<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HECTOR COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
/X/ Items 22(a)(2) of
Schedule A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
HECTOR COMMUNICATIONS CORPORATION
------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 18, 1999
------------------------
Notice is hereby given that the Annual Meeting of Shareholders of Hector
Communications Corporation will be held at the Carlson School of Management, 321
19th Avenue South, Room 2-260Z, Minneapolis, Minnesota on Tuesday, May 18, 1999
at 2:00 p.m., Central Daylight Time, for the following purposes:
1. To elect two (2) directors to hold office until the 2002 Annual Meeting
of Shareholders or until their successors are elected.
2. To consider and act upon a proposal to ratify and approve the Company's
1999 Stock Plan which authorizes the issuance of up to 300,000 shares
pursuant to options and other awards granted under the Plan and increases
from 1000 to 2000 the number of shares purchasable upon exercise of an
option automatically granted to each director reelected at or continuing
in office after the annual meeting of shareholders.
3. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on March 19, 1999 as
the record date for the determination of shareholders entitled to notice of and
to vote at the meeting.
By Order of the Board of Directors
Richard A. Primuth,
SECRETARY
Hector, Minnesota
April 15, 1999
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND IN
PERSON. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN
PERSON IF THEY SO DESIRE.
<PAGE>
HECTOR COMMUNICATIONS CORPORATION
211 SOUTH MAIN STREET
HECTOR, MINNESOTA 55342
(612) 848-6611
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is furnished to the shareholders of Hector
Communications Corporation ("HCC" or the "Company") in connection with the
solicitation of proxies by the Board of Directors of the Company to be voted at
the Annual Meeting of Shareholders to be held at the Carlson School of
Management, 321 19th Avenue South, Room 2-260Z, Minneapolis, Minnesota on
Tuesday, May 18, 1999, beginning at 2:00 p.m. or at any adjournment or
adjournments thereof. The cost of this solicitation will be paid by the Company.
In addition to solicitation by mail, officers, directors and employees of the
Company may solicit proxies by telephone, telegraph or in person. The Company
may also request banks and brokers to solicit their customers who have a
beneficial interest in the Company's Common Stock registered in the names of
nominees and will reimburse such banks and brokers for their reasonable
out-of-pocket expenses.
Any proxy may be revoked at any time before it is voted by receipt of a
proxy properly signed and dated subsequent to an earlier proxy, or by revocation
of a written proxy by request in person at the Annual Meeting. If not so
revoked, the shares represented by such proxy will be voted by the persons
designated as proxies in favor of the matters indicated. In the event any other
matters properly come before the meeting calling for a vote of shareholders, the
persons named as proxies will vote in accordance with their judgment on such
matters. The Company's corporate offices are located at 211 South Main Street,
Hector, Minnesota 55342, and its telephone number is (320) 848-6611. The mailing
of this Proxy Statement to shareholders of the Company commenced on or about
April 15, 1999.
The total number of shares outstanding and entitled to vote at the meeting
as of March 19, 1999 were 2,663,968 shares of $.01 par value Common Stock. Each
share of Common Stock is entitled to one vote. Cumulative voting in the election
of directors is not permitted. Only shareholders of record at the close of
business on March 19, 1999 will be entitled to vote at the meeting. The presence
in person or by proxy of the holders of a majority of the shares entitled to
vote at the Annual Meeting of Shareholders constitutes a quorum for the
transaction of business. In addition to its outstanding Common Stock, the
Company had outstanding on the record date 342,800 shares of non-voting
convertible preferred stock. See "Security Ownership of Certain Beneficial
Owners and Management" herein.
Under Minnesota law, each item of business properly presented at a meeting
of shareholders generally must be approved by the affirmative vote of the
holders of a majority of the voting power of the shares present, in person or by
proxy, and entitled to vote on that item of business. However, if the shares
present and entitled to vote on any particular item of business would not
constitute a quorum for the transaction of business at the meeting, then that
item must be approved by holders of a majority of the minimum number of shares
that would constitute such a quorum. Votes cast by proxy or in person at the
Annual Meeting of Shareholders will be tabulated at the meeting to determine
whether or not a quorum is present. Abstentions on a particular item of business
will be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum, but as unvoted for purposes of determining
the approval of the matter. If a broker indicates on the proxy that it does not
have discretionary authority as to certain shares to vote on a particular
matter, those shares will not be considered as present and entitled to vote with
respect to that matter.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock by each person known by the Company to own of record or beneficially five
percent (5%) or more of the Company's common stock, and all officers and
directors of the Company as a group based upon information available as of March
31, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS*
- -------------------------------------- -------------------- ------------
<S> <C> <C>
Curtis A. Sampson 565,894(1) 21.2%
211 South Main Street
Hector, MN 55342
Mario J. Gabelli 462,900(2) 15.4%
One Corporate Center
Rye, New York 10580
Perkins Capital Management Inc. 366,136(3) 13.7%
730 E Lake Street
Wayzata, MN 55391
Golden West Cablevision, Inc. 171,425 6.4%
P.O. Box 411
Wall, South Dakota 57790
Paul N. Hanson 152,769(4) 5.7%
211 South Main Street
Hector, MN 55342
All directors and officers 633,768(5) 23.8%
as a group (9 persons)
</TABLE>
- ------------------------
* There are currently outstanding 342,800 shares of the Company's Series A
Convertible Preferred Stock. The holders of preferred stock have no voting
rights, except in limited circumstances, but each share of preferred stock
is convertible at any time at the option of the holder into one share of
common stock. The percent of class calculations in the right column above do
not give effect to the conversion of any shares of Preferred Stock, all of
which are issued to persons and entities directly or indirectly controlled
by or affiliated with Mr. Mario J. Gabelli, except for the percentage
calculation applicable to Mr. Gabelli. See footnote 2. Each such percentage
calculation would decline approximately 9% if such conversion were assumed.
(1) The shares listed above include 383,541 shares owned by Mr. Sampson
directly, 50,000 shares which may be purchased within 60 days pursuant to
outstanding stock options, 5,625 shares issuable upon conversion of the
Company's 8.5% Convertible Subordinated Debentures due 2002 ("Convertible
Debentures"), 14,937 shares owned by Mr. Sampson's wife, 54,719 shares owned
by the Communications Systems, Inc. Employee Stock Ownership Plan ("CSI
ESOP") of which Mr. Sampson is a trustee and 57,072 shares owned by the
Hector Communications Corporation Employee Stock Ownership Plan ("Hector
ESOP") of which Mr. Sampson is a trustee. See "Certain Transactions" below.
Mr. Sampson disclaims any beneficial ownership of the shares owned by his
wife and disclaims any beneficial ownership of the shares owned by the CSI
ESOP and the Hector ESOP in excess of the shares allocated to his account,
which totaled 10,157 shares at December 31, 1998.
2
<PAGE>
(2) The aggregate number of shares listed includes shares respectively held by
various persons or entities which are deemed to be controlled, directly or
indirectly, by or affiliated with Mr. Gabelli. The aggregate number of
shares listed above include 342,800 shares of the Company's non-voting
Convertible Preferred Stock (which are convertible on a one for one basis at
any time into the Company's common stock), including shares held by the
following persons in the amounts respectively indicated: Gabelli Performance
Partnership, 201,700 shares; and Lynch Corporation, 124,000 shares. In
addition, the following persons hold shares of the Company's common stock in
the amounts respectively indicated: Gabelli Performance Partnership, 25,800
shares; Lynch Corporation, 31,800 shares; and GAMCO Investors, Inc., 62,500
shares.
(3) The shares indicated include 358,834 shares deemed to be owned by Perkins
Capital Management, Inc. as the beneficial holder of $3,190,000 principal
amount of Convertible Debentures.
(4) The shares listed above include 12,978 shares owned by Mr. Hanson directly,
24,000 shares which may be purchased within 60 days pursuant to outstanding
stock options, 4,000 shares owned by Mr. Hanson's wife, 5,625 shares
issuable to Mr. Hanson's wife upon conversion of the Convertible Debentures;
54,719 shares owned by the CSI ESOP of which Mr. Hanson is a trustee and
57,072 shares owned by the Hector ESOP of which Mr. Hanson is a trustee. Mr.
Hanson disclaims any beneficial ownership of the shares owned by the CSI
ESOP and Hector ESOP in excess of the shares allocated to his account, which
totaled 3,823 shares at December 31, 1998.
(5) Includes 111,791 shares owned collectively by the CSI ESOP and the Hector
ESOP of which Messrs. C. A. Sampson and Hanson are trustees, and 149, 800
shares deemed outstanding pursuant to options exercisable within 60 days.
Mr. Sampson and Mr. Hanson disclaim any beneficial ownership of the shares
owned by the CSI ESOP and the Hector ESOP in excess of shares allocated to
their respective accounts as described under footnotes 1 and 4 above.
1. ELECTION OF DIRECTORS
The Board of Directors has nominated and recommends for election as
directors of the Company the two persons named below. Messrs. Curtis A. Sampson
and Steven H. Sjogren have served as directors since 1990. It is intended that
proxies will be voted for such nominees. The Board of Directors believes that
each nominee named below will be able to serve, but should a nominee be unable
to serve as a director, the persons named in the proxies have advised that they
will vote for the election of such substitute nominee as the Board of Directors
may propose.
Information regarding the nominees and other directors filling unexpired
terms, including information regarding their principal occupations currently and
for the preceding five years, is set forth below and on the following page.
Ownership of Common Stock of the Company is given as of March 24, 1999. To the
3
<PAGE>
best of the Company's knowledge, unless otherwise indicated below, the persons
indicated possess sole voting and investment power with respect to their stock
ownership.
<TABLE>
<CAPTION>
YEAR
CURRENT AMOUNT OF PERCENT OF
PRINCIPAL OCCUPATION AND OTHER DIRECTOR TERM STOCK OUTSTANDING
NAME AND AGE DIRECTORSHIPS SINCE EXPIRES OWNERSHIP STOCK
- ------------------------ ------------------------------------------ ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
NOMINEES PROPOSED FOR ELECTION FOR TERM EXPIRING IN 2002
Curtis A. Sampson Chairman and Chief Executive Officer of 1990 1999 565,894(1) 21.2%
(65)+ the Company; Chairman of the Board,
President and Chief Executive Officer of
Communications Systems, Inc.
(telecommunications manufacturing);
Chairman of the Board of Canterbury Park
Holding Corporation (thoroughbred
racetrack).
Steven H. Sjogren President and Chief Operating Officer of 1990 1999 115,250(2) 4.3%
(56)+ the Company.
DIRECTORS SERVING UNEXPIRED TERMS
Charles R. Dickman Retired Pharmacist, Hector, Minnesota. 1990 2000 55,161 (3) 2.1 %
(78)
Paul A. Hoff Chief Executive Officer, Park Regional 1993 2000 4,000 (4) *
(51) Mutual Telephone Company, Underwood,
Minnesota.
Edward E. Strickland Business and management consultant; 1990 2000 18,111 (5) *
(72) Director of: Reuter Manufacturing, Inc.
(manufacturing); Bio-Vascular, Inc.
(medical devices); Intercim, Inc. (factory
management software); Communications
Systems, Inc.; and Quantech, Ltd. (medical
devices).
James O. Ericson Business consultant and private investor 1995 2001 26,957 (6) 1.0 %
(63)
Paul N. Hanson Vice President and Treasurer of the 1990 2001 152,769 (7) 5.7 %
(52) Company; Chief Financial Officer, Vice
President of Finance and Treasurer of
Communications Systems, Inc.
Wayne E. Sampson Management consultant; director of 1990 2001 63,719 (8) 2.4 %
(69)+ Communications Systems, Inc.
</TABLE>
- ------------------------
+ Wayne E. Sampson and Curtis A. Sampson are brothers and each is a first
cousin to Mr. Sjogren.
* Indicates ownership of less than one percent.
(1) See footnote 1 to "Security Ownership of Certain Beneficial Owners and
Management" above.
4
<PAGE>
(2) Includes 16,978 shares owned by Mr. Sjogren directly, 41,200 shares deemed
outstanding pursuant to options exercisable within 60 days and 57,072 shares
owned by the Hector ESOP of which Mr. Sjogren is a trustee. Mr. Sjogren
disclaims any beneficial ownership of the shares owned by the Hector ESOP in
excess of the shares allocated to his account, which totaled 6,181 shares at
December 31, 1998.
(3) Includes 14,334 shares owned by Mr. Dickman's wife, as to which beneficial
ownership is disclaimed, and 5,500 shares deemed outstanding pursuant to
options exercisable within 60 days.
(4) Represents shares deemed outstanding pursuant to options exercisable within
60 days.
(5) Includes 4,500 shares deemed outstanding pursuant to options exercisable
within 60 days and 2,025 shares upon conversion of Convertible Debentures.
(6) Includes 3,310 shares owned by Mr. Ericson's spouse, as to which beneficial
ownership is disclaimed and 3,000 shares deemed outstanding pursuant to
options exercisable within sixty days.
(7) See footnote 4 to "Security Ownership of Certain Beneficial Owners and
Management" above.
(8) Includes 3,500 shares owned by Mr. W. E. Sampson directly, 5,500 shares
which may be purchased within 60 days pursuant to outstanding stock options,
and 54,719 shares owned by the CSI ESOP, of which Mr. Sampson is a trustee.
Mr. Sampson disclaims any beneficial ownership of the shares owned by the
CSI ESOP.
INFORMATION REGARDING BOARD AND BOARD COMMITTEES
The Board of Directors of the Company met four times during 1998. Each
director nominee and each continuing director attended at least 75% of the
meetings of the Board and each committee on which such director served.
Each non-employee member of the Board is paid an monthly fee of $500, plus
$400 for each Board or committee meeting attended. Messrs. Curtis A. Sampson,
Sjogren and Hanson, who are otherwise employed by the Company, receive no
additional compensation for service on the Board.
Each non-employee member of the Board of Directors nominated for reelection
or continuing in office receives at the time of each annual meeting of the
shareholders an option to purchase 1,000 shares of the Company's Common Stock.
Each director's option provides for an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant exercisable over a
ten-year period beginning six months after the date the option is granted. If
Proposal No. 2 is adopted, this automatic option grant will increase to cover
2,000 shares.
The Company has an Audit Committee consisting of Messrs. Wayne E. Sampson
and Strickland. The Audit Committee recommends to the full Board of Directors
the selection of independent accountants and reviews the activities and reports
of the independent accountants, as well as the internal accounting controls of
the Company. The Audit Committee met once in 1998.
The Company has a Compensation Committee consisting of Messrs. Hoff, Wayne
E. Sampson and Sjogren. The Compensation Committee met once during 1998. The
Compensation Committee recommends to the Board of Directors compensation for
executive officers and key personnel and reviews the Company's compensation
policies and practices. Mr. Sjogren does not participate in the consideration by
the committee of his own compensation.
5
<PAGE>
PROPOSAL TO RATIFY AND APPROVE
THE COMPANY'S STOCK PLAN
GENERAL INFORMATION
The Company's Board of Directors has adopted the Hector Communications 1999
Stock Plan (the "Plan"), subject to ratification and approval by the Company's
shareholders. The Plan is a successor to the Company's 1990 Stock Option Plan
(the "1990 Plan"). Consistent with the purposes of the 1990 Plan, the purpose of
the Plan is to enable the Company and its subsidiaries to retain and attract key
employees, consultants and non-employee directors who contribute to the
Company's success by their ability, ingenuity and industry, and to enable such
key employees, consultants and non-employee directors to participate in the
long-term success and growth of the Company by giving them a proprietary
interest in the Company. The Plan authorizes the granting of awards in any of
the following forms: (i) stock options, (ii) stock appreciation rights, (iii)
restricted stock, and (iv) deferred stock.
The Plan provides for a total share authorization of 300,000 shares in order
to provide an adequate reserve for the grant of options to key employees in the
future and to provide for ongoing automatic grants of stock options to
non-employee directors. The 1990 Plan was originally adopted with an
authorization of 250,000 shares which was increased to 500,000 shares pursuant
to an amendment approved by the shareholders in May 1997. As of April 1, 1999, a
total of 61,000 shares have been purchased through the exercise of options under
the 1990 Plan and, in addition, options to purchase 341,275 shares were
outstanding. The 1990 Plan will expire in accordance with its terms on July 19,
2000 and the Board has determined it is prudent to adopt a new successor plan at
this time.
The principal features of the Plan are summarized below.
SHARES AVAILABLE UNDER THE PLAN
The maximum number of common shares reserved and available under the Plan
for awards is 300,000 (subject to possible adjustment in the event of stock
splits or other similar changes in outstanding common shares). Common shares
covered by expired or terminated stock options and forfeited shares of
restricted stock or deferred stock may be used for subsequent awards under the
Plan.
ELIGIBILITY AND ADMINISTRATION
Officers and other key employees of the Company and its subsidiaries who are
responsible for or contribute to the management, growth and/or profitability of
the business of the Company and its subsidiaries, as well as consultants and
non-employee directors, are eligible to be granted awards under the Plan. The
Plan will be administered by the Board or, in its discretion, by a committee of
not less than two non-employee directors who are "outside directors" as defined
in the Plan (the "Committee") appointed by the Board of Directors. The term
"Board" as used in this section refers to the Board of Directors or if the Board
has delegated its authority, the Committee. The Board will have the power to
make awards (other than awards to non-employee directors), determine the number
of shares covered by each award and other terms and conditions of such awards,
interpret the Plan, and adopt rules, regulations and procedures with respect to
the administration of the Plan. The Board may delegate its authority to officers
of the Company for the purpose of selecting key employees who are not officers
of the Company to be participants in the Plan.
6
<PAGE>
AWARDS UNDER PLAN
STOCK OPTIONS. The Board may grant stock options that either qualify as
"incentive stock options" under the Internal Revenue Code of 1986, as amended
("Code") or are "non-qualified stock options" in such form and upon such terms
as the Board may approve from time to time. Stock options granted under the Plan
may be exercised during their respective terms as determined by the Board. The
purchase price may be paid by tendering cash or, in the Board's discretion, by
tendering promissory notes or Company common stock. The optionee may elect to
pay all or part of the option exercise price by having the Company withhold upon
exercise of the option a number of shares with a fair market value equal to the
aggregate option exercise price for the shares with respect to which such
election is made. No stock option shall be transferable by the optionee or
exercised by anyone else during the optionee's lifetime.
Stock options may be exercised during varying periods of time after a
participant's termination of employment, dependent upon the reason for the
termination. Following a participant's death, the participant's stock options
may be exercised to the extent they were exercisable at the time of death by the
legal representative of the estate or the optionee's legatee for a period of one
year or until the expiration of the stated term of the option, whichever is
less. The same time periods apply if the participant is terminated by reason of
disability. If the participant retires, the participant's stock options may be
exercised to the extent they were exercisable at the time of retirement or for a
period of twelve months from the date of retirement or until the expiration of
the stated term of the option, whichever is less. If the participant is
involuntarily terminated without cause, the participant's options may be
exercised to the extent they were exercisable at the time of termination for the
lesser of three months or the balance of the stated term of the option. If the
participant's employment is terminated for cause, the participant's stock
options immediately terminate. The Board may, in its discretion, accelerate the
exercisability of stock options which would not otherwise be exercisable upon
death, disability or retirement.
No incentive stock options shall be granted under the Plan as originally
adopted after April 1, 2009. The term of an incentive stock option may not
exceed 10 years (or 5 years if issued to a participant who owns or is deemed to
own more than 10% of the combined voting power of all classes of stock of the
Company, any subsidiary or affiliate). The aggregate fair market value of the
common stock with respect to which an incentive stock option is exercisable for
the first time by an optionee during any calendar year shall not exceed
$100,000. The exercise price under an incentive stock option may not be less
than the fair market value of the common stock on the date the option is granted
(or, in the event the participant owns more than 10% of the combined voting
power of all classes of stock of the Company, the option price shall be not less
than 110% of the fair market value of the stock on the date the option is
granted). The exercise price for non-qualified options granted under the Plan
may be less than 100% of the fair market value of the common stock on the date
of grant.
The Plan provides for the automatic granting of options to non-employee
directors. Such options are granted to each person who (i) is not an employee of
the Company, any parent corporation or subsidiary and (ii) is elected or
re-elected as a director by vote of the Board or the shareholders subsequent to
April 1, 1999 or continues in effect following the annual meeting of
Shareholders. Each such person automatically receives, as of the date of each
such election or re-election, a non-qualified option to purchase 2,000 shares of
common stock with an option price equal to the fair market value of the
Company's common stock on the date the option is granted. The options have
ten-year terms and are exercisable beginning six months after the date of option
grant. These options will not expire upon termination of service as a director.
Non-employee directors are also eligible to receive additional grants of
non-qualified stock options under the Plan.
7
<PAGE>
The automatic grant program under the Plan replaces a similar formula grant
program under the 1990 Plan, with each option granted under the 1990 Plan
covering 1,000 shares.
STOCK APPRECIATION RIGHTS. The Board may grant stock appreciation rights
("SARs") in connection with all or part of any stock option (with the exception
of options granted to non-employee directors), either at the time of the stock
option grant, or, in the case of non-qualified options, later during the term of
the stock option. SARs entitle the participant to receive from the Company the
same economic value that would have been derived from the exercise of an
underlying stock option and the immediate sale of the shares of common stock.
Such value is paid by the Company in cash, shares of common stock or a
combination of both, in the discretion of the Board. SARs are exercisable or
transferable only at such times and to the extent stock options to which they
relate are exercisable or transferable. If an SAR is exercised, the underlying
stock option is terminated as to the number of shares covered by the SAR
exercise.
RESTRICTED STOCK. The Board may grant restricted stock awards that result
in shares of common stock being issued to a participant subject to restrictions
against disposition during a restricted period established by the Board. The
Board may condition the grant of restricted stock upon the attainment of
specified performance goals or service requirements. The provisions of
restricted stock awards need not be the same with respect to each recipient. The
restricted stock will be held in custody by the Company until the restrictions
thereon have lapsed. During the period of the restrictions, a participant has
the right to vote the shares of restricted stock and to receive dividends and
distributions unless the Board requires such dividends and distributions to be
held by the Company subject to the same restrictions as the restricted stock.
Notwithstanding the foregoing, all restrictions with respect to restricted stock
lapse 60 days (or less as determined by the Board) prior to the occurrence of a
merger or other significant corporate change, as provided in the Plan.
If a participant terminates employment during the period of the
restrictions, all shares still subject to restrictions will be forfeited and
returned to the Company, subject to the right of the Board to waive such
restrictions in the event of a participant's death, total disability, retirement
or under special circumstances approved by the Board.
DEFERRED STOCK. The Board may grant deferred stock awards that result in
shares of common stock being issued to a participant or group of participants
upon the expiration of a deferral period. The Board may condition the grant of
deferred stock upon the attainment of specified performance goals. The
provisions of deferred stock awards need not be the same with respect to each
recipient.
Upon termination of employment for any reason during the deferral period for
a given award, the deferred stock in question shall be forfeited by the
participant, subject to the Board's ability to waive any remaining deferral
limitations with respect to a participant's deferred stock. During the deferral
period, deferred stock awards may not be sold, assigned, transferred, pledged or
otherwise encumbered and any dividends declared with respect to the number of
shares covered by a deferred stock award will either be immediately paid to the
participant or deferred and deemed to be reinvested in additional deferred
stock, as determined by the Board. The Board may allow a participant to elect to
further defer receipt of a deferred stock award for a specified period or until
a specified event.
8
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
STOCK OPTIONS. An optionee will not realize taxable compensation income
upon the grant of an incentive stock option. In addition, an optionee generally
will not realize taxable compensation income upon the exercise of an incentive
stock option if he or she exercises it as an employee or within three months
after termination of employment (or within one year after termination if the
termination results from a permanent and total disability). The amount by which
the fair market value of the shares purchased exceeds the aggregate option price
at the time of exercise will be alternative minimum taxable income for purposes
of applying the alternative minimum tax. If stock acquired pursuant to an
incentive stock option is not disposed of prior to the date two years from the
option grant date or prior to one year from the option exercise date (the
"Applicable Holding Periods"), any gain or loss realized upon the sale of such
shares will be characterized as capital gain or loss. If the Applicable Holding
Periods are not satisfied, then any gain realized in connection with the
disposition of such stock will generally be taxable as ordinary compensation
income in the year in which the disposition occurred, to the extent of the
difference between the fair market value of such stock on the date of exercise
and the option exercise price. The Company is entitled to a tax deduction to the
extent, and at the time, the participant realizes compensation income. The
balance of any gain will be characterized as a capital gain. Under current law,
net capital gains are taxed at a minimum federal rate of 28% while compensation
income may be taxed at higher federal rates.
An optionee generally will not realize taxable compensation income upon the
grant of a non-qualified stock option. As a general matter, when an optionee
exercises a non-qualified stock option, he or she will realize taxable
compensation at that time equal to the difference between the aggregate option
price and the fair market value of the stock on the date of exercise. The
Company is entitled to a tax deduction to the extent, and at the time, the
participant realizes compensation income.
SARS. The grant of an SAR would not result in income for the participant or
in a deduction for the Company. Upon receipt of shares or cash from exercise of
an SAR, the participant would generally recognize compensation income, measured
by the fair market value of the shares plus any cash received, and the Company
would be entitled to a corresponding deduction.
RESTRICTED STOCK AND DEFERRED STOCK. The grant of restricted stock and
deferred stock should not result in immediate income for the participant or in a
deduction for the Company for federal income tax purposes, assuming the shares
are nontransferable and subject to restrictions or to a deferral period which
would result in a "substantial risk of forfeiture" as intended by the Company
and as defined in applicable Treasury regulations. If the shares are
transferable or there are no such restrictions or significant deferral periods,
the participant will realize compensation income upon receipt of the award.
Otherwise, a participant generally will realize taxable compensation when any
such restrictions or deferral period lapses. The amount of such income will be
the value of the common stock on that date less any amount paid for the shares.
Dividends paid on the common stock and received by the participant during the
restricted period or deferral period also will be taxable compensation income to
the participant. In any event, the Company will be entitled to a tax deduction
to the extent, and at the time, the participant realizes compensation income. A
participant may elect, under Section 83(b) of the Code, to be taxed on the value
of the stock at the time of award. If the election is made, the fair market
value of the stock at the time of the award is taxable to the participant as
compensation income and the Company is entitled to a corresponding deduction.
WITHHOLDING. The Plan requires each participant, no later than the date as
of which any part of the value of an award first becomes includible as
compensation in the gross income of the participant, to pay to
9
<PAGE>
the Company any federal, state or local taxes required by law to be withheld
with respect to the award. The Company shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment otherwise due to the
participant. With respect to any award under the Plan, if the terms of the award
so permit, a participant may elect to satisfy part or all of the withholding tax
requirements associated with the award by (i) authorizing the Company to retain
from the number of shares of Company common stock which would otherwise be
deliverable to the participant, or (ii) delivering to the Company from shares of
Company common stock already owned by the participant that number of shares
having an aggregate fair market value equal to part or all of the tax payable by
the participant. In that case, the Company would pay the tax liability from its
own funds.
REGISTRATION WITH SEC
The Company intends to file a Registration Statement covering the issuance
of shares issuable under the Stock Plan with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, amended.
ADDITIONAL INFORMATION
A copy of the Plan can be obtained by writing to: Chief Financial Officer,
Hector Communications Corporation, 211 South Main Street, Hector, Minnesota
55342.
SHAREHOLDER APPROVAL
The affirmative vote of a majority of the outstanding shares of the
Company's Common Stock voting at the meeting in person or by proxy is required
for ratification and approval of the Company's Stock Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION AND APPROVAL OF
THE 1999 STOCK PLAN.
10
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following tables show, for the fiscal years ending December 31, 1998,
1997 and 1996, the cash and other compensation paid to or accrued by the Company
for the Company's Chief Executive Officer and Chief Operating Officer in all
capacities served, as well as information relating to option grants, option
exercises and fiscal year end option values applicable to such persons.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION OPTIONS
-------------------------------- (NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SHARES) COMPENSATION(2)
- -------------------------------------------------- --------- ---------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Curtis A. Sampson, Chief Executive
Officer(1)...................................... 1998 $ 140,769 $ 25,000 10,000 $ 10,284
1997 $ 122,308 $ 20,000 10,000 $ 9,536
1996 $ 113,654 $ 15,000 10,000 $ 7,618
Steven H. Sjogren, Chief Operating
Officer......................................... 1998 $ 107,615 $ 15,000 9,000 $ 7,524
1997 $ 96,576 $ 10,000 8,100 $ 7,436
1996 $ 89,385 $ 9,000 8,100 $ 6,501
</TABLE>
- ------------------------
Note: Certain columns have not been included in this table because the
information called for therein is not applicable to the Company or the
individual named above for the periods indicated.
(1) Mr. Sampson devotes approximately 40% of his working time to the Company.
The balance of his working time Mr. Sampson serves as Chairman and Executive
Officer of Communications Systems, Inc., for which he is separately
compensated. See "Certain Transactions."
(2) All other compensation for Messrs. Sampson and Sjogren consisted of Company
contributions to the Company's 401(k) Plan and Employee Stock Ownership
Plan.
(3) In May, 1998, pursuant to a Board of Director approval, the Company loaned
to Curtis A. Sampson $71,500 pursuant to a two-year promissory note bearing
interest at 6.5% to enable Mr. Sampson to exercise stock options he was
granted by the Company. The loan to Mr. Sampson is secured by the pledge of
10,000 shares of the Company's common stock.
11
<PAGE>
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL
GRANTED RATES OF STOCK
TO MARKET PRICE APPRECIATION
EMPLOYEES EXERCISE PRICE FOR OPTION TERM
OPTIONS IN FISCAL PRICE ON DATE EXPIRATION --------------------
NAME GRANTED YEAR PER SHARE OF GRANT DATE 5% 10%
- ------------------------------------ ----------- ------------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Curtis A. Sampson................... 10,000 14% $ 12.5125 $ 11.375 3/24/03 $ 34,570 $ 76,390
Steven H. Sjogren................... 9,000 13% 11.375 11.375 3/24/03 28,284 62,501
</TABLE>
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT FY-END
VALUE REALIZED (BASED ON 12/31/98
(MARKET PRICE NUMBER OF UNEXERCISED PRICE OF
AT EXERCISE OPTIONS AT 12/31/98 $8.31/SHAREHOLDER)
SHARES ACQUIRED LESS -------------------------- --------------------------
NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Curtis A. Sampson................. 10,000 71,500 40,000 10,000 $ 20,185 $ 211
Steven H. Sjogren................. 8,000 52,000 32,500 8,700 37,083 2,195
</TABLE>
EMPLOYMENT CONTRACTS
The Company entered into an employment agreement effective August 1, 1990
with Mr. Steven H. Sjogren, the Company's President, which has a term of 10
years. Current compensation under the contract is $106,000 per annum which is
subject to increase pursuant to annual salary reviews. In addition to other
customary terms and conditions, the employment agreement requires that any early
termination of the agreement by the Company be "for cause."
COMPENSATION COMMITTEE REPORT
The Compensation Committee appointed by the Company's Board of Directors has
primary responsibility in regard to determinations relating to executive
compensation and administration of the Company's stock option plans. All
decisions by the Compensation Committee pertaining to the compensation of the
Company's executive officers are reviewed and approved by the full Board. Steven
H. Sjogren, the Company's Chief Operating Officer, did not participate in any
discussions or decisions of either the Compensation Committee or the Board of
Directors relating to any aspect of his compensation.
12
<PAGE>
COMPENSATION POLICIES
It is the objective of the Compensation Committee to pay compensation at
levels which will attract, retain and motivate executives with superior
leadership and management abilities and to structure the forms of compensation
paid such that their interests will be closely aligned with achievement of
superior financial performance by the Company. With these objectives in mind,
the compensation currently paid to the Company's executive officers principally
consists of three elements: base salary, bonus and stock option awards.
COMPENSATION ELEMENTS
Base salaries of the Company's executive officers are generally established
by reference to base salaries paid to executives in similar positions with
similar responsibilities based upon publicly available compensation surveys and
limited informal surveys by Compensation Committee members. Base salaries are
reviewed annually. Adjustments to base salaries are determined by reference to
individual and company performance having in mind both measurable financial
factors, as well as subjective judgments by the Compensation Committee in regard
to factors such as development and execution of strategic plans, changes in
areas of responsibility, the development and management of employees and
participation in industry, regulatory and political initiatives beneficial to
the Company. The Compensation Committee does not, however, assign specific
weights to these various quantitative and qualitative factors in reaching its
decisions.
Bonuses are intended to provide executives with an opportunity to receive
additional cash compensation, but only if they earn it through Company and
individual performance. After year end results are available, the Committee
determines each officer's bonus based on the Company's performance, as measured
by such factors as growth in earnings per share, as well as the Compensation
Committee's subjective assessment of individual performance in the executive's
area of responsibility, but without assigning specific weight to the various
qualitative and quantitative factors considered.
Stock options have, to date, been awarded to the Company's executives under
the Company's 1990 Stock Plan. In the future, if shareholder approval is
obtained, stock options will be awarded to the Company's executives under the
Company's 1999 Stock Plan. Stock options represent an additional vehicle for
aligning management's and stockholders' interests, specifically motivating
executives to remain focused on factors which will enhance the market value of
the Company's common stock. If there is no price appreciation in the common
stock, the option holders receive no benefit from the stock options, because
options are granted with an option exercise price at least equal to the fair
market value of the common stock on the date of grant.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Curtis A. Sampson participates in the same executive compensation plans
provided to other senior executives and is evaluated by the same factors
applicable to the other executives as described above. Mr. Sampson's total cash
compensation for 1998 was $165,769, an increase of 16.5% over total cash
compensation in 1997. In addition, Mr Sampson was granted options to purchase
10,000 shares in 1998, the same amount granted to Mr. Sampson in 1997. Because
of his significant holdings of Company common stock, under applicable IRS rules,
Mr. Sampson's options are priced at 110% of the market price on the
13
<PAGE>
date of grant. The base salary and bonus compensation payable to Mr. Sampson in
1998 was determined in April 1998 and reflects the Committee's evaluation of Mr.
Sampson and the Company's performance for fiscal year 1997 as compared to fiscal
year 1996. In 1997 the Company experienced a 40% increase in revenues and a 125%
increase in net income reflecting the successful acquisition of Ollig Utilities
Company in 1996, an acquisition spearheaded by Mr. Sampson. In addition, Mr.
Sampson's compensation reflects his active leadership role in national
telecommunications organizations and associations and the benefits this provides
to the Company. The Compensation Committee believes, based upon their general
knowledge of compensation paid to other chief executives and published regional
salary data (but without conducting a formal survey), that Mr. Sampson's total
compensation is below that which could be reasonably justified in relation to
the scope of his responsibilities, as well as the financial performance of the
Company.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Paul A. Hoff Steven H. Sjorgen Wayne E. Sampson
14
<PAGE>
PERFORMANCE GRAPH
The following graph presents, at the end of each of the Company's last five
fiscal years, the cumulative total return on the common stock of the Company as
compared to the cumulative total return of the NASDAQ Stock Market Total Return
Index (U.S. Companies), and Hickory Tech Corporation which the Company has
selected as a peer issuer in the same industry assuming, in each case, the
investment of $100 on the last business day before January 1, 1993 and the
reinvestment of all dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HECTOR COMMUNICATIONS NASDAQ
CORPORATION STOCK MARKET HICKORY TECH CORPORATION
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 87.50 96.99 98.83
1995 95.31 130.24 100.26
1996 90.63 166.79 92.31
1997 115.63 203.98 125.79
1998 103.91 281.69 142.23
</TABLE>
15
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS AND SHARED MANAGEMENT WITH COMMUNICATIONS SYSTEMS, INC.
The Company receives certain staff services and systems, such as payroll and
pension plan administration, from Communications Systems, Inc. pursuant to an
agreement entered into in August 1990 with the costs and expenses of such
services paid by the Company. CSI has continued to make available to the Company
certain centralized staff services and systems, such as payroll and pension plan
administration, with the related costs and expenses being paid by the Company.
In 1998 and 1997 the Company paid CSI, respectively, $300,000 and $264,000 for
such services, amounts which management believes is less than what the Company
would pay if it was required to pay for such services from another vendor.
Three of the Company's executive officers, Curtis A. Sampson, Paul N. Hanson
and Charles A. Braun, each devote approximately 40% of their working time to the
Company. Messrs. Sampson, Hanson and Braun devote substantially all of the
remainder of their working time to CSI, of which Mr. Sampson serves as Chairman
and Chief Executive Officer. Mr. Hanson serves as Chief Financial Officer, Vice
President of Finance and Treasurer, and Mr. Braun serves as Controller. These
officers are separately compensated for their services to CSI.
REPORTS TO THE SECURITIES AND EXCHANGE COMMISSION
The Company's officers, directors and beneficial holders of 10% or more of
the Company's securities are required to file reports of their beneficial
ownership with the Securities and Exchange Commission on SEC Forms 3, 4 and 5.
According to the Company's records, during the period from January 1, 1998 to
December 31, 1998, officers, directors and ten percent beneficial holders of the
Company filed all reports with the Securities and Exchange Commission required
under Section 16(a) to report their beneficial ownership.
THE COMPANY'S AUDITORS
Olsen Thielen & Co., Ltd. have been the auditors for the Company since 1969
and have been selected by the Board of Directors, upon recommendation of the
Audit Committee, to serve as such for the current fiscal year. A representative
of Olsen Thielen & Co., Ltd. is expected to be present at the Annual Meeting of
Shareholders and will have an opportunity to make a statement and will be
available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
The proxy rules of the Securities and Exchange Commission permit
shareholders of the Company, after timely notice to the Company, to present
proposals for shareholder action in the Company's proxy statement where such
proposals are consistent with applicable law, pertain to matters appropriate for
shareholder action and are not properly omitted by Company action in accordance
with the Commission's proxy rules. The next annual meeting of the shareholders
of Hector Communications Corporation is expected to be held on or about May 20,
2000 and proxy materials in connection with that meeting are expected to be
mailed on or about March 31, 2000. Shareholder proposals prepared in accordance
with the Commission's proxy rules must be received at the Company's corporate
office, 211 South Main Street, Hector, Minnesota 55342, Attention: President, by
December 15, 1999, in order to be considered for inclusion in the Board of
Directors' Proxy Statement and proxy card for the 2000 Annual Meeting of
Shareholders. Any such proposals must be in writing and signed by the
shareholder.
16
<PAGE>
The Bylaws of the Company establish an advance notice procedure with regard
to (i) certain business to be brought before an annual meeting of shareholders
of the Company and (ii) the nomination by shareholders of candidates for
election as directors.
PROPERLY BROUGHT BUSINESS. The Bylaws provide that at the annual meeting
only such business may be conducted as is of a nature that is appropriate for
consideration at an annual meeting and has been either specified in the notice
of the meeting, otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or otherwise properly brought before the
meeting by a shareholder who has given timely written notice to the Secretary of
the Company of such shareholder's intention to bring such business before the
meeting. To be timely, the notice must be given by such shareholder to the
Secretary of the Company not less than 45 days nor more than 75 days prior to a
meeting date corresponding to the previous year's annual meeting. Notice
relating to the conduct of such business at an annual meeting must contain
certain information as described in Section 2.9 of the Company's Bylaws, which
are available for inspection by shareholders at the Company's principal
executive offices pursuant to Section 302A.461, subd. 4 of the Minnesota
Statutes. Nothing in the Bylaws precludes discussion by any shareholder of any
business properly brought before the annual meeting in accordance with the
Company's Bylaws.
SHAREHOLDER NOMINATIONS. The Bylaws provide that a notice of proposed
shareholder nominations for the election of directors must be timely given in
writing to the Secretary of the Company prior to the meeting at which directors
are to be elected. To be timely, the notice must be given by such shareholder to
the Secretary of the Company not less than 45 days nor more than 75 days prior
to a meeting date corresponding to the previous year's annual meeting. The
notice to the Company from a shareholder who intends to nominate a person at the
meeting for election as a director must contain certain information as described
in Section 3.7 of the Company's Bylaws, which are available for inspection by
shareholders as described above. If the presiding officer of a meeting of
shareholders determines that a person was not nominated in accordance with the
foregoing procedure, such person will not be eligible for election as a
director.
OTHER MATTERS
Management knows of no other matters that will be presented at the meeting.
If any other matters arise at the meeting, it is intended that the shares
represented by the proxies in the accompanying form will be voted in accordance
with the judgment of the persons named in the proxy.
The Company is transmitting with this Proxy Statement its Annual Report for
the year ended December 31, 1998. SHAREHOLDERS MAY RECEIVE, WITHOUT CHARGE, A
COPY OF THE COMPANY'S 1998 FORM 10-K REPORT AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION BY WRITING TO ASSISTANT SECRETARY, HECTOR COMMUNICATIONS
CORPORATION, 211 SOUTH MAIN STREET, HECTOR, MINNESOTA 55342.
By Order of the Board of Directors,
Richard A. Primuth, SECRETARY
17
<PAGE>
HECTOR COMMUNICATIONS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 18, 1999
The undersigned hereby appoints James O. Ericson, Paul N. Hanson and Wayne
E. Sampson or any of them, as proxies, with full power of substitution to vote
all the shares of common stock which the undersigned would be entitled to vote
if personally present at the Annual Meeting of Shareholders of Hector
Communications Corporation, to be held Tuesday, May 18, 1999, at 2:00 p.m.
Central Daylight Time at the Carlson School of Management, 321 19th Avenue
South, Room 2-260Z, Minneapolis, Minnesota or at any adjournments thereof, upon
any and all matters which may properly be brought before the meeting or
adjournment thereof, hereby revoking all former proxies.
<TABLE>
<S> <C> <C>
1. ELECTION OF DIRECTORS.
/ / WITH AUTHORITY to vote for the two nominees listed below (except as indicated to the contrary) for a three
year term ending at the 2002 Annual Meeting of Shareholders
/ / WITHOUT AUTHORITY to vote for nominees listed below
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
Curtis A. Sampson Steven H. Sjogren
-------------------------------------------------------------------------------------------------------
2. PROPOSAL TO RATIFY AND APPROVE THE COMPANY'S 1999 STOCK PLAN.
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
<TABLE>
<S> <C> <C>
(CONTINUED FROM PREVIOUS SIDE)
3. In their discretion upon any matters coming before the meeting.
</TABLE>
UNLESS OTHERWISE SPECIFIED, THE SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED "FOR" THE ELECTION OF THE DIRECTORS AND PROPOSAL 2 SUMMARIZED ON THE
REVERSE SIDE OF THIS CARD.
Dated ______________________, 1999
__________________________________
Signature
__________________________________
Signature if held jointly
Please date and sign exactly as
your name(s) appears below
indicating, where proper, official
position or representative
capacity in which you are signing.
When signing as executor,
administrator, trustee or
guardian, give full title as such;
when shares have been issued in
names of two or more persons, all
should sign.
