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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
-------------------------------------------------
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 [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). YES [ ] NO [X]
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 April 30, 2003
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share 3,482,782
Total Pages (24)
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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 (Loss) 4
Consolidated Statements of Comprehensive Income (Loss) 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 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information 20
Exhibits
Exhibit 11 - Calculation of Earnings Per Share 21
Exhibit 99.1 - Certification of Chief Executive Officer 22
Exhibit 99.2 - Certification of Chief Financial Officer 23
Exhibit 99.3 - Certification pursuant to 18 USCss.1350 24
2
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
Assets: 2003 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 15,418,982 $ 12,020,186
Construction fund 4,522,384 662,232
Accounts receivable, net 4,315,231 4,819,174
Materials, supplies and inventories 1,157,579 1,175,587
Other current assets 247,203 231,685
------------ ------------
Total current assets 25,661,379 18,908,864
Property, plant and equipment 115,528,064 115,546,596
less accumulated depreciation (60,775,922) (58,880,798)
------------ ------------
Net property, plant and equipment 54,752,142 56,665,798
Other assets:
Excess of cost over net assets acquired, net 49,074,993 49,074,993
Marketable securities 110,781 114,234
Investment in Midwest Wireless holdings, LLC 16,805,916 16,232,707
Investment in other unconsolidated affiliates 4,405,429 4,373,597
Other investments 8,785,265 8,704,268
Other assets 404,203 411,499
------------ ------------
Total other assets 79,586,587 78,911,298
------------ ------------
Total Assets $ 160,000,108 $ 154,485,960
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion
of long-term debt $ 7,746,000 $ 7,364,600
Accounts payable 2,219,411 2,523,878
Accrued expenses 2,745,469 2,422,986
Income taxes payable 809,909 879,417
------------ ------------
Total current liabilities 13,520,789 13,190,881
Long-term debt, less current portion 78,651,633 75,147,560
Deferred investment tax credits 22,914 27,554
Deferred income taxes 5,822,979 5,866,754
Deferred compensation 970,094 976,179
Minority stockholders interest in Alliance
Telecommunications Corp. 17,407,220 17,027,697
Stockholders' Equity 43,604,479 42,249,335
------------ ------------
Total Liabilities and Stockholders' Equity $ 160,000,108 $ 154,485,960
============ ============
See notes to consolidated financial statements.
3
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Three Months Ended March 31
---------------------------------
2003 2002
------------- -------------
Revenues:
Local network $ 1,855,728 $ 1,789,130
Network access 5,729,366 5,420,254
Video services 1,136,106 1,055,514
Internet services 712,426 561,866
Other nonregulated services 1,059,961 1,031,832
------------- -------------
Total revenues 10,493,587 9,858,596
Costs and expenses:
Plant operations 1,632,921 1,306,871
Customer operations 515,390 594,492
Other operating expenses:
Operating taxes 157,735 132,394
Video services 786,191 839,778
Internet 278,537 332,375
Other 381,199 312,583
General and administrative 1,441,101 1,341,673
Depreciation and amortization 2,479,181 2,441,678
------------- -------------
Total costs and expenses 7,672,255 7,301,844
Operating income 2,821,332 2,556,752
Other income and (expenses):
Interest expense (1,218,232) (1,129,466)
Interest and dividend income 94,620 95,281
Income from investments in unconsolidated
affilates:
Midwest Wireless Holdings, LLC 806,364 793,348
Other unconsolidated affiliates 8,641 86,471
------------- -------------
Other expense, net (308,607) (154,366)
Income before income taxes and minority
interest 2,512,725 2,402,386
Income tax expense 1,006,000 920,000
------------- -------------
Income before minority interest 1,506,725 1,482,386
Minority interest in earnings of
Alliance Telecommunications Corporation 380,207 397,661
------------- -------------
Income before change in accounting principle 1,126,518 1,084,725
------------- -------------
Cumulative effect of change in accounting
principle, net of income taxes
and minority interest 3,146,569
------------- -------------
Net income (loss) $ 1,126,518 $ (2,061,844)
============= =============
Basic net income (loss) per common share:
Before cumulative effect of change in
accounting principle $ .32 $ .31
Cumulative effect of accounting change (.90)
------------- -------------
$ .32 $ (.59)
Diluted net income (loss) per share
Before cumulative effect of change in
accounting principle $ .30 $ .28
Cumulative effect of accounting change (.82)
------------- -------------
$ .30 $ (.54)
See notes to consolidated financial statements.
4
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended March 31
---------------------------------
2003 2002
------------- -------------
Net income (loss) $ 1,126,518 $ (2,061,844)
Other comprehensive loss:
Unrealized holding losses on marketable
securities (3,453) (194,831)
------------- -------------
Other comprehensive loss before income taxes (3,453) (194,831)
Income tax benefit related to unrealized
holding losses on marketable securities (1,365) (77,933)
Minority interest in other comprehensive loss
of Alliance Telecommunications Corporation (686) (35,667)
------------- -------------
Other comprehensive loss (1,402) (81,231)
------------- -------------
Comprehensive income (loss) $ 1,125,116 $ (2,143,075)
============= =============
See notes to consolidated financial statements.
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Preferred Stock Common Stock Additional Other
------------------ ------------------ Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Loss Total
-------- --------- --------- -------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 2002 220,100 $ 220,100 3,455,067 $ 34,551 $13,262,969 $28,742,832 $ (11,117) $42,249,335
Net income 1,126,518 1,126,518
Issuance of common stock to ESOP 11,000 110 139,040 139,150
Issuance of common stock under
Employee Stock Option Plan 8,850 88 93,681 93,769
Purchase and retirement of
common stock (240) (2) (932) (1,957) (2,891)
Change in unrealized loss on
marketable securities, net of
deferred taxes (1,402) (1,402)
-------- --------- --------- -------- ----------- ----------- ---------- -----------
BALANCE AT MARCH 31, 2003 220,100 $ 220,100 3,474,677 $ 34,747 $13,494,758 $29,867,393 $ (12,519) $43,604,479
======== ========= ========= ======== =========== =========== ========== ===========
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31
---------------------------------
2003 2002
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $ 1,126,518 $ (2,061,844)
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 2,479,181 2,441,678
Minority stockholders' interest in
earnings of Alliance Telecommunications
Corporation 380,207 397,661
Income from Midwest Wireless Holdings, LLC (806,364) (793,348)
Income from other unconsolidated affiliates (8,641) (86,471)
Cash distributions from Midwest Wireless
Holdings, LLC 233,155 132,500
Changes in assets and liabilities:
Accounts receivable 503,943 (272,879)
Materials, supplies and inventories 18,008 (312,953)
Other current assets (15,518) 75,461
Accounts payable (304,467) 682,711
Accrued expenses 461,633 (218,257)
Income taxes payable (69,508) 336,316
Deferred investment credits (4,640) (1,485)
Deferred taxes (42,409) (38,236)
Deferred compensation (6,085) 6,740
----------- -----------
Net cash provided by operating activities 3,945,013 3,434,163
Cash Flows from Investing Activities:
Capital expenditures, net (565,027) (1,001,828)
Increase in construction fund (3,860,152) (478,667)
Investments in other unconsolidated affiliates (23,191)
Purchases of other investments (80,997) (18,411)
Increase) decrease in other assets 6,799 (29,427)
----------- -----------
Net cash used in investing activities (4,522,568) (1,528,333)
Cash Flows from Financing Activities:
Repayment of long-term debt (1,768,681) (1,406,297)
Proceeds from issuance of notes payable
and long-term debt 5,654,154 625,176
Issuance of common stock 93,769 161,172
Purchase of stock (2,891)
----------- -----------
Net cash privided by (used in)
financing activities 3,976,351 (619,949)
----------- -----------
Net Increase in Cash and Cash Equivalents 3,398,796 1,285,881
Cash and Cash Equivalents at
Beginning of Period 12,020,186 13,083,481
----------- -----------
Cash and Cash Equivalents at End of Period $ 15,418,982 $ 14,369,362
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,281,314 $ 1,118,040
Income taxes paid during the period 1,080,148 585,170
See notes to consolidated financial statements.
6
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The balance sheet and statement of stockholders' equity as of March 31, 2003 and
the statements of income (loss), comprehensive income (loss) and cash flows for
the periods ended March 31, 2003 and 2002 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, 2003 and
2002 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, 2002 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.
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. 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.
In January 2003 the Company issued 11,000 shares of the Company's common stock
to the Employee Stock Ownership Plan in payment of its 2002 obligation. In a
noncash transaction, the Company recorded additional stockholders' equity of
$139,150 (reflecting the market value of the stock at the time of the
contribution) and reduced accrued expenses by the same amount.
7
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity as previously reported.
STOCK COMPENSATION
The Company has stock plans under which stock options, stock appreciation
rights, restricted stock or deferred stock may be granted to officers, key
employees and nonemployee directors. Employees may also participate in an
employee stock purchase plan which allows them to purchase shares through
payroll deductions on favorable terms. The Company has elected to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement and
recognition of stock-based transactions with its employees and directors. If the
Company had elected to recognize compensation cost for its stock-based
transactions based on the fair value of the options method prescribed by SFAS
No. 123 net income (loss);and net income (loss) per share would have been as
follows:
Three Months Ended March 31
---------------------------
2003 2002
----------- ------------
Net income (loss) as reported $ 1,126,518 $ (2,061,844)
Less: Total stock-based employee compensation
expense determined under the fair value method
for all awards (84,065) (88,046)
Pro forma net income (loss) $ 1,042,453 $ (2,149,890)
Basic net income (loss) per share:
As reported $ .32 $ (.59)
Pro forma $ .30 $ (.62)
Diluted net income (loss) per share:
As reported $ .30 $ (.54)
Pro forma $ .28 $ (.56)
GOODWILL AND INTANGIBLE ASSETS
The Company accounts for goodwill and other intangible assets under 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.
During 2002, the Company tested the beginning value of its goodwill and
intangible assets as required by SFAS No. 142. 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 in the first
quarter of 2002.
In calculating the impairment charge, the fair value of the impaired reporting
units underlying the segments were estimated using the same valuation
methodology the Company is using to negotiate the breakup of Alliance. The
valuation is an average of access line and customer valuations and cash flow
multiple valuations considered appropriate in the current marketplace. The
Company believes the valuations placed on these units are consistent with values
placed on properties in recent comparable transactions and that valuation of the
reporting units using different methods would have yielded similar results. The
Company performs its annual impairment test as of August 31.
8
Changes in the Company's goodwill and intangible assets by segment are as
follows:
Hector Alliance Consolidated
--------- ----------- ------------
Goodwill:
Balance December 31, 2002 $ 395,274 $ 48,678,719 $ 49,074,993
--------- ----------- -----------
Balance March 31, 2003 $ 395,274 $ 48,679,719 $ 49,074,993
========= =========== ===========
Hector Alliance
---------- ---------------------
Intangible Intangible Other
Assets Assets Assets Consolidated
---------- ---------- ---------- ------------
Balance December 31, 2002 $ 8,393 $ 98,358 $ 304,748 $ 411,499
Additions 998 998
Disposals (7,798) (7,798)
Amortization (496) (496)
---------- ---------- ---------- -----------
Balance March 31, 2003 $ 7,897 $ 98,358 $ 297,949 $ 404,203
========== ========== ========== ===========
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.
MIDWEST WIRELESS HOLDINGS, LLC
At March 31, 2003 the Company owned 10.4% of Midwest Wireless Holdings LLC,
which provides cellular service to rural service areas in Minnesota, Wisconsin
and Iowa and the Rochester, Minnesota MSA. The investment is recorded on the
equity method of accounting, which reflects original cost and recognition of the
Company's share of income or losses. Income from this investment was $806,000
and $793,000 in the three-month periods ended March 31, 2003 and 2002,
respectively. Cash distributions received from Midwest Wireless were $233,000
and $133,000 in the same respective periods. Income statement information for
Midwest Wireless Holdings, LLC for the three-month periods ended March 31, 2003
and 2002 was as follows:
Three Months Ended March 31
---------------------------------------
2003 2002
--------------- ----------------
Revenues $ 38,416,758 $ 36,720,133
Expenses (29,675,491) (28,160,686)
Minority Interest (987,763) (965,506)
Net income 7,753,504 7,593,941
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:
9
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended March 31, 2003
Revenues $ 2,477,297 $ 8,016,290 $ 10,493,587
Costs and expenses 1,985,750 5,686,505 7,672,255
--------------- --------------- ---------------
Operating income 491,547 2,329,785 2,821,332
Interest expense (219,982) (998,250) (1,218,232)
Interest and dividend income 18,305 76,315 94,620
Income from Midwest Wireless Holdings LLC 232,605 573,759 806,364
Income (loss) on other unconsolidated affiliates 10,102 (1,461) 8,641
--------------- ---------------- ---------------
Income before income taxes $ 532,577 $ 1,980,148 $ 2,512,725
=============== =============== ===============
Depreciation and amortization $ 764,844 $ 1,714,337 $ 2,479,181
=============== =============== ===============
Total assets $ 31,811,572 $ 128,188,536 $ 160,000,108
=============== =============== ===============
Capital expenditures $ 127,328 $ 437,699 $ 565,027
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended March 31, 2002
Revenues $ 2,391,368 $ 7,467,228 $ 9,858,596
Costs and expenses 2,030,702 5,271,142 7,301,844
--------------- --------------- ---------------
Operating income 360,666 2,196,086 2,556,752
Interest expense (229,728) (899,738) (1,129,466)
Interest and dividend income 27,785 67,496 95,281
Income from Midwest Wireless Holdings LLC 227,818 565,530 793,348
Income from unconsolidated affiliates 13,155 73,316 86,471
--------------- --------------- ---------------
Income before income taxes $ 399,696 $ 2,002,690 $ 2,402,386
=============== =============== ===============
Depreciation and amortization $ 775,256 $ 1,666,422 $ 2,441,678
=============== =============== ===============
Total assets $ 31,498,759 $ 128,187,688 $ 159,686,447
=============== =============== ===============
Capital expenditures $ 285,319 $ 716,509 $ 1,001,828
=============== =============== ===============
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 7,518 access
lines in 9 rural communities in Minnesota and Wisconsin at March 31, 2003. HCC,
through its subsidiaries, also provides cable television service to 4,536
subscribers in Minnesota and Wisconsin.
HCC's 68% owned subsidiary, Alliance Telecommunications Corporation
("Alliance"), owns and operates six additional LEC subsidiaries which served
31,263 access lines in 28 rural communities in Minnesota, Wisconsin, Iowa and
South Dakota at March 31, 2003. Alliance, through its subsidiaries, also served
9,174 cable television subscribers in Minnesota, North Dakota, South Dakota and
Iowa. Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota,
and Alliance Communications Cooperative, Inc. of Garretson, South Dakota own the
remaining interests in Alliance.
10
Three Months Ended March 31, 2003 Compared to
Three Months Ended March 31, 2002
Consolidated revenues increased to $10,494,000 in 2003 from $9,859,000 in 2002.
The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Local network $ 403,700 $ 388,731 $ 1,452,028 $ 1,400,399
Network access 1,316,308 1,336,558 4,413,058 4,083,696
Nonregulated activities:
Video services 414,472 373,925 721,634 681,589
Internet 148,171 111,010 564,255 450,856
Other 194,646 181,144 865,315 850,688
---------------- ---------------- --------------- ---------------
$ 2,477,297 $ 2,391,368 $ 8,016,290 $ 7,467,228
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $67,000 or 4%. The increase was
primarily due to increased revenues from CLASS service features and custom
calling. The Company increased the rates charged for these services during the
2003 period. Access lines served were 38,781 at March 31, 2003 compared to
38,792 at March 31, 2002. Access line growth is stagnant due to the reduced
number of second lines being used for dial-up internet service and increased
substitution of cellular phones for landline phones by customers.
Network access revenues increased $309,000 or 6%. Access revenues benefited from
greater than anticipated recovery of bankruptcy reserves the Company established
against its WorldCom receivables in 2002.
Revenues from video services increased $81,000 or 8%. Revenues from internet
services increased $151,000 or 27%. Revenues from both sources increased due to
the deployment of broadband equipment manufactured by Next Level Communications,
Inc. in the Company's Sleepy Eye, MN exchange. This equipment makes it possible
to deliver POTS, video and high speed Internet services to the customer over the
same circuit. At March 31, 2003 the Company had 2,410 DSL customers and 9,366
dial-up internet customers, compared to 1,455 DSL customers and 8,888 dial-up
customers in March, 2002. Nonregulated revenues from all other sources increased
$28,000 or 3%.
Consolidated operating costs and expenses were $7,672,000 in 2003 compared to
$7,302,000 in 2002. Costs and expenses by operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Plant operations $ 361,489 $ 383,594 $ 1,271,432 $ 923,277
Customer operations 105,900 79,171 409,490 515,321
Other operating expenses:
Operating taxes 38,896 36,742 118,839 95,652
Video services 254,105 267,480 532,086 572,298
Internet 58,112 50,465 220,425 281,910
Other 67,660 43,304 313,539 269,279
General and administrative 334,744 394,690 1,106,357 946,983
Depreciation and amortization 764,844 775,256 1,714,337 1,666,422
---------------- ---------------- --------------- ---------------
$ 1,985,750 $ 2,030,702 $ 5,686,505 $ 5,271,142
---------------- ---------------- --------------- ---------------
11
Consolidated plant operations expenses increased $326,000 or 25% due to reduced
capitalization of labor expenditures for new construction projects and severance
charges for employee headcount reductions. Customer operations expenses
decreased $79,000 or 13% due to employee headcount reductions. Other operating
expenses decreased $14,000 or 1% due to lower maintenance expenses for video
services and lower internet operating expenses. General and administrative
expenses increased $99,000 or 7% due to expenses incurred in breaking up
Alliance. Depreciation expense increased $38,000 or 2% due to depreciation on
new plant additions. Consolidated operating income increased 10% to $2,821,000.
Interest expenses increased $89,000 due to charges on new loan funds drawn down
from the Rural Utilities Service and the Rural Telephone Bank. Interest and
dividend income decreased $1,000 due to lower interest rates earned on invested
cash balances. Income from the Company's investment in Midwest Wireless
Holdings, LLC increased 2% to $806,000. Income from other unconsolidated
investments decreased to $9,000 in 2003 from $86,000 in 2002.
Income before income taxes and minority interest increased to $2,513,000 in 2003
from $2,402,000 in 2002. The Company's effective income tax rate increased to
40% in 2003 from 38% in 2002 due to the effect of state income taxes. Income
before minority interest in Alliance's earnings increased to $1,507,000 in 2003
from $1,482,000 in 2002. Minority interests in earnings of Alliance were
$380,000 compared to $398,000 in 2002. Income before change in accounting
principle increased to $1,127,000 compared to $1,085,000 in 2002. 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. The Company had net income of $1,127,000
in 2003 compared to a net loss of $2,062,000 in 2002.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the three-month periods
were $3,945,000 and $3,434,000 in 2003 and 2002, respectively. At March 31,
2003, the Company's cash, cash equivalents and marketable securities totaled
$15,530,000 compared to $12,134,000 at December 31, 2002. Alliance's cash and
securities were $9,022,000 of this total. Working capital at March 31, 2003 was
$12,141,000 compared to $5,718,000 at December 31, 2002. The current ratio was
1.9 to 1 at March 31, 2003.
The improvement in the Company's working capital and current ratio at March 31
is principally due to borrowing. The Company received $5,654,000 of loan funds
from the Rural Utilities Service and Rural Telephone Bank during the first
quarter to finance plant additions in the Sleepy Eye and Pine Island exchanges.
At March 31, 2003, construction funds remaining totaled $4,522,000.
The Company makes periodic improvements to its facilities to provide up-to-date
services to its customers. Plant additions in the 2003 and 2002 three-month
periods were $565,000 and $1,002,000, respectively. Plant additions for 2003 are
expected to total $6,300,000 and will expand usage of high capacity fiber optics
in the telephone network and provide customers with additional advanced
telecommunications services.
The Company carries a significant amount of debt due to Alliance`s borrowing to
finance the acquisition of Ollig Utilities Company. Interest rates on a portion
of Alliance's acquisition loan from CoBank have been locked for periods of one
to ten years. At March 31, 2003 interest rates on the loan averaged 6.8%. The
outstanding balance on this loan at March 31, 2003 was $37,311,000. CoBank is a
cooperative, owned and controlled by its customers. Each customer borrowing from
the bank on a patronage basis shares in the bank's net income through payment of
patronage refunds. As a condition of maintaining the loan, Alliance owns stock
in the bank. Its investment in CoBank stock was $3,945,000 at March 31, 2003.
12
The Company's Board of Directors has authorized the purchase and retirement,
from time to time, of shares of the Company's stock on the open market, or in
private transactions consistent with overall market and financial conditions. At
March 31, 2003 216,000 shares could be repurchased under outstanding Board
authorizations.
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.
Breakup of Alliance Telecommunications Corporation
In July 2001, Golden West Telecommunications Cooperative, Inc. and Alliance
Communications Cooperative, Inc ("ACCI")., respectively the 20% and 12% minority
shareholders of Alliance, advised the Company that they were interested in
exchanging their minority investment for a pro rata share of the assets and
liabilities of Alliance. Thereafter the parties engaged in negotiations that
continued through December 2002. The negotiation process included evaluations
and appraisals of Alliance's business components, negotiations with Alliance's
lenders (CoBank, Rural Utilities Service and Rural Telephone Bank) regarding
waivers, lien releases, interest penalties where applicable and future financing
terms. The process also included seeking necessary regulatory approvals from
local, state and national regulators.
The Company expects to complete the Alliance breakup transactions by May 31,
2003. As agreed among the parties, in the breakup, Golden West will exchange its
20% ownership interest in Alliance for all of the outstanding stock of Sioux
Valley Telephone Company and certain other Alliance assets. ACCI will exchange
its 12% ownership interest in Alliance for all of the outstanding stock of Hills
Telephone Company and certain other Alliance assets. Sioux Valley Telephone
Company and Hills Telephone Company collectively serve 8,650 telephone access
lines and 2,400 cable television customers. In addition, under the breakup, 32%
of Alliance's ownership interest in Midwest Wireless Holdings LLC will be
transferred to Golden West and ACCI, reducing Hector's total ownership from
10.4% to 8%. Immediately prior to the breakup Sioux Valley and Hills will pay a
dividend to Alliance of approximately $13,145,000 to equalize post breakup
values in proportion to the current 68%-20%-12% stock ownership percentages. The
dividend proceeds will used to reduce Alliance's debt to its primary lender,
CoBank. A number of other stock and asset transfers will also occur among
Alliance and its subsidiaries prior to the breakup in order to satisfy various
tax, regulatory and lender requirements.
13
Alliance expects the breakup transactions to be tax-free under Section 355 of
the Internal Revenue Code. Alliance also expects the related internal stock and
asset transfers to be tax-free under Section 355, related Code provisions and
the consolidated return regulations, although no private letter ruling is being
sought from the IRS in connection with the breakup. Prior to conducting the
breakup transaction, the parties will enter into one or more agreements with
regard to cooperation, exchange of information, interim use of common services,
employee benefits, tax allocations and indemnification generally in proportion
to ownership percentages with respect to unexpected adverse tax consequences,
and other matters arising after the breakup transaction which relate to
commitments, events or circumstances in effect as of the date of the breakup
transaction.
The following pro forma financial statements of income and explanatory notes
show the pro forma effect on the operating results of the Company as if the
breakup occurred January 1, 2003. The pro forma balance sheet and explanatory
notes show the effect on the Company's financial position as if the breakup
occurred March 31, 2003.
The pro forma financial information and explanatory notes are unaudited and
include adjustments which are based on management's assumptions. Management
believes these statements provide a reasonable basis for presenting the
significant effects of the breakup and the pro forma adjustments are properly
applied in the pro forma statements.
The pro forma financial statements are not necessarily indicative of the
results of operations had the acquisition occurred at the beginning of the
periods presented, nor are they necessarily indicative of the results of future
operations.
14
Pro forma income statement - Three Months Ended March 31, 2003
Eliminate
Sioux Valley
Hector and Hills Other
Communications Telephone Pro forma Pro forma
Corporation Companies Adjustments Combined
------------ ------------ ----------- -------------
REVENUES:
Local network $ 1,855,728 $ (393,940) $ 1,461,788
Network access 5,729,366 (1,670,126) 4,059,240
Video services 1,136,106 (172,658) 963,448
Internet services 712,426 (142,149) 570,277
Other nonregulated services 1,059,961 (81,757) 978,204
------------ ----------- ----------- -------------
TOTAL REVENUES 10,493,587 (2,460,630) - 8,032,957
COSTS AND EXPENSES:
Plant operations 1,632,921 (336,181) 1,296,740
Depreciation and amortization 2,479,181 (486,374) 1,992,807
Customer operations 515,390 (141,638) 373,752
General and administrative 1,441,101 (205,320) 1,235,781
Other operating expenses 1,603,662 (301,726) 1,301,936
------------ ----------- ----------- -------------
TOTAL COSTS AND EXPENSES 7,672,255 (1,471,239) - 6,201,016
------------ ----------- ----------- -------------
OPERATING INCOME 2,821,332 (989,391) - 1,831,941
OTHER INCOME (EXPENSES):
Interest expense (1,218,232) 117,086 196,648 (a)(b) (904,498)
Income from investments in
unconsolidated affiliates:
Midwest Wireless Holdings, LLC 806,364 (258,036)(c) 548,328
Other unconsolidated affiliates 8,641 (105,197) (96,556)
Interest and dividend income 94,620 (13,689) 80,931
------------ ----------- ----------- -------------
OTHER INCOME (EXPENSES), net (308,607) (1,800) (61,388) (371,795)
------------ ----------- ----------- -------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 2,512,725 (991,191) (61,388) 1,460,146
Income tax expense 1,006,000 (396,476) (24,555)(d) 584,968
------------ ------------ ------------ -------------
INCOME BEFORE MINORITY INTEREST 1,506,725 (594,715) (36,833) 875,177
Minority interest in earnings of
Alliance Telecommunications
Corporation 380,207 (380,207)(e) 0
------------ ------------ ------------ -------------
NET INCOME $ 1,126,518 $ (594,715) $ 343,374 $ 875,177
============ ============ ============= =============
NET INCOME PER COMMON SHARE:
Basic $ .32 $ .25
Diluted .30 .23
AVERAGE SHARES OUTSTANDING
Common shares only 3,470,000 3,470,000
Common and potential common shares 3,746,000 3,746,000
The following is a summary of the adjustments made:
(a) Interest adjustment on CoBank loan at average interest rate (6.8%) $223,467
(b) Interest adjustment on CoBank loan for accrued patronage 26,819
(c) Adjust income from Midwest Wireless Holdings for ownership transfer 258,036
(d) Income tax effect of above adjustments (40% rate) 24,555
(e) Eliminate minority interest in earnings of Alliance 380,207
15
Pro forma balance sheet - March 31, 2003
Eliminate
Sioux Valley
Hector and Hills Other
Communications Telephone Pro forma Pro forma
Assets Corporation Companies Adjustments Combined
------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 15,418,982 $ (3,578,964) $ 11,840,018
Construction fund 4,522,384 (4,187) 4,518,197
Accounts receivable, net 4,315,231 (1,229,468) 3,085,763
Materials, supplies and inventories 1,157,579 (141,443) 1,016,136
Other current assets 247,203 (79,870) 167,333
------------ ------------ ------------ ------------
Total Current Assets 25,661,379 (5,033,932) 20,627,447
Property, plant and equipment, net 54,752,142 (9,611,359) 45,140,783
Investments and other assets:
Excess of cost over net assets acquired, net 49,074,992 (122,569) $(13,192,878)(e) 35,759,545
Marketable securities 110,781 110,781
Investment in Midwest Wireless Holdings LLC 16,805,916 (4,341,805)(a) 12,464,111
Investments in other unconsolidated affiliates 4,405,429 (1,571,884) 2,833,545
Other investments 8,785,265 (1,173,743) ( 1,389,786)(c) 6,221,736
Other assets 404,204 (122,636) 281,568
------------ ------------ ------------ ------------
Total investments and other assets 79,586,587 (2,990,832) (18,924,469) 57,671,286
------------ ------------ ------------ ------------
Total Assets $160,000,108 $(17,636,123) $(18,924,469) $123,439,516
============ ============ ============ ============
Liabilities and Stockholders Equity
Current liabilities:
Notes payable and current
portion of long-term debt $ 7,746,000 $ (364,000) $ 7,382,000
Accounts payable 2,219,411 (515,149) 1,704,262
Accrued expenses 2,745,469 (508,017) 2,237,452
Income taxes payable 809,909 (325,504) 484,405
------------ ------------ ------------ ------------
Total current liabilities 13,520,789 (1,712,670) 11,808,119
Long-term debt, less current portion 78,651,633 (5,328,745) $(13,145,132)(d) 60,177,756
Deferred investment tax credits 22,914 22,914
Deferred income taxes 5,822,979 (1,345,693) (42,301)(a)(b) 4,434,985
Deferred compensation 970,094 (310,430)(b) 659,664
Minority interest in Alliance
Telecommunications Corporation 17,407,220 (17,407,220)(f) 0
Stockholders' equity 43,604,479 (9,249,015) 11,980,614 (a)(b)(c) 46,336,078
(d)(e)(f)
------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $160,000,108 $(17,636,123) $(18,924,469) $123,439,516
============ ============ ============ ============
The following is a summary of the adjustments made:
(a) Transfer of 32% of Alliance's ownership interest in Midwest
Wireless and related deferred tax liabilities of $162,523 $ 4,341,805
(b) Transfer of 32% of deferred compensation obligations and
related deferred tax assets of $120,222 310,430
(c) Transfer of 32% of investment in CoBank stock 1,389,786
(d) Repayment of CoBank debt thru dividend from Sioux Valley
and Hills 13,145,132
(e) Eliminate goodwill value of investment in Sioux Valley and Hills 13,192,878
(f) Eliminate minority interest in Alliance Telecommunications Corp. 17,407,220
16
New Accounting Principles
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 establishes accounting and disclosure
requirements for a company's obligations under certain guarantees that it has
issued. A guarantor is required to recognize a liability for the obligation it
has undertaken in issuing a guarantee, including the ongoing obligation to stand
ready to perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The objective of the initial measurement
of that liability is the fair value of the guarantee at its inception. The
initial recognition and measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. FIN 45 also requires expanded disclosure of information
related to product warranty amounts recorded in the financial statements. The
disclosure provisions are effective for interim and annual periods ending after
December 15, 2002. The Company has not issued any guarantees to date that are
subject to the new provisions.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", an amendment to SFAS No. 123. This
standard provides alternative methods of transition for any voluntary changes to
the fair value based method of accounting for stock-based employee compensation.
It also amends the disclosure requirements to require prominent disclosure in
both the annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The new disclosure requirements are effective for interim
periods beginning after December 15, 2002 and are included in this report. The
Company will continue to apply the principles of APB Opinion No. 25 and related
interpretations in accounting for its stock based compensation plans.
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.
Item 4. Controls and Procedures
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls.
- --------------------------------------------------------------------------------
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" (the "Disclosure Controls"), and its
"internal controls and procedures for financial reporting" (the "Internal
Controls"). This evaluation (the "Controls Evaluation") was done under the
supervision and with the participation of management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Rules adopted by
the Securities and Exchange Commission (the "SEC" or "Commission") require that
in this section of the Quarterly Report we present the conclusions of the CEO
and the CFO about the effectiveness of the Company's Disclosure Controls and
Internal Controls based on and as of the date of the Controls Evaluation.
CEO and CFO Certifications.
- ---------------------------
Appearing in this Quarterly Report are two separate forms of "Certifications" of
the CEO and the CFO. The first form of Certification, immediately following the
Signatures section, is required in accord with Section 302 of the Sarbanes-Oxley
Act of 2002 (the "Section 302 Certification"). This section of Form 10-Q
contains information concerning the Controls Evaluation referred to in the
Section 302 Certifications and this information should be read in conjunction
with the Section 302 Certifications for a more complete understanding of the
topics presented. The second Certification is pursuant to Section 906 of
Sarbanes-Oxley and concerns compliance and disclosure under the Securities
Exchange Act of 1934.
17
Disclosure Controls and Internal Controls.
- ------------------------------------------
Disclosure Controls are procedures that are designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (the "Exchange Act"), such as this Quarterly Report, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to the Company's management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure. Internal Controls are procedures designed to provide
reasonable assurance that (1) the Company's transactions are properly
authorized; (2) the Company's assets are safeguarded against unauthorized or
improper use; and (3) the Company's transactions are properly recorded and
reported, all of which assists the preparation of financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls.
- ---------------------------------------------
The Company's management, including the CEO and CFO, does not expect that the
Disclosure Controls or the Internal Controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Scope of the Controls Evaluation.
- ---------------------------------
The CEO/CFO evaluation of Disclosure Controls and Internal Controls included a
review of the controls' objectives and design, the controls' implementation by
the Company and the effect of the controls on the information generated for use
in this Quarterly Report. In the course of the Controls Evaluation, we sought to
identify data errors, controls problems or acts of fraud and to confirm that
appropriate corrective action, including process improvements, were being
undertaken. This type of evaluation will be done on a quarterly and annual basis
so that the conclusions concerning controls effectiveness can be reported in the
Company's Quarterly Reports on Form 10-Q and in the Company's Annual Reports on
Form 10-K. Internal Controls are also evaluated on an ongoing basis by our
Accounting Department, by other personnel in the Company and by the Company's
independent auditors in connection with their audit and review activities. The
overall goals of these various evaluation activities are to monitor our
Disclosure Controls and our Internal Controls and to make modifications as
necessary; the Company's intent in this regard is that the Disclosure Controls
and the Internal Controls will be maintained as dynamic systems that change
(including with improvements and corrections) as conditions warrant.
18
Among other matters, the Company sought in the evaluation to determine whether
there were any "significant deficiencies" or "material weakness" in the
Company's Internal Controls, or whether the Company had identified any acts of
fraud involving personnel who a have significant role in the Company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose such information to our Board's
Audit Committee and to the independent auditors and to report on related matters
in this section of the Quarterly Report. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined as a particularly
serious reportable condition where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error or fraud may
occur in amounts that would be material in relation to the financial statements
and not be detected within a timely period by employees in the normal course of
performing their assigned functions. The Company has sought to deal with other
controls matters in the Controls Evaluation, and in each case if a problem was
identified, the Company considered what revision, improvement and/or correction
to make in accord with its on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Quarterly Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions.
- ------------
Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject
to the limitations noted above, the Company's Disclosure Controls are effective
to ensure that material information relating to the Company and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when periodic reports are being prepared, and
that the Company's Internal Controls are effective to provide reasonable
assurance that the financial statements are fairly presented in conformity with
generally accepted accounting principles.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
19
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. Exhibit 99.3 "Certification pursuant to 18 USC ss.1350" 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: May 14, 2003 Chief Executive Officer
By /s/Charles A. Braun
------------------------
Charles A. Braun
Date: May 14, 2003 Chief Financial Officer
20
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended March 31
Basic: 2003 2002
- ------- ----------- -----------
Income before cumulative effect of change in
accounting principle $ 1,126,518 $ 1,084,725
Cumulative effect of accounting change (3,146,569)
----------- -----------
Net income (loss) $ 1,126,518 $(2,061,844)
=========== ===========
Common shares:
Weighted average number of common
shares outstanding 3,469,930 3,493,956
=========== ===========
Net income (loss) per common share:
Before cumulative effect of change
in accounting principle $ .32 $ .31
Cumulative effect of accounting change (.90)
----------- -----------
$ .32 $ (.59)
=========== ===========
Diluted:
- -------------
Income before cumulative effect of change in
accounting principle $ 1,126,518 $ 1,084,725
Cumulative effect of accounting change (3,146,569)
----------- -----------
Net income (loss) $ 1,126,518 $(2,061,844)
=========== ===========
Common and common equivalent shares:
Weighted average number of common shares
outstanding 3,469,930 3,493,956
Dilutive effect of convertible preferred
shares outstanding 220,100 220,100
Dilutive effect of stock options outstanding
after application of treasury stock method 49,853 105,113
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 5,993 1,186
----------- -----------
3,745,876 3,820,355
=========== ===========
Diluted net income (loss) per share:
Before cumulative effect of change in
accounting principle $ .30 $ .28
Cumulative effect of accounting change (.82)
----------- -----------
$ .30 $ (.54)
=========== ===========
21
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: May 14, 2003 Chief Executive Officer
22
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: May 14, 2003 Chief Financial Officer
23
EXHIBIT 99.3
Certification
The undersigned officers of Hector Communications Corporation (the" Company")
certify pursuant to 18 U.S.C. ss. 1350, that:
(1) The Company's Quarterly Report on Form 10-Q for the three months ended March
31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company as of
the date of the Report.
Date: May 14, 2003 /s/ Curtis A. Sampson
--------------------------
Chief Executive Officer
Date: May 14, 2003 /s/ Charles A. Braun
--------------------------
Chief Financial Officer
24