- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
-------------------------------------------------
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: 001-13891
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 July 31, 2004
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 3,639,068
- --------------------------------------------------------------------------------
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 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information 20
2
PART i. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
Assets: 2004 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 19,659,766 $ 16,581,315
Construction fund 3,118,415 3,240,073
Accounts receivable, net 3,403,235 4,140,052
Materials, supplies and inventories 1,319,696 944,099
Other current assets 4,501 285,071
------------ ------------
Total current assets 27,505,613 25,190,610
Property, plant and equipment 98,999,327 98,174,546
less accumulated depreciation (57,526,186) (55,086,440)
------------ ------------
Net property, plant and equipment 41,473,141 43,088,106
Other assets:
Excess of cost over net assets acquired 30,921,094 31,691,927
Investment in Midwest Wireless Holdings, LLC 14,203,468 13,349,155
Investment in other unconsolidated affiliates 2,890,376 2,796,035
Other investments 6,873,858 6,533,858
Other assets 384,207 409,664
------------ ------------
Total other assets 55,273,003 54,780,639
------------ ------------
Total Assets $124,251,757 $123,059,355
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of
long-term debt $ 6,561,000 $ 6,537,800
Accounts payable 1,284,544 1,557,969
Accrued expenses 2,195,566 2,238,587
Income taxes payable 448,561 1,541,830
------------ ------------
Total current liabilities 10,489,671 11,876,186
Long-term debt, less current portion 56,324,345 57,529,378
Deferred investment tax credits 3,717 8,999
Deferred income taxes 5,416,470 4,902,870
Deferred compensation 708,194 698,254
Stockholders' Equity 51,309,360 48,043,668
------------ ------------
Total Liabilities and Stockholders' Equity $124,251,757 $123,059,355
============ ============
See notes to consolidated financial statements.
3
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
----------------------------- ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues from continuing operations:
Local network $ 1,568,145 $ 1,548,135 $ 3,060,996 $ 3,009,923
Network access 3,925,157 4,029,702 7,938,770 8,088,942
Nonregulated services:
Video services 874,779 910,049 1,693,032 1,873,497
Internet services 772,640 671,922 1,513,788 1,242,199
Other nonregulated services 851,285 894,642 1,731,073 1,872,846
------------- ------------- ------------- -------------
Total revenues 7,992,006 8,054,450 15,937,659 16,087,407
Costs and expenses:
Plant operations, excluding depreciation 1,148,552 1,199,048 2,204,193 2,495,448
Customer operations 444,862 429,131 795,880 802,883
General and administrative 1,158,375 1,265,070 2,317,424 2,385,756
Depreciation and amortization 2,008,399 1,958,351 4,016,668 3,951,158
Other operating expenses:
Operating taxes 97,579 111,754 210,387 197,386
Video service expenses 868,485 777,744 1,547,021 1,564,608
Internet expenses 254,192 101,408 491,072 335,765
Other 559,804 391,805 922,063 702,323
------------- ------------- ------------- -------------
Total costs and expenses 6,540,248 6,234,311 12,504,708 12,435,327
Operating income from continuing operations 1,451,758 1,820,139 3,432,951 3,652,080
Other income and (expenses):
Interest expense (716,408) (875,731) (1,487,877) (1,768,852)
Interest and dividend income 63,006 54,535 116,532 135,466
Income from investment in Midwest Wireless Holdings, LLC 626,118 683,998 1,308,247 1,306,759
Income (loss) from investments in other unconsolidated
affiliates 134,255 51,208 179,441 (45,348)
Gain on sale of cable television systems 28,590 1,080,723 28,590 1,080,723
------------- ------------- ------------- -------------
Other income (expense), net 135,561 994,733 144,933 708,748
Income from continuing operations before income taxes
and minority interest 1,587,319 2,814,872 3,577,884 4,360,828
Income tax expense 633,000 1,060,000 1,430,000 1,679,000
------------- ------------- ------------- -------------
Income from continuing operations before minority interest 954,319 1,754,872 2,147,884 2,681,828
Minority interest in continuing operations of
Alliance Telecommunications Corporation (464,943) (659,624)
------------- ------------- ------------- -------------
Income from continuing operations 954,319 1,289,929 2,147,884 2,022,204
Discontinued operations:
Income from operations of asset group distributed in
split-up of Alliance Telecommunications Corporation,
net of income taxes 408,979 988,748
Minority interest in discontinued operations of
Alliance Telecommunications Corporation (130,873) (316,399)
------------- ------------- ------------- -------------
Income from discontinued operations - 278,106 - 672,349
------------- ------------- ------------- -------------
Net income $ 954,319 $ 1,568,035 $ 2,147,884 $ 2,694,553
============= ============= ============= =============
Basic net income per share:
Continuing operations $ .26 $ .37 $ .60 $ .58
Discontinued operations .08 .20
------------- ------------- ------------- -------------
$ .26 $ .45 $ .60 $ .78
============= ============= ============= =============
Diluted net income per share:
Continuing operations $ .24 $ .34 $ .55 $ .54
Discontinued operations .08 .18
------------- ------------- ------------- -------------
$ .24 $ .42 $ .55 $ .71
============= ============= ============= =============
See notes to consolidated financial statements.
4
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
----------------------------- ---------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income $ 954,319 $ 1,568,035 $ 2,147,884 $ 2,694,553
Other comprehensive income (loss):
Unrealized holding gains (losses) on
marketable securities (21,940) 53,890 (708) 50,437
Income tax (expense) benefit related to unrealized
holding gains (losses) on marketable securities 8,776 (21,555) 277 (20,190)
Minority interest in other comprehensive income (loss)
of Alliance Telecommunications Corporation (6,781) (6,095)
------------- ------------- ------------- -------------
Other comprehensive income (loss) (13,164) 25,554 (431) 24,152
------------- ------------- ------------- -------------
Comprehensive income $ 941,155 $ 1,593,589 $ 2,147,453 $ 2,718,705
============= ============= ============= =============
See notes to consolidated financial statements.
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Preferred Stock Common Stock Additional Other
------------------- -------------------- Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income (Loss) Total
------- --------- --------- -------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2003 220,100 $ 220,100 3,515,482 $ 35,155 $13,828,414 $33,908,774 $ 51,225 $ 48,043,668
Net income 2,147,884 2,147,884
Issuance of common stock to ESOP 20,467 205 286,753 286,958
Issuance of common stock under
Employee Stock Option Plan 94,219 942 830,339 831,281
Conversion of preferred stock
to common (8,900) (8,900) 8,900 89 8,811 0
Change in unrealized gains on
marketable securities, net of
deferred taxes (431) 431
------- --------- --------- -------- ------------ ----------- ------------- ------------
BALANCE AT JUNE 30, 2004 211,200 $ 211,200 3,639,068 $ 36,391 $14,954,317 $36,056,658 $ 50,794 $ 51,309,360
======= ========= ========= ======== ============ =========== ============= ============
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
--------------------------
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net income $ 2,147,884 $ 2,694,553
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in earnings of
Alliance Telecommunications Corporation 976,023
Depreciation and amortization 4,025,476 4,888,483
Income from Midwest Wireless Holdings, LLC (1,308,247) (1,692,018)
Cash distributions from Midwest Wireless
Holdings, LLC 453,934 421,848
Income from other unconsolidated affiliates (179,441) (131,270)
Cash distributions from other unconsolidated
affiliates 130,610 154,987
Gain on sale of cable television systems (28,590) (1,080,723)
Changes in assets and liabilities net of effects
of discontinued operations:
Accounts receivable 627,236 758,260
Materials, supplies and inventories (375,597) (119,047)
Other current assets 280,570 105,391
Accounts payable (273,425) (299,138)
Accrued expenses 243,937 487,464
Income taxes payable (1,093,269) 541,947
Deferred investment credits (5,282) (13,511)
Deferred taxes 4,940
Deferred compensation 9,940 (12,169)
------------ ------------
Net cash provided by operating activities 4,655,736 7,686,020
Cash Flows from Investing Activities:
Capital expenditures, net (1,571,044) (1,720,438)
Proceeds from sales of cable television systems 98,875 1,665,782
Change in the RUS construction fund 121,658 (3,866,140)
Investments in other unconsolidated affiliates (45,510)
Purchases of other investments (181,187) (210,165)
Proceeds from other investments 345,548 1,235,328
Decrease in other assets 4,927 10,081
------------ ------------
Net cash used in investing activities (1,226,733) (2,885,552)
Cash Flows from Financing Activities:
Repayment of long-term debt (3,215,740) (2,796,835)
Proceeds from issuance of notes payable
and long-term debt 2,033,907 5,654,154
Issuance of common stock 831,281 176,374
Purchase of stock (5,493)
------------ ------------
Net cash (used in) provided by financing activities (350,552) 3,028,200
------------ ------------
Net Increase in Cash and Cash Equivalents 3,078,451 7,828,668
Cash and Cash Equivalents at Beginning of Period 16,581,315 12,020,186
------------ ------------
Cash and Cash Equivalents at End of Period $ 19,659,766 $ 19,848,854
============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,660,058 $ 2,565,590
Income taxes paid during the period 2,528,551 1,916,332
See notes to consolidated financial statements.
6
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements include the accounts of Hector
Communications Corporation ("HCC" or "Company") and its 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 balance sheet and statement of stockholders' equity as of June 30, 2004 and
the statements of income, comprehensive income and cash flows for the periods
ended June 30, 2004 and 2003 have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and changes in cash flows at June 30, 2004 and 2003 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, 2003 Annual Report to
Shareholders. The results of operations for the periods ended June 30 are not
necessarily indicative of the operating results for the entire year.
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.
The Company's operating results for the periods ended June 30, 2003 have been
restated pursuant to the discontinued operations rules of SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" to reflect the effects of
the split-up of Alliance Telecommunications Corporation. Certain other amounts
in the 2003 financial statements have been reclassified to conform to the 2004
financial statement presentation. These reclassifications had no effect on net
income or stockholders' equity as previously reported.
7
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 and net income per share would have been as follows:
Three Months Ended June 30
2004 2003
------------ ------------
Net income as reported $ 954,319 $ 1,568,035
Less: Total stock-based employee compensation
expense determined under the fair value method
for all awards (253,562) (180,569)
Pro forma net income $ 700,757 $ 1,387,466
Basic net income per share:
As reported $ .26 $ .45
Pro forma $ .19 $ .40
Diluted net income per share:
As reported $ .24 $ .42
Pro forma $ .18 $ .37
Six Months Ended June 30
2004 2003
------------ ------------
Net income as reported $ 2,147,884 $ 2,694,553
Less: Total stock-based employee compensation
expense determined under the fair value method
for all awards (358,464) (264,634)
Pro forma net income $ 1,789,420 $ 2,429,919
Basic net income per share:
As reported $ .60 $ .78
Pro forma $ .50 $ .70
Diluted net income per share:
As reported $ .55 $ .72
Pro forma $ .46 $ .65
SPLIT-UP OF ALLIANCE TELECOMMUNICATIONS CORPORATION
Prior to July 7, 2003 Alliance Telecommunications Corporation ("Alliance") was
68% owned by HCC. Golden West Telecommunications Cooperative, Inc. ("Golden
West") of Wall, South Dakota and Alliance Communications Cooperative, Inc.
("ACCI") of Garretson, South Dakota owned the remaining interests in Alliance.
Effective July 7, 2003 Alliance was reorganized under Section 355 of the
Internal Revenue Code ("the split-up transactions'). In the split-up
transactions, Golden West exchanged its minority ownership interest in Alliance
for all of the outstanding stock of Sioux Valley Telephone Company, which
included a pro rata share of Alliance's ownership interest in Midwest Wireless
Holdings, LLC and certain other Alliance assets. ACCI exchanged its minority
ownership interest in Alliance for all of the outstanding stock of Hills
Telephone Company, which included a pro rata share of Alliance's ownership
interest in Midwest Wireless Holdings, LLC and certain other Alliance assets.
HCC became the 100% owner of all remaining Alliance assets and operations.
8
The Company believes the split-up transactions are tax-free under Section 355 of
the Internal Revenue Code. The Company also believes that related internal stock
and asset transfers that occurred prior to the split-up are tax-free under
Section 355, related Code provisions and the consolidated return regulations,
although no private letter ruling was sought from the IRS in connection with the
split-up. Prior to conducting the split-up transactions, the parties entered
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 split-up
transactions which relate to commitments, events or circumstances in effect as
of the date of the split-up transactions.
Operating results for the discontinued operations in the 2003 periods were as
follows:
Three Months Six Months
Ended June 30, Ended June 30,
2003 2003
------------- -------------
Revenues $ 2,290,247 $ 4,750,877
Operating costs and expenses 1,448,619 2,919,858
------------- -------------
Operating income 841,628 1,831,019
Other income and (expenses):
Interest expense (354,948) (680,059)
Interest and dividend income 32,222 45,911
Income (loss) from investments in unconsolidated
affilates:
Midwest Wireless Holdings, LLC 201,656 385,259
Other unconsolidated affiliates 71,421 176,618
------------- -------------
Other expense, net (49,649) (72,271)
Income before income taxes and minority interest 791,979 1,758,748
Income tax expense 383,000 770,000
------------- -------------
Income before minority interest 408,979 988,748
Minority interest in discontinued operations of
Alliance Telecommunications Corporation (130,873) (316,399)
------------- -------------
Income from discontinued operations $ 278,106 $ 672,349
============= =============
The Company accounted for the split-up transactions using the purchase method of
accounting. In recording the purchase of the minority interest in Alliance's
continuing operations, the Company estimated fair value of the assets and
liabilities acquired, pending receipt of an appraisal by outside experts, which
was received during the current quarter. After receipt of the appraisal, the
Company adjusted its recording of the allocation of excess fair value over book
value as follows:
Estimated As Appraised
------------ ------------
Excess of fair value over book value allocated
to plant assets, net of related deferred taxes $ 576,000 $ 1,346,833
Excess of fair value over book value allocated
to goodwill 7,909,006 7,138,173
9
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 and when changes in circumstances indicate that the value of
goodwill may be below its carrying value.
Goodwill is tested using a two step process based upon a fair value approach. In
the first step, the fair values of the reporting units underlying the Company's
segments are estimated. The valuation method used by the Company includes an
average of access line and customer valuations and cash flow multiple valuations
it considers appropriate in the current marketplace. If the fair value of a
reporting unit is less than its carrying value, a second step is required to
measure the amount of goodwill impairment. For 2003, the Company performed its
annual impairment test of goodwill during the third quarter. The determined fair
value of the reporting units was sufficient to pass the first step impairment
test, and no impairment was recorded. The Company believes the valuations placed
on the reporting units in the test were consistent with values placed on other
similar properties in recent comparable transactions and that valuation of the
reporting units using different methods would have yielded similar results.
The carrying value of HCC's goodwill was $30,921,000 at June 30, 2004 and
$31,692,000 at December 31, 2003. The change in the goodwill value was due to
the results of the appraisal of the assets and liabilities acquired in the
Alliance split-up transactions. $29,416,000 of goodwill is related to the
Company's telephone operations. $1,505,000 of goodwill is related to other
operations.
Changes in the Company's intangible and other assets are as follows:
Loan
Origination Customer Other
Fees Lists Assets Total
--------- -------- --------- ---------
Balance December 31, 2003 $ 162,687 $ 83,306 $ 163,671 $ 409,664
Disposals (4,924) (4,924)
Amortization (8,810) (11,723) (20,533)
--------- -------- --------- ---------
Balance June 30, 2004 $ 153,877 $ 71,583 $ 158,747 $ 384,207
========= ======== ========= =========
MIDWEST WIRELESS HOLDINGS, LLC
Midwest Wireless Holdings LLC ("Midwest Wireless") provides wireless
telecommunications services to 377,000 customers in fourteen rural service areas
and one metropolitan service area in Minnesota, Wisconsin and Iowa. Population
of the service areas is approximately 1,910,000. Midwest Wireless offers a
complete package of services, including custom calling features, facsimile and
data transmission.
10
Midwest Wireless is owned by telecommunications companies (principally ILECs)
located within Midwest Wireless' operating footprint in southern Minnesota,
northern Iowa and southeastern Wisconsin. HCC is presently the second largest
member of Midwest Wireless Holdings LLC, with an 8.0% ownership stake. HCC
actively participates in Midwest Wireless' operations and has had a seat on the
Board of Directors since the inception of the Company. HCC influences Midwest
Wireless policies and procedures applying to administration, planning and
budgeting, cell siting, technology selection, roaming agreements, affiliation
agreements, marketing and customer service, financing, accounting policies and
financial reporting and disclosure policies and the timing of financial reports.
HCC accounts for its investment in Midwest Wireless using the equity method.
Income from this investment included in continuing operations was $1,308,000 and
$1,307,000 in the six-month periods ended June 30, 2004 and 2003, respectively.
Cash distributions received by continuing operations from Midwest Wireless were
$454,000 and $422,000 in the same respective periods.
Discontinued operations of the Company include a 2.4% ownership interest in
Midwest Wireless Holdings, LLC. Income from this investment included in
discontinued operations in the three-month and six-month periods ended June 30,
2003 was $202,000 and $385,000, respectively.
Income statement information for Midwest Wireless Holdings, LLC for the periods
ended June 30, 2004 and 2003 was as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
Revenues $ 51,914,128 $ 43,150,492 $ 100,341,128 $ 81,567,250
Expenses (43,095,572) (33,531,557) (81,915,112) (63,207,048)
Minority interest (992,084) (1,103,029) (2,072,927) (2,090,792)
Net income 7,826,472 8,515,906 16,353,089 16,269,410
SALES OF CABLE TELEVISION SYSTEMS
Effective June 30, 2004 the Company sold the assets of the cable television
system serving Hudson Township, WI to Baldwin Telecom Inc. for $99,000 of cash
and a note receivable of $395,000.
Effect of the asset sale was as follows:
Sales price $ 494,375
Less: Property, plant and equipment (net) (465,785)
--------------
Gain on sale of cable assets $ 28,590
==============
The Company sold two groups of cable television systems during the second
quarter of 2003. Effective April 30, 2003, Alliance sold four systems in rural
North Dakota serving 930 subscribers to MLGC, LLC for $200,000 of cash and a
note receivable of $650,000. Effective June 2, 2003, Alliance sold systems
serving 1,150 subscribers in three communities surrounding the Fargo, ND -
Moorhead, MN area to Cable One, Inc. for $1,545,000 of cash (including $80,000
of escrowed funds).
Effect of the asset sales was as follows:
Sales price $ 2,395,032
Less: Property, plant and equipment (net) (343,636)
Less: Intangible assets (goodwill) (970,673)
--------------
Gain on sale of cable assets $ 1,080,723
==============
SEGMENT INFORMATION
The Company has changed its segment data presentation to match its new
organization subsequent to the split-up of Alliance Telecommunications
Corporation. Segment information is presented on a product line basis. The
majority of the Company's operations consist of providing basic telephone
services (often referred to as "plain old telephone service" or "POTS") to
residential and business customers within its service territories. POTS revenues
consist mainly of fees for local service which are billed directly to customers
and access revenues which are received for intrastate and interstate exchange
services provided to long distance carriers. POTS revenues are subject to
regulation by a number of state and federal government agencies.
11
The Company also provides a number of nonregulated telecommunications services
to customers. These services include cable television or video service, internet
access services, lease of fiber optic transport facilities, billing and
collection services to long distance carriers, telephone directory services,
engineering services and equipment rental. The Company also makes retail sales
of consumer telecommunications equipment and sells wireless telephone services
on a commission basis. Segment information provided presents only continuing
operations except where noted.
POTS Other Services Total
--------------- ----------------- ---------------
Six Months Ended June 30, 2004
Revenues from continuing operations $ 10,999,766 $ 4,937,893 $ 15,937,659
Costs and expenses 8,106,738 4,397,970 12,504,708
--------------- --------------- ---------------
Operating income from continuing operations 2,893,028 539,923 3,432,951
=============== =============== ===============
Depreciation and amortization $ 3,084,209 $ 932,459 $ 4,016,668
=============== =============== ===============
Total assets $ 90,409,628 $ 33,842,129 $ 124,251,757
=============== =============== ===============
Capital expenditures $ 1,385,966 $ 185,078 $ 1,571,044
=============== =============== ===============
Six Months Ended June 30, 2003
Revenues from continuing operations $ 11,098,865 $ 4,988,542 $ 16,087,407
Costs and expenses 8,302,104 4,133,223 12,435,327
--------------- --------------- ---------------
Operating income from continuing operations 2,796,761 855,319 3,652,080
=============== =============== ===============
Depreciation and amortization $ 3,097,490 $ 853,668 $ 3,951,158
=============== =============== ===============
Total assets:
Continuing operations $ 109,669,618 $ 33,847,613 $ 143,517,231
Discontinued operations 15,748,505 2,678,971 18,427,476
--------------- --------------- ---------------
Total assets $ 125,418,123 $ 36,526,584 $ 161,944,707
=============== =============== ===============
Capital expenditures:
Continuing operations $ 1,229,591 $ 233,953 $ 1,463,544
Discontinued operations 256,894 256,894
--------------- --------------- ---------------
$ 1,486,485 $ 233,953 $ 1,720,438
=============== =============== ===============
POTS Other Services Total
--------------- ----------------- ---------------
Three Months Ended June 30, 2004
Revenues from continuing operations $ 5,493,302 $ 2,498,704 $ 7,992,006
Costs and expenses 4,137,231 2,403,017 6,540,248
--------------- --------------- ---------------
Operating income from continuing operations 1,356,071 95,687 1,451,758
=============== =============== ===============
Depreciation and amortization $ 1,542,105 $ 466,294 $ 2,008,399
=============== =============== ===============
Capital expenditures $ 784,926 $ 82,909 $ 867,835
=============== =============== ===============
Three Months Ended June 30, 2003
Revenues from continuing operations $ 5,577,837 $ 2,476,613 $ 8,054,450
Costs and expenses 4,144,517 2,089,794 6,234,311
--------------- --------------- ---------------
Operating income from continuing operations 1,433,320 386,819 1,820,139
=============== =============== ===============
Depreciation and amortization $ 1,533,455 $ 424,896 $ 1,958,351
=============== =============== ===============
Capital expenditures:
Continuing operations $ 898,420 $ 76,747 $ 975,167
Discontinued operations 180,244 180,244
--------------- --------------- ---------------
$ 1,078,664 $ 76,747 $ 1,155,411
=============== =============== ===============
12
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 subsidiaries, primarily provides local
telephone and cable television service. The Company also invests in other
companies providing wireless telephone and other telecommunications related
services.
At June 30, 2004 HCC operated nine wholly-owned local exchange company
subsidiaries (generally referred to as "local exchange carriers" or "LECs")
serving 29,878 access lines in 28 rural communities in Minnesota, Wisconsin and
North Dakota. HCC, through its subsidiaries, also provides cable television
service to 8,353 subscribers in Minnesota.
Disclosures in the discussion relate to the Company's continuing operations (see
Split-up of Alliance Telecommunications Corporation in the notes). The Company
has changed its discussion format to conform to the current presentation of its
segment information.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------------
Revenues from continuing operations decreased 1% to $15,938,000 in 2004 from
$16,087,000 in 2003. The revenue breakdown was as follows:
Six Months Ended June 30
2004 2003
------------ ------------
Plain old telephone service ("POTS"):
Local network $ 3,060,996 $ 3,009,923
Network access revenues:
Long distance providers (including NECA) 6,992,341 7,187,770
Universal service fund support 946,429 901,172
------------ ------------
Total network access revenues 7,938,770 8,088,942
------------ ------------
Total POTS revenues 10,999,766 11,098,865
------------ ------------
Other services:
Video services 1,693,032 1,873,497
Internet services 1,513,788 1,242,199
Other nonregulated services:
Fiber leases 382,229 403,302
Cellular sales commissions 195,407 115,194
Directory revenues 255,133 247,992
Retail sales 226,870 210,938
Long distance resale 182,471 187,471
Customer equipment installation and repair 188,209 208,219
Engineering services 69,233 183,518
All other revenues 231,521 316,212
------------ ------------
Total nonregulated services revenue 1,731,073 1,872,846
------------ ------------
Total other service revenues 4,937,893 4,988,542
------------ ------------
Total revenue $ 15,937,659 $ 16,087,407
============ ============
Total POTS revenues decreased $99,000 or 1%. Local network revenues increased
$51,000 or 2%. The increase was primarily due to increased revenues from CLASS
service features (which include caller identification, call-waiting, call
forwarding and other related services) and increased extended area service
("EAS") revenues in one exchange. EAS enables customers to call neighboring
telephone systems toll free in exchange for a flat monthly fee. The Company
increased the rates charged for CLASS services during the 2003 period. Access
lines served were 29,878 at June 30, 2004, a decrease of 1% from June 2003. The
number of access lines the Company serves fell due to increased substitution of
cellular phones for landline phones by customers and the reduced number of
second lines being used for dial-up internet service.
13
Network access revenues decreased $150,000 or 2%. Access revenues in 2003
benefited from greater than anticipated recovery of bankruptcy reserves the
Company established against its WorldCom receivables in 2002. Increases in
universal service fund support the Company received in areas where it has newly
installed Next Level equipment were offset by decreases in support for other
areas.
Total revenues from other services decreased $51,000 or 1%. Revenues from video
(cable television) services declined $180,000 or 10%. Video service revenues in
2004 were reduced by the sales of seven systems serving 2,080 subscribers during
the second quarter of 2003. Revenues from internet services increased $272,000
or 22%, due to a 44% increase in the number of DSL customers. At June 30, 2004
the Company had 3,347 digital subscriber line ("DSL") customers and 7,566
dial-up internet customers, compared to 2,332 DSL customers and 7,857 dial-up
customers in June 2003. The DSL customer growth was facilitated by the
deployment of broadband equipment manufactured by Next Level Communications,
Inc. in the Company's Sleepy Eye, MN exchange in 2002 and 2003. This equipment
makes it possible to deliver voice, video and high speed internet services to
the customer over the same circuit.
Revenues from other nonregulated services declined $142,000 or 8%. The revenue
decline was due to lower revenues from leases of fiber optic facilities and
lower fees from engineering services which offset higher cellular commissions
and higher retail sales.
Operating costs and expenses were $12,505,000 in 2004, an increase of 1% from
$12,435,000 in 2003. The breakdown of costs and expenses was as follows:
Six Months Ended June 30
2004 2003
------------ ------------
Plain old telephone service ("POTS"):
Plant operations, excluding depreciation $ 2,202,767 $ 2,493,497
Customer operations 669,187 698,587
General and administrative 1,817,656 1,825,941
Depreciation and amortization 3,084,209 3,097,490
Operating taxes 200,069 186,589
Cellular receivable write-downs 132,850
------------ ------------
Total POTS costs and expenses 8,106,738 8,302,104
------------ ------------
Other services:
Customer operations 126,693 104,296
General and administrative 499,768 559,815
Depreciation and amortization 932,459 853,668
Other costs and expenses:
Video service expenses 1,547,021 1,564,608
Internet expenses 491,072 335,765
Other 800,957 715,071
------------ ------------
Total Other service costs and expenses 4,397,970 4,133,223
------------ ------------
Total costs and expenses $ 12,504,708 $ 12,435,327
============ ============
14
Total POTS costs and expenses decreased $195,000 or 2%. Plant operations
expenses decreased $291,000 or 12% due to reduced headcount - 2003 included
severance charges for employee headcount reductions. Customer operations
expenses decreased $29,000 or 4% due to employee headcount reductions. General
and administrative expenses increased $8,000. The 2004 period included $132,000
in expenses for write-offs of accounts receivable for access services provided
to cellular telephone service providers. Operating income in 2004 from POTS was
$2,893,000, an increase of 3% from $2,797,000 in 2003.
Total costs and expenses for other services increased $265,000 or 6%. Video
service expenses decreased $18,000 or 1% as expense reductions due to sales of
cable television systems in 2003 were offset by higher fee payments to
programming providers. Internet expenses increased $155,000 or 46% due to
increased expenditures for internet "backbone". "Backbone" is the slang term
applied to the network of circuits used to connect customers to the internet.
The Company made additional expenditures in 2004 to increase the amount of
bandwidth available to provide services to customers and to increase the
security and redundancy of its internet network. General and administrative
expenses decreased $60,000 or 11% from 2003, which included expenses incurred in
breaking up Alliance. Depreciation expense increased $79,000 or 9% due to
depreciation on new plant investments. Operating income in 2004 from other
services was $540,000, a decrease of 37% from $855,000 in 2003. Total operating
income from continuing operations decreased 6% to $3,433,000.
Interest expenses decreased $281,000 due to lower interest rates on borrowings
from CoBank. A significant portion of the Company's CoBank debt moved from a
higher fixed interest rate to lower floating market rates during the fourth
quarter of 2003. Interest and dividend income decreased $19,000 due to lower
interest rates paid on invested cash balances.
Income from the Company's investment in Midwest Wireless Holdings, LLC was
$1,308,000 in 2004 compared to $1,307,000 in 2003. Midwest Wireless operations
in 2004 benefited from determinations by regulators that its operations were
eligible to receive universal service high cost support funds. The Company had
income from other unconsolidated investments of $179,000 in 2004 compared to
losses of $45,000 in 2003. In 2004, the Company sold the assets of the cable
television system serving Hudson Township, WI for a gain of $29,000. The Company
sold two groups of cable television systems during the second quarter of 2003
for a total gain of $1,081,000.
Income from continuing operations before income taxes and minority interest
decreased 18% to $3,578,000. Income tax expense decreased to $1,430,000 in 2004
from $1,679,000 in 2003. Income before minority interest in Alliance's earnings
was $2,148,000 in 2004 compared to $2,682,000 in 2003. Minority interests in
earnings of Alliance from continuing operations in the first six months of 2003
were $660,000. Income from continuing operations totaled $2,148,000 compared to
$2,022,000 in 2003.
Income from discontinued operations before minority interest in 2003 was
$989,000. Minority interests in those earnings were $316,000. The Company had
net income of $2,148,000 in 2004 compared to $2,695,000 in 2003.
15
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
- -------------------------------------------------------------------------------
Revenues from continuing operations decreased 1% to $7,992,000 in 2004 from
$8,054,000 in 2003. The revenue breakdown was as follows:
Three Months Ended June 30
2004 2003
------------ ------------
Plain old telephone service ("POTS"):
Local network $ 1,568,145 $ 1,548,135
Network access revenues:
Long distance providers (including NECA) 3,465,415 3,616,224
Universal service fund support 459,742 413,478
------------ ------------
Total network access revenues 3,925,157 4,029,702
------------ ------------
Total POTS revenues 5,493,302 5,577,837
------------ ------------
Other services:
Video services 874,779 910,049
Internet services 772,640 671,922
Other nonregulated services:
Fiber leases 185,146 151,711
Cellular sales commissions 71,111 59,669
Directory revenues 135,462 127,234
Retail sales 114,805 118,052
Long distance resale 85,913 87,973
Customer equipment installation and repair 97,985 113,726
Engineering services 47,478 84,969
All other revenues 113,385 151,308
------------ ------------
Total nonregulated services revenue 851,285 894,642
------------ ------------
Total other service revenues 2,498,704 2,476,613
------------ ------------
Total revenue $ 7,992,006 $ 8,054,450
============ ============
Total POTS revenues decreased $85,000 or 2%. Local network revenues increased
$20,000 or 1%. The increase was primarily due to increased revenues from CLASS
service and increased extended area service revenues in one exchange.
Network access revenues decreased $105,000 or 3%. The Company's settlement
payments from interstate long distance carriers were lower during the period due
to lower customer usage of the network. The Company received increased universal
service fund support in areas where it has newly installed Next Level equipment.
Total revenues from other services increased $22,000 or 1%. Revenues from video
(cable television) services declined $35,000 or 4%. Video service revenues in
2004 were reduced by the sales of seven systems serving 2,080 subscribers during
the second quarter of 2003. Revenues from internet services increased $101,000
or 15%, due to increases in the number of customer subscribing to DSL service as
opposed to lower priced dial-up service.
Revenues from other nonregulated services declined $43,000 or 5%. Revenues from
fiber leases and cellular commissions increased in the period, but were offset
by lower fees from engineering services and lower customer installation and
repair revenues.
Operating costs and expenses were $6,540,000 in 2004, an increase of 5% from
$6,234,000 in 2003. The breakdown of costs and expenses was as follows:
16
Three Months Ended June 30
2004 2003
------------ ------------
Plain old telephone service ("POTS"):
Plant operations, excluding depreciation $ 1,148,552 $ 1,197,097
Customer operations 355,612 357,887
General and administrative 860,533 955,121
Depreciation and amortization 1,542,105 1,533,455
Operating taxes 97,579 100,957
Cellular receivable write-downs 132,850
------------ ------------
Total POTS costs and expenses 4,137,231 4,144,517
------------ ------------
Other services:
Customer operations 89,250 71,244
General and administrative 297,842 309,949
Depreciation and amortization 466,294 424,896
Other costs and expenses:
Video service expenses 868,485 777,744
Internet expenses 254,192 101,408
Other 426,954 404,553
------------ ------------
Total other service costs and expenses 2,403,017 2,089,794
------------ ------------
Total costs and expenses $ 6,540,248 $ 6,234,311
============ ============
Total POTS costs and expenses decreased $7,000. Plant operations expenses
decreased $49,000 or 4%. Customer operations expenses decreased $2,000. General
and administrative expenses decreased $95,000 or 10%. The 2004 period included
$132,000 in expenses for write-offs of accounts receivable for access services
provided to cellular telephone service providers. Operating income in 2004 from
POTS was $1,356,000, a decrease of 5% from $1,433,000 in 2003.
Total costs and expenses for other services increased $313,000 or 15%. Video
service expenses increased $91,000 or 12% due to higher fee payments to
programming providers. Internet expenses increased $153,000 or 150% due to
increased expenditures for internet "backbone". "Backbone" is the slang term
applied to the network of circuits used to connect customers to the internet.
The Company made additional expenditures in 2004 to increase the amount of
bandwidth available to provide services to customers and to increase the
security and redundancy of its internet network. General and administrative
expenses decreased $12,000 or 4% from 2003, which included expenses incurred in
breaking up Alliance. Depreciation expense increased $41,000 or 10% due to
depreciation on new plant investments. Operating income in 2004 from other
services was $96,000, a decrease of 75% from $387,000 in 2003. Total operating
income from continuing operations decreased 20% to $1,452,000.
Interest expenses decreased $159,000 due to lower interest rates on borrowings
from CoBank. A significant portion of the Company's CoBank debt moved from a
higher fixed interest rate to lower floating market rates during the fourth
quarter of 2003. Interest and dividend income increased $8,000 due to higher
invested cash balances.
Income from the Company's investment in Midwest Wireless Holdings, LLC decreased
8% to $626,000. The Company had income from other unconsolidated investments of
$134,000 in 2004 compared to income of $51,000 in 2003. In 2004, the Company
sold the assets of the cable television system serving Hudson Township, WI for a
gain of $29,000. The Company sold two groups of cable television systems during
the second quarter of 2003 for a total gain of $1,081,000.
17
Income from continuing operations before income taxes and minority interest
decreased to $1,587,000 in 2004 from $2,815,000 in 2003. Income tax expense
decreased to $633,000 in 2004 from $1,060,000 in 2003. Income before minority
interest in Alliance's earnings was $954,000 in 2004 compared to $1,755,000 in
2003. Minority interests in earnings of Alliance from continuing operations in
the 2003 period were $465,000. Income from continuing operations totaled
$954,000 compared to $1,290,000 in 2003.
Income from discontinued operations before minority interest in 2003 was
$409,000. Minority interests in those earnings were $131,000. The Company had
net income of $954,000 in 2004 compared to $1,568,000 in 2003.
Liquidity and Capital Resources
- ---------------------------------
Cash flows from consolidated operating activities (including the activities of
discontinued operations in 2003) for the six-month periods were $4,656,000 and
$7,686,000 in 2004 and 2003, respectively. At June 30, 2004, the Company's cash
and cash equivalents totaled $19,660,000 compared to $16,581,000 at December 31,
2003. Working capital at June 30, 2004 was $17,016,000 compared to $13,314,000
at December 31, 2003. The current ratio was 2.6 to 1 at June 30, 2004.
The Company's working capital at June 30, 2004 benefited from debt and equity
issuances. The Company received $2,034,000 of loan funds from the Rural
Utilities Service and Rural Telephone Bank in 2004 to finance plant additions in
the Indianhead and Pine Island telephone exchanges. At June 30, 2004,
construction funds available totaled $3,118,000. The Company received $831,000
of cash during 2004 from the exercise of employee stock options.
Plant additions in support of the Company's continuing operations in the 2004
and 2003 periods were $1,571,000 and $1,464,000, respectively. Plant additions
in the 2004 period went primarily to upgrade the Company's central offices to
enable local number portability ("LNP"). The Company's LEC subsidiaries are
subject to FCC rules requiring wireline telephone numbers to be "ported" to
wireless carriers. The process makes it possible for customers to change their
telephone service from wireline to wireless without changing their telephone
numbers. The FCC has not established final rules covering payments of the costs
of LNP. The Company also made plant investments to support additional broadband
deployments in its LEC exchanges. Plant additions for 2004 are expected to total
$4,400,000 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 borrowing to finance
Alliance's acquisition of Ollig Utilities Company. Prior to the split-up
transaction, Alliance and its subsidiaries carried this debt. In July 2003 the
Company repaid the acquisition loan with proceeds from a new term loan provided
to HCC by CoBank. The loan is secured by a pledge of the stock of HCC's
subsidiary companies. Interest rates on long-term portions of the loan are fixed
through 2007, while the non-fixed portion floats at short-term market rates. The
average rate on the total loan was approximately 4.6% at June 30, 2004.
Principal payments are made quarterly and will continue until April 2013. The
outstanding balance on this loan at June 30, 2004 was $24,750,000.
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
June 30, 2004, 215,000 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.
However, competition for properties that become available remains intense. 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.
18
New Accounting Principles
- -------------------------
In December 2003, the FASB issued a revised Financial Interpretation ("FIN") No.
46, "Consolidation of Variable Interest Entities". FIN No. 46 requires the
assets, liabilities and results of operations of variable interest entities to
be included in the Company's financial statements if the entities have certain
financial characteristics. FIN No. 46 is effective for investments in
special-purpose entities for periods ending after December 15, 2003, and for
other types of entities for periods ending after March 15, 2004. Adoption of FIN
No. 46 did not result in consolidation or change the Company's disclosures for
any of the entities in which it maintains investments.
In December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The statement
revises the disclosures required for pension and other post-retirement benefit
plans. The new disclosure requirements are reflected in the Company's Notes to
Consolidated Financial Statements in this report as appropriate.
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
- --------------------------------
The Company, with the participation of management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. The Company's disclosure controls and procedures are
designed to provide a reasonable level of assurance that information required to
be disclosed in the Company's reports under the Securities Exchange Act of 1934
is recorded and reported within the appropriate time periods. Based upon that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures are effective. During the period covered by this report, there have
been no changes in internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Company's
internal control over financial reporting.
- --------------------------------------------------------------------------------
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
11 Calculation of Earnings Per Share
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 USCss.1350).
Item 6(b). Reports on Form 8-K.
On May 5, 2004, the Company filed a current report on Form 8-K with the
Securities and Exchange Commission, reporting under Items 7 and 12 its first
quarter 2004 earnings release to shareholders.
On May 25, 2004, the Company filed a current report on Form 8-K under Item 5
reporting the results of the shareholder vote at its annual shareholders
meeting, which are incorporated into this Form 10-Q by reference.
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: August 13, 2004 Chief Executive Officer
By /s/Charles A. Braun
-------------------------
Charles A. Braun
Date: August 13, 2004 Chief Financial Officer