Hector Communications 10-Q/A 2003 Q1 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q/A

Amendment No. 2

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  MARCH 31, 2003

OR

o 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 incorporation or organization)	(Federal Employer 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  ý     NO  o

Indicate by a check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).     YES  o   NO  ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS	Outstanding at April 30, 2003
Common Stock, par value $.01 per share	3,482,782

EXPLANATORY NOTE

Hector Communications Corporation is filing this Amendment No. 2 to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 to restate and amend the pro forma income statement and balance sheet presented in Item 2, “Breakup of Alliance Telecommunications Corporation” to reflect the purchase method of accounting required by SFAS No. 141, “Business Combinations”. The Company is also clarifying its discussion of controls and procedures under Item 4. Other than information set forth in this amended filing, previously filed information has not been updated and the term “filing date” refers to the original filing date of the Form 10-Q.

HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES

INDEX

Part I.  Financial Information
	Item 1.  Financial Statements
		Consolidated Balance Sheets*
		Consolidated Statements of Income*
		Consolidated Statements of Comprehensive Income*
		Consolidated Statement of Stockholders’ Equity*
		Consolidated Statements of Cash Flows*
		Notes to Consolidated Financial Statements*
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Quantitative and Qualitative Disclosures About Market Risk*
	Item 4.  Controls and Procedures
Part II.  Other Information
Signatures

*Previously Filed

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Breakup of Alliance Telecommunications Corporation

In July 2001, Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota (“Golden West”) Alliance Communications Cooperative, Inc. of Garretson, South Dakota (“ACCI”), respectively the 20% and 12% minority shareholders of Alliance, advised the Company that they were interested in exchanging their minority investment for a pro rata share of the assets and liabilities of Alliance.  Thereafter the parties engaged in negotiations that continued through December 2002.  The negotiation process included evaluations and appraisals of Alliance’s business components, negotiations with Alliance’s lenders (CoBank, Rural Utilities Service and Rural Telephone Bank) regarding waivers, lien releases, interest penalties where applicable and future financing terms.  The process also included seeking necessary regulatory approvals from local, state and national regulators.

The Company completed the Alliance breakup transactions on July 7, 2003.  As agreed among the parties, in the breakup, Golden West exchanged its 20% ownership interest in Alliance for all of the outstanding stock of Sioux Valley Telephone Company, its pro rata share of Alliance’s ownership interest in Midwest Wireless Holdings L.L.C. and certain other Alliance assets.  ACCI exchanged its 12% ownership interest in Alliance for all of the outstanding stock of Hills Telephone Company, its pro rata share of Alliance’s ownership interest in Midwest Wireless Holdings L.L.C. and certain other Alliance assets.  Sioux Valley Telephone Company and Hills Telephone Company collectively serve 8,700 telephone access lines and 2,400 cable television customers. Immediately prior to the breakup Sioux Valley and Hills will paid a dividend to Alliance of approximately $12,849,000 to equalize post breakup values in proportion to the current 68%-20%-12% stock ownership percentages. The dividend proceeds were used to reduce Alliance’s debt to its primary lender, CoBank. A number of other stock and asset transfers also occurred among Alliance and its subsidiaries prior to the breakup in order to satisfy various tax, regulatory and lender requirements.

Alliance believes the breakup transactions are tax-free under Section 355 of the Internal Revenue Code. Alliance also believes the related internal stock and asset transfers are tax-free under Section 355, related Code provisions and the consolidated return regulations, although no private letter ruling has been sought from the IRS in connection with the breakup. Prior to conducting the breakup transaction, the parties entered into agreements with regard to cooperation, exchange of information, interim use of common services, employee benefits, tax allocations and indemnification generally in proportion to ownership percentages with respect to unexpected adverse tax consequences, and other matters arising after the breakup transaction which relate to commitments, events or circumstances in effect as of the date of the breakup transaction.

The following pro forma financial statements of income and explanatory notes show the pro forma effect on the operating results of the Company as if the breakup occurred January 1, 2003.  The pro forma balance sheet and explanatory notes show the effect on the Company’s financial position as if the breakup occurred March 31, 2003.

The pro forma financial information and explanatory notes are unaudited and include adjustments based on management’s assumptions.  Management believes these statements provide a reasonable basis for presenting the significant effects of the breakup and the pro forma adjustments are properly applied in the pro forma statements.

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The pro forma financial statements are not necessarily indicative of the results of operations had the acquisition occurred at the beginning of the periods presented, nor are they necessarily indicative of the results of future operations.

Pro forma income statement - Three Months Ended March 31, 2003

	Hector Communications Corporation			Eliminate Hills and Sioux Valley Telephone Companies			Other Pro forma Adjustments		Pro forma Combined
REVENUES:
Local network	$	1,855,728		$	(393,940	)			$	1,461,788
Network access	5,729,366			(1,670,126		)			4,059,240
Video services	1,136,106			(172,658		)			963,448
Internet services	712,426			(142,149		)			570,277
Other nonregulated services	1,059,961			(81,757		)			978,204
TOTAL REVENUES	10,493,587			(2,460,630		)	—		8,032,957
COSTS AND EXPENSES:
Plant operations	1,632,921			(336,181		)			1,296,740
Depreciation and amortization	2,479,181			(486,374		)	16,003	(d)	2,008,810
Customer operations	515,390			(141,638		)			373,752
General and administrative	1,441,101			(205,320		)			1,235,781
Other operating expenses	1,603,662			(301,726		)			1,301,936
TOTAL COSTS AND EXPENSES	7,672,255			(1,471,239		)	16,003		6,217,019
OPERATING INCOME	2,821,332			(989,391		)	(16,003	)	1,815,938
OTHER INCOME (EXPENSES):
Interest expense	(1,218,232		)	117,086			196,651	(a)(b)	(904,495		)
Income from investments in unconsolidated affilates:
Midwest Wireless Holdings, LLC	806,364						(183,603	)(c)	622,761
Other unconsolidated affiliates	8,641			(105,197		)			(96,556		)
Interest and dividend income	94,620			(13,689		)			80,931
OTHER INCOME (EXPENSES), net	(308,607		)	(1,800		)	13,048		(297,359		)
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST	2,512,725			(991,191		)	(2,955	)	1,518,579
Income tax expense	1,006,000			(396,476		)	(1,182	)(e)	608,342
INCOME BEFORE MINORITY INTEREST	1,506,725			(594,715		)	(1,773	)	910,237
Minority interest in earnings of Alliance Telecommunications Corporation	380,207						(380,207	)(f)	0
NET INCOME	1,126,518			(594,715		)	378,434		910,237
NET INCOME PER COMMON SHARE:
Basic	$	.32							$	.26
Diluted	.30								.24
AVERAGE SHARES OUTSTANDING
Common shares only	3,470,000								3,470,000
Common and potential common shares	3,746,000								3,746,000

(a) Interest adjustment on CoBank loan at average interest rate (6.8%)		$	223,467
(b)  Interest adjustment on CoBank loan for accrued patronage	(26,816			)
(c) Adjust income from Midwest Wireless Holdings for ownership transfer	(183,603			)
(d) Depreciation expense on plant allocation	16,003
(e) Income tax effect of above adjustments (40% rate)	(1,182			)
(f) Eliminate minority interest in earnings of Alliance	(380,207			)

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Pro forma balance sheet - March 31, 2003

	Hector Communications Corporation		Eliminate Assets and Liabilities of Sioux Valley and Hills Telephone Companies			Pro forma Disposal Adjustments		Pro forma Acquisition Adjustments		Pro forma Combined
Assets
Current assets:
Cash and cash equivalents	$	15,418,982	$	(3,578,964	)					$	11,840,018
Construction fund	4,522,384		(4,187		)					4,518,197
Accounts receivable, net	4,315,231		(1,229,468		)					3,085,763
Materials, supplies and inventories	1,157,579		(141,443		)					1,016,136
Other current assets	247,203		(79,870		)					167,333
Total Current Assets	25,661,379									20,627,447
Property, plant and equipment, net	54,752,142		(9,611,359		)			960,000	(k)	46,100,783
Investments and other assets:
Excess of cost over net assets acquired, net	49,074,992		(122,569		)	(13,192,878	)(e)	(14,447,535	)(j)	32,694,572
						11,958,562	(g)	(960,000	)(k)
								384,000	(l)
Investment in Midwest Wireless Holdings LLC	16,805,916		0			(4,341,805	)(a)			12,464,111
Investments in other unconsolidated affiliates	4,405,429		(1,571,884		)					2,833,545
Other investments	8,896,046		(1,173,743		)	(1,389,786	)(c)			6,332,517
Other assets	404,204		(122,636		)					281,568
Total investments and other assets	79,586,587									54,606,313
Total Assets	$	160,000,108	$	17,636,123						$	121,334,543
Liabilities and Stockholders Equity
Current liabilities:
Notes payable and current portion of long-term debt	$	7,746,000	$	(364,000	)					$	7,382,000
Accounts payable	2,219,411		(515,149		)					1,704,262
Accrued expenses	2,745,469		(508,017		)					2,237,452
Income taxes payable	809,909		(325,504		)					484,405
Total current liabilities	13,520,789									11,808,119
Long-term debt, less current portion	78,651,633		(5,328,745		)	(13,145,132	)(d)			60,177,756
Deferred investment tax credits	22,914									22,914
Deferred income taxes	5,822,979		(1,345,693		)	(162,523	)(a)	384,000	(l)	4,915,633
						120,222	(b)
						96,648	(h)
Deferred compensation	970,094		0			(310,430	)(b)			659,664
Minority interest in Alliance
Telecommunications Corporation	17,407,220					(2,959,685	)(f)	(14,447,535	)(j)	0
Stockholders’ equity	43,604,479					145,978	(I)			43,750,457
Total Liabilities and Stockholders’ Equity	$	160,000,108								$	121,334,543

Transaction to dispose of majority interest in Sioux Valley and Hills Telephone Companies
Book value of disposed assets and liabilities	(9,249,015	)
(a) Transfer of 32% of Alliance’s ownership interest in Midwest Wireless and and related deferred tax liabilities	(4,179,282	)
(b) Transfer of 32% of deferred compensation obligations and related deferred tax assets	190,208
(c) Transfer of 32% of investment in CoBank stock	(1,389,786	)
(d) Repayment of CoBank debt thru dividend from Sioux Valley and Hills	13,145,132
(e) Eliminate goodwill value of investment in Sioux Valley and Hills	(13,192,878	)
(f) Eliminate minority interest in tangible assets of Alliance Telecommunications Corp.	2,959,685
(g) Fair value of majority interest in disposed assets and liabilities	11,958,562
Pretax gain on disposal	242,626
(h) Income tax expense	(96,648	)
(I)  Gain on split-up	145,978
Transaction to record acquisition of minority interest in Alliance Telecommunications Corp.
(j) Eliminate minority interest in goodwill of Alliance Telecommunications Corp.	(14,447,535	)
(k) Fair value of tangilbe assets of minority interest acquired	960,000
(l) Deferred taxes related to tangible assets acquired	(384,000	)

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Item 4.  Controls and Procedures

As of the end of the period covered by this report, 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. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s reports under the Securities and Exchange Act of 1934 is recorded and reported within the appropriate time periods. Based upon that review, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective. There was no significant change in the company’s internal controls over financial reporting during or subsequent to the company’s most recently completed fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-Q 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:  December 1, 2003		Chief Executive Officer
	By	/s/ Charles A. Braun
		Charles A. Braun
Date:  December 1, 2003		Chief Financial Officer

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