- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 3
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 0-18587
-------
HECTOR COMMUNICATIONS CORPORATION
.................................................................................
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1666660
.................................................................................
(State or other jurisdiction of (Federal Employer
incorporation or organization) Identification No.)
211 South Main Street, Hector, MN 55342
.................................................................................
(Address of principal executive offices) (Zip Code)
(320) 848-6611
.................................................................................
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). YES [ ] NO [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at July 31, 2003
- ----------------------------------- -----------------------------
Common Stock, par value 3,483,378
$.01 per share
EXPLANATORY NOTE
Hector Communications Corporation is filing this Amendment No. 3 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 internal 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 this Form 10-Q.
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
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 3
Item 3. Quantitative and Qualitative Disclosures
About Market Risk *
Item 4. Controls and Procedures 13
Part II. Other Information *
Signatures 13
Exhibits
Exhibit 11 - Calculation of Earnings Per Share * Exhibit 31.1 -
Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 Filed Herewith
Exhibit 31.2 - Certification Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 Filed Herewith
Exhibit 32 - Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *
- --------------------------------
*Previously Filed
2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Hector Communications Corporation ("HCC" or "Company") is a telecommunications
holding company which, through its subsidiaries, primarily provides local
telephone and cable television service. The Company also invests in other
companies providing wireless telephone and other telecommunications related
services.
At June 30, 2003 HCC operated five wholly-owned local exchange company
subsidiaries (generally referred to as "local exchange carriers" or "LECs")
serving 7,597 access lines in 9 rural communities in Minnesota and Wisconsin.
HCC, through its subsidiaries, also provides cable television service to 4,457
subscribers in Minnesota and Wisconsin.
At June 30, 2003 HCC owned a 68% interest in Alliance Telecommunications
Corporation ("Alliance"), a holding company that owned and operated six
additional LEC subsidiaries serving 31,241 access lines in 28 rural communities
in Minnesota, Wisconsin, Iowa and South Dakota and 7,033 cable television
subscribers in Minnesota, North Dakota, South Dakota and Iowa. At June 30, 2003,
Golden West Telecommunications Cooperative, Inc. of Wall, South Dakota ("Golden
West"), and Alliance Communications Cooperative, Inc. of Garretson, South Dakota
("ACCI") owned the remaining interests in Alliance. On July 7, 2003 Alliance was
the subject of a split-up transaction in which the assets and operations of
Alliance were divided among the Company, Golden West and ACCI. (See "Split-up of
Alliance Telecommunications Corporation" below.)
Six Months Ended June 30, 2003 Compared to
Six Months Ended June 30, 2002
Consolidated revenues increased to $20,838,000 in 2003 from $19,416,000 in 2002.
The revenue breakdown by operating group was as follows:
Hector Alliance
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Local network $ 830,672 $ 797,825 $ 2,971,228 $ 2,890,556
Network access 2,588,716 2,617,902 8,773,117 7,708,500
Nonregulated activities:
Video services 828,179 758,888 1,308,820 1,394,363
Internet 320,577 222,187 1,182,258 931,244
Other 385,385 356,855 1,649,332 1,737,723
---------------- ---------------- --------------- ---------------
$ 4,953,529 $ 4,753,657 $ 15,884,755 $ 14,662,386
---------------- ---------------- --------------- ---------------
3
Consolidated local service revenues increased $114,000 or 3%. The increase was
primarily due to increased revenues from CLASS service features and custom
calling. The Company increased the rates charged for these services during the
2003 period. Access lines served were 38,838 at June 30, 2003 compared to 39,028
at June 30, 2002. The number of access lines the Company serves fell due to the
reduced number of second lines being used for dial-up internet service and
increased substitution of cellular phones for landline phones by customers.
Network access revenues increased $1,035,000 or 10%. Access revenues in 2003
benefited from greater than anticipated recovery of bankruptcy reserves the
Company established against its WorldCom receivables in 2002. Establishment of
reserves for the bankruptcy losses negatively impacted access revenues in 2002.
Revenues from video services declined $16,000 or 1%. Video service revenues in
2003 were reduced by the sales of seven systems serving 2,080 subscribers during
the second quarter. Revenues from internet services increased $349,000 or 30%.
Revenues increased due to the deployment of broadband equipment manufactured by
Next Level Communications, Inc. in the Company's Sleepy Eye, MN exchange. This
equipment makes it possible to deliver POTS, video and high speed Internet
services to the customer over the same circuit. At June 30, 2003 the Company had
2,610 DSL customers and 9,646 dial-up internet customers, compared to 1,695 DSL
customers and 9,469 dial-up customers in June 2002. Nonregulated revenues from
all other sources decreased $60,000 or 3%.
Consolidated operating costs and expenses were $15,355,000 in 2003 compared to
$14,753,000 in 2002. Costs and expenses by operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Plant operations $ 731,397 $ 779,036 $ 2,444,228 $ 1,824,332
Customer operations 200,674 195,734 871,339 1,083,359
Other operating expenses:
Operating taxes 76,028 74,242 257,619 187,867
Video services 537,006 565,136 990,172 1,065,031
Internet 143,338 95,275 398,540 596,319
Other 112,742 164,596 603,251 592,857
General and administrative 707,955 795,067 2,392,413 1,892,917
Depreciation and amortization 1,527,004 1,550,957 3,361,479 3,290,307
---------------- ---------------- --------------- ---------------
$ 4,036,144 $ 4,220,043 $ 11,319,041 $ 10,532,989
---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses increased $572,000 or 22% due to reduced
capitalization of labor expenditures for new construction projects and severance
charges for employee headcount reductions. Customer operations expenses
decreased $207,000 or 16% due to employee headcount reductions. Other operating
expenses decreased $223,000 or 7% due to lower maintenance expenses for video
services and lower internet operating expenses. General and administrative
expenses increased $412,000 or 15% due to expenses incurred in breaking up
Alliance. Depreciation expense increased $47,000 or 1% due to depreciation on
new plant additions. Consolidated operating income increased 18% to $5,483,000.
Interest expenses increased $102,000 due to charges on new loan funds drawn down
from the Rural Utilities Service and the Rural Telephone Bank. Interest and
dividend income increased $13,000 due to the increase in cash balances available
for investment. Income from the Company's investment in Midwest Wireless
Holdings, LLC increased 11% to $1,692,000. Income from other unconsolidated
4
investments increased to $131,000 in 2003 from $107,000 in 2002. Alliance
recorded gains on sales of cable television systems totaling $1,081,000 in the
2003 period.
Income before income taxes and minority interest increased to $6,120,000 in 2003
from $4,112,000 in 2002. The Company's effective income tax rate increased to
40% in 2003 from 39% in 2002 due to the effect of state income taxes. Income
before minority interest in Alliance's earnings increased to $3,671,000 in 2003
from $2,515,000 in 2002. Minority interests in earnings of Alliance were
$976,000 compared to $693,000 in 2002. Income before change in accounting
principle increased to $2,695,000 compared to $1,822,000 in 2002. In 2002, the
Company took a charge against earnings related to the cumulative effect of
impairment of the value of its goodwill and intangible assets of $3,147,000, net
of income taxes and minority interest. The Company had net income of $2,695,000
in 2003 compared to a net loss of $1,324,000 in 2002.
Three Months Ended June 30, 2003 Compared to
Three Months Ended June 30, 2002
Consolidated revenues increased to $10,345,000 in 2003 from $9,557,000 in 2002.
Revenues by operating group were as follows:
Hector Alliance
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Local network $ 426,972 $ 409,094 $ 1,519,200 $ 1,490,157
Network access 1,272,408 1,281,344 4,360,059 3,624,804
Nonregulated activities:
Video services 413,707 384,963 587,186 712,774
Internet 172,406 111,177 618,003 480,388
Other 190,739 175,711 784,017 887,035
---------------- ---------------- --------------- ---------------
$ 2,476,232 $ 2,362,289 $ 7,868,465 $ 7,195,158
---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $47,000 or 2%. The increase was
primarily due to increased revenues from CLASS service features and custom
calling. The Company increased the rates charged for these services during the
first quarter of 2003. Network access revenues increased $726,000 or 15%.
Network access reserves were lower than normal in 2002 due to establishment of
reserves for the losses due to the bankruptcy of two large interexchange
carriers.
Revenues from video services declined $97,000 or 9%. Video service revenues in
2003 were reduced by the sales of seven systems serving 2,080 subscribers during
the second quarter. Revenues from internet services increased $199,000 or 34%.
Revenues increased due to the deployment of broadband equipment manufactured by
Next Level Communications, Inc. in the Company's Sleepy Eye, MN exchange, which
has greatly increased the number of customers using DSL services. Nonregulated
revenues from all other sources decreased $88,000 or 8% due to lower fees from
engineering services.
Consolidated operating costs and expenses were $7,683,000 in 2003 compared to
$7,451,000 in 2002. Costs and expenses by operating group were as follows:
5
Hector Alliance
------------------------------------ -----------------------------------
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Plant operations $ 369,908 $ 395,442 $ 1,172,796 $ 901,055
Customer operations 94,774 116,563 461,849 568,038
Other operating expenses:
Operating taxes 37,132 37,500 138,780 92,215
Video services 282,901 297,656 458,086 492,733
Internet 85,226 44,810 178,115 314,409
Other 45,082 121,292 289,712 323,578
General and administrative 373,211 400,377 1,286,056 945,934
Depreciation and amortization 762,160 775,701 1,647,142 1,623,885
---------------- ---------------- --------------- ---------------
$ 2,050,394 $ 2,189,341 $ 5,632,536 $ 5,261,847
---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses increased $246,000 or 19% due to reduced
capitalization of labor expenditures for new construction projects and severance
charges for employee headcount reductions. Customer operations expenses
decreased $128,000 or 19% due to employee headcount reductions. Other operating
expenses decreased $209,000 or 12% due to lower maintenance expenses for video
services and lower internet operating expenses. General and administrative
expenses increased $313,000 or 23% due to expenses incurred in breaking up
Alliance. Depreciation expense increased $10,000 due to depreciation on new
plant additions. Consolidated operating income increased 26% to $2,662,000.
Interest expenses increased $13,000 due to charges on new loan funds drawn down
from the Rural Utilities Service and the Rural Telephone Bank. Interest and
dividend income increased $13,000 due to the increase in cash balances available
for investment. Income from the Company's investment in Midwest Wireless
Holdings, LLC increased 22% to $886,000. Income from other unconsolidated
investments increased to $123,000 in 2003 from $20,000 in 2002. Alliance
recorded gains on sales of cable television systems totaling $1,081,000 in the
2003 period.
Income before income taxes and minority interest increased to $3,607,000 in 2003
from $1,710,000 in 2002. The Company's effective income tax rate was 40% in 2003
and 2002. The income tax rate is higher than the federal rate due to the effect
of state income taxes. Income before minority interest in Alliance's earnings
increased to $2,164,000 in 2003 from $1,033,000 in 2002. Minority interests in
earnings of Alliance were $596,000 compared to $295,000 in 2002. Net income
increased to $1,568,000 in 2003 compared to $738,000 in 2002.
Liquidity and Capital Resources
Cash flows from consolidated operating activities for the six-month periods were
$7,528,000 and $5,373,000 in 2003 and 2002, respectively. At June 30, 2003, the
Company's cash, cash equivalents and marketable securities totaled $20,014,000
compared to $12,134,000 at December 31, 2002. Alliance's cash and securities
were $13,838,000 of this total. Working capital at June 30, 2003 was $15,565,000
compared to $5,718,000 at December 31, 2002. The current ratio was 2.1 to 1 at
June 30, 2003.
The improvement in the Company's working capital and current ratio at June 30
was due to several factors. The Company received $5,654,000 of loan funds from
the Rural Utilities Service and Rural Telephone Bank during the first quarter to
finance plant additions in the Sleepy Eye and Pine Island exchanges. At June 30,
2003, construction funds remaining totaled $4,528,000. The second quarter
principal payments on the Company's loan from CoBank were pushed out in
anticipation of closing the Alliance split-up transactions discussed below,
which conserved cash. The Company also received $1,666,000 of cash during the
second quarter from the sales of cable television systems.
6
The Company makes periodic improvements to its facilities to provide up-to-date
services to its customers. Plant additions in the 2003 and 2002 six-month
periods were $1,720,000 and $3,346,000, respectively. Plant additions for 2003
are expected to total $6,300,000 and will expand usage of high capacity fiber
optics in the telephone network and provide customers with additional advanced
telecommunications services.
The Company carries a significant amount of debt due to Alliance`s borrowing to
finance the acquisition of Ollig Utilities Company. Interest rates on a portion
of Alliance's acquisition loan from CoBank have been locked for periods of one
to ten years. At June 30, 2003 interest rates on the loan averaged 6.8%. The
outstanding balance on this loan at June 30, 2003 was $37,311,000. CoBank is a
cooperative, owned and controlled by its customers. Each customer borrowing from
the bank on a patronage basis shares in the bank's net income through payment of
patronage refunds. As a condition of maintaining the loan, Alliance owns stock
in the bank. Its investment in CoBank stock was $3,945,000 at June 30, 2003.
Subsequent to June 30, 2003 the Company retired the CoBank loan to Alliance with
proceeds from a new loan from CoBank directly to the Company. See "Split-up of
Alliance Telecommunications Corporation" below regarding new loan arrangements.
The Company's Board of Directors has authorized the purchase and retirement,
from time to time, of shares of the Company's stock on the open market, or in
private transactions consistent with overall market and financial conditions. At
June 30, 2003 216,000 shares could be repurchased under outstanding Board
authorizations.
The Company is always looking to acquire properties that advance its plan to be
a provider of top quality telecommunications services to rural customers. In
2001, the Company acquired several small cable systems in South Dakota. In 2000,
the Company acquired Hager TeleCom, Inc. In 1998, the Company acquired Felton
Telephone Company and eight cable television systems from Spectrum Cablevision
Limited Partnership. The Company cannot predict if it will be successful in
acquiring additional properties in the future and does not currently have
financing plans in place to pay for possible acquisitions.
By utilizing cash flow from operations, current cash and investment balances,
and other available financing sources, the Company feels it has adequate
resources to meet its anticipated operating, debt service and capital
expenditure requirements.
Split-up of Alliance Telecommunications Corporation
In July 2001, Golden West Telecommunications Cooperative, Inc. and Alliance
Communications Cooperative, Inc ("ACCI"), respectively the 20% and 12% minority
shareholders of Alliance, advised the Company that they were interested in
exchanging their minority investment for a pro rata share of the assets and
liabilities of Alliance. Thereafter the parties engaged in negotiations that
continued through December 2002. The negotiation process included evaluations
and appraisals of Alliance's business components, negotiations with Alliance's
lenders (CoBank, Rural Utilities Service and Rural Telephone Bank) regarding
waivers, lien releases, interest penalties where applicable and future financing
terms. The process also included seeking necessary regulatory approvals from
local, state and national regulators.
The Company completed the Alliance split-up transactions on July 7, 2003, which
was subsequent to the financial periods reported herein. As agreed among the
parties, in the split-up, Golden West exchanged its 20% ownership interest in
Alliance for all of the outstanding stock of Sioux Valley Telephone Company and
7
certain other Alliance assets. ACCI exchanged its 12% ownership interest in
Alliance for all of the outstanding stock of Hills Telephone Company and certain
other Alliance assets. At June 30, 2003, Sioux Valley Telephone Company and
Hills Telephone Company collectively served 8,650 telephone access lines and
2,400 cable television customers. In addition, as a result of the split-up, 32%
of Alliance's ownership interest in Midwest Wireless Holdings LLC was
transferred to Golden West and ACCI, reducing Hector's total ownership from
10.4% to 8%. Immediately prior to the split-up Sioux Valley and Hills paid a
dividend to Alliance of approximately $13,145,000 to equalize post split-up
values in proportion to the 68%-20%-12% stock ownership percentages. The
dividend proceeds were used to reduce Alliance's debt to its primary lender,
CoBank. Concurrent with the split-up, the balance of Alliance's debt to CoBank
and the balance of the Company's debt to Rural Telephone Finance Cooperative
($3,047,000 at June 30, 2003) were retired using proceeds from a new $26,813,000
loan from CoBank to the Company. A number of other stock and asset transfers
also occurred among Alliance and its subsidiaries prior to the split-up in order
to satisfy various tax, regulatory and lender requirements.
Alliance expects the split-up transactions to be tax-free under Section 355 of
the Internal Revenue Code. Alliance also expects the related internal stock and
asset transfers that occurred prior to the split-up to be 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.
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
split-up occurred January 1, 2003. The pro forma balance sheet and explanatory
notes show the effect on the Company's financial position as if the split-up
occurred June 30, 2003.
The pro forma financial information and explanatory notes are unaudited and
include adjustments which are based on management's assumptions. Management
believes these statements provide a reasonable basis for presenting the
significant effects of the split-up and the pro forma adjustments are properly
applied in the pro forma statements.
The pro forma financial statements are not necessarily indicative of the results
of operations had the acquisition occurred at the beginning of the periods
presented, nor are they necessarily indicative of the results of future
operations.
8
Pro forma income statement - Six Months Ended June 30, 2003
Eliminate
Hector Hills and Sioux Other
Communications Valley Telephone Pro forma Pro forma
Corporation Companies Adjustments Combined
------------- ------------- ------------- -------------
REVENUES:
Local network $ 3,801,900 $ (791,977) $ - $ 3,009,923
Network access 11,361,833 (3,272,891) 8,088,942
Video services 2,136,999 (263,502) 1,873,497
Internet services 1,502,835 (260,636) 1,242,199
Other nonregulated services 2,034,717 (161,871) 1,872,846
------------- ------------- ------------- -------------
TOTAL REVENUES 20,838,284 (4,750,877) - 16,087,407
COSTS AND EXPENSES:
Plant operations 3,175,625 (680,177) 2,495,448
Depreciation and amortization 4,888,483 (938,095) 32,006 3,982,394
Customer operations 1,072,013 (269,130) 802,883
General and administrative 3,100,368 (402,463) 2,697,905
Other operating expenses 3,118,696 (551,941) 2,566,755
------------- ------------- ------------- -------------
TOTAL COSTS AND EXPENSES 15,355,185 (2,841,806) 32,006 12,545,385
------------- ------------- ------------- -------------
OPERATING INCOME 5,483,099 (1,909,071) (32,006) 3,542,022
OTHER INCOME (EXPENSES):
Interest expense (2,448,911) 216,388 409,546 (a)(b) (1,822,977)
Income from investments in unconsolidated
affilates:
Midwest Wireless Holdings, LLC 1,692,018 (385,260)(c) 1,306,758
Other unconsolidated affiliates 131,270 (176,618) (45,348)
Interest and dividend income 181,377 (45,911) 135,466
Gain on sale of cable television systems 1,080,723
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES), net 636,477 (6,141) 24,286 654,622
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 6,119,576 (1,915,212) (7,720) 4,196,644
Income tax expense 2,449,000 (766,085) (3,088)(e) 1,679,827
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST 3,670,576 (1,149,127) (4,632) 2,516,817
Minority interest in earnings of
Alliance Telecommunications Corporation 976,023 (976,023)(f) 0
------------- ------------- ------------- -------------
NET INCOME $ 2,694,553 $ (1,149,127) $ 971,391 $ 2,516,817
============= ============= ============= =============
NET INCOME PER COMMON SHARE:
Basic $ .78 $ .72
Diluted .72 .67
AVERAGE SHARES OUTSTANDING
Common shares only 3,475,000 3,475,000
Common and potential common shares 3,754,000 3,754,000
(a) Interest adjustment on CoBank loan at average interest rate (6.8%) $ 446,934
(b) Interest adjustment on CoBank loan for accrued patronage (37,389)
(c) Adjust income from Midwest Wireless Holdings for ownership transfer (385,260)
(d) Depreciation expense on plant allocation 32,006
(e) Income tax effect of above adjustments (40% rate) (3,088)
(f) Eliminate minority interest in earnings of Alliance (976,023)
9
Pro forma income statement - Three Months Ended June 30, 2003 Pro forma income
statement - Three Months Ended June 30, 2003
Eliminate
Hector Hills and Sioux Other
Communications Valley Telephone Pro forma Pro forma
Corporation Companies Adjustments Combined
------------- ------------- ------------- -------------
REVENUES:
Local network $ 1,946,172 $ (398,037) $ - $ 1,548,135
Network access 5,632,467 (1,602,765) 4,029,702
Video services 1,000,893 (90,844) 910,049
Internet services 790,409 (118,487) 671,922
Other nonregulated services 974,756 (80,114) 894,642
------------- ------------- ------------- -------------
TOTAL REVENUES 10,344,697 (2,290,247) - 8,054,450
COSTS AND EXPENSES:
Plant operations 1,542,704 (343,996) 1,198,708
Depreciation and amortization 2,409,302 (451,721) 16,003 1,973,584
Customer operations 556,623 (127,492) 429,131
General and administrative 1,659,267 (197,143) 1,462,124
Other operating expenses 1,515,034 (250,215) 1,264,819
------------- ------------- ------------- -------------
TOTAL COSTS AND EXPENSES 7,682,930 (1,370,567) 16,003 6,328,366
------------- ------------- ------------- -------------
OPERATING INCOME 2,661,767 (919,680) (16,003) 1,726,084
OTHER INCOME (EXPENSES):
Interest expense (1,230,679) 99,302 212,898 (a)(b) (918,479)
Income from investments in unconsolidated
affilates:
Midwest Wireless Holdings, LLC 885,654 (201,657)(c) 683,997
Other unconsolidated affiliates 122,629 (71,421) 51,208
Interest and dividend income 86,757 (32,222) 54,535
Gain on sale of cable television systems 1,080,723
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES), net 945,084 (4,341) 11,241 951,984
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 3,606,851 (924,021) (4,762) 2,678,068
Income tax expense 1,443,000 (369,609) (1,905)(e) 1,071,486
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST 2,163,851 (554,412) (2,857) 1,606,582
Minority interest in earnings of
Alliance Telecommunications Corporation 595,816 (595,816)(f) 0
------------- ------------- ------------- -------------
NET INCOME $ 1,568,035 $ (554,412) $ 592,959 $ 1,606,582
============= ============= ============= =============
NET INCOME PER COMMON SHARE:
Basic $ .45 $ .46
Diluted .42 .43
AVERAGE SHARES OUTSTANDING
Common shares only 3,481,000 3,481,000
Common and potential common shares 3,764,000 3,764,000
(a) Interest adjustment on CoBank loan at average interest rate (6.8%) $ 223,467
(b) Interest adjustment on CoBank loan for accrued patronage (10,570)
(c) Adjust income from Midwest Wireless Holdings for ownership transfer (201,657)
(d) Depreciation expense on plant allocation 16,003
(e) Income tax effect of above adjustments (40% rate) (1,905)
(f) Eliminate minority interest in earnings of Alliance (595,816)
10
Pro forma balance sheet - June 30, 2003 Pro forma balance sheet - June 30, 2003
Eliminate Assets
and Liabilities of
Hector Sioux Valley and Pro forma Pro forma
Communications Hills Telephone Disposal Acquisition Pro forma
Assets Corporation Companies Adjustments Adjustments Combined
-------------- ---------------- ---------------- --------------- --------------
Current assets:
Cash and cash equivalents $ 19,848,854 $ (5,214,465) $ 14,634,389
Construction fund 4,528,372 (3) 4,528,369
Accounts receivable, net 4,060,914 (1,069,379) 2,991,535
Materials, supplies and inventories 1,294,634 (167,039) 1,127,595
Other current assets 126,294 (10,744) 115,550
-------------- --------------
Total Current Assets 29,859,068 23,397,438
Property, plant and equipment, net 53,155,110 (9,339,880) $ 960,000 (k) 44,775,230
Investments and other assets:
Excess of cost over net assets
acquired, net 48,104,320 (122,569) $ (13,192,878)(e) (14,872,853)(j) 31,691,928
12,351,908 (g) (960,000)(k)
384,000 (l)
Investment in Midwest Wireless
Holdings LLC 17,502,877 0 (4,500,496)(a) 13,002,381
Investments in other unconsolidated
affiliates 4,349,880 (1,634,127) 2,715,753
Other investments 8,569,625 (819,708) (1,389,786)(c) 6,360,131
Other assets 400,426 (122,635) 277,791
-------------- --------------
Total investments and other assets 78,927,128 54,047,984
-------------- --------------
Total Assets $ 161,941,306 $ 122,220,652
============== ==============
Liabilities and Stockholders Equity
Current liabilities:
Notes payable and current portion
of long-term debt $ 7,877,000 (364,000) $ 7,513,000
Accounts payable 2,224,740 (717,565) 1,507,175
Accrued expenses 2,771,300 (592,648) 2,178,652
Income taxes payable 1,421,364 (698,698) 722,666
-------------- --------------
Total current liabilities 14,294,404 11,921,493
Long-term debt, less current portion 77,492,479 (5,228,822) (13,145,132)(d) 59,118,525
Deferred investment tax credits 13,743 0 13,743
Deferred income taxes 5,888,782 (1,345,693) (162,523)(a) 384,000 (l) 5,023,788
120,222 (b)
139,000 (h)
Deferred compensation 964,010 0 (308,483)(b) 655,527
Minority interest in Alliance
Telecommunications Corporation 18,009,817 (3,136,964)(f) (14,872,853)(j) 0
Stockholders' equity 45,278,071 209,505 (I) 45,487,576
-------------- --------------
Total Liabilities and
Stockholders' Equity $ 161,941,306 $ 122,220,652
============== ==============
11
Transaction to dispose of majority interest in Sioux Valley and Hills Telephone
Companies:
Book value of disposed assets and liabilities $ (9,553,123)
(a) Transfer of 32% of Alliance's ownership interest in Midwest
Wireless and and related deferred tax liabilities (4,337,973)
(b) Transfer of 32% of deferred compensation obligations and
related deferred tax assets 188,261
(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. 3,136,964
(g) Fair value of majority interest in disposed assets and
liabilities 12,351,908
--------------
Pretax gain on disposal 348,505
(h) Income tax expense (139,000)
--------------
(I) Gain on split-up $ 209,505
==============
Transaction to record acquisition of minority interest in Alliance
Telecommunications Corp.:
(j) Eliminate minority interest in goodwill of Alliance
Telecommunications Corp. (14,872,853)
(k) Fair value of tangilbe assets of minority interest acquired 960,000
(l) Deferred taxes related to tangible assets acquired (384,000)
12
New Accounting Principles
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 establishes accounting and disclosure
requirements for a company's obligations under certain guarantees that it has
issued. A guarantor is required to recognize a liability for the obligation it
has undertaken in issuing a guarantee, including the ongoing obligation to stand
ready to perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The objective of the initial measurement
of that liability is the fair value of the guarantee at its inception. The
initial recognition and measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. FIN 45 also requires expanded disclosure of information
related to product warranty amounts recorded in the financial statements. The
disclosure provisions are effective for interim and annual periods ending after
December 15, 2002. The Company has not issued any guarantees to date that are
subject to the new provisions.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", an amendment to SFAS No. 123. This
standard provides alternative methods of transition for any voluntary changes to
the fair value based method of accounting for stock-based employee compensation.
It also amends the disclosure requirements to require prominent disclosure in
both the annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The new disclosure requirements are effective for interim
periods beginning after December 15, 2002 and are included in this report. The
Company will continue to apply the principles of APB Opinion No. 25 and related
interpretations in accounting for its stock based compensation plans.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equities", which becomes effective for the Company during the
third quarter of 2003. Adoption of this statement will not have a material
impact on the Company's consolidated results of operations and financial
position.
Item 4. Controls and Procedures
The Company, with the participation of management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. Disclosure controls and procedures are designed to
provide a reasonable level of assurance that information required to be
disclosed in the Company's reports under the Securities Exchange Act of 1934 is
recorded and reported within the appropriate time periods. Based upon that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures are effective. During the period covered by this report, there have
been no changes in internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Hector Communications Corporation
By /s/Curtis A. Sampson
------------------------
Curtis A. Sampson
Date: March 29, 2004 Chief Executive Officer
By /s/Charles A. Braun
------------------------
Charles A. Braun
Date: March 29, 2004 Chief Financial Officer
13