- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/Amendment No. 1
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------------
Commission File Number: 0-18587
-------
HECTOR COMMUNICATIONS CORPORATION
.................................................................................
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1666660
................................ .....................
(State or other jurisdiction of (Federal Employer
incorporation or organization) Identification No.)
211 South Main Street, Hector, MN 55342
.................................................................................
(Address of principal executive offices) (Zip Code)
(320) 848-6611
.................................................................................
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at July 31, 2002
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 3,507,428
Total Pages (21) Exhibit at Pages 19-20
- --------------------------------------------------------------------------------
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information 18
2
PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
Assets: 2002 2001
-------------- --------------
Current assets:
Cash and cash equivalents $ 12,748,101 $ 13,083,481
Construction fund 868,522 759,934
Accounts receivable, net 4,291,319 4,736,131
Materials, supplies and inventories 1,697,985 1,249,109
Prepaid income taxes 47,218
Other current assets 53,866 186,451
-------------- --------------
Total current assets 19,707,011 20,015,106
Property, plant and equipment 110,285,415 107,225,400
less accumulated depreciation (54,418,470) (49,863,075)
-------------- --------------
Net property, plant and equipment 55,866,945 57,362,325
Other assets:
Excess of cost over net assets acquired, net 49,074,992 53,662,750
Marketable securities 166,968 419,004
Wireless telephone investments 15,318,095 14,174,179
Other investments 12,328,799 12,290,004
Other assets 286,330 327,685
-------------- --------------
Total other assets 77,175,184 80,873,622
-------------- --------------
Total Assets $ 152,749,140 $ 158,251,053
============== ==============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable and current portion of long-term debt $ 6,965,300 $ 6,752,100
Accounts payable 2,567,512 2,497,804
Accrued expenses 2,272,458 2,409,669
Income taxes payable 722,797
-------------- --------------
Total current liabilities 11,805,270 12,382,370
Long-term debt, less current portion 76,943,250 79,641,269
Deferred investment tax credits 19,944 48,269
Deferred income taxes 5,752,813 5,975,119
Deferred compensation 936,008 931,529
Minority stockholders interest in Alliance
Telecommunications Corp. 16,286,936 17,031,204
Stockholders' Equity 41,004,919 42,241,293
-------------- --------------
Total Liabilities and Stockholders' Equity $ 152,749,140 $ 158,251,053
============== ==============
See notes to consolidated financial statements.
3
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
----------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Local network $ 1,899,251 $ 1,805,297 $ 3,688,381 $ 3,502,498
Network access 4,906,148 5,710,695 10,326,402 11,334,185
Nonregulated:
Cable television 1,097,737 1,037,204 2,153,251 2,025,012
Internet 591,565 480,873 1,153,431 925,532
Billing and collection 98,002 133,641 199,105 273,851
Other 964,744 1,078,689 1,895,473 2,070,162
------------- ------------- ------------- -------------
Total revenues 9,557,447 10,246,399 19,416,043 20,131,240
Costs and expenses:
Plant operations 1,296,497 1,598,611 2,603,368 2,944,469
Customer operations 684,601 642,158 1,279,093 1,283,097
Other operating expenses:
Operating taxes 129,715 138,753 262,109 267,036
Cable television 790,389 759,047 1,630,167 1,383,235
Internet 359,219 391,372 691,594 732,569
Other 444,870 414,120 757,453 675,080
General and administrative 1,346,311 1,226,732 2,687,984 2,420,050
Depreciation and amortization 2,399,586 2,686,331 4,841,264 5,396,550
------------- ------------- ------------- -------------
Total costs and expenses 7,451,188 7,857,124 14,753,032 15,102,086
Operating income 2,106,259 2,389,275 4,663,011 5,029,154
Other income and (expenses):
Interest expense (1,217,267) (1,392,445) (2,346,733) (2,787,304)
Gain on sale of marketable securities 1,323,145 1,323,145
Interest and dividend income 73,253 135,777 168,534 305,402
Income from investments in unconsolidated
affiliates 747,330 344,877 1,627,149 740,361
------------- ------------- ------------- -------------
Other expense, net (396,684) 411,354 (551,050) (418,396)
Income before income taxes 1,709,575 2,800,629 4,111,961 4,610,758
Income tax expense 677,000 1,209,000 1,597,000 2,068,000
------------- ------------- ------------- -------------
Income before minority interest 1,032,575 1,591,629 2,514,961 2,542,758
Minority interest in earnings of
Alliance Telecommunications Corporation 294,870 454,190 692,531 711,653
------------- ------------- ------------- -------------
Income before cummulative effect of change
in accounting principle 737,705 1,137,439 1,822,430 1,831,105
Cumulative effect of change in accounting
principle, net of income taxes and
minority interest (3,146,569)
------------- ------------- ------------- -------------
Net income (loss) $ 737,705 $ 1,137,439 $(1,324,139) $ 1,831,105
------------- ------------- ------------- -------------
Other comprehensive income (loss):
Unrealized holding gains (losses) on
marketable securities (57,205) 1,363,394 (252,036) 1,054,870
Less: Reclassification adjustment for gains
included in net income (1,323,145) (1,323,145)
------------- ------------- ------------- -------------
Other comprehensive income (loss) before
income taxes (57,205) 40,249 (252,036) (268,275)
Income tax benefit related to unrealized
holding gains (losses) on marketable
securities (22,882) 545,356 (100,815) 421,948
Income taxes related to reclassification
adjustment for gains included in net income (529,258) (529,258)
Minority interest in other comprehensive
income (loss) of Alliance Telecommunications
Corporation (6,153) 6,336 (41,820) (45,830)
------------- ------------- ------------- -------------
Other comprehensive income (loss) (28,170) 17,815 (109,401) (115,135)
------------- ------------- ------------- -------------
4
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
----------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 709,535 $ 1,155,254 $(1,433,540) $ 1,715,970
============= ============= ============= =============
Basic net income per share:
Before cumulative effect of change
in accounting principle $ .21 $ .33 $ .52 $ .53
Cumulative effect of change
in accounting principle (.90)
------------- ------------- ------------- -------------
$ .21 $ .33 $ (.38) $ .53
============= ============= ============= =============
Diluted net income per share:
Before cumulative effect of change
in accounting principle $ .19 $ .30 $ .48 $ .49
Cumulative effect of change
in accounting principle (.83)
------------- ------------- ------------- -------------
$ .19 $ .30 $ (.35) $ .49
============= ============= ============= =============
See notes to consolidated financial statements.
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income Total
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 2000 221,300 221,300 3,504,363 $35,044 $12,844,776 $24,945,512 $ 1,061,235 $39,107,867
Net income 4,616,154 4,616,154
Issuance of common stock under
Employee Stock Purchase Plan 11,626 116 136,998 137,114
Issuance of common stock under
Employee Stock Option Plan 52,375 524 412,351 412,875
Issuance of common stock in
exchange for preferred stock (1,200) (1,200) 1,200 12 1,188 0
Issuance of common stock to ESOP 16,709 167 225,026 225,193
Purchase and retirement of
common stock (109,704) (1,097) (407,369) (859,521) (1,267,987)
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes (989,923) (989,923)
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 2001 220,100 220,100 3,476,569 34,766 13,212,970 28,702,145 71,312 42,241,293
Net loss (1,324,139) (1,324,139)
Issuance of common stock under
Employee Stock Option Plan, net 36,705 367 196,799 197,166
Change in unrealized gains and
losses on marketable securities,
net of deferred taxes (109,401) (109,401)
------- -------- --------- ------- ----------- ----------- ---------- -----------
BALANCE AT JUNE 30, 2002 220,100 $220,100 3,513,274 $35,133 $13,409,769 $27,378,006 $ (38,089) $41,004,919
======= ======== ========= ======= =========== =========== ========== ===========
See notes to consolidated financial statements.
5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30
--------------------------------
2002 2001
------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ (1,324,139) $ 1,831,105
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash effect of cumulative change in accounting principle 3,146,569
Depreciation and amortization 4,841,264 5,396,550
Minority stockholders' interest in earnings of Alliance
Telecommunications Corporation 692,531 711,653
Gain on sales of marketable securities (1,323,145)
Income from unconsolidated affiliates (1,627,149) (740,361)
Proceeds from wireless telephone investments 376,877 413,161
Changes in assets and liabilities:
Decrease in accounts receivable 444,812 399,708
Increase in materials, supplies and inventories (448,876) (852,989)
Increase in prepaid income taxes (47,218)
Decrease in other current assets 132,585 164,923
Increase (decrease) in accounts payable 69,708 (413,024)
Decrease in accrued expenses (137,211) (100,556)
Increase (decrease) in income taxes payable (722,797) 211,503
Decrease in deferred investment credits (28,325) (40,771)
Increase (decrease) in deferred compensation 4,479 (46,521)
------------- -------------
Net cash provided by operating activities 5,373,110 5,611,236
Cash Flows from Investing Activities:
Capital expenditures, net (3,345,661) (4,176,370)
Sales of marketable securities 1,323,145
Increase in construction fund (108,588) 18,688
Purchases of wireless telephone investments (16,876)
Proceeds from (purchases of) other investments 67,561 (1,127,286)
(Increase) decrease in other assets (34,149) 46,742
------------ -------------
Net cash used in investing activities (3,420,837) (3,931,957)
Cash Flows from Financing Activities:
Repayment of long-term debt (3,109,995) (3,095,508)
Proceeds from issuance of notes payable and long-term debt 625,176 470,000
Issuance of common stock 197,166 208,212
Purchase of stock (1,120,862)
------------ ---=---------
Net cash used in financing activities (2,287,653) (3,538,158)
------------ ---=---------
Net Decrease in Cash and Cash Equivalents (335,380) (1,858,879)
Cash and Cash Equivalents at Beginning of Period 13,083,481 13,834,110
------------- -------------
Cash and Cash Equivalents at End of Period $ 12,748,101 $ 11,975,231
============= =============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 2,342,019 $ 2,795,324
Income taxes paid during the period 2,395,341 1,897,232
See notes to consolidated financial statements.
6
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements include the accounts of Hector
Communications Corporation and its wholly and majority owned subsidiaries. All
material intercompany transactions and accounts have been eliminated. Accounting
practices prescribed by regulatory authorities have been considered in the
preparation of the financial statements and formulation of accounting policies
for telephone subsidiaries. These policies conform to generally accepted
accounting principles as applied to regulated public utilities in accordance
with Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71).
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, and disclosure of contingent
assets and liabilities at the balance sheet date, and the reported amounts of
revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of the time
of the financial statements. Actual results could differ from those estimates.
The Company's financial statements are also affected by depreciation rates
prescribed by regulators, which may result in different depreciation rates than
for an unregulated enterprise.
Revenues are recognized when earned, regardless of the period in which they are
billed. Network access revenues are furnished in conjunction with interexchange
carriers and are determined by cost separation studies and nationwide average
schedules. Revenues include estimates pending finalization of cost studies.
Network access revenues are based upon interstate tariffs filed with the Federal
Communications Commission by the National Exchange Carriers Association and
state tariffs filed with state regulatory agencies. Access revenues have been
adjusted for the estimated effect of bad debt write-offs due to the bankruptcy
filings of two large interexchange carriers. Management believes recorded
revenues are reasonable based on estimates of cost separation studies, which are
typically settled within two years.
Income taxes have been calculated in proportion to the earnings and tax credits
generated by operations. Investment tax credits have been deferred and are
included in income over the estimated useful lives of the related assets. The
Company's effective income tax rate is higher than the U.S. rate due to the
effect of state income taxes.
The balance sheet and statement of stockholders' equity as of June 30, 2002 and
the statements of income and comprehensive income and the statements of cash
flows for the periods ended June 30, 2002 and 2001 have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and changes in cash flows at June 30,
2002 and 2001 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 2001 Annual Report to
Shareholders. The results of operations for the periods ended June 30 are not
necessarily indicative of the operating results for the entire year.
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 financial statement presentation. These reclassifications
had no effect on net income or stockholders' equity as previously reported.
7
NOTE 2 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Under the provisions of this accounting standard, goodwill
and intangible assets with indefinite useful lives are no longer amortized but
are instead tested for impairment on at least an annual basis.
At December 31, 2001 the Company had goodwill of $53,663,000, which was net of
an amortization reserve of $10,025,000. The Company also had an investment in
cable television franchises of $77,000, net of an amortization reserve of
$146,000. The Company determined that these assets have indefinite useful lives
and ceased amortization effective January 1, 2002.
During the first half of 2002, the Company tested the beginning value of its
goodwill and intangible assets as required by SFAS No. 142. In valuing its
operating units, the Company used the same valuation methodology it is using to
negotiate the breakup of Alliance. The valuation is an average of access line
and customer valuations and cashflow multiple valuations considered appropriate
in the current marketplace. As a result of this test, the Company concluded that
the carrying value of the goodwill and intangible assets in certain of its
operating units exceeded the market value. Accordingly, the Company recognized
an impairment loss and reduced its goodwill and intangible assets by $4,663,000.
After income tax benefits of $121,000 and minority interest of $1,395,000, the
charge against earnings was $3,147,000 which was recognized as a cumulative
effect of change in accounting principle and carried back to the first quarter
of 2002. The impairment loss came principally from the Company's 2000
acquisition of Hager TeleCom, Inc. ($4,089,000 charge) but also included charges
from certain cable television acquisitions ($304,000 charge) as well as the
Company's 1996 acquisition of Ollig Utilities, Inc. ($270,000 charge).
Changes in the Company's goodwill and intangible assets by segment are as
follows:
Hector Alliance Consolidated
--------------- --------------- ---------------
Goodwill:
Balance December 31, 2001 $ 623,721 $ 53,039,029 $ 53,662,750
Impairment loss (228,448) (4,359,310) (4,587,758)
---------------- ---------------- ----------------
Balance June 30, 2002 $ 395,273 $ 48,679,719 $ 49,074,992
================ ================ ================
Hector Alliance Consolidated
--------------- --------------- ---------------
Intangible assets:
Balance December 31, 2001 $ 77,060 $ 250,625 $ 327,685
Additions 34,149 34,149
Amortization (222) (222)
Impairment loss (75,282) (75,282)
---------------- --------------- ----------------
Balance June 30, 2002 $ 1,556 $ 284,774 $ 286,330
================ ================ ================
The Company owns 10.4% of Midwest Wireless Holdings, LLC. The Company accounts
for its investment in Midwest Wireless Holdings using the equity method, and
earnings from the investment are material to the Company's net income. At
December 31, 2001 Midwest Wireless Holdings LLC had investments in cellular,
LMDS and PCS licenses totaling $187,212,000, net of amortization of $9,922,000.
Midwest Wireless Holdings LLC has determined that these licenses have indefinite
useful lives and ceased amortization on January 1, 2002.
The following table provides, on a pro forma basis, financial information for
the periods ended June 30 as if the provisions of SFAS 142 had been effective
January 1, 2001. A calculation of pro forma earnings per share can be found in
Exhibit 11.
8
Three Months Ended June 30 Six Months Ended June 30
--------------------------------- ----------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues $ 9,557,447 $ 10,246,399 $ 19,416,043 $ 20,131,240
Costs and expenses (7,451,188) (7,857,124) (14,753,032) (15,102,086)
Add back - Amortization expense 414,183 871,791
------------- ------------- ------------- -------------
Operating income 2,106,259 2,803,458 4,663,011 5,900,945
Other income (expenses), net (396,684) 411,354 (551,050) (418,396)
Add back - pro rata share of Midwest
Wireless Holdings LLC amortization 190,909 370,821
------------- ------------- ------------- -------------
Income before income taxes 1,709,575 3,405,721 4,111,961 5,853,370
Income tax expense (677,000) (1,209,000) (1,597,000) (2,068,000)
Tax effect of change in amortization (76,000) (148,000)
------------- ------------- ------------- -------------
Income before minority interest 1,032,575 2,120,721 2,514,961 3,637,370
Minority interest in earnings of
Alliance Telecommunications Corporation (294,870) (454,190) (692,531) (711,653)
Change in minority interest due to
change in amortization (155,372) (322,401)
------------- ------------- ------------- -------------
Adjusted income before cumulative
effect of accounting change $ 737,705 $ 1,511,159 $ 1,822,430 $ 2,603,316
============= ============= ============= =============
NOTE 3 - MARKETABLE SECURITIES
Marketable securities consist principally of equity securities of other
telecommunications companies. The Company's marketable securities portfolio is
classified as available-for-sale. The cost and fair value of available-for-sale
investment securities was as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ------------- -------------
June 30, 2002 $ 260,980 $ 55,655 $ (149,667) $ 166,968
December 31, 2001 260,980 172,159 (14,135) 419,004
Net unrealized gains on marketable securities, net of related deferred taxes,
are included in accumulated other comprehensive income as follows:
Accumulated
Net Deferred Other
Unrealized Income Minority Comprehensive
Gains (Losses) Taxes Interest Income (Loss)
----------------- ------------- ------------- --------------
June 30, 2002 $ (94,012) $ 34,024 $ 21,899 $ (38,089)
December 31, 2001 158,024 (66,791) (19,921) 71,312
These amounts have no cash effect and are not included in the statement of cash
flows.
Proceeds from sales of available-for-sale securities were $1,323,000 in the
six-month period ended June 30, 2001. Gross realized gains on sales of
securities were $1,323,000 in 2001. Realized gains on sales are based on the
difference between net sales proceeds and the book value of securities sold,
using the specific identification method.
9
NOTE 4 - WIRELESS TELEPHONE INVESTMENTS
The Company's investments in wireless telephone partnerships and limited
liability companies are recorded on the equity method of accounting, which
reflects original cost and recognition of the Company's share of income or
losses.
Income recognized on the Company's investment in Midwest Wireless Holdings LLC,
net of amortization, was $1,521,000 and $625,000 for the six-month periods ended
June 30, 2002 and 2001 respectively. Cash distributions received from Midwest
Wireless Holdings LLC were $377,000 and $413,000 in 2002 and 2001, respectively.
At June 30, 2002, the Company owned 10.4% of Midwest Wireless Holdings LLC.
Income statement information for Midwest Wireless Holdings, LLC for the three
and six month periods ended June 30, 2002 and 2001 was as follows:
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 39,601,907 $ 32,203,959 $ 75,001,088 $ 61,148,940
Expenses (31,615,463) (27,059,171) (58,455,197) (52,711,568)
Minority interest (962,914) (580,333) (1,928,420) (951,736)
Net income 7,023,530 4,564,455 14,617,471 7,485,636
Losses from the Company's Wireless North LLC PCS investments were $17,000 in the
first six months of 2001. During the third quarter of 2001, Wireless North LLC
defaulted on its loan payment obligations to its primary lender. As a result of
this default, the Company paid $1,091,000 plus interest to settle the loan
guarantees it had made to the bank on Wireless North's behalf. The Company does
not expect to make additional expenditures or receive additional income from
this investment.
NOTE 5 - OTHER INVESTMENTS
Other investments consist of Rural Telephone Bank stock, CoBank stock and
investments in stock companies and partnerships of other telecommunications
service providers. Long-term investments in companies that are not intended for
resale or are not readily marketable are valued at cost, which does not exceed
net realizable value. Investments in joint ventures, partnerships and limited
liability companies are recorded on the equity method of accounting, which
reflects original cost and recognition of the Company's share of operating
income or losses from the respective operations. Other assets are cable
television franchises owned by the Company and other deferred charges.
NOTE 6 - SEGMENT INFORMATION
The Company is organized into two business segments: Hector Communications
Corporation and its wholly owned subsidiaries, and Alliance Telecommunications
Corporation and its subsidiaries. Segment information is as follows:
10
Hector Alliance Consolidated
--------------- --------------- ---------------
Six Months Ended June 30, 2002
Revenues $ 4,753,657 $ 14,662,386 $ 19,416,043
Costs and expenses 4,220,043 10,532,989 14,753,032
--------------- --------------- ---------------
Operating income 533,614 4,129,397 4,663,011
Interest expense (460,172) (1,886,561) (2,346,733)
Interest and dividend income 51,375 117,159 168,534
Income from unconsolidated affiliates 459,986 1,167,163 1,627,149
--------------- --------------- ---------------
Income before income taxes $ 584,803 $ 3,527,158 $ 4,111,961
=============== =============== ===============
Depreciation and amortization $ 1,550,957 $ 3,290,307 $ 4,841,264
=============== =============== ===============
Total assets $ 30,683,298 $ 122,065,842 $ 152,749,140
=============== =============== ===============
Capital expenditures $ 547,653 $ 2,798,008 $ 3,345,661
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Six Months Ended June 30, 2001
Revenues $ 4,720,013 $ 15,411,227 $ 20,131,240
Costs and expenses 4,001,093 11,100,993 15,102,086
--------------- --------------- ---------------
Operating income 718,920 4,310,234 5,029,154
Interest expense (488,315) (2,298,989) (2,787,304)
Interest and dividend income 136,426 168,976 305,402
Gain on sale of marketable securities 1,323,145 1,323,145
Income from unconsolidated affiliates 195,810 544,551 740,361
--------------- --------------- ---------------
Income before income taxes $ 562,841 $ 4,047,917 $ 4,610,758
=============== =============== ===============
Depreciation and amortization $ 1,565,248 $ 3,831,302 $ 5,396,550
=============== =============== ===============
Total assets $ 28,739,174 $ 128,285,761 $ 157,024,935
=============== =============== ===============
Capital expenditures $ 1,223,811 $ 2,952,559 $ 4,176,370
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended June 30, 2002
Revenues $ 2,362,289 $ 7,195,158 $ 9,557,447
Costs and expenses 2,189,341 5,261,847 7,451,188
--------------- --------------- ---------------
Operating income 172,948 1,933,311 2,106,259
Interest expense (230,444) (986,823) (1,217,267)
Interest and dividend income 23,590 49,663 73,253
Income from unconsolidated affiliates 219,013 528,317 747,330
--------------- --------------- ---------------
Income before income taxes $ 185,107 $ 1,524,468 $ 1,709,575
=============== =============== ===============
Depreciation and amortization $ 775,701 $ 1,623,885 $ 2,399,586
=============== =============== ===============
Capital expenditures $ 262,334 $ 2,081,499 $ 2,343,833
=============== =============== ===============
Hector Alliance Consolidated
--------------- --------------- ---------------
Three Months Ended June 30, 2001
Revenues $ 2,404,772 $ 7,841,627 $ 10,246,399
Costs and expenses 2,051,160 5,805,964 7,857,124
--------------- --------------- ---------------
Operating income 353,612 2,035,663 2,389,275
Interest expense (240,538) (1,151,907) (1,392,445)
Interest and dividend income 59,218 76,559 135,777
Gain on sale of marketable securities 1,323,145 1,323,145
Income from unconsolidated affiliates 130,993 213,884 344,877
--------------- --------------- ---------------
Income before income taxes $ 303,285 $ 2,497,344 $ 2,800,629
=============== =============== ===============
Depreciation and amortization $ 782,624 $ 1,903,707 $ 2,686,331
=============== =============== ===============
Capital expenditures $ 711,138 $ 2,323,262 $ 3,034,400
=============== =============== ===============
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Hector Communications Corporation ("HCC" or "Company") is a telecommunications
holding company which, through its wholly-owned and majority-owned subsidiaries,
primarily provides local telephone and cable television service. The Company
also invests in other companies providing wireless telephone and other
telecommunications related services.
HCC operates five wholly-owned local exchange company subsidiaries (generally
referred to as "local exchange carriers" or "LECs") which served 7,618 access
lines in 9 rural communities in Minnesota and Wisconsin at June 30, 2002. HCC,
through its subsidiaries, also provides cable television service to 4,693
subscribers in Minnesota and Wisconsin.
HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns and
operates six additional LEC subsidiaries which served 31,410 access lines in 28
rural communities in Minnesota, Wisconsin, Iowa and South Dakota at June 30,
2002. Alliance, through its subsidiaries, also served 8,934 cable television
subscribers in Minnesota, North Dakota, South Dakota and Iowa. Golden West
Telecommunications Cooperative, Inc. of Wall, South Dakota, and Split Rock
Telecom Cooperative, Inc. of Garretson, South Dakota own the remaining interests
in Alliance.
Six Months Ended June 30, 2002 Compared to
Six Months Ended June 30, 2001
Consolidated revenues decreased to $19,416,000 in 2002 from $20,131,000 in 2001.
The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Local network $ 797,825 $ 774,758 $ 2,890,556 $ 2,727,740
Network access 2,617,902 2,690,133 7,708,500 8,644,052
Nonregulated activities:
Cable television 758,888 718,534 1,394,363 1,306,478
Internet 222,187 131,759 931,244 793,773
Billing and collection 47,021 70,990 152,084 202,861
Other 309,834 333,839 1,585,639 1,736,323
---------------- ---------------- --------------- ---------------
$ 4,753,657 $ 4,720,013 $ 14,662,386 $ 15,411,227
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $186,000 or 5%. The increase was
primarily due to a local service rate increase in one of Alliance's telephone
companies. Access lines served were 39,028 at June 30, 2002 compared to 38,836
at June 30, 2001. Access line growth is being reduced by increasing customer
acceptance of digital subscriber line service ("DSL") as their internet
platform. DSL customers can access voice and data networks simultaneously over
their telephone lines, eliminating the need for many second lines. At June 30,
2002 the Company had 1,695 DSL customers and 9,469 dial-up internet customers, a
20% increase from 2001 in the number of customers subscribing to some form of
broadband service. Network access revenues decreased $1,008,000 or 9%. Access
revenues were negatively affected by the $584,000 of reserves established due to
the bankruptcy of two large interexchange carriers and by lower intrastate
access revenues from the Company's Iowa and South Dakota exchanges.
Nonregulated revenues from all sources increased $107,000 or 2%. Cable
television revenues increased $128,000 or 6% due to the acquisition of
additional cable systems in the second quarter of 2001. Internet service
12
revenues increased $228,000 or 25% due to increases in the number of total
customers and the migration of dial-up customers to more expensive, higher speed
DSL service. Lower billing and collection revenues and lower revenues from
leases of fiber-optic transport facilities negatively affected nonregulated
revenues.
Consolidated operating costs and expenses were $14,753,000 in 2002 compared to
$15,102,000 in 2001. If the provisions of SFAS 142 had been in effect at January
1, 2001, 2001 operating costs would have been $14,230,000. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Plant operations $ 779,036 $ 743,483 $ 1,824,332 $ 2,200,986
Customer operations 195,734 178,012 1,083,359 1,105,085
Other operating expenses:
Operating taxes 74,242 70,111 187,867 196,925
Cable television 565,136 450,708 1,065,031 932,527
Internet 95,275 101,552 596,319 631,017
Other 164,596 116,288 592,857 558,792
General and administrative 795,067 775,691 1,892,917 1,644,359
Depreciation and amortization 1,550,957 1,565,248 3,290,307 3,831,302
---------------- ---------------- --------------- ---------------
$ 4,220,043 $ 4,001,093 $ 10,532,989 $ 11,100,993
---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses decreased $341,000 or 12% due to
increased capitalization of labor expenditures for new construction projects.
Customer operations expenses decreased $4,000. Other operating expenses
increased $288,000 or 9% due to higher cable television operating expenses.
General and administrative expenses increased $268,000 or 11%. Depreciation
expense increased $317,000 due to depreciation on new plant additions.
Amortization expense decreased $872,000 due to adoption of SFAS 142.
Consolidated operating income decreased $366,000 to $4,663,000.
Interest expenses decreased $441,000 due to patronage accruals on interest
payments made by the Company to CoBank, lower interest rates on floating
portions of the Company's debt and principal payments made which reduced the
Company's long-term debt. Interest and dividend income decreased $137,000 due to
lower interest rates earned on invested cash balances. The Company recorded
gains on sales of marketable securities of $1,323,000 in the 2001 period.
The Company had income from unconsolidated affiliates (its partnership and LLC
investments) of $1,627,000 for the 2002 period compared to income of $740,000 in
2001 (Note 4). Income recorded from the Company's investment in Midwest Wireless
Holdings LLC benefited from the adoption of SFAS 142 (Note 2).
Income before income taxes decreased to $4,112,000 in 2002 from $4,611,000 in
2001. The Company's effective income tax rate decreased to 39% in 2002 from 45%
in 2001 due to elimination of the effect of non-deductible amortization
expenses. Income before minority interest in Alliance's earnings decreased to
$2,515,000 in 2002 from $2,543,000 in 2001. Minority interests in earnings of
Alliance were $693,000 compared to $712,000 in 2001. Income before change in
accounting principle decreased to $1,822,000 compared to $1,831,000 in 2001. In
2002, the Company took a charge against earnings related to the cumulative
effect of impairment of the value of its goodwill and intangible assets of
$3,147,000, net of income taxes and minority interest (Note 2). The Company had
a net loss of $1,324,000 in 2002 compared to net income of $1,831,000 in 2001.
13
Three Months Ended June 30, 2002 Compared to
Three Months Ended June 30, 2001
Consolidated revenues decreased to $9,557,000 in 2002 from $10,246,000 in 2001.
The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Local network $ 409,094 $ 392,941 $ 1,490,157 $ 1,412,356
Network access 1,281,344 1,379,352 3,624,804 4,331,343
Nonregulated activities:
Cable television 384,963 361,829 712,774 675,375
Internet 111,177 70,860 480,388 410,013
Billing and collection 21,527 34,547 76,475 99,094
Other 154,184 165,243 810,560 913,446
---------------- ---------------- --------------- ---------------
$ 2,362,289 $ 2,404,772 $ 7,195,158 $ 7,841,627
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $94,000 or 5%. The increase was
primarily due to a local service rate increase in one of Alliance's telephone
companies. Network access revenues decreased $805,000 or 14%. Access revenues
were negatively affected by $451,000 of reserves established in the 2002 period
due to the bankruptcy of a large interexchange carrier and by lower intrastate
access revenues from the Company's Iowa and South Dakota exchanges.
Nonregulated revenues from all sources increased $22,000 or 1%. Cable television
revenues increased $61,000 or 6% due to the acquisition of additional cable
systems in the second quarter of 2001. Internet service revenues increased
$111,000 or 23% due to increases in the number of total customers and the
migration of dial-up customers to more expensive, higher speed DSL service.
Lower billing and collection revenues and lower revenues from leases of
fiber-optic transport facilities negatively affected nonregulated revenues.
Consolidated operating costs and expenses were $7,451,000 in 2002 compared to
$7,857,000 in 2001. If the provisions of SFAS 142 had been in effect at January
1, 2001, 2001 operating costs would have been $7,443,000. Costs and expenses by
operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- --------------- ---------------
Plant operations $ 395,442 $ 395,066 $ 901,055 $ 1,203,545
Customer operations 116,563 93,776 568,038 548,382
Other operating expenses:
Operating taxes 37,500 38,104 92,215 100,649
Cable television 297,656 221,551 492,733 537,496
Internet 44,810 45,045 314,409 346,327
Other 121,292 80,970 323,578 333,150
General and administrative 400,377 394,024 945,934 832,708
Depreciation and amortization 775,701 782,624 1,623,885 1,903,707
---------------- ---------------- --------------- ---------------
$ 2,189,341 $ 2,051,160 $ 5,261,847 $ 5,805,964
---------------- ---------------- --------------- ---------------
14
Consolidated plant operations expenses decreased $302,000 or 19% due to
increased capitalization of labor expenditures for new plant construction.
Customer operations expenses increased $42,000, or 7%. Other operating expenses
increased $21,000 or 1% due to higher cable television operating expenses.
General and administrative expenses increased $120,000 or 10%. Depreciation
expense increased $127,000 due to depreciation on new plant additions.
Amortization expense decreased $414,000 due to adoption of SFAS 142.
Consolidated operating income decreased $283,000 to $2,106,000.
Interest expenses decreased $175,000 due to lower interest rates on floating
portions of the Company's debt and principal payments made which reduced the
Company's long-term debt. Interest and dividend income decreased $63,000 due to
lower interest rates earned on invested cash balances. The Company recorded
gains on sales of marketable securities of $1,323,000 in the 2001 period.
The Company had income from unconsolidated affiliates (its partnership and LLC
investments) of $747,000 for the 2002 period compared to income of $345,000 in
2001 (Note 4). Income recorded from the Company's investment in Midwest Wireless
Holdings LLC benefited from the adoption of SFAS 142 (Note 2).
Income before income taxes decreased to $1,710,000 in 2002 from $2,801,000 in
2001. The Company's effective income tax rate decreased to 40% in 2002 from 43%
in 2001 due to elimination of the effect of non-deductible amortization
expenses. Income before minority interest in Alliance's earnings decreased to
$1,033,000 in 2002 from $1,592,000 in 2001. Minority interests in earnings of
Alliance were $295,000 compared to $454,000 in 2001. Net income decreased to
$738,000 in 2002 from $1,137,000 in 2001.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the six-month periods were
$5,373,000 and $5,611,000 in 2002 and 2001, respectively. At June 30, 2002, the
Company's cash, cash equivalents and marketable securities totaled $12,915,000
compared to $13,502,000 at December 31, 2001. Alliance's cash and securities
were $6,558,000 of this total. Working capital at June 30, 2002 was $7,902,000
compared to $7,633,000 at December 31, 2001. The current ratio was 1.7 to 1 at
June 30, 2002.
The Company makes periodic improvements to its facilities to provide up-to-date
services to its telephone and cable television customers. Hector's plant
additions in the 2002 and 2001 six-month periods were $548,000 and $1,224,000,
respectively. Alliance's plant additions in the same periods were $2,798,000 and
$2,953,000, respectively. Plant additions for 2002 for Hector and Alliance are
expected to total $2,993,000 and $7,165,000, respectively, and will provide
customers with additional advanced telecommunications services and expand usage
of high capacity fiber optics in the telephone network. The Company finances its
plant improvements using a combination of internal funds and borrowings from the
Rural Utilities Service ("RUS") and Rural Telephone Bank ("RTB"). Borrowings
from RUS and RTB in the six-month periods ended June 30, 2002 and 2001 were
$625,000 and $470,000, respectively.
The Company is an investor in partnerships that provide fiber optic transport
facilities to other telecommunications companies. The Company also leases some
of its own fiber optic facilities to transport users. Due to lower than expected
demand and an increased supply of fiber, the Company and its partners have
reduced the prices charged for use of their facilities. The Company expects the
reductions to negatively effect its financial results in future periods, but
cannot determine if competition will result in additional price changes.
15
The Company is continuing to negotiate with Golden West Telecommunications
Cooperative, Inc. and Split Rock Telecom Cooperative, Inc. (its minority
partners) regarding the breakup of Alliance Telecommunications Corporation,
which is currently 68% owned by the Company. The Company is contemplating a
transaction in which it exchanges its ownership interests in Sioux Valley
Telephone Company and Hills Telephone Company and a portion of its ownership
interest in other telecommunications investments in return for its partners
minority ownership interest in the remainder of Alliance. The minority partners
would also assume a portion of the acquisition debt the Company incurred in
setting up Alliance and acquiring Ollig Utilities, Inc. in 1996. Sioux Valley
Telephone Company and Hills Telephone Company serve 8,700 telephone access lines
and 2,400 cable television customers. Revenues from these operations in 2001
(twelve months) totaled $9,560,000. The Company expects to announce a definitive
agreement on the breakup during the third quarter of 2002, with the intention of
completing the breakup before the end of 2002.
In August 2000, the Company's Board of Directors authorized the purchase and
retirement of up to 335,000 shares of the Company's stock in open market
transactions or in private transactions consistent with overall market and
financial conditions. Following the events of September 11, 2001, the Company's
Board of Directors authorized the repurchase of 250,000 additional shares of
stock, if warranted by market conditions. During 2001, the Company purchased and
retired 109,704 shares of common stock. No shares have been repurchased in 2002.
At June 30, 2002, 295,515 shares could be purchased under the remaining
authorization. The Company received $197,000 and $208,000 from exercises of
employee stock options in the first six months of 2002 and 2001, respectively.
The Company is always looking to acquire properties that advance its plan to be
a provider of top quality telecommunications services to rural customers. In
2001, the Company acquired several small cable systems in South Dakota. In 2000,
the Company acquired Hager TeleCom, Inc. In 1998, the Company acquired Felton
Telephone Company and eight cable television systems from Spectrum Cablevision
Limited Partnership. The Company cannot predict if it will be successful in
acquiring additional properties in the future and does not currently have
financing plans in place to pay for possible acquisitions.
By utilizing cash flow from operations, current cash and investment balances,
and other available financing sources, the Company feels it has adequate
resources to meet its anticipated operating, debt service and capital
expenditure requirements.
New Accounting Principles:
Effective January 1, 2002, the Company adopted Statement on Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". This statement
applies to intangibles and goodwill acquired after June 30, 2001, as well as
goodwill and intangibles previously acquired. Under this statement goodwill as
well as other intangibles determined to have an indefinite life will no longer
be amortized; however, these assets will be reviewed for impairment on a
periodic basis. Statement No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. (See Note 2.)
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and an associated
asset retirement cost. The statement applies to tangible long-lived assets,
including individual assets, functional groups of related assets and significant
parts of assets. It covers a company's legal obligations resulting from the
acquisition, construction, development or normal operation of a capital asset.
The Company is currently evaluating the provisions of SFAS No. 143, but does not
expect its adoption to have a material impact on its financial position or
operating results.
16
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 sets forth
requirements for measuring and recognizing impairment losses on long-lived
assets. The statement also establishes financial reporting requirements when
impairment losses are recognized. Adoption of SFAS No. 144 did not have a
material effect on the Company's financial statements.
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
17
PART II. OTHER INFORMATION
Items 1 - 3. Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders
- --------------------------------------------------------------
The Annual Meeting of the Shareholders of the Registrant was held on May 16,
2002 in Minneapolis, MN. The total number of shares outstanding and entitled to
vote at the meeting was 3,508,879 of which 3,081,181 were present either in
person or by proxy. Shareholders re-elected board members Curtis A. Sampson and
Steven H. Sjogren and elected new board member Ronald J. Bach to three-year
terms expiring at the 2005 Annual Meeting of Shareholders. Shareholders elected
new board members Luella Gross Goldberg and Gerald D. Pint to one-year terms
expiring at the 2003 Annual Meeting of Shareholders. The vote for these board
members was as follows:
In Favor Abstaining
Curtis A. Sampson 3,055,292 26,989
Steven H. Sjogren 3,053,192 29,089
Ronald J. Bach 3,069,496 12,785
Luella Gross Goldberg 3,068,082 13,099
Gerald D. Pint 3,067,919 13,262
Robert L. Hammond resigned from the Board effective at the 2002 Annual Meeting.
Board members continuing in office are Paul A. Hoff (whose term expires at the
2003 Annual Meeting of Shareholders) and James O. Ericson, Paul N. Hanson and
Wayne E. Sampson (whose terms expire at the 2004 Annual Meeting of
Shareholders).
Item 5. Not Applicable
Item 6(a). Exhibits
Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q.
Item 6(b). Exhibits and Reports on Form 8-K.
- ---------------------------------------------
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Hector Communications Corporation
By /s/Charles A. Braun
--------------------------------
Charles A. Braun
Chief Financial Officer
Date: August 14, 2002
18
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Six Months Ended June 30
----------------------------------------------------
Basic: 2002 2001 2001 Pro forma
- ------- ----------- ---------- --------------
Income before cumulative effect of
change in accounting principle $ 1,822,430 $ 1,831,105 $ 2,603,316
Cumulative effect of accounting change (3,146,569)
----------- ----------- -----------
Net income (loss) $(1,324,139) $ 1,831,105 $ 2,603,316
=========== =========== ===========
Common shares:
Weighted average number of common shares outstanding 3,502,896 3,482,707 3,482,707
=========== =========== ===========
Net income (loss) per common share:
Before cumulative effect of change in accounting principle $ .52 $ .53 $ .75
Cumulative effect of accounting change (.90)
----------- ----------- -----------
Net income (loss) per common share $ (.38) $ .53 $ .75
=========== =========== ===========
Diluted:
- -------------
Income before cumulative effect of
change in accounting principle $ 1,822,430 $ 1,831,105 $ 2,603,316
Cumulative effect of accounting change (3,146,569)
----------- ----------- -----------
Net income (loss) $(1,324,139) $ 1,831,105 $ 2,603,316
=========== =========== ===========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,502,896 3,482,707 3,482,707
Dilutive effect of convertible preferred shares outstanding 220,100 221,300 221,300
Dilutive effect of stock options outstanding after
application of treasury stock method 87,266 41,753 41,753
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 1,833 181 181
----------- ----------- -----------
3,812,095 3,745,941 3,745,941
=========== =========== ===========
Diluted net income (loss) per share
Before cumulative effect of change in accounting principle $ .48 $ .49 $ .69
Cumulative effect of accounting change (.83)
----------- ----------- -----------
Diluted net income (loss) per share $ (.35) $ .49 $ .69
=========== =========== ===========
2001 Pro forma earnings per share are presented as if the provisions of SFAS No. 142 had been in effect
January 1, 2001 (Note 2).
19
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
EXHIBIT 11
CALCULATION OF EARNINGS PER SHARE
Three Months Ended June 30
----------------------------------------------------
Basic: 2002 2001 2001 Pro forma
- ------- ----------- ----------- --------------
Net income $ 737,705 $ 1,137,439 $ 1,511,159
=========== =========== ===========
Common shares:
Weighted average number of common shares outstanding 3,511,737 3,483,915 3,483,915
=========== =========== ===========
Net income per common share $ .21 $ .33 $ .43
=========== =========== ===========
Diluted:
- -------------
Income before cumulative effect of
change in accounting principle $ 737,705 $ 1,137,439 $ 1,511,159
Cumulative effect of accounting change
----------- ----------- -----------
Net income $ 737,705 $ 1,137,439 $ 1,511,159
=========== =========== ===========
Common and common equivalent shares:
Weighted average number of common shares outstanding 3,511,737 3,483,915 3,483,915
Dilutive effect of convertible preferred shares outstanding 220,100 221,300 221,300
Dilutive effect of stock options outstanding after
application of treasury stock method 69,637 49,616 49,616
Dilutive effect of Employee Stock
Purchase Plan shares subscribed 1,506 657 657
----------- ----------- -----------
3,802,980 3,755,488 3,755,488
=========== =========== ===========
Diluted net income per share $ .19 $ .30 $ .40
=========== =========== ===========
2001 Pro forma earnings per share are presented as if the provisions of SFAS No. 142 had been in effect
January 1, 2001 (Note 2)
20
CERTIFICATION
The undersigned certifies pursuant to 18 U.S.C. 1350 that:
(1) The accompanying report on Form 10-Q fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the accompanying Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By /s/ Curtis A. Sampson
-------------------------
Curtis A. Sampson
Chairman and
August 14, 2002 Chief Executive Officer
By /s/ Charles A. Braun
-------------------------
Charles A. Braun
Vice President and
August 14, 2002 Chief Financial Officer
21