10-Q 1 hct3q02.txt HECTOR COMMUNICATIONS CORP. FORM 10-Q (9/30/2002) -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 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 October 31, 2002 -------------------------------------- ------------------------------- Common Stock, par value $.01 per share 3,483,966 Total Pages (22) -------------------------------------------------------------------------------- HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX Page No. Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statement of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 Part II. Other Information 18 Exhibits Exhibit 11 - Calculation of Earnings Per Share 19 Exhibit 99.1 - Certification of Chief Executive Officer 21 Exhibit 99.2 - Certification of Chief Financial Officer 22 2 PART I. FINANCIAL INFORMATION
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (unaudited) September 30 December 31 Assets: 2002 2001 ------------ ------------ Current assets: Cash and cash equivalents $ 11,743,449 $ 13,083,481 Construction fund 1,544,647 759,934 Accounts receivable, net 5,314,719 4,736,131 Materials, supplies and inventories 1,713,471 1,249,109 Other current assets 302,824 186,451 ------------ ------------ Total current assets 20,619,110 20,015,106 Property, plant and equipment 113,681,634 107,225,400 less accumulated depreciation (56,857,176) (49,863,075) ------------ ------------ Net property, plant and equipment 56,824,458 57,362,325 Other assets: Excess of cost over net assets acquired, net 49,074,993 53,662,750 Marketable securities 137,165 419,004 Wireless telephone investments 15,951,211 14,174,179 Other investments 12,428,267 12,290,004 Other assets 281,133 327,685 ------------ ------------ Total other assets 77,872,769 80,873,622 ------------ ------------ Total Assets $155,316,337 $158,251,053 ============ ============ Liabilities and Stockholders' Equity: Current liabilities: Notes payable and current portion of long-term debt $ 7,071,900 $ 6,752,100 Accounts payable 2,827,818 2,497,804 Accrued expenses 2,620,674 2,409,669 Income taxes payable 547,116 722,797 ------------ ------------ Total current liabilities 13,067,508 12,382,370 Long-term debt, less current portion 76,576,555 79,641,269 Deferred investment tax credits 18,457 48,269 Deferred income taxes 5,740,892 5,975,119 Deferred compensation 933,748 931,529 Minority stockholders interest in Alliance Telecommunications Corp. 16,808,243 17,031,204 Stockholders' Equity: Preferred stock, par value $1.00 per share; 3,000,000 shares authorized: Convertible Series A, 220,100 issued and outstanding 220,100 220,100 Common stock, par value $.01 per share; 10,000,000 shares authorized; 3,501,028 and 3,476,569 shares issued and outstanding 35,010 34,766 Additional paid-in capital 13,413,562 13,212,970 Retained earnings 28,557,493 28,702,145 Accumulated other comprehensive income (loss) (55,231) 71,312 ------------ ------------ Total stockholders' equity 42,170,934 42,241,293 ------------ ------------ Total Liabilities and Stockholders' Equity $155,316,337 $158,251,053 ============ ============ See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Revenues: Local network $ 1,919,020 $ 1,819,726 $ 5,607,401 $ 5,322,224 Network access 5,627,354 5,686,479 15,953,756 17,020,664 Nonregulated: Cable television 1,138,787 1,055,776 3,292,038 3,080,788 Internet 620,274 515,343 1,773,705 1,440,875 Billing and collection 91,708 142,504 290,813 416,355 Other 1,038,435 1,166,298 2,933,908 3,236,460 -------------- -------------- -------------- -------------- Total revenues 10,435,578 10,386,126 29,851,621 30,517,366 Costs and expenses: Plant operations 1,221,951 1,212,395 3,825,319 4,156,864 Customer operations 590,433 631,169 1,869,526 1,914,266 Other operating expenses: Operating taxes 150,543 158,605 412,652 425,641 Cable television 809,702 731,492 2,439,869 2,114,727 Internet 382,547 167,265 1,074,141 899,834 Other 329,561 575,159 1,087,014 1,250,239 General and administrative 1,194,603 1,031,634 3,882,587 3,451,684 Depreciation and amortization 2,405,214 2,849,433 7,246,478 8,245,983 -------------- -------------- -------------- -------------- Total costs and expenses 7,084,554 7,357,152 21,837,586 22,459,238 Operating income 3,351,024 3,028,974 8,014,035 8,058,128 Other income and (expenses): Interest expense (1,224,001) (1,326,627) (3,570,734) (4,113,931) Gain on sale of marketable securities 2,335,909 3,659,054 Interest and dividend income 77,852 127,648 246,386 433,050 Income from investments in unconsolidated affiliates 908,973 704,842 2,536,122 1,445,203 -------------- -------------- -------------- -------------- Other expense, net (237,176) 1,841,772 (788,226) 1,423,376 Income before income taxes 3,113,848 4,870,746 7,225,809 9,481,504 Income tax expense 1,263,000 2,093,000 2,860,000 4,161,000 -------------- -------------- -------------- -------------- Income before minority interest 1,850,848 2,777,746 4,365,809 5,320,504 Minority interest in earnings of Alliance Telecommunications Corporation 522,048 809,196 1,214,579 1,520,849 -------------- -------------- -------------- -------------- Income before cummulative effect of change in accounting principle 1,328,800 1,968,550 3,151,230 3,799,655 Cumulative effect of change in accounting principle, net of income taxes and minority interest (3,146,569) -------------- -------------- -------------- -------------- Net income $ 1,328,800 $ 1,968,550 $ 4,661 $ 3,799,655 ============== ============== ============== ============== Basic net income per share Before cumulative effect of change in accounting principle $ .38 $ .57 $ .90 $ 1.09 Cumulative effect of change in accounting principle (.90) -------------- -------------- -------------- -------------- $ .38 $ .57 $ - $ 1.09 ============== ============== ============== ============== Diluted net income per share Before cumulative effect of change in accounting principle $ .35 $ .52 $ .83 $ 1.01 Cumulative effect of change in accounting principle (.83) -------------- -------------- --------------- -------------- $ .35 $ .52 $ - $ 1.01 ============== ============== =============== ============== See notes to consolidated financial statements.
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HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Net income $ 1,328,800 $ 1,968,550 $ 4,661 $ 3,799,655 Other comprehensive income (loss): Unrealized holding gains (losses) on marketable securities (29,803) 161,968 (281,839) 1,216,838 Less: Reclassification adjustment for gains included in net income (2,335,909) (3,659,054) -------------- -------------- -------------- -------------- Other comprehensive income (loss) before income taxes (29,803) (2,173,941) (281,839) (2,442,216) Income tax benefit related to unrealized holding gains (losses) on marketable securities (11,920) 64,787 (112,735) 486,735 Income taxes related to reclassification adjustment for gains included in net income (965,118) (1,494,376) Minority interest in other comprehensive income (loss) of Alliance Telecommunications Corporation (741) (407,804) (42,561) (453,634) -------------- -------------- -------------- -------------- Other comprehensive income (loss) (17,142) (865,806) (126,543) (980,941) -------------- -------------- -------------- -------------- Comprehensive income (loss) $ 1,311,658 $ 1,102,744 $ (121,882) $ 2,818,714 ============== ============== ============== ============== See notes to consolidated financial statements.
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT 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, 2001 220,100 220,100 3,476,569 $34,766 $13,212,970 $28,702,145 $ 71,312 $42,241,293 Net loss 4,661 4,661 Issuance of common stock under Employee Stock Option Plan, net 37,159 371 196,794 197,165 Issuance of common stock under Employee Stock Purchase Plan 11,578 116 96,827 96,943 Purchase and retirement of common stock (24,278) (243) (93,029) (149,313) (242,585) Change in unrealized gains and losses on marketable securities, net of deferred taxes (126,543) (126,543) ------- -------- --------- ------- ----------- ----------- ---------- ----------- BALANCE AT SEPTEMBR 30, 2002 220,100 $220,100 3,501,028 $35,010 $13,413,562 $28,557,493 $ (55,231) $42,170,934 ======= ======== ========= ======= =========== =========== ========== ===========
See notes to consolidated financial statements. 5
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended September 30 ------------------------------ 2002 2001 ----------- ----------- Cash Flows from Operating Activities: Net income $ 4,661 $ 3,799,655 Adjustments to reconcile net income to net cash provided by operating activities: Noncash cumulative effect of change in accounting principle 3,146,569 Depreciation and amortization 7,246,478 8,245,983 Minority stockholders' interest in earnings of Alliance Telecommunications Corporation 1,214,579 1,520,849 Gain on sales of marketable securities (3,659,054) Income from unconsolidated affiliates (2,536,122) (1,445,203) Proceeds from wireless telephone investments 598,443 657,293 Changes in assets and liabilities: Accounts receivable (578,588) 80,325 Materials, supplies and inventories (464,362) (917,746) Other current assets (116,373) (73,206) Accounts payable 330,014 (276,151) Accrued expenses 211,005 (189,131) Income taxes payable (175,681) 1,332,229 Deferred investment credits (29,812) (55,291) Deferred taxes (34,946) Deferred compensation 2,219 (69,782) ----------- ----------- Net cash provided by operating activities 8,853,030 8,915,824 Cash Flows from Investing Activities: Capital expenditures, net (6,708,279) (6,855,705) Sales of marketable securities 1,323,145 Increase in construction fund (784,713) (182,406) Purchases of wireless telephone investments (1,128,606) Proceeds from (purchases of) other investments 22,384 (968,332) Increase in other assets (29,063) (49,307) ----------- ----------- Net cash used in investing activities (7,499,671) (7,861,211) Cash Flows from Financing Activities: Repayment of long-term debt (3,633,090) (4,302,391) Proceeds from issuance of notes payable and long-term debt 888,176 470,000 Issuance of common stock 294,108 455,609 Purchase of stock (242,585) (1,140,632) ----------- ----------- Net cash used in financing activities (2,693,391) (4,517,414) ----------- ----------- Net Decrease in Cash and Cash Equivalents (1,340,032) (3,462,801) Cash and Cash Equivalents at Beginning of Period 13,083,481 13,834,110 ----------- ----------- Cash and Cash Equivalents at End of Period $ 11,743,449 $ 10,371,309 =========== =========== Supplemental disclosures of cash flow information: Interest paid during the period $ 3,567,065 $ 4,380,535 Income taxes paid during the period 3,065,493 2,884,063 See notes to consolidated financial statements.
6 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES The balance sheet and statement of stockholders' equity as of September 30, 2002 and the statements of income, comprehensive income and cash flows for the periods ended September 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 September 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 September 30 are not necessarily indicative of the operating results for the entire year. 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. 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 excess of cost over net assets acquired or "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 September 30, 2002 $ 395,273 $ 48,679,719 $ 49,074,992 =========== ============ ============ Intangible assets: Balance December 31, 2001 $ 77,060 $ 250,625 $ 327,685 Additions 2,899 26,164 29,063 Amortization (333) (333) Impairment loss (75,282) (75,282) ----------- ------------ ------------ Balance September 30, 2002 $ 4,344 $ 276,789 $ 281,133 =========== ============ ============ 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. 8 The following table provides, on a pro forma basis, financial information for the periods ended September 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.
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Revenues $ 10,435,578 $ 10,386,126 $ 29,851,621 $ 30,517,366 Costs and expenses (7,084,554) (7,357,152) (21,837,586) (22,459,238) Add back - Amortization expense 499,961 1,371,752 -------------- -------------- -------------- -------------- Operating income 3,351,024 3,528,935 8,014,035 9,429,880 Other income (expenses), net (237,176) 1,841,772 (788,226) 1,423,376 Add back - pro rata share of Midwest Wireless Holdings LLC amortization 185,733 556,554 -------------- -------------- -------------- -------------- Income before income taxes 3,113,848 5,556,440 7,225,809 11,409,810 Income tax expense (1,263,000) (2,093,000) (2,860,000) (4,161,000) Tax effect of change in amortization (75,000) (223,000) -------------- -------------- -------------- -------------- Income before minority interest 1,850,848 3,388,440 4,365,809 7,025,810 Minority interest in earnings of Alliance Telecommunications Corp. (522,048) (809,196) (1,214,579) (1,520,849) Change in minority interest due to change in amortization (181,465) (503,867) -------------- -------------- -------------- -------------- Adjusted income before cumulative effect of accounting change $ 1,328,800 $ 2,397,779 $ 3,151,230 $ 5,001,094 ============== ============== ============== ==============
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 -------------- ------------- ------------- ------------- September 30, 2002 $ 260,980 $ 42,698 $ (166,513) $ 137,615 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) --------------- ------------- ------------- ------------- September 30, 2002 $ (123,815) $ 45,944 $ 22,640 $ (55,231) 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. 9 Proceeds from sales of available-for-sale securities were $1,323,000 in the nine-month period ended September 30, 2001. Accounts receivable from sales of securities were $2,352,000 at September 30, 2001. Gross realized gains on sales of securities were $3,659,000 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. 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 $2,375,000 and $1,030,000 for the nine month periods ended September 30, 2002 and 2001 respectively. Cash distributions received from Midwest Wireless Holdings LLC were $598,000 and $657,000 in 2002 and 2001, respectively. At September 30, 2002, the Company owned 10.4% of Midwest Wireless Holdings LLC. Income statement information for Midwest Wireless Holdings, LLC for the three and nine month periods ended September 30, 2002 and 2001 was as follows: Three Months Ended September 30 Nine Months Ended September 30 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues $ 40,945,465 $ 35,643,457 $115,946,553 $ 96,792,397 Expenses (31,754,849 (29,472,900) (90,210,046) (82,184,468) Minority interest (975,771) (696,038) (2,904,191) (1,647,774) Net income 8,214,845 5,474,519 22,832,316 12,960,155 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 subsidiaries, which are 100% owned, and Alliance Telecommunications Corporation and its subsidiaries, which are 68% owned. Segment information is as follows: 10
Hector Alliance Consolidated --------------- --------------- --------------- Nine Months Ended September 30, 2002 Revenues $ 7,089,140 $ 22,762,481 $ 29,851,621 Costs and expenses 6,241,710 15,595,876 21,837,586 --------------- --------------- --------------- Operating income 847,430 7,166,605 8,014,035 Interest expense (691,334) (2,879,400) (3,570,734) Interest and dividend income 78,235 168,151 246,386 Income from unconsolidated affiliates 715,919 1,820,203 2,536,122 --------------- --------------- --------------- Income before income taxes $ 950,250 $ 6,275,559 $ 7,225,809 =============== =============== =============== Depreciation and amortization $ 2,326,433 $ 4,920,045 $ 7,246,478 =============== =============== =============== Total assets $ 31,238,176 $ 124,078,161 $ 155,316,337 =============== =============== =============== Capital expenditures $ 1,692,128 $ 5,016,151 $ 6,708,279 =============== =============== =============== Hector Alliance Consolidated --------------- --------------- --------------- Nine Months Ended September 30, 2001 Revenues $ 7,150,561 $ 23,366,805 $ 30,517,366 Costs and expenses 5,960,998 16,498,240 22,459,238 --------------- --------------- --------------- Operating income 1,189,563 6,868,565 8,058,128 Interest expense (739,815) (3,374,116) (4,113,931) Interest and dividend income 188,482 244,568 433,050 Gain on sale of marketable securities 3,659,054 3,659,054 Income from unconsolidated affiliates 354,622 1,090,581 1,445,203 --------------- --------------- --------------- Income before income taxes $ 992,852 $ 8,488,652 $ 9,481,504 =============== =============== =============== Depreciation and amortization $ 2,347,905 $ 5,898,078 $ 8,245,983 =============== =============== =============== Total assets $ 29,075,075 $ 128,670,707 $ 157,745,782 =============== =============== =============== Capital expenditures $ 1,994,723 $ 4,860,982 $ 6,855,705 =============== =============== =============== Hector Alliance Consolidated --------------- --------------- --------------- Three Months Ended September 30, 2002 Revenues $ 2,335,483 $ 8,100,095 $ 10,435,578 Costs and expenses 2,021,667 5,062,887 7,084,554 --------------- --------------- --------------- Operating income 313,816 3,037,208 3,351,024 Interest expense (231,162) (992,839) (1,224,001) Interest and dividend income 26,860 50,992 77,852 Income from unconsolidated affiliates 255,933 653,040 908,973 --------------- --------------- --------------- Income before income taxes $ 365,447 $ 2,748,401 $ 3,113,848 =============== =============== =============== Depreciation and amortization $ 775,476 $ 1,629,738 $ 2,405,214 =============== =============== =============== Capital expenditures $ 1,144,475 $ 2,218,143 $ 3,362,618 =============== =============== =============== Hector Alliance Consolidated --------------- --------------- --------------- Three Months Ended September 30, 2001 Revenues $ 2,430,548 $ 7,955,578 $ 10,386,126 Costs and expenses 1,959,905 5,397,247 7,357,152 --------------- --------------- --------------- Operating income 470,643 2,558,331 3,028,974 Interest expense (251,500) (1,075,127) (1,326,627) Interest and dividend income 52,056 75,592 127,648 Gain on sale of marketable securities 2,335,909 2,335,909 Income from unconsolidated affiliates 158,812 546,030 704,842 --------------- --------------- --------------- Income before income taxes $ 430,011 $ 4,440,735 $ 4,870,746 =============== =============== =============== Depreciation and amortization $ 782,657 $ 2,066,776 $ 2,849,433 =============== =============== =============== Capital expenditures $ 770,912 $ 1,908,423 $ 2,679,335 =============== =============== ===============
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 7,639 access lines in 9 rural communities in Minnesota and Wisconsin at September 30, 2002. HCC, through its subsidiaries, also provides cable television service to 4,687 subscribers in Minnesota and Wisconsin. HCC's 68% owned subsidiary, Alliance Telecommunications Corporation, owns and operates six additional LEC subsidiaries which served 31,373 access lines in 28 rural communities in Minnesota, Wisconsin, Iowa and South Dakota at September 30, 2002. Alliance, through its subsidiaries, also served 8,911 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. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Consolidated revenues decreased to $29,852,000 in 2002 from $30,517,000 in 2001. The revenue breakdown by operating group was as follows:
Hector Alliance ------------------------------------ ----------------------------------- 2002 2001 2002 2001 ---------------- ---------------- --------------- --------------- Local network $ 1,207,839 $ 1,173,263 $ 4,399,562 $ 4,148,961 Network access 3,859,226 4,066,616 12,094,530 12,954,048 Nonregulated activities: Cable television 1,179,676 1,087,465 2,112,362 1,993,323 Internet 343,953 206,284 1,429,752 1,234,591 Billing and collection 69,985 107,576 220,828 308,779 Other 428,461 509,357 2,505,447 2,727,103 ---------------- ---------------- --------------- --------------- $ 7,089,140 $ 7,150,561 $ 22,762,481 $ 23,366,805 ---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $285,000 or 5%. The increase was primarily due to a local service rate increase in one of Alliance's telephone companies. Access lines served were 39,012 at September 30, 2002 compared to 38,936 at September 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 September 30, 2002 the Company had 1,767 DSL customers and 9,526 dial-up internet customers, an 18% increase from 2001 in the number of customers subscribing to some form of broadband service. Network access revenues decreased $1,067,000 or 6%. Access revenues were negatively affected by 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 $116,000 or 1%. Cable television revenues increased $211,000 or 7% due to rate increases and the acquisition of additional cable systems in the second quarter of 2001. Internet service revenues increased $333,000 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. 12 Consolidated operating costs and expenses were $21,838,000 in 2002 compared to $22,459,000 in 2001. If the provisions of SFAS 142 had been in effect at January 1, 2001, 2001 operating costs would have been $21,087,000. Costs and expenses by operating group were as follows:
Hector Alliance ------------------------------------ ----------------------------------- 2002 2001 2002 2001 ---------------- ---------------- --------------- --------------- Plant operations $ 1,156,599 $ 1,066,659 $ 2,668,720 $ 3,090,205 Customer operations 288,696 268,165 1,580,830 1,646,101 Other operating expenses: Operating taxes 123,438 114,062 289,214 311,579 Cable television 861,239 680,676 1,578,630 1,434,051 Internet 153,408 158,120 920,733 899,834 Other 172,311 181,333 914,703 910,786 General and administrative 1,159,586 1,144,078 2,723,001 2,307,606 Depreciation and amortization 2,326,433 2,347,905 4,920,045 5,898,078 ---------------- ---------------- --------------- --------------- $ 6,241,710 $ 5,960,998 $ 15,595,876 $ 16,498,240 ---------------- ---------------- --------------- ---------------
Consolidated plant operations expenses decreased $332,000 or 8% due to increased capitalization of labor expenditures for new construction projects. Customer operations expenses decreased $45,000 or 2%. Other operating expenses increased $323,000 or 7% due to higher cable television and internet operating expenses. General and administrative expenses increased $431,000 or 12%. Depreciation expense increased $372,000 due to depreciation on new plant additions. Amortization expense decreased $1,372,000 due to adoption of SFAS 142. Consolidated operating income decreased $44,000 to $8,014,000. Interest expenses decreased $543,000 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 $187,000 due to lower interest rates earned on invested cash balances. Alliance recorded gains on sales of marketable securities of $3,659,000 in the 2001 period. The Company had income from unconsolidated affiliates (its partnership and LLC investments) of $2,536,000 for the 2002 period compared to income of $1,445,000 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 $7,226,000 in 2002 from $9,482,000 in 2001. The Company's effective income tax rate decreased to 40% in 2002 from 44% in 2001 due to elimination of the effect of non-deductible amortization expenses. Income before minority interest in Alliance's earnings decreased to $4,366,000 in 2002 from $5,321,000 in 2001. Minority interests in earnings of Alliance were $1,215,000 compared to $1,521,000 in 2001. Income before change in accounting principle decreased to $3,151,000 compared to $3,800,000 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 net income of $5,000 in 2002 compared to net income of $3,800,000 in 2001. 13 Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 Consolidated revenues increased by less than 1% to $10,436,000 in 2002 from $10,386,000 in 2001. The revenue breakdown by operating group was as follows:
Hector Alliance ------------------------------------ ----------------------------------- 2002 2001 2002 2001 ---------------- ---------------- --------------- --------------- Local network $ 410,014 $ 398,505 $ 1,509,006 $ 1,421,221 Network access 1,241,324 1,376,483 4,386,030 4,309,996 Nonregulated activities: Cable television 420,788 368,931 717,999 686,845 Internet 121,766 74,525 498,508 440,818 Billing and collection 22,964 36,586 68,744 105,918 Other 118,627 175,518 919,808 990,780 ---------------- ---------------- --------------- --------------- $ 2,335,483 $ 2,430,548 $ 8,100,095 $ 7,955,578 ---------------- ---------------- --------------- ---------------
Consolidated local service revenues increased $99,000 or 5%. The increase was primarily due to a local service rate increase in one of Alliance's telephone companies. Network access revenues decreased $59,000 or 1%. Access revenues were negatively affected by reserves established in the 2002 period due to the bankruptcy of a large interexchange carrier. Alliance's access revenues benefited from increased universal service support payments. Nonregulated revenues from all sources increased $9,000. Cable television revenues increased $83,000 or 8% due to rate increases. Internet service revenues increased $105,000 or 20% 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 $7,085,000 in 2002 compared to $7,357,000 in 2001. If the provisions of SFAS 142 had been in effect at January 1, 2001, 2001 operating costs would have been $6,857,000. Costs and expenses by operating group were as follows:
Hector Alliance ------------------------------------ ----------------------------------- 2002 2001 2002 2001 ---------------- ---------------- --------------- --------------- Plant operations $ 377,563 $ 323,176 $ 844,388 $ 889,219 Customer operations 92,962 90,153 497,471 541,016 Other operating expenses: Operating taxes 49,196 43,951 101,347 114,654 Cable television 296,103 229,968 513,599 501,524 Internet 58,133 56,568 324,414 268,817 Other 7,715 65,045 321,846 351,994 General and administrative 364,519 368,387 830,084 663,247 Depreciation and amortization 775,476 782,657 1,629,738 2,066,776 ---------------- ---------------- --------------- --------------- $ 2,021,667 $ 1,959,905 $ 5,062,887 $ 5,397,247 ---------------- ---------------- --------------- ---------------
14 Consolidated plant operations expenses increased $10,000 or 1%. Customer operations expenses decreased $41,000, or 6%. Other operating expenses increased $40,000 or 2% due to higher cable television programming fees and higher internet costs. General and administrative expenses increased $163,000 or 16%. Depreciation expense increased $56,000 due to depreciation on new plant additions. Amortization expense decreased $500,000 due to adoption of SFAS 142. Consolidated operating income increased $322,000 to $3,351,000. Interest expenses decreased $103,000 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 $50,000 due to lower interest rates earned on invested cash balances. Alliance recorded gains on sales of marketable securities of $2,336,000 in the 2001 period. The Company had income from unconsolidated affiliates (its partnership and LLC investments) of $909,000 for the 2002 period compared to income of $705,000 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 $3,114,000 in 2002 from $4,871,000 in 2001. The Company's effective income tax rate decreased to 41% 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 $1,851,000 in 2002 from $2,778,000 in 2001. Minority interests in earnings of Alliance were $522,000 compared to $809,000 in 2001. Net income decreased to $1,329,000 in 2002 from $1,969,000 in 2001. Liquidity and Capital Resources Cash flows from consolidated operating activities for the nine-month periods were $8,853,000 and $8,916,000 in 2002 and 2001, respectively. At September 30, 2002, the Company's cash, cash equivalents and marketable securities totaled $11,881,000 compared to $13,502,000 at December 31, 2001. Alliance's cash and securities were $5,567,000 of this total. Working capital at September 30, 2002 was $7,552,000 compared to $7,633,000 at December 31, 2001. The current ratio was 1.6 to 1 at September 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 nine-month periods were $1,692,000 and $1,995,000, respectively. Alliance's plant additions in the same periods were $5,016,000 and $4,861,000, 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 nine-month periods ended September 30, 2002 and 2001 were $888,000 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 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. During the third quarter of 2002, 24,278 additional shares were repurchased. At September 30, 2002, 262,000 shares could be purchased under the remaining authorization. The Company received $294,000 and $456,000 from exercises of employee stock options and issue of employee stock purchase plan shares in the first nine 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. Proposed Breakup of Alliance Telecommunications Corporation 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 two rural ILECs 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 acquisition debt the Company incurred in acquiring Ollig Utilities, Inc. in 1996 would also be reduced. The two ILECs serve 8,700 telephone access lines and 2,400 cable television customers. Revenues from these operations in 2001 totaled $9,560,000. The breakup is not expected to materially affect the Company's net income. A definitive agreement on the breakup is expected during the fourth quarter of 2002. The breakup is expected to occur on March 1, 2003, assuming timely receipt of regulatory and financial approvals. -------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- 16 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. 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. In June 2002, the Financial Accounting Standards Board issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of the entity committed to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on its financial position or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not use derivative financial instruments in its operations or investment portfolio. Its operations are not subject to risks associated with changes in the value of foreign currencies. Portions of the Company's long-term debt have variable interest rates based on the lenders' cost of money. The Company has investments in money market funds that earn interest at prevailing market rates. In the opinion of management, the Company does not have a material exposure to loss caused by market risk. 17 Item 4. Controls and Procedures We performed an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls and procedures or in other factors that could significantly affect internal controls subsequent to September 30, 2002. PART II. OTHER INFORMATION Items 1 - 5. Not Applicable Item 6(a). Exhibits Exhibit 11, "Calculation of Earnings Per Share" is attached to this Form 10-Q. Exhibit 99.1, "Certification of Chief Executive Officer" is attached to this Form 10-Q. Exhibit 99.2, "Certification of Chief Financial Officer" 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/Curtis A. Sampson ------------------------ Curtis A. Sampson Date: November 14, 2002 Chief Executive Officer By /s/Charles A. Braun ------------------------ Charles A. Braun Date: November 14, 2002 Chief Financial Officer 18
HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES EXHIBIT 11 CALCULATION OF EARNINGS PER SHARE Nine Months Ended September 30 ------------------------------------------------------ Basic: 2002 2001 2001 Pro forma ------- ----------- ----------- -------------- Income before cumulative effect of change in accounting principle $ 3,151,230 $ 3,799,655 $ 5,001,094 Cumulative effect of accounting change (3,146,569) - ----------- ----------- ----------- Net income $ 4,661 $ 3,799,655 $ 5,001,094 =========== =========== =========== Common shares: Weighted average number of common shares outstanding 3,505,276 3,480,298 3,480,298 =========== =========== =========== Net income per common share: Before cumulative effect of change in accounting principle $ .90 $ 1.09 $ 1.44 Cumulative effect of accounting change (.90) ----------- ----------- ----------- Net income per common share $ .00 $ 1.09 $ 1.44 =========== =========== =========== Diluted: ------------- Income before cumulative effect of change in accounting principle $ 3,151,230 $ 3,799,655 $ 5,001,094 Cumulative effect of accounting change (3,146,569) ----------- ----------- ----------- Net income $ 4,661 $ 3,799,655 $ 5,001,094 =========== =========== =========== Common and common equivalent shares: Weighted average number of common shares outstanding 3,505,276 3,480,298 3,480,298 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 61,753 56,310 56,310 Dilutive effect of Employee Stock Purchase Plan shares subscribed 2,614 181 181 ----------- ----------- ----------- 3,789,743 3,758,089 3,758,089 =========== =========== =========== Diluted net income per share Before cumulative effect of change in accounting principle $ .83 $ 1.01 $ 1.33 Cumulative effect of accounting change (.83) ----------- ----------- ----------- Diluted net income per share $ .00 $ 1.01 $ 1.33 =========== =========== =========== 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 September 30 ------------------------------------------------------ Basic: 2002 2001 2001 Pro forma ------- ----------- ----------- ------------- Net income $ 1,328,800 $ 1,968,550 $ 2,397,779 =========== =========== =========== Common shares: Weighted average number of common shares outstanding 3,509,966 3,475,545 3,475,545 =========== =========== =========== Net income per common share $ .38 $ .57 $ .69 =========== =========== =========== Diluted: ------------- Net income $ 1,328,800 $ 1,968,550 $ 2,397,779 =========== =========== =========== Common and common equivalent shares: Weighted average number of common shares outstanding 3,509,966 3,475,545 3,475,545 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 18,072 100,817 100,817 Dilutive effect of Employee Stock Purchase Plan shares subscribed 1,660 657 657 ----------- ----------- ----------- 3,749,798 3,798,319 3,798,319 =========== =========== =========== Diluted net income per share $ .35 $ .52 $ .63 =========== =========== =========== 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 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Exhibit 99.1 Chief Executive Officer Certification I, Curtis A. Sampson certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hector Communications Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/Curtis A. Sampson ------------------------ Curtis A. Sampson Date: November 14, 2002 Chief Executive Officer 21 HECTOR COMMUNICATIONS CORPORATION AND SUBSIDIARIES Exhibit 99.2 Chief Financial Officer Certification I, Charles A. Braun, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hector Communications Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/Charles A. Braun ----------------------- Charles A. Braun Date: November 14, 2002 Chief Financial Officer 22