- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2004
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 3,684,668
- --------------------------------------------------------------------------------
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
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30 December 31
Assets: 2004 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 20,215,528 $ 16,581,315
Construction fund 3,112,158 3,240,073
Accounts receivable, net 3,479,397 4,140,052
Materials, supplies and inventories 1,379,012 944,099
Other current assets 272,150 285,071
------------ ------------
Total current assets 28,458,245 25,190,610
Property, plant and equipment 98,370,482 98,174,546
less accumulated depreciation (58,094,785) (55,086,440)
------------ ------------
Net property, plant and equipment 40,275,697 43,088,106
Other assets:
Excess of cost over net assets acquired 30,921,094 31,691,927
Investment in Midwest Wireless Holdings, LLC 14,932,409 13,349,155
Investment in other unconsolidated affiliates 2,860,208 2,796,035
Other investments 6,913,255 6,533,858
Other assets 373,943 409,664
------------ ------------
Total other assets 56,000,909 54,780,639
------------ ------------
Total Assets $ 124,734,851 $ 123,059,355
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 6,512,000 $ 6,537,800
Accounts payable 1,517,690 1,557,969
Accrued expenses 2,320,425 2,238,587
Income taxes payable 620,757 1,541,830
------------ ------------
Total current liabilities 10,970,872 11,876,186
Long-term debt, less current portion 54,738,786 57,529,378
Deferred investment tax credits 3,529 8,999
Deferred income taxes 5,416,429 4,902,870
Deferred compensation 713,164 698,254
Stockholders' Equity 52,892,071 48,043,668
------------ ------------
Total Liabilities and Stockholders' Equity $ 124,734,851 $ 123,059,355
============ ============
See notes to consolidated financial statements.
3
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------ -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues from continuing operations:
Local network $ 1,601,814 $ 1,575,132 $ 4,662,810 $ 4,585,055
Network access 3,645,122 3,999,965 11,583,892 12,088,907
Nonregulated services:
Video services 835,541 860,123 2,528,573 2,733,620
Internet services 815,610 699,862 2,329,398 1,942,061
Other nonregulated services 907,503 971,506 2,638,576 2,844,352
------------- ------------- ------------- -------------
Total revenues 7,805,590 8,106,588 23,743,249 24,193,995
Costs and expenses:
Plant operations, excluding depreciation 1,043,564 1,044,727 3,247,757 3,540,175
Customer operations 437,496 347,440 1,233,376 1,150,323
General and administrative 926,325 1,065,367 3,243,749 3,451,123
Depreciation and amortization 1,995,983 1,978,170 6,012,651 5,929,328
Other operating expenses:
Operating taxes 142,202 93,409 352,589 290,795
Video service expenses 735,242 715,275 2,282,263 2,279,883
Internet expenses 229,628 371,538 720,700 707,303
Other 371,882 370,348 1,293,945 1,072,671
------------- ------------- ------------- -------------
Total costs and expenses 5,882,322 5,986,274 18,387,030 18,421,601
Operating income from continuing operations 1,923,268 2,120,314 5,356,219 5,772,394
Other income and (expenses):
Interest expense (728,323) (961,574) (2,216,200) (2,730,426)
Interest and dividend income 75,043 51,455 191,575 186,921
Income from investment in Midwest Wireless Holdings, LLC 842,842 596,331 2,151,089 1,903,090
Income (loss) from investments in other unconsolidated affiliates 52,003 (30,556) 231,444 (75,904)
Gain on sale of cable television systems and other business 12,805 41,395 1,080,723
------------- ------------- ------------- -------------
Other income (expense), net 254,370 (344,344) 399,303 364,404
Income from continuing operations before income taxes
and minority interest 2,177,638 1,775,970 5,755,522 6,136,798
Income tax expense 884,000 768,000 2,314,000 2,447,000
------------- ------------- ------------- -------------
Income from continuing operations before minority interest 1,293,638 1,007,970 3,441,522 3,689,798
Minority interest in continuing operations of
Alliance Telecommunications Corporation (659,624)
------------- ------------- ------------- -------------
Income from continuing operations 1,293,638 1,007,970 3,441,522 3,030,174
Discontinued operations:
Income from operations of asset group distributed in split-up of
Alliance Telecommunications Corporation, net of income taxes 988,748
Minority interest in discontinued operations of
Alliance Telecommunications Corporation (316,399)
Gain on split-up of Alliance Telecommunications Corp.,
net of income taxes 209,505 209,505
------------- ------------- ------------- -------------
Income from discontinued operations - 209,505 - 881,854
------------- ------------- ------------- -------------
Net income $ 1,293,638 $ 1,217,475 $ 3,441,522 $ 3,912,028
============= ============= ============= =============
Basic net income per share:
Continuing operations $ .35 $ .29 $ .95 $ .87
Discontinued operations .06 .25
------------- ------------- ------------- -------------
$ .35 $ .35 $ .95 $ 1.12
============= ============= ============= =============
Diluted net income per share:
Continuing operations $ .32 $ .27 $ .87 $ .81
Discontinued operations .05 .23
------------- ------------- ------------- -------------
$ .32 $ .32 $ .87 $ 1.04
============= ============= ============= =============
See notes to consolidated financial statements
4
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------ -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income $ 1,293,638 $ 1,217,475 $ 3,441,522 $ 3,912,028
Other comprehensive income (loss):
Unrealized holding gains (losses) on
marketable securities (103) 64,809 (811) 115,246
Income tax (expense) benefit related to unrealized
holding gains (losses) on marketable securities 41 (22,141) 318 (42,331)
------------- ------------- ------------- -------------
Other comprehensive income (loss) (62) 42,668 (493) 72,915
------------- ------------- ------------- -------------
Comprehensive income $ 1,293,576 $ 1,260,143 $ 3,441,029 $ 3,984,943
============= ============= ============= =============
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 3,441,522 3,441,522
Issuance of common stock to ESOP 20,467 205 286,753 286,958
Issuance of common stock under
Employee Stock Purchase Plan 10,951 109 133,575 133,684
Issuance of common stock under
Employee Stock Option Plan 106,218 1,062 985,670 986,732
Conversion of preferred stock
to common (26,400) (26,400) 26,400 264 26,136 0
Change in unrealized gains on
marketable securities, net of
deferred taxes (493) (493)
------- --------- --------- -------- ------------ ----------- ------------- -----------
BALANCE AT SEPTEMBER 30, 2004 193,700 $ 193,700 3,679,518 $ 36,795 $15,260,548 $37,350,296 $ 50,732 $ 52,892,071
======= ========= ========= ======== ============ =========== ============= ===========
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30
------------------------------
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net income $ 3,441,522 $ 3,912,028
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 6,025,864 6,871,481
Income from Midwest Wireless Holdings, LLC (2,151,089) (2,288,349)
Cash distributions from Midwest Wireless Holdings, LLC 567,835 668,018
Income from other unconsolidated affiliates (231,444) (100,714)
Cash distributions from other unconsolidated affiliates 212,781 21,073
Gain on sale of cable television systems and other business (41,395) (1,080,723)
Gain on split-up of Alliance Telecommunications Corporation (348,505)
Changes in assets and liabilities net of effects of discontinued operations:
Accounts receivable 551,074 125,513
Materials, supplies and inventories (434,913) (202,260)
Other current assets 12,921 (210,844)
Accounts payable (40,279) (292,855)
Accrued expenses 368,796 918,635
Income taxes payable (921,073) 533,544
Deferred investment credits (5,470) (13,917)
Deferred taxes 90,230
Deferred compensation 14,910 (16,307)
----------- -----------
Net cash provided by operating activities 7,370,040 9,562,071
Cash Flows from Investing Activities:
Capital expenditures, net (2,399,307) (2,935,042)
Proceeds from sales of cable television systems and other business 147,265 1,665,782
Change in the RUS construction fund 127,915 (2,971,244)
Investments in other unconsolidated affiliates (45,510) 154,987
Purchases of other investments (282,579) (206,764)
Proceeds from other investments 407,440 1,294,720
Change in other assets 4,925 (154,785)
Cash transferred in split-up of Alliance Telecommunications Corporation (5,214,465)
----------- -----------
Net cash used in investing activities (2,039,851) (8,366,811)
Cash Flows from Financing Activities:
Repayment of long-term debt (4,850,299) (30,686,054)
Proceeds from issuance of notes payable and long-term debt 2,033,907 32,679,352
Issuance of common stock 1,120,416 368,732
Purchase of stock (11,511)
----------- -----------
Net cash (used in) provided by financing activities (1,695,976) 2,350,519
----------- -----------
Net Increase in Cash and Cash Equivalents 3,634,213 3,545,779
Cash and Cash Equivalents at Beginning of Period 16,581,315 12,020,186
----------- -----------
Cash and Cash Equivalents at End of Period $ 20,215,528 $ 15,565,965
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 2,417,226 $ 3,477,999
Income taxes paid during the period 3,240,543 2,692,735
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 September 30, 2004
and the statements of income, comprehensive income and cash flows for the
periods ended September 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 September 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 September 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.
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 September 30
2004 2003
--------------- ----------------
Net income as reported $ 1,293,638 $ 1,217,475
Less: Total stock-based employee compensation expense
determined under the fair value method for all awards (137,749) (122,306)
Pro forma net income $ 1,155,889 $ 1,095,169
Basic net income per share:
As reported $ .35 $ .35
Pro forma $ .32 $ .31
Diluted net income per share:
As reported $ .32 $ .32
Pro forma $ .29 $ .29
Nine Months Ended September 30
2004 2003
--------------- ----------------
Net income as reported $ 3,441,522 $ 3,912,028
Less: Total stock-based employee compensation expense
determined under the fair value method for all awards (496,213) (386,940)
Pro forma net income $ 2,945,309 $ 3,525,088
Basic net income per share:
As reported $ .95 $ 1.12
Pro forma $ .82 $ 1.01
Diluted net income per share:
As reported $ .87 $ 1.04
Pro forma $ .75 $ .94
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 Nine Months
Ended September 30, Ended September 30,
2003 2003
---------------- ----------------
Revenues $ 4,750,877
Operating costs and expenses 2,919,858
----------------
Operating income 1,831,019
Other income and (expenses):
Interest expense (680,059)
Interest and dividend income 45,911
Income (loss) from investments in unconsolidated affilates:
Midwest Wireless Holdings, LLC 385,259
Other unconsolidated affiliates 176,618
----------------
Other expense, net (72,271)
Income before income taxes and minority interest 1,758,748
Income tax expense 770,000
----------------
Income before minority interest 988,748
Minority interest in discontinued operations of
Alliance Telecommunications Corporation (316,399)
Gain on split-up of Alliance Telecommunications Corp.,
net of income taxes 209,505 209,505
---------------- ----------------
Income from discontinued operations $ 209,505 $ 881,854
================ ================
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. After
receipt of the appraisal during the June 30 quarter, 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.
For 2004, the Company performed its annual impairment test of goodwill during
the current quarter. The determined fair value of the reporting units was
sufficient to pass the first step impairment test, and no impairment was
recorded.
The carrying value of HCC's goodwill was $30,921,000 at September 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 (13,413) (17,584) (30,997)
--------- -------- --------- ---------
Balance September 30, 2004 $ 149,274 $ 65,722 $ 158,747 $ 373,743
========= ======== ========= =========
MIDWEST WIRELESS HOLDINGS, LLC
Midwest Wireless Holdings LLC ("Midwest Wireless") provides wireless
telecommunications services to 391,000 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.
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 $2,151,000 and
$1,903,000 in the nine-month periods ended September 30, 2004 and 2003,
respectively. Cash distributions received by continuing operations from Midwest
Wireless were $568,000 and $668,000 in the same respective periods.
10
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 nine-month period ended September 30, 2003 was
$385,000.
Income statement information for Midwest Wireless Holdings, LLC for the periods
ended September 30, 2004 and 2003 was as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
Revenues $ 57,375,673 $ 47,179,981 $ 157,716,801 $ 128,747,231
Expenses (45,504,663) (38,720,993) (127,419,775) (101,928,041)
Minority interest (1,335,488) (939,777) (3,408,415) (3,060,569)
Net income 10,535,522 7,519,211 26,888,611 123,788,621
SALES OF CABLE TELEVISION SYSTEMS AND OTHER BUSINESS
Effective July 15, 2004 the Company sold the assets of Hastad Engineering
Company to Finley Engineering Company. Proceeds from the sale totaled $48,390
and the Company recorded a gain of $12,805.
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. The Company recorded a gain on the sale of
$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 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
--------------- ----------------- ---------------
Nine Months Ended September 30, 2004
Revenues from continuing operations $ 16,246,702 $ 7,496,547 $ 23,743,249
Costs and expenses 12,010,995 6,376,035 18,387,030
--------------- --------------- ---------------
Operating income from continuing operations 4,235,707 1,120,512 5,356,219
=============== =============== ===============
Depreciation and amortization $ 4,626,314 $ 1,386,337 $ 6,012,651
=============== =============== ===============
Total assets $ 92,020,076 $ 32,714,775 $ 124,734,851
=============== =============== ===============
Capital expenditures $ 2,139,421 $ 259,886 $ 2,399,307
=============== =============== ===============
Nine Months Ended September 30, 2003
Revenues from continuing operations $ 16,673,962 $ 7,520,033 $ 24,193,995
Costs and expenses 12,009,170 6,412,431 18,421,601
--------------- --------------- ---------------
Operating income from continuing operations 4,664,792 1,107,602 5,772,394
=============== =============== ===============
Depreciation and amortization $ 4,630,491 $ 1,298,837 $ 5,929,328
=============== =============== ===============
Total assets $ 92,510,041 $ 30,610,769 $ 123,120,810
=============== =============== ===============
Capital expenditures:
Continuing operations $ 2,321,119 $ 357,029 $ 2,678,148
Discontinued operations 256,894 256,894
--------------- --------------- ---------------
$ 2,578,013 $ 357,029 $ 2,935,042
=============== =============== ===============
Three Months Ended September 30, 2004
Revenues from continuing operations $ 5,246,936 $ 2,558,654 $ 7,805,590
Costs and expenses 3,904,257 1,978,065 5,882,322
--------------- --------------- ---------------
Operating income from continuing operations 1,342,679 580,589 1,923,268
=============== =============== ===============
Depreciation and amortization $ 1,542,105 $ 453,878 $ 1,995,983
=============== =============== ===============
Capital expenditures $ 753,455 $ 74,808 $ 828,263
=============== =============== ===============
Three Months Ended September 30, 2003
Revenues from continuing operations $ 5,575,097 $ 2,531,491 $ 8,106,588
Costs and expenses 3,707,066 2,279,208 5,986,274
--------------- --------------- ---------------
Operating income from continuing operations 1,868,031 252,283 2,120,314
=============== =============== ===============
Depreciation and amortization $ 1,533,001 $ 445,169 $ 1,978,940
=============== =============== ===============
Capital expenditures $ 1,091,528 $ 123,076 $ 1,214,604
=============== =============== ===============
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 September 30, 2004 HCC operated nine wholly-owned local exchange company
subsidiaries (generally referred to as "local exchange carriers" or "LECs")
serving 29,694 access lines in 28 rural communities in Minnesota, Wisconsin and
North Dakota. HCC, through its subsidiaries, also provides cable television
service to 8,218 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.
Nine Months Ended September 30, 2004 Compared to
Nine Months Ended September 30, 2003
- --------------------------------------------------------------------------------
Revenues from continuing operations decreased 2% to $23,743,000 in 2004 from
$24,194,000 in 2003. The revenue breakdown was as follows:
Nine Months Ended September 30
--------------------------------------
2004 2003
--------------- ---------------
Plain old telephone service ("POTS"):
Local network $ 4,662,810 $ 4,585,055
Network access revenues:
Long distance providers (including NECA) 10,287,166 10,694,028
Universal service fund support 1,296,726 1,394,879
--------------- ---------------
Total network access revenues 11,583,892 12,088,907
--------------- ---------------
Total POTS revenues 16,246,702 16,673,962
--------------- ---------------
Other services:
Video services 2,528,573 2,733,620
Internet services 2,329,398 1,942,061
Other nonregulated services:
Fiber leases 558,869 585,243
Cellular sales commissions 325,100 206,533
Directory revenues 385,667 370,711
Retail sales 377,439 320,382
Long distance resale 287,398 288,052
Customer equipment installation and repair 290,494 339,430
Engineering services 70,378 243,997
All other revenues 343,231 490,004
--------------- ---------------
Total nonregulated services revenue 2,638,576 2,844,352
--------------- ---------------
Total other service revenues 7,496,547 7,520,033
--------------- ---------------
Total revenue $ 23,743,249 $ 24,193,995
=============== ===============
Total POTS revenues decreased $427,000 or 3%. Local network revenues increased
$78,000 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 29,694 at September 30, 2004, a decrease of 1% from September
2003. The number of access lines served fell due to 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 $505,000 or 4%. The revenue decrease was due
to lower network access revenues from long distance providers. Access revenues
from wireless communications providers were also lower due to the impact of new
interconnection agreements that have been negotiated between the Company and
selected wireless carriers. Access revenues in 2003 benefited from greater than
anticipated recovery of bankruptcy reserves the Company established against its
WorldCom receivables in 2002. Universal service support funding decreased
$98,000 or 7%. Increases in support funds 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 $23,000. Revenues from video (cable
television) services declined $205,000 or 8%. Video service revenues in 2004
were reduced by the sales of seven systems serving 2,080 subscribers during the
second quarter of 2003 and by the sale of the Hudson Township WI system in June
2004. Revenues from internet services increased $387,000 or 20%, due to a 51%
increase in the number of DSL customers. At September 30, 2004 the Company had
3,652 digital subscriber line ("DSL") customers and 7,108 dial-up internet
customers, compared to 2,425 DSL customers and 7,692 dial-up customers in
September 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 $206,000 or 7%. The revenue decline was due to lower fees from
engineering services and lower revenues from leases of fiber optic facilities
which offset higher cellular commissions and higher retail sales. The Company
sold its engineering service company in July 2004.
Operating costs and expenses were $18,387,000 in 2004, a decrease of $35,000
from $18,422,000 in 2003. The breakdown of costs and expenses was as follows:
Nine Months Ended September 30
---------------------------------------
2004 2003
--------------- ----------------
Plain old telephone service ("POTS"):
Plant operations, excluding depreciation $ 3,244,537 $ 3,535,946
Customer operations 1,062,479 1,006,501
General and administrative 2,613,739 2,560,189
Depreciation and amortization 4,626,314 4,630,491
Operating taxes 344,261 276,043
Cellular receivable write-downs 119,665
--------------- ---------------
Total POTS costs and expenses 12,010,995 12,009,170
--------------- ---------------
Other services:
Plant operations 3,220 4,229
Customer operations 170,897 143,822
Operating taxes 8,328 14,752
General and administrative 630,010 890,934
Depreciation and amortization 1,386,337 1,298,837
Other costs and expenses:
Video service expenses 2,282,263 2,279,883
Internet expenses 720,700 707,303
Other 1,174,280 1,072,671
--------------- ---------------
Total other service costs and expenses 6,376,035 6,412,431
--------------- ---------------
Total costs and expenses $ 18,387,030 $ 18,421,601
=============== ===============
14
Total POTS costs and expenses decreased $2,000. Plant operations expenses
decreased $291,000 or 8% due to reduced headcount - 2003 included severance
charges for employee headcount reductions. Customer operations expenses
increased $56,000 or 6%. General and administrative expenses increased $54,000
or 2%. The 2004 period included $120,000 in expenses for write-offs of accounts
receivable for access services provided to cellular telephone service providers.
Operating income in 2004 from POTS was $4,236,000, a decrease of 9% from
$4,665,000 in 2003.
Total costs and expenses for other services decreased $36,000 or 1%. Video
service expenses increased $2,000 as expense reductions due to sales of cable
television systems in 2004 and 2003 were offset by higher fee payments to
programming providers. Internet expenses increased $13,000 or 2%. General and
administrative expenses decreased $261,000 or 29% from 2003, which included
expenses incurred in breaking up Alliance. Depreciation and amortization
expenses increased $88,000 or 7% due to depreciation on new plant investments.
Operating income in 2004 from other services was $1,121,000, an increase of 1%
from $1,108,000 in 2003. Total operating income from continuing operations
decreased 7% to $5,356,000.
Interest expenses for 2004 decreased $514,000 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 $5,000 due to
higher cash balances available for investment.
Income from the Company's investment in Midwest Wireless Holdings, LLC was
$2,151,000 in 2004 compared to $1,903,000 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 $231,000 in 2004 compared to
losses of $76,000 in 2003. In 2004, the Company sold the assets of the cable
television system serving Hudson Township, WI for a gain of $29,000 and sold the
assets of Hastad Engineering Company for a gain of $13,000. 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 6% to $5,756,000. Income tax expense decreased to $2,314,000 in 2004
from $2,447,000 in 2003. Income before minority interest in Alliance's earnings
was $3,442,000 in 2004 compared to $3,690,000 in 2003. Minority interests in
earnings of Alliance from continuing operations in 2003 were $660,000. Income
from continuing operations totaled $3,442,000 compared to $3,030,000 in 2003.
Income from discontinued operations before minority interest in 2003 was
$989,000. Minority interests in those earnings were $316,000. The Company
recorded a gain on the split-up of Alliance, net of income taxes, of $210,000 in
2003. The Company had net income of $3,442,000 in 2004 compared to $3,912,000 in
2003.
15
Three Months Ended September 30, 2004 Compared to
Three Months Ended September 30, 2003
- --------------------------------------------------------------------------------
Revenues from continuing operations decreased 4% to $7,806,000 in 2004 from
$8,107,000 in 2003. The revenue breakdown was as follows:
Three Months Ended September 30
--------------------------------------
2004 2003
-------------- ---------------
Plain old telephone service ("POTS"):
Local network $ 1,601,814 $ 1,575,132
Network access revenues:
Long distance providers (including NECA) 3,294,825 3,506,258
Universal service fund support 350,297 493,707
-------------- --------------
Total network access revenues 3,645,122 3,999,965
-------------- --------------
Total POTS revenues 5,246,936 5,575,097
-------------- --------------
Other services:
Video services 835,541 860,123
Internet services 815,610 699,862
Other nonregulated services:
Fiber leases 176,640 181,941
Cellular sales commissions 129,693 91,339
Directory revenues 130,534 122,719
Retail sales 150,569 109,444
Long distance resale 104,927 100,581
Customer equipment installation and repair 102,285 131,211
Engineering services 1,145 60,479
All other revenues 111,710 173,792
-------------- --------------
Total nonregulated services revenue 907,503 971,506
-------------- --------------
Total other service revenues 2,558,654 2,531,491
-------------- --------------
Total revenue $ 7,805,590 $ 8,106,588
============== ==============
Total POTS revenues decreased $328,000 or 6%. Local network revenues increased
$27,000 or 2%. The increase was primarily due to increased revenues from CLASS
service and increased extended area service revenues in one exchange.
Network access revenues decreased $355,000 or 9%. The revenue decrease was due
to lower network access revenues from long distance providers. Access revenues
from wireless communications providers were also lower due to the impact of rate
reductions negotiated in new interconnection agreements between the Company and
selected wireless carriers. Access revenues in 2003 benefited from greater than
anticipated recovery of bankruptcy reserves the Company established against its
WorldCom receivables in 2002. Universal service support funding decreased
$143,000 or 29%. The decrease included a $103,000 adjustment from NECA for high
cost loop support payments received in 2002 and 2003.
Total revenues from other services increased $27,000 or 1%. Revenues from video
(cable television) services declined $25,000 or 3%. Video service revenues in
2004 were reduced by the sale of the Hudson Township WI system in June 2004.
Revenues from internet services increased $116,000 or 17%, 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 $64,000 or 7%. Most of the
decrease was due to the loss of engineering fee revenues following the sale of
Hastad Engineering Company in July 2004.
16
Operating costs and expenses were $5,882,000 in 2004, a decrease of 2% from
$5,986,000 in 2003. The breakdown of costs and expenses was as follows:
Three Months Ended September 30
---------------------------------------
2004 2003
--------------- ----------------
Plain old telephone service ("POTS"):
Plant operations, excluding depreciation $ 1,041,770 $ 1,042,449
Customer operations 393,292 307,914
General and administrative 796,083 734,248
Depreciation and amortization 1,542,105 1,533,001
Operating taxes 144,192 89,454
Cellular receivable write-downs (13,185)
--------------- ---------------
Total POTS costs and expenses 3,904,257 3,707,066
--------------- ---------------
Other services:
Plant operations 1,794 2,278
Customer operations 44,204 39,526
Operating taxes (1,990) 3,955
General and administrative 130,242 331,119
Depreciation and amortization 453,878 445,169
Other costs and expenses:
Video service expenses 735,242 715,275
Internet expenses 229,628 371,538
Other 385,067 370,348
--------------- ---------------
Total other service costs and expenses 1,978,065 2,279,208
--------------- ---------------
Total costs and expenses $ 5,882,322 $ 5,986,274
=============== ===============
Total POTS costs and expenses increased $197,000 or 5%. Plant operations
expenses decreased $1,000. Customer operations expenses increased $85,000.
General and administrative expenses increased $62,000 or 8%. Operating income in
2004 from POTS was $1,343,000, a decrease of 28% from $1,868,000 in 2003.
Total costs and expenses for other services decreased $301,000 or 13%. Video
service expenses increased $20,000 or 3% due to higher fee payments to
programming providers. Internet expenses decreased $142,000 or 38%. General and
administrative expenses decreased $201,000 from 2003 due to the sale of Hastad
Engineering in 2004. General and administrative expenses in 2003 were higher
than normal due to expenses incurred in breaking up Alliance. Depreciation and
amortization expense increased $9,000 due to depreciation on new plant
investments. Operating income in 2004 from other services was $581,000 compared
to $252,000 in 2003. Total operating income from continuing operations decreased
9% to $1,923,000.
Interest expenses decreased $233,000 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 $24,000 due to higher
invested cash balances.
Income from the Company's investment in Midwest Wireless Holdings, LLC increased
41% to $843,000. The Company had income from other unconsolidated investments of
$52,000 in 2004 compared to a loss of $31,000 in 2003. In 2004, the Company sold
the assets of Hastad Engineering Company for a gain of $13,000.
17
Income from continuing operations before income taxes and minority interest
increased to $2,178,000 in 2004 from $1,776,000 in 2003. Income tax expense
decreased to $884,000 in 2004 from $768,000 in 2003. Income from continuing
operations totaled $1,294,000 compared to $1,008,000 in 2003.
The Company recorded a gain on the split-up of Alliance Telecommunications
Corporation, net of income taxes, of $210,000 in 2003. The Company had net
income of $1,294,000 in 2004 compared to $1,217,000 in 2003.
Liquidity and Capital Resources
- -------------------------------
Cash flows from consolidated operating activities (including the activities of
discontinued operations in 2003) for the nine-month periods were $7,370,000 and
$9,562,000 in 2004 and 2003, respectively. At September 30, 2004, the Company's
cash and cash equivalents totaled $20,215,000 compared to $16,581,000 at
December 31, 2003. Working capital at September 30, 2004 was $17,487,000
compared to $13,314,000 at December 31, 2003. The current ratio was 2.6 to 1 at
September 30, 2004.
The Company's working capital at September 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 September 30, 2004,
construction funds on hand totaled $3,112,000. The Company received $1,120,000
of cash during 2004 from employee stock option exercises and employee stock
purchase plan issuances.
Plant additions in support of the Company's continuing operations in the 2004
and 2003 periods were $2,399,000 and $2,678,000, 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
$3,400,000 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 1996 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 5.0% at September 30, 2004.
Principal payments are made quarterly and will continue until April 2013. The
outstanding balance on this loan at September 30, 2004 was $24,063,000.
Subsequent to the end of the quarter, the Company's Board of Directors declared
the first cash dividend to shareholders in the Company's history. The cash
dividend of $.05 per share will be paid on December 15, 2004 to shareholders of
record on November 30, 2004. The timing or amount of any future dividend
payments has not been determined. The Board of Directors has also 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 September 30, 2004, 215,000 shares could be repurchased
under outstanding Board authorizations.
18
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.
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
- --------------------------------
Under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on that evaluation, our CEO
and CFO have concluded that, as of the end of the period covered by this report,
our disclosure controls and procedures are operating effectively and are
adequately designed to ensure that information required to be disclosed by us in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the applicable
rules and forms and is accumulated and communicated to our management, including
the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. During the period covered by this Report there was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
19
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- ---------------------------
Items 1 - 4. Not Applicable
- ----------------------------
Item 5. Other Information
- --------------------------
On November 11, 2004 the Company issued a news release which announced that
Curtis A. Sampson, the Company's Chairman of the Board and Chief Executive
Officer, has entered into a pre-arranged, systematic trading plan to sell HCC
shares in accordance with the guidelines specified by Rule 10b5-1 under the
Securities Exchange Act of 1934 and HCC's policies with respect to insider
sales. Mr. Sampson's 10b5-1 Plan provides for the sale of approximately 39,000
shares of HCC common stock, beginning November 11, 2004. As of November 11,
2004, Mr. Sampson beneficially owned approximately 600,000 HCC common shares.
Mr. Sampson has designated a target price for the sale shares covered by the
10b5-1 Plan. If HCC stock is not trading at or above the target price, the
shares may not be sold.
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 USC ss.1350).
Item 6(b). Reports on Form 8-K.
- --------------------------------
On August 3, 2004, the Company filed a current report on Form 8-K with the
Securities and Exchange Commission, reporting under Items 7 and 12 its second
quarter 2004 earnings release to shareholders.
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
------------------------
Date: November 15, 2004 Chief Executive Officer
By /s/Charles A. Braun
------------------------
Date: November 15, 2004 Chief Financial Officer
20