-month periods were $1,692,000 and
$1,995,000, respectively. Alliance's plant additions in the same periods were
$5,016,000 and $4,861,000, respectively. Plant additions for 2002 for Hector and
Alliance are expected to total $2,993,000 and $7,165,000, respectively, and will
provide customers with additional advanced telecommunications services and
expand usage of high capacity fiber optics in the telephone network. The Company
finances its plant improvements using a combination of internal funds and
borrowings from the Rural Utilities Service ("RUS") and Rural Telephone Bank
("RTB"). Borrowings from RUS and RTB in the nine-month periods ended September
30, 2002 and 2001 were $888,000 and $470,000, respectively.
The Company is an investor in partnerships that provide fiber optic transport
facilities to other telecommunications companies. The Company also leases some
of its own fiber optic facilities to transport users. Due to lower than expected
demand and an increased supply of fiber, the Company and its partners have
reduced the prices charged for use of their facilities. The Company expects the
reductions to negatively effect its financial results in future periods, but
cannot determine if competition will result in additional price changes.
15
In August 2000, the Company's Board of Directors authorized the purchase and
retirement of up to 335,000 shares of the Company's stock in open market
transactions or in private transactions consistent with overall market and
financial conditions. Following the events of September 11, 2001, the Company's
Board of Directors authorized the repurchase of 250,000 additional shares of
stock, if warranted by market conditions. During 2001, the Company purchased and
retired 109,704 shares of common stock. During the third quarter of 2002, 24,278
additional shares were repurchased. At September 30, 2002, 262,000 shares could
be purchased under the remaining authorization. The Company received $294,000
and $456,000 from exercises of employee stock options and issue of employee
stock purchase plan shares in the first nine months of 2002 and 2001,
respectively.
The Company is always looking to acquire properties that advance its plan to be
a provider of top quality telecommunications services to rural customers. In
2001, the Company acquired several small cable systems in South Dakota. In 2000,
the Company acquired Hager TeleCom, Inc. In 1998, the Company acquired Felton
Telephone Company and eight cable television systems from Spectrum Cablevision
Limited Partnership. The Company cannot predict if it will be successful in
acquiring additional properties in the future and does not currently have
financing plans in place to pay for possible acquisitions.
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.
Proposed Breakup of Alliance Telecommunications Corporation
The Company is continuing to negotiate with Golden West Telecommunications
Cooperative, Inc. and Split Rock Telecom Cooperative, Inc. (its minority
partners) regarding the breakup of Alliance Telecommunications Corporation,
which is currently 68% owned by the Company. The Company is contemplating a
transaction in which it exchanges its ownership interests in two rural ILECs and
a portion of its ownership interest in other telecommunications investments in
return for its partners' minority ownership interest in the remainder of
Alliance. The acquisition debt the Company incurred in acquiring Ollig
Utilities, Inc. in 1996 would also be reduced. The two ILECs serve 8,700
telephone access lines and 2,400 cable television customers. Revenues from these
operations in 2001 totaled $9,560,000. The breakup is not expected to materially
affect the Company's net income. A definitive agreement on the breakup is
expected during the fourth quarter of 2002. The breakup is expected to occur on
March 1, 2003, assuming timely receipt of regulatory and financial approvals.
- --------------------------------------------------------------------------------
From time to time in reports filed with the Securities and Exchange Commission,
in press releases, and in other communications to shareholders and the investing
public, the Company may make statements regarding the Company's future financial
performance. Such forward looking statements are subject to risks and
uncertainties, including but not limited to, the effects of the
Telecommunications Act, new technological developments which may reduce barriers
for competitors entering the Company's local exchange or cable television
markets, higher than expected expenses and other risks involving the
telecommunications industry generally. All such forward-looking statements
should be considered in light of such risks and uncertainties.
- --------------------------------------------------------------------------------
16
New Accounting Principles
Effective January 1, 2002, the Company adopted Statement on Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". This statement
applies to intangibles and goodwill acquired after June 30, 2001, as well as
goodwill and intangibles previously acquired. Under this statement goodwill as
well as other intangibles determined to have an indefinite life will no longer
be amortized; however, these assets will be reviewed for impairment on a
periodic basis. Statement No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. (See Note 2.)
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and an associated
asset retirement cost. The statement applies to tangible long-lived assets,
including individual assets, functional groups of related assets and significant
parts of assets. It covers a company's legal obligations resulting from the
acquisition, construction, development or normal operation of a capital asset.
The Company is currently evaluating the provisions of SFAS No. 143, but does not
expect its adoption to have a material impact on its financial position or
operating results.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 sets forth
requirements for measuring and recognizing impairment losses on long-lived
assets. The statement also establishes financial reporting requirements when
impairment losses are recognized. Adoption of SFAS No. 144 did not have a
material effect on the Company's financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No.146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue No.
94-3, a liability for an exit cost was recognized at the date of the entity
committed to an exit plan. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company does not believe that the adoption of
SFAS No. 146 will have a material impact on its financial position or results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not use derivative financial instruments in its operations or
investment portfolio. Its operations are not subject to risks associated with
changes in the value of foreign currencies. Portions of the Company's long-term
debt have variable interest rates based on the lenders' cost of money. The
Company has investments in money market funds that earn interest at prevailing
market rates. In the opinion of management, the Company does not have a material
exposure to loss caused by market risk.
17
Item 4. Controls and Procedures
We performed an evaluation under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including the
Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were effective. There have been no
significant changes in our internal controls and procedures or in other factors
that could significantly affect internal controls subsequent to September 30,
2002.
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.
Exhibit 99.1, "Certification of Chief Executive Officer" is attached to this
Form 10-Q. Exhibit 99.2, "Certification of Chief Financial Officer" is attached
to this Form 10-Q.
Item 6(b). Exhibits and Reports on Form 8-K.
- ---------------------------------------------
None.
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 /s/Curtis A. Sampson
------------------------
Curtis A. Sampson
Date: November 14, 2002 Chief Executive Officer
By /s/Charles A. Braun
------------------------
Charles A. Braun
Date: November 14, 2002 Chief Financial Officer
18
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Nine Months Ended September 30
------------------------------------------------------
Basic: 2002 2001 2001 Pro forma
- ------- ----------- ----------- --------------
Income before cumulative effect of
change in accounting principle $ 3,151,230 $ 3,799,655 $ 5,001,094
Cumulative effect of accounting change (3,146,569) -
----------- ----------- -----------
Net income $ 4,661 $ 3,799,655 $ 5,001,094
=========== =========== ===========
Common shares:
Weighted average number of common shares outstanding 3,505,276 3,480,298 3,480,298
=========== =========== ===========
Net income per common share:
Before cumulative effect of change in accounting principle $ .90 $ 1.09 $ 1.44
Cumulative effect of accounting change (.90)
----------- ----------- -----------
Net income per common share $ .00 $ 1.09 $ 1.44
=========== =========== ===========
Diluted:
- -------------
Income before cumulative effect of
change in accounting principle $ 3,151,230 $ 3,799,655 $ 5,001,094
Cumulative effect of accounting change (3,146,569)
----------- ----------- -----------
Net income $ 4,661 $ 3,799,655 $ 5,001,094
=========== =========== ===========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,505,276 3,480,298 3,480,298
Dilutive effect of convertible preferred shares outstanding 220,100 221,300 221,300
Dilutive effect of stock options outstanding after
application of treasury stock method 61,753 56,310 56,310
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 2,614 181 181
----------- ----------- -----------
3,789,743 3,758,089 3,758,089
=========== =========== ===========
Diluted net income per share
Before cumulative effect of change in accounting principle $ .83 $ 1.01 $ 1.33
Cumulative effect of accounting change (.83)
----------- ----------- -----------
Diluted net income per share $ .00 $ 1.01 $ 1.33
=========== =========== ===========
2001 Pro forma earnings per share are presented as if the provisions of SFAS No. 142 had been in effect
January 1, 2001 (Note 2)
19
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended September 30
------------------------------------------------------
Basic: 2002 2001 2001 Pro forma
- ------- ----------- ----------- -------------
Net income $ 1,328,800 $ 1,968,550 $ 2,397,779
=========== =========== ===========
Common shares:
Weighted average number of common shares outstanding 3,509,966 3,475,545 3,475,545
=========== =========== ===========
Net income per common share $ .38 $ .57 $ .69
=========== =========== ===========
Diluted:
- -------------
Net income $ 1,328,800 $ 1,968,550 $ 2,397,779
=========== =========== ===========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,509,966 3,475,545 3,475,545
Dilutive effect of convertible preferred shares outstanding 220,100 221,300 221,300
Dilutive effect of stock options outstanding after
application of treasury stock method 18,072 100,817 100,817
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 1,660 657 657
----------- ----------- -----------
3,749,798 3,798,319 3,798,319
=========== =========== ===========
Diluted net income per share $ .35 $ .52 $ .63
=========== =========== ===========
2001 Pro forma earnings per share are presented as if the provisions of SFAS No. 142 had been in effect
January 1, 2001 (Note 2)
20
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Exhibit 99.1
Chief Executive Officer Certification
I, Curtis A. Sampson certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hector Communications
Corporation; 2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report; 3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly
report; 4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; 5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/Curtis A. Sampson
------------------------
Curtis A. Sampson
Date: November 14, 2002 Chief Executive Officer
21
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Exhibit 99.2
Chief Financial Officer Certification
I, Charles A. Braun, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hector Communications
Corporation; 2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report; 3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly
report; 4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; 5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/Charles A. Braun
-----------------------
Charles A. Braun
Date: November 14, 2002 Chief Financial Officer
22