**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K/A**

 

| **(Mark One)** |                                                                                                                  |   |
|----------------|-----------------------------------------------------------------------------------------------------------------------|--------|
| **ý**     | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]**        |   |
|           |                                                                                                                  |   |
|           | **For the fiscal year ended December 31, 2002**                                                                  |   |
|           |                                                                                                                  |   |
|           | **OR**                                                                                                                |   |
|           |                                                                                                                  |   |
| **o**          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]** |   |

 

**CommissionFile Number: 001-13891**

** **

| **HECTOR  COMMUNICATIONS CORPORATION**                           |
|------------------------------------------------------------------|
| (Exact name  of registrant as specified in its charter)          |
|                                                             |   |   |
| **Minnesota**                                                    |   | **41-1666660** |
| (State or  other jurisdiction  of incorporation or organization) |   | (Federal  Employer  Identification No.) |
|                                                             |   |   |
| **211 South Main Street  Hector, MN  55342**                |
| (Address of  principal executive offices and zip code)           |

 

Registrant’s telephone number, including area code: **(320) 848-6611**

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of  each class**      |
|-------------------------------|
| Common  Stock, $.01 par value |

 

Securities registered pursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý  No o

 

Indicate by a check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicate by a check mark whether the registrant is an accelerated filer(as defined by Rule 12b-2 of the Act).

Yes o   No ý

 

 

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The aggregate market value of the voting stock held by non-affiliatesof the Registrant was approximately $37,386,000 based upon the closing saleprice of the Company’s common stock on the American Stock Exchange onSeptember 30, 2003.

 

As of October 31, 2003 there were outstanding 3,504,989 shares ofthe Registrant’s common stock.

 

### **EXPLANATORYNOTE**

### ** **

This Form 10-K/A (Amendment No.1) amends the Registrant’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2002, which was originally filed on March 31, 2003.  This amendment restates and amends the proforma income statement and balance sheet presented in Part II, Item 7, “Breakupof Alliance Telecommunications Corporation” to reflect the purchase method ofaccounting required by SFAS No. 141, “Business Combinations”.

 

Item 7.                       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Breakup of Alliance Telecommunications Corporation

 

InJuly 2001, Golden West Telecommunications Cooperative, Inc. of Wall, SouthDakota (“Golden West”) Alliance Communications Cooperative, Inc. of Garretson,South Dakota (“ACCI”), respectively the 20% and 12% minority shareholders ofAlliance, advised the Company that they were interested in exchanging theirminority investment for a pro rata share of the assets and liabilities ofAlliance.  Thereafter the partiesengaged in negotiations that continued through December 2002.  The negotiation process included evaluationsand appraisals of Alliance’s business components, negotiations with Alliance’slenders (CoBank, Rural Utilities Service and Rural Telephone Bank) regardingwaivers, lien releases, interest penalties where applicable and futurefinancing terms.  The process alsoincluded seeking necessary regulatory approvals from local, state and nationalregulators.

 

The Company completed the Alliance breakuptransactions on July 7, 2003.  Asagreed among the parties, in the breakup, Golden West exchanged its 20%ownership interest in Alliance for all of the outstanding stock of Sioux ValleyTelephone Company, its pro rata share of Alliance’s ownership interest inMidwest Wireless Holdings L.L.C. and certain other Alliance assets.  ACCI exchanged its 12% ownership interest inAlliance for all of the outstanding stock of Hills Telephone Company, its prorata share of Alliance’s ownership interest in Midwest Wireless Holdings L.L.C.and certain other Alliance assets. Sioux Valley Telephone Company and Hills Telephone Company collectivelyserve 8,700 telephone access lines and 2,400 cable television customers.Immediately prior to the breakup Sioux Valley and Hills will paid a dividend toAlliance of approximately $12,849,000 to equalize post breakup values inproportion to the current 68%-20%-12% stock ownership percentages. The dividendproceeds were used to reduce Alliance’s debt to its primary lender, CoBank. Anumber of other stock and asset transfers also occurred among Alliance and itssubsidiaries prior to the breakup in order to satisfy various tax, regulatoryand lender requirements.

 

Alliance believes the breakup transactions aretax-free under Section 355 of the Internal Revenue Code. Alliance alsobelieves the related internal stock and asset transfers are tax-free underSection 355, related Code provisions and the consolidated returnregulations, although no private letter ruling has been sought from the IRS inconnection with the breakup. Prior to conducting the breakup transaction, theparties entered into agreements with regard to cooperation, exchange ofinformation, interim use of common services, employee benefits, tax allocationsand indemnification generally in proportion to ownership percentages withrespect to

 

2

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unexpected adverse tax consequences, and other mattersarising after the breakup transaction which relate to commitments, events orcircumstances in effect as of the date of the breakup transaction.

 

The following pro forma financial statements of incomeand explanatory notes show the pro forma effect on the operating results of theCompany as if the breakup occurred January 1, 2002.  The pro forma balance sheet and explanatorynotes show the effect on the Company’s financial position as if the breakup occurredDecember 31, 2002.

 

The pro forma financial information and explanatorynotes are unaudited and include adjustments based on management’sassumptions.  Management believes thesestatements provide a reasonable basis for presenting the significant effects ofthe breakup and the pro forma adjustments are properly applied in the pro formastatements.

 

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

 

3

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TwelveMonths Ended December 31, 2002

 
|                                                                      |   | **Hector  Communications  Corporation** |      | **Eliminate  Hills and Sioux  Valley Telephone  Companies** |   | **Other  Pro forma  Adjustments** |      | **Pro forma  Combined** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------------|-----------|-------------------------------------------------------------|--------|-----------------------------------|-----------|-------------------------|--------|
| REVENUES:                                                                 |   |                                    |      |                                                        |   |                              |      |                    |   |
| Local network                                                             |   | $                                       | 7,447,951 |                                                        | $      | (1,573,223                        | )         |                    |   | $ | 5,874,728 |   |
| Network access                                                            |   | 21,233,284                              |      | (5,929,427                                                  | )      |                              |      | 15,303,857              |   |
| Video services                                                            |   | 4,412,372                               |      | (713,582                                                    | )      |                              |      | 3,698,790               |   |
| Internet services                                                         |   | 2,404,684                               |      | (459,773                                                    | )      |                              |      | 1,944,911               |   |
| Other nonregulated services                                               |   | 4,223,355                               |      | (528,851                                                    | )      |                              |      | 3,694,504               |   |
| TOTAL REVENUES                                                            |   | 39,721,646                              |      | (9,204,856                                                  | )      | —                            |      | 30,516,790              |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| COSTS AND EXPENSES:                                                       |   |                                    |      |                                                        |   |                              |      |                    |   |
| Plant operations                                                          |   | 5,385,538                               |      | (1,305,122                                                  | )      |                              |      | 4,080,416               |   |
| Depreciation and amortization                                             |   | 9,962,652                               |      | (1,975,002                                                  | )      | 64,012                            | (f)  | 8,051,662               |   |
| Customer operations                                                       |   | 2,430,453                               |      | (580,368                                                    | )      |                              |      | 1,850,085               |   |
| General and administrative                                                |   | 5,473,999                               |      | (753,399                                                    | )      | (44,160                           | )(e)      | 4,676,440               |   |
| Other operating expenses                                                  |   | 6,427,251                               |      | (1,190,583                                                  | )      |                              |      | 5,236,668               |   |
| TOTAL COSTS AND EXPENSES                                                  |   | 29,679,893                              |      | (5,804,474                                                  | )      | 19,852                            |      | 23,895,271              |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| OPERATING INCOME                                                          |   | 10,041,753                              |      | (3,400,382                                                  | )      | (19,852                           | )         | 6,621,519               |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| OTHER INCOME (EXPENSES):                                                  |   |                                    |      |                                                        |   |                              |      |                    |   |
| Interest expense                                                          |   | (4,726,799                              | )         | 453,296                                                     |   | 698,906                           | (a)(b)(c) | (3,574,597              | )      |
| Income from investments in unconsolidated  affilates:                     |   |                                    |      |                                                        |   |                              |      |                    |   |
| Midwest Wireless Holdings, LLC                                            |   | 2,928,251                               |      |                                                        |   | (666,831                          | )(d)      | 2,261,420               |   |
| Other unconsolidated affiliates                                           |   | 142,535                                 |      | (198,846                                                    | )      |                              |      | (56,311                 | )      |
| Interest and dividend income                                              |   | 481,258                                 |      | (134,633                                                    | )      |                              |      | 346,625                 |   |
| Gain (loss) on sale of marketable  securities                             |   | (134,498                                | )         |                                                        |   |                              |      | (134,498                | )      |
| OTHER INCOME (EXPENSES), net                                              |   | (1,309,253                              | )         | 119,817                                                     |   | 32,075                            |      | (1,037,544              | )      |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| INCOME BEFORE INCOME TAXES AND MINORITY  INTEREST                         |   | 8,732,500                               |      | (3,280,565                                                  | )      | 12,223                            |      | 5,583,975               |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| Income tax expense                                                        |   | 3,670,000                               |      | (1,242,000                                                  | )      | 4,889                             | (g)  | 2,432,889               |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| INCOME BEFORE MINORITY INTEREST                                           |   | 5,062,500                               |      | (2,038,565                                                  | )      | 7,334                             |      | 3,151,086               |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| Minority interest in earnings of Alliance  Telecommunications Corporation |   | 1,407,611                               |      |                                                        |   | (1,407,611                        | )(h)      | 0                       |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| INCOME BEFORE CHANGE IN ACCOUNTING  PRINCIPLE                             |   | 3,654,889                               |      | (2,038,565                                                  | )      | 1,414,945                         |      | 3,151,086               |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| INCOME BEFORE CHANGE IN ACCOUNTING  PRINCIPLE PER COMMON SHARE:           |   |                                    |      |                                                        |   |                              |      |                    |   |
| Basic                                                                     |   | $                                       | 1.05      |                                                        |   |                              |      |                    | $      | .90 |   |
| Diluted                                                                   |   | $                                       | .97       |                                                        |   |                              |      |                    | $      | .84 |   |
|                                                                      |   |                                    |      |                                                        |   |                              |      |                    |   |
| AVERAGE SHARES OUTSTANDING                                                |   |                                    |      |                                                        |   |                              |      |                    |   |
| Common shares only                                                        |   | 3,498,000                               |      |                                                        |   |                              |      | 3,498,000               |   |
| Common and potential common shares                                        |   | 3,770,000                               |      |                                                        |   |                              |      | 3,770,000               |   |
|                                                                           |        |                                         |           |                                                             |        |                                   |           |                         |        |  |  |  |

 

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| (a) Interest adjustment on CoBank loan at  average interest rate (6.8%)  |   | 914,841    |   |
|--------------------------------------------------------------------------|--------|------------|--------|
| (b) Interest adjustment on CoBank loan for  accrued patronage            |   | (95,935    | )      |
| (c) Estimated loan fee - CoBank  refinancing                             |   | (120,000   | )      |
| (d) Adjust income from Midwest Wireless  Holdings for ownership transfer |   | (666,831   | )      |
| (e) Adjust deferred compensation expense                                 |   | (44,160    | )      |
| (f) Adjust depreciation expense for plant  allocation                    |   | 64,012     |   |
| (g) Income tax effect of above adjustments  (40% rate)                   |   | 4,889      |   |
| (h) Eliminate minority interest in  earnings of Alliance                 |   | (1,407,611 | )      |

 

4

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Pro forma balance sheet - December 31, 2002

 
|                                                 |   | **Hector  Communications  Corporation  December 31, 2002** |        | **Eliminate Assets  and Liabilities of  Sioux Valley and  Hills Telephone  Companies** |   | **Pro forma  Disposal  Adjustments** |   | **Pro forma  Acquisition  Adjustments** |   | **Pro forma  Combined** |   |
|------------------------------------------------------|--------|-----------------------------------------------------------------|-------------|----------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------|--------|-------------------------|--------|
| Assets                                               |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Current assets:                                      |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Cash and cash equivalents                            |   | $                                                               | 12,020,186  |                                                                                   | $      | (2,428,061                           | )      |                                    |   |                    |   | $ | 9,592,125 |   |
| Construction fund                                    |   | 662,232                                                         |        | (4,187                                                                                 | )      |                                 |   |                                    |   | 658,045                 |   |
| Accounts receivable, net                             |   | 4,819,174                                                       |        | (1,293,835                                                                             | )      |                                 |   |                                    |   | 3,525,339               |   |
| Materials, supplies and inventories                  |   | 1,175,587                                                       |        | (140,214                                                                               | )      |                                 |   |                                    |   | 1,035,373               |   |
| Other current assets                                 |   | 231,685                                                         |        | (28,168                                                                                | )      |                                 |   |                                    |   | 203,517                 |   |
| Accounts with affiliates                             |   |                                                            |        | 248,867                                                                                |   |                                 |   |                                    |   | 248,867                 |   |
| Total Current Assets                                 |   | 18,908,864                                                      |        |                                                                                   |   |                                 |   |                                    |   | 15,263,266              |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Property, plant and equipment, net                   |   | 56,665,798                                                      |        | (10,021,081                                                                            | )      |                                 |   | 960,000                                 | (k)    | 47,604,717              |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Investments and other assets:                        |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Excess of cost over net assets acquired,  net        |   | 49,074,993                                                      |        | 0                                                                                      |   | (13,192,878                          | )(e)   | (14,258,325                             | )(j)   | 31,865,448              |   |
|                                                 |   |                                                            |        |                                                                                   |   | 10,817,658                           | (g)    | (960,000                                | )(k)   |                    |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   | 384,000                                 | (l)    |                    |   |
| Investment in Midwest Wireless Holdings  LLC         |   | 16,232,707                                                      |        | 0                                                                                      |   | (4,211,292                           | )(a)   |                                    |   | 12,021,415              |   |
| Investments in other unconsolidated  affiliates      |   | 4,373,597                                                       |        | (1,443,496                                                                             | )      |                                 |   |                                    |   | 2,930,101               |   |
| Other investments                                    |   | 8,818,502                                                       |        | (1,173,743                                                                             | )      | (1,328,850                           | )(c)   |                                    |   | 6,315,909               |   |
| Other assets                                         |   | 411,499                                                         |        | (244,206                                                                               | )      |                                 |   |                                    |   | 167,293                 |   |
| Total investments and other assets                   |   | 78,911,298                                                      |        |                                                                                   |   |                                 |   |                                    |   | 53,300,166              |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Total Assets                                         |   | $                                                               | 154,485,960 |                                                                                   |   |                                 |   |                                    |   |                    | $      | 116,168,149 |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Liabilities and Stockholders Equity                  |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Current liabilities:                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Notes payable and current portion of  long-term debt |   | $                                                               | 7,364,600   |                                                                                   | $      | (399,900                             | )      |                                    |   |                    |   | $ | 6,964,700 |   |
| Accounts payable (Note 10)                           |   | 2,523,878                                                       |        | (302,825                                                                               | )      |                                 |   |                                    |   | 2,221,053               |   |
| Accrued expenses                                     |   | 2,422,986                                                       |        | (447,195                                                                               | )      |                                 |   |                                    |   | 1,975,791               |   |
| Income taxes payable                                 |   | 879,417                                                         |        | 12,349                                                                                 |   |                                 |   |                                    |   | 891,766                 |   |
| Total current liabilities                            |   | 13,190,881                                                      |        |                                                                                   |   |                                 |   |                                    |   | 12,053,310              |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Long-term debt, less current portion                 |   | 75,147,560                                                      |        | (5,391,281                                                                             | )      | (13,453,550                          | )(d)   |                                    |   | 56,302,729              |   |
| Deferred investment tax credits                      |   | 27,554                                                          |        |                                                                                   |   |                                 |   |                                    |   | 27,554                  |   |
| Deferred income taxes                                |   | 5,866,754                                                       |        | (1,344,985                                                                             | )      | (162,523                             | )(a)   | 384,000                                 | (l)    | 4,866,246               |   |
|                                                 |   |                                                            |        |                                                                                   |   | 120,222                              | (b)    |                                    |   |                    |   |
|                                                 |   |                                                            |        |                                                                                   |   | 2,778                                | (h)    |                                    |   |                    |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Deferred compensation                                |   | 976,179                                                         |        | 0                                                                                      |   | (312,377                             | )(b)   |                                    |   | 663,802                 |   |
| Minority interest in Alliance                        |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Telecommunications Corporation                       |   | 17,027,697                                                      |        |                                                                                   |   | (2,769,372                           | )(f)   | (14,258,325                             | )(j)   | 0                       |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Stockholders’ equity                            |   | 42,249,335                                                      |        |                                                                                   |   | 5,173                                | (I)    |                                    |   | 42,254,508              |   |
|                                                 |   |                                                            |        |                                                                                   |   |                                 |   |                                    |   |                    |   |
| Total Liabilities and Stockholders’ Equity      |   | $                                                               | 154,485,960 |                                                                                   |   |                                 |   |                                    |   |                    | $      | 116,168,149 |   |

 

5

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| Transaction to dispose of majority interest  in Sioux Valley and Hills Telephone Companies                          |   |        |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|
| Book value of disposed assets and  liabilities                                                                      |   | (8,654,287  | )      |
| (a) Transfer of 32% of Alliance’s  ownership interest in Midwest Wireless and related deferred tax liabilities |   | (4,048,769  | )      |
| (b) Transfer of 32% of deferred  compensation obligations and related deferred tax assets                           |   | 192,155     |   |
| (c) Transfer of 32% of investment in  CoBank stock                                                                  |   | (1,328,850  | )      |
| (d) Repayment of CoBank debt thru dividend  from Sioux Valley Hills                                                 |   | 13,453,550  |   |
| (e) Eliminate goodwill value of investment  in Sioux Valley and Hills                                               |   | (13,192,878 | )      |
| (f)   Eliminate minority interest in tangible assets of Alliance  Telecommunications Corp.                     |   | 2,769,372   |   |
| (g) Fair value of majority interest in  disposed assets and liabilities                                             |   | 10,817,658  |   |
| Pretax gain on disposal                                                                                             |   | 7,951       |   |
| (h) Income tax expense                                                                                              |   | (2,778      | )      |
| (I) Gain on split-up                                                                                                |   | 5,173       |   |
|                                                                                                                |   |        |   |
| Transaction to record acquisition of  minority interest in Alliance Telecommunications Corp.                        |   |        |   |
| (j) Eliminate minority interest in  goodwill of Alliance Telecommunications Corp.                                   |   | (14,258,325 | )      |
| (k) Fair value of tangilbe assets of  minority interest acquired                                                    |   | 960,000     |   |
| (l) Deferred taxes related to tangible  assets acquired                                                             |   | (384,000    | )      |

 

SIGNATURES

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                    | HECTOR COMMUNICATIONS CORPORATION                                                                                                         |
|-------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                                      |
| Dated: December 1, 2003 | /s/ Curtis A. Sampson                                                                                                                     |   |
|                    | Curtis A. Sampson, Chairman of the Board  of Directors, Chief Executive Officer and  Attorney-in-fact for the Registrant’s Directors |
|                    |                                                                                                                                      |
| Dated: December 1, 2003 | /s/ Charles A. Braun                                                                                                                      |   |
|                    | Charles A. Braun, Chief Financial Officer  and                                                                                            |
|                    | Principal Accounting Officer                                                                                                              |

 

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