<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
COMMISSION FILE NUMBER: 0-13721
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
HICKORY TECH CORPORATION
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
MINNESOTA 41-1524393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
221 EAST HICKORY STREET
P.O. BOX 3248
MANKATO, MINNESOTA 56002
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 800-326-5789
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR
TITLE OF CLASS
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 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 information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 7, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $136,289,494 (exclusive of voting stock
owned by Registrant's Directors and Officers).
The total number of shares outstanding of the Registrant's common stock as
of March 7, 1997: 4,665,946.
Documents Incorporated by Reference: None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. Business I-1
2. Properties I-11
3. Legal Proceedings I-12
4. Submission of Matters to a Vote of Security Holders I-12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters II-1
6. Selected Financial Data II-2
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-3
8. Financial Statements and Supplementary Data II-12
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-26
PART III
10. Directors and Executive Officers of the Registrant III-1
11. Executive Compensation III-3
12. Security Ownership of Certain Beneficial Owners and
Management III-10
13. Certain Relationships and Related Transactions III-11
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
<PAGE>
PART I
ITEM 1. BUSINESS.
IN GENERAL
(a) The Registrant is Hickory Tech Corporation, which is the parent
company for seven operating subsidiaries, which are:
Mankato Citizens Telephone Company (MCTC), a Minnesota corporation;
Mid-Communications, Inc. (Mid-Comm), a Minnesota corporation;
Cable Network, Inc. (CNI), a Minnesota corporation;
Amana Colonies Telephone Company (ACTC), a Minnesota corporation;
Computoservice, Inc. (CSI), a Minnesota corporation *;
Collins Communications Systems Co. (Collins), a Minnesota corporation and;
Digital Techniques, Inc. (DTI), a Texas corporation.
* Includes a wholly owned subsidiary, National Independent Billing, Inc.
(NIBI), a Minnesota corporation.
Hickory Tech Corporation (Company) was reorganized as the parent company in
June, 1985. Its predecessor, MCTC, has been in business since February, 1898.
The Company has evolved into four main segments, based upon the eight operating
companies listed above. The four business segments are described below.
TELEPHONE SEGMENT
Telephone Operations represented approximately 48% of 1996 Consolidated
Operating Revenues.
MCTC and Mid-Comm, both medium-sized independent telephone utilities in and
around Mankato, Minnesota, have experienced no major change in the scope or
direction of their operations during the past year. The telephone operations of
MCTC and Mid-Comm are regulated by the Minnesota Public Utilities Commission.
MCTC also owns and operates a direct broadcast satellite license under the trade
name DirectVision. The DirectVision line of business is not regulated by State
and Federal regulators. ACTC is a small independent telephone company in east
central Iowa and is regulated by the Iowa Utilities Board. CNI owns and operates
fiber optic cable facilities in southern Minnesota which are used to transport
interexchange communications as a service to telephone exchange carriers. CNI
also holds a minority ownership interest in a rural cellular limited liability
company in south central Minnesota. None of CNI's operations are subject to
regulation by the Minnesota Public Utilities Commission.
The four companies that provide telephone related services, MCTC, Mid-Comm,
ACTC and CNI, are combined into the Company's Telephone Segment. The total
landline access lines served as of December 31, 1996 was 44,583. There are
twelve contiguous exchanges/central offices in and around Mankato, Minnesota and
one exchange serving seven communities in and around Amana, Iowa. The net
combined operating revenues after intercompany eliminations for this Segment
were $31,887,000 in 1996 compared with $30,209,000 in 1995, which is an increase
of 5.6%. Revenue for this Segment has increased for both network access and
local service. Network access revenues were positively affected by the continued
growth in access minutes, offset by overall lower rates charged for access
service. Local service has grown primarily as a result of an increase in number
of access lines served. Additional growth resulted from the marketing efforts to
sell custom calling services, Centrex and voice mail. Competition for customer
selection of dedicated trunklines over switched access services (i.e. bypass)
also caused reductions. Operating
I-1
<PAGE>
income for this Segment was $15,432,000 in 1996 compared with $14,648,000 in
1995. This Segment is in a capital-intensive industry, and during the two year
period ended 1996, $14,974,000 was invested in telecommunications plant
facilities.
BILLING AND DATA SERVICES SEGMENT
Billing and Data Services represented approximately 14% of 1996
Consolidated Operating Revenues.
CSI operates a computer data processing business from its base in Mankato,
Minnesota, with an emphasis on the telecommunications businesses and
municipalities. Included in CSI's customer base are numerous independent
telephone companies and several interexchange telephone carriers (IXC) such as
AT&T, US West Communications, Inc., Sprint and MCI. National Independent
Billing, Inc. (NIBI), a wholly owned subsidiary of CSI, provides services for
many facets of telecommunications. NIBI provides telecommunications message
processing for IXCs such as United Telephone Long Distance (UTLD) and MCImetro.
CSI's consolidated operating revenues after intercompany eliminations were
$9,573,000 in 1996 compared to $10,405,000 in 1995, a decrease of 8.0%.
Operating income for this subsidiary was $658,000 in 1996 compared to $721,000
in 1995, a 8.7% decrease. Computer data processing, the core service of CSI,
is a dynamic business of standard programming services, with a base of existing
customers comprised mostly of local telephone companies. However, there is
turnover in this base. New customers and services to existing customers are
continually being sought to offset the attrition of customers who establish
in-house systems. IXC contracts represent specialized services to long distance
communications providers. The volume of monthly processing with these IXCs under
the existing contracts has declined over the past three years. In contrast, a
contract with a large IXC initiated in 1995, has significantly increased CSI's
volume and profits in the last six months of 1996.
EQUIPMENT SALES SEGMENT
Equipment Sales represented approximately 28% of 1996 Consolidated
Operating Revenues.
Collins sells and services telephone apparatus on a retail level in the
metropolitan Minneapolis/St. Paul area. Collins continues its commitment to
service and support of its core product, Nortel (formerly Northern Telecom),
while identifying new opportunities such as call centers, Meridian Link,
computer telephone integration voice mail and interactive voice response.
Collins sold the assets of its California division, CoasTel, in 1995. Collins'
operations, as well as the equipment sales operations of the Company's local
telephone companies in and around Mankato, Minnesota, and Amana, Iowa, are
reflected in the Company's Equipment Sales Segment. This Segment's operating
revenues were $18,600,000 in 1996 compared with $14,502,000 in 1995, a 28.3%
increase. The Segment's operating income was $2,022,000 in 1996 compared with
$583,000 in 1995. This increase was primarily due to increased sales and margin
in the Minneapolis/St. Paul operations but is also affected by the 1995
operations in California which resulted in a loss of $268,000.
I-2
<PAGE>
TELECOMMUNICATIONS PRODUCT DEVELOPMENT SEGMENT
Telecommunications Product Development revenues represented approximately
10% of 1996 Consolidated Operating Revenues.
The Telecommunications Product Development Segment consists of the
operations of DTI. DTI designs, assembles and distributes unique
telecommunications components for business telephone systems throughout North
America, the United Kingdom and the Pacific Rim. DTI develops new products,
responds to original equipment manufacturing assembly orders, and distributes or
licenses products through large nationally recognized distributors. DTI's
expertise is in engineering telephone system interface devices, using software
and hardware solutions. DTI has a base of operations in the Dallas, Texas area,
but enjoys a national and international presence through its RBOC, GTE and
British Telecom, Inc. distributor networks. This Segment's operating revenues
were $6,502,000 in 1996 compared with $7,731,000 in 1995, a 15.9% decrease. Net
Operating Income/Loss decreased from income of $1,129,000 in 1995 to a loss of
($403,000) in 1996. The company experienced a delay in the introduction of a new
Automatic Call Distribution product (Qstar) designed to be used in customer
service centers to route calls. The company discovered product compatibility
problems in Qstar, which were not resolved until the end of 1996, too late to
reach the volume originally anticipated in 1996. This, combined with the
temporary suspension of a contract for an E911 product, resulted in the decrease
in revenues and income.
FINANCIAL CONDITION
The Company's financial position continues to be strong, with net working
capital of $6,279,000 at December 31, 1996. The Company operates in capital
intensive businesses. Additions to Property, Plant and Equipment are the
Company's largest investing activity, using $19,601,000 of cash in the three
years ended 1996. Another $12,000,000 has been planned for the next year. The
Company's primary source of working capital has been its operations, primarily
the Telephone Segment. The Company has achieved modernization of its core
business technology through internal reinvestment of capital, added
diversification through acquisition of external companies and generated new
business through start-up ventures, while still improving its shareholders'
capital position. The debt portion of the Company's total capitalization is
1.6%, an extremely low position which allows the Company an opportunity for
additional growth.
The construction and facilities program for 1997 is approximately
$12,000,000. This level of commitment is higher than the historical average of
construction due to the completion of two building projects in Mankato,
Minnesota and restructuring the switching platform for the eleven new exchanges
that will be acquired in April, as discussed below. Normal purchase commitments
have or will be made for planned expenditures.
The Company has entered into agreements to purchase the assets of eleven
rural telephone exchanges in the State of Iowa from U S WEST Communications,
Inc. ("US WEST") for $35,271,000. The eleven exchanges contain approximately
12,500 access lines. The acquisitions will be structured as a purchase of
telephone assets from US WEST. The purchase has been approved by all required
regulatory bodies. The transaction is scheduled to close in April, 1997. The
acquisition will be funded by new long-term debt instruments. The Company has
secured commitments from institutional sources in a private placement. The
financing transaction for this US West acquisition will close in April, 1997.
Seven institutional investors have pledged a total of $40 million in senior
unsecured notes with final maturity in 15 years and principal payments
I-3
<PAGE>
starting in the fifth year. The interest rate will be fixed at 7.11%.
Management believes the Company will generate sufficient working capital
internally from operations to meet its operating needs and sustain its
historical dividend, debt service, and equipment additions levels. The Company
has a $10,000,000 line-of-credit arrangement with a local bank at a rate
floating with LIBOR. The Company will utilize new long-term debt instruments
from institutional sources to fund the $35 million acquisition price of the Iowa
- - US WEST telephone property in 1997. The debt portion of the Company's total
capitalization is expected to be approximately 40% after the April, 1997 US West
acquisition, which is a comparably low proportion in the Company's industry.
The Company's reinvested growth in equity has come about while increasing
dividends to shareholders from $2,251,000 in 1986 to $5,481,000 in 1996, a 9.3%
compound annual growth rate over 10 years. The Company announced a dividend
increase of 9.1% in 1997. This increase is not expected to affect the liquidity
of the Company.
BUSINESS SEGMENTS - FINANCIAL INFORMATION
(b) The Company's operations are conducted in four business segments. The
Telephone Segment provides telecommunications services to Mankato and adjacent
areas of Blue Earth and Nicollet Counties in southern Minnesota and to the Amana
Colonies in east-central Iowa. The Telephone Segment also operates fiber optic
cable transport facilities in southern Minnesota, and holds a minority ownership
interest in a rural cellular limited liability company in south central
Minnesota. The Billing and Data Services Segment provides data processing and
related services primarily to telecommunications companies. Its customers are
local exchange telephone companies and interexchange network carriers with
operations across the country. The Equipment Sales Segment sells, installs and
services communications equipment in the retail market. It has many ongoing
business contracts with large business customers in Minneapolis/St. Paul and
southern Minnesota. The Telecommunications Product Development Segment designs,
assembles and distributes unique business telephone system components through
large distributors in North America and the United Kingdom.
I-4
<PAGE>
BUSINESS SEGMENT DATA
Years Ended December 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Telephone $51,020 $49,435 $46,967
Billing and Data Services 4,964 7,725 6,856
Equipment Sales 8,079 6,089 6,694
Telecommunications Product Development 4,180 3,417 3,634
Corporate 3,020 7,271 3,629
------- ------- -------
Total Assets $71,263 $73,937 $67,780
------- ------- -------
------- ------- -------
REVENUES BEFORE INTERSEGMENT ELIMINATION
Telephone $32,032 $30,538 $26,987
Billing and Data Services 11,769 12,437 9,817
Equipment Sales 18,600 14,503 15,430
Telecommunications Product Development 6,502 7,731 8,063
Intersegment Elimination (2,341) (2,362) (2,089)
------- ------- -------
Total Revenue $66,562 $62,847 $58,208
------- ------- -------
------- ------- -------
INTERSEGMENT REVENUES
Telephone $ 145 $ 330 $ 118
Billing and Data Services 2,196 2,032 1,971
------- ------- -------
Total Intersegment Revenues $ 2,341 $ 2,362 $ 2,089
------- ------- -------
------- ------- -------
OPERATING INCOME
Telephone $15,432 $14,648 $12,721
Billing and Data Services 658 721 763
Equipment Sales 2,022 583 765
Telecommunications Product Development (403) 1,129 845
Corporate (936) (1,302) (588)
------- ------- -------
Total Operating Income $16,733 $15,779 $14,506
------- ------- -------
------- ------- -------
DEPRECIATION AND AMORTIZATION
Telephone $ 4,571 $ 4,621 $ 4,143
Billing and Data Services 1,939 1,784 1,639
Equipment Sales 104 523 531
Telecommunications Product Development 131 138 130
Corporate 113 122 187
------- ------- -------
Total Depreciation and Amortization $ 6,858 $ 7,188 $ 6,630
------- ------- -------
------- ------- -------
CAPITAL EXPENDITURES
Telephone $ 9,536 $ 5,438 $ 5,317
Billing and Data Services 62 328 668
Equipment Sales 204 120 58
Telecommunications Product Development 97 123 88
Corporate 201 12 73
------- ------- -------
Total Capital Expenditures $10,100 $ 6,021 $ 6,204
------- ------- -------
------- ------- -------
</TABLE>
I-5
<PAGE>
BUSINESS SEGMENT DESCRIPTION
(c) 1 (i) The Company's operations are conducted in 4 business
segments:
Telephone Segment
MCTC owns and operates an independent telephone system serving the cities
of Mankato and North Mankato, and adjacent rural areas in Blue Earth and
Nicollet Counties in south-central Minnesota approximately 75 miles south of
Minneapolis/St. Paul. Mid-Comm provides telephone services to the communities
of Amboy, Cambria, Eagle Lake, Garden City, Good Thunder, Judson, Lake Crystal,
Madison Lake, Mapleton, Pemberton, St. Clair, Vernon Center and surrounding
rural areas located primarily in Nicollet and Blue Earth Counties in
south-central Minnesota. ACTC provides telephone services to the Amana Colonies
in east-central Iowa. The total number of lines served in 1996 was 44,538. The
proposed acquisition of access lines in northern Iowa from US West
Communications, Inc. will add approximately 12,500 lines in April 1997.
MCTC derives its principal revenues and income from local services charged
to subscribers in its service area and from the operation of a toll tandem
switching center in Mankato, Minnesota. Revenues and income for Mid-Comm are
also derived from local service charges in its area of operation, and from
providing access to long distance services for its subscribers through the toll
center in Mankato. Local and interexchange telephone access for the two
companies are provided on an integrated basis. The local and interexchange
telephone access for both telephone companies utilize the same facilities and
equipment and are managed and maintained by the same work force. ACTC derives
its principal revenues and income from local services charged to subscribers in
its service area and from providing interexchange access for its subscribers.
Interexchange telephone access is provided by all three of the Company's
telephone companies by connecting the communications networks of interexchange
and cellular carriers with the equipment and facilities of end users by use of
its switched networks or private lines.
CNI's activities are included in the Telephone Segment and are centered on
the operation of a fiber optic cable transmission facility in southern
Minnesota. CNI also owns and operates a direct broadcast satellite license under
the trade name DirectVision and holds a minority ownership interest in a rural
cellular limited liability company in south central Minnesota. The operations of
CNI, after elimination of intercompany activity, did not have a material impact
on the financial operations of the Company and are not separately disclosed.
Billing and Data Services Segment
CSI provides data processing and related services principally for the
Company, other local exchange telephone companies, interexchange carriers, and
miscellaneous municipalities. The computer operations are considered a separate
Segment of business in the Company's consolidated financial statements. CSI's
principal activity is the provision of monthly batch processing of computerized
data. Services for telephone company customers include the processing of long
distance telephone calls from data sources and telephone switches, the
preparation of the subscriber telephone bills, general accounting and payroll.
CSI provides certain billing clearinghouse functions for interexchange carriers
through its wholly owned subsidiary, National Independent Billing, Inc. CSI
obtains specialty programming contracts with these carriers due to its expertise
in the telecommunications field. The unique programming and consulting aspects
of telecommunications data processing have become a primary source of revenue
for CSI/NIBI. Services for municipal customers consist of preparation of utility
bills, payroll and fund accounting,
I-6
<PAGE>
as well as a full array of turnkey management systems. CSI generates revenues
from the initial sale of software products as well as the associated support and
contract programming that complement the sale.
Equipment Sales Segment
The Equipment Sales Segment activities are centered around the sale, lease
and service of telephone equipment and services in the metropolitan
Minneapolis/St. Paul area and in southern Minnesota. The products for this
Segment consist of telecommunication platforms such as Nortel, Centigram and
Rolm. Its expertise is very high quality system installation and maintenance.
Collins Communications Systems Co. operates in the very competitive market of
Minneapolis/St. Paul.
Telecommunications Product Development Segment
The Telecommunications Product Development Segment has operations which
design, assemble and distribute value added telecommunications products. This
innovative development company is based in Dallas, Texas, but distributes to
national and international markets using large operating telephone companies and
suppliers. DTI develops new products, responds to original equipment
manufacturing assembly orders and distributes or licenses products through large
internationally recognized distributors. DIT operates in a competitive market,
dominated by large manufacturers. D has been able to create a niche in this
market with its unique engineering expertise and its rapid turnaround
capabilities.
(ii) In February of 1997, the Company publicly announced the
creation of a new subsidiary, Crystal Communications, Inc. The new company will
provide competitive telecommunications services to customers served by other
telephone companies.
With the passing of the Federal Telecommunications Act of 1996 (Telecom
Act), the telephone companies no longer have the exclusive right to offer
telephone service to the customers in a franchised service area. This
legislation has created the opportunity for the Company to offer communications
service in territories served by other telephone companies. Crystal
Communications, Inc. will offer local dial tone, long distance, and local call
Internet access services to select markets. Studies are currently in progress
to determine the specific markets in which services will be offered. The
Company does not believe a material investment of assets will be required to
begin offering services by this new subsidiary. Likewise, the existing Company
and subsidiaries are not planning the development or sale of a new product line
which would require the investment of a material amount of the assets of the
Company or its subsidiaries.
(iii) Materials and supplies which are necessary for the
operation of the businesses of the Company and its subsidiaries are available
from a variety of sources. No supply problems are anticipated during the coming
year.
(iv) The two telephone subsidiaries of the Company in
Minnesota are public utilities operating pursuant to Indeterminate Permits
issued by the Minnesota Public Utilities Commission, the governing regulatory
agency. ACTC is also a public utility which operates pursuant to a Certificate
of Public Convenience and Necessity issued by the Iowa Utilities Board. Local
service rates are filed as tariffs with the individual state regulatory
authority. At this time, Iowa's level of regulation of local service rates is
less restrictive than Minnesota's. Regardless of
I-7
<PAGE>
whether a particular rate is subject to regulatory review, the Company's ability
to raise rates will be determined by various factors, including economic and
competitive circumstances. Other patents, licenses, franchises and concessions
(such as cellular licenses, cable TV franchises and wireless TV rights) while
important assets, are of less significance in the businesses of the Company and
its subsidiaries.
(v) The businesses are not highly seasonal.
(vi) The Company and its subsidiaries are engaged in service
businesses. Working capital practices primarily involve allocation of funds for
the construction and maintenance of telephone and computer plant, the payroll
costs of highly skilled labor, and the inventory to service its telephone
equipment customers.
(vii) As local exchange telephone companies, MCTC, Mid-Comm
and ACTC provide end office switching and ancillary services to long distance
interexchange carriers, such as AT&T, US West, MCI and Sprint. This
relationship allows the Company's telephone subscribers to place long distance
telephone calls. By paying access charges in bulk quantities for the long
distance usage of all of the individual customers who use their service, the
long distance interexchange carriers are large customers of the Company, but
individually do not represent more than ten percent of consolidated revenues.
Access charges, payable by long distance IXCs, are filed as tariffs with either
the FCC or the individual state regulatory authority, depending upon the
jurisdiction of the traffic.
The Company's level of activity with any of its long distance carrier
customers, including the largest customers, AT&T and US West, is not secured by
contract. The FCC dictates that AT&T, or one of its long distance competitors,
must serve the Company's subscribers for certain types of toll calls in certain
jurisdictions, and the Minnesota Public Utilities Commission dictates that US
West must serve the Company's subscribers for certain types of toll calls in
certain jurisdictions as the "carrier of last resort." The prices for the
services performed by the Company for interexchange carriers are primarily
established by the FCC and by State regulatory agencies.
The Company offers equal access to other non-AT&T carriers in its service
territory. The Company's level of activity with the non-AT&T carriers is not
secured by contract, and the prices for services performed by the Company for
these carriers are established by regulatory authorities in the same manner as
it is for AT&T and US West.
The Company does not provide long distance telecommunications directly to
end user customers under its own name in any jurisdiction.
The business of the Company's Equipment Sales and Telecommunications
Product Development Segments are not dependent upon any single customer or small
group of customers. These service and equipment activities are more of a
commodity relationship and tend to provide more customers with smaller
individual transactions than the Company's telephone business. The Company's
Billing and Data Services Segment has a single customer which accounts for a
significant portion of its revenue. There is no customer which accounts for ten
percent or more of the Company's consolidated revenues in these Segments.
(viii) The Company and its subsidiaries are in service
businesses which provide an ongoing benefit to their customers for a fee. These
services are repetitive and recurring. Backlog orders are not a significant
factor in providing these services.
I-8
<PAGE>
(ix) There is no material portion of the businesses of the
Company or its subsidiaries which is subject to renegotiation or termination by
the Government.
(x) The two telephone subsidiaries of the Company in
Minnesota operate pursuant to Indeterminate Permits issued by the Minnesota
Public Utilities Commission. The telephone subsidiary in Iowa operates pursuant
to a Certificate of Public Convenience and Necessity issued by the Iowa
Utilities Board. These commissions regulate the services provided by MCTC,
Mid-Comm and ACTC. Due to the size of the Company's operations in Minnesota and
in Iowa, these commissions do not regulate the rate of return or profits of the
Company's telephone operations. The Telecom Act will open the doors to large
telecommunications markets. Due to the relatively rural nature of the Company's
service territory, management does not expect State or Federal regulation to
materially impact the Company's operations in the near future. The Company's
telephone subsidiaries are exempt from certain obligations of the Telecom Act
unless, in response to a bona fide request, a state regulatory commission
removes the exemption. Competition is less likely to be a factor in rural areas
because population densities are much lower and rural LECs such as the Company's
are very advanced in terms of technology. The Company has already begun to
respond to these changes with active programs to market products and to engineer
their infrastructure to pro-actively participate in these changes.
Competitors now offer private line switched voice and data services in or
adjacent to the territories served by the Company, thus permitting bypass of
local telephone facilities. In addition, microwave transmission services,
wireless communications, fiber optic and coaxial cable deployment and other
services permit bypass of the local exchange network. These alternatives to
local exchange service represent a potential threat to the Company's long-term
ability to provide local exchange service at economical rates.
In order to meet this competition, the Company has deployed new technology
for its local exchange network to increase operating efficiencies and to provide
new services to its customers. These new technologies include the latest release
of digital switching technology on all of the Company's switches, remote
switching technology to within 12,000 feet of every customer in the local
network, installation of over 275 miles of fiber optic cable and installation of
SS7 (an out-of-band system) to all of its access lines.
Competition does exist in some of the services provided for interexchange
carriers, such as customer billing services, operator services and network
switching. The competition comes from the interexchange carriers themselves.
The provision of these services is of a contractual nature and is primarily
controlled by the interexchange carriers. Other services such as directory
advertising and local private line transport and cellular communications are
open to competition. Competition is based primarily on service and experience.
Since the mid-1980's, the Company's business strategy has been to position
itself as a "one-stop" telecommunications services provider. Long-term business
relationships with its customers have strengthened the Company's business
position. The Company believes that its customers value the fact that it is the
"local company" whose goal is to meet the customers' total communications needs.
The Company has several competitive advantages in telecommunications; its prices
and costs are extremely low; its service reputation is extremely high; its
technical investment is unsurpassed; and it has a first hand billing
relationship with almost 100% of the customers in its service territories.
I-9
<PAGE>
The long-range effect of competition on the provision of telecommunications
services and equipment will depend on technological advances, regulatory actions
at both the State and Federal levels, court decisions, and possible additional
future State and Federal legislation. The trend emanating from legislation is to
expand competition in the telecommunications industry. It is imperative that the
Company continue to do whatever it can to ensure that competition is open on a
equal basis to all providers.
There are a number of companies engaged in supplying data processing
services comparable to those furnished by CSI. Competition is based primarily
on price and service. There are some companies of much larger size that dominate
certain aspects of this field. As the level of competition is opening for
providers of local telephone service, those companies who are trying to provide
service will require facilities for rating, billing and other related services.
CSI is in a position to provide those services for these new telecommunications
companies.
There are several companies competing in the equipment sales market in
which Collins operates. Competition is based primarily on price and service.
No company is dominant in this field. Collins offers state-of-the-art customer
premises telephone equipment through well-trained and experienced market
representatives with long term relationships with customers. It also enjoys a
very strong reputation for quality service. Collins has built a strong base of
customers and enjoys most of its recurring revenue by selling to this base. With
these attributes, Collins believes that it effectively competes in this market
segment.
There are a limited number of companies competing in the product
development market for the specific types of products distributed by DTI. This
market is characterized by pressures to lower the manufacturing costs and to
raise the quality standards to meet customer expectations. DTI is a small
developer of telecommunications products attempting to distribute its products
through very large national distributors. DTI depends on finding niches in
development which are not met by the product line of large manufacturers This
creates slow product recognition and testing cycles which may cause cyclical
patterns in DTI's financial results.
(xi) The Company's subsidiary, DTI, engages in research and
development for the new telecommunications products it distributes. These
research and development activities are not material to the Company's
consolidated operation.
(xii) The Company and its subsidiaries anticipate no material
effects on their capital expenditures, earnings, or competitive position because
of laws relating to the protection of the environment.
(xiii) As of December 31, 1996, the Company and its
subsidiaries had 412 full-time employees.
(d) The two telephone subsidiaries of the Company in Minnesota (MCTC and
Mid-Comm) provide telephone services to south central Minnesota. ACTC provides
telephone services in east-central Iowa. CNI has operations in south central
Minnesota. The activities of CSI are primarily concentrated in Midwest United
States, with local exchange telephone company customers nationwide. CSI also has
major IXC customers which tend to be in metropolitan areas in the Midwest, on
the east coast and in the south. The activities of Collins are primarily
concentrated in the metropolitan Minneapolis/St. Paul area of Minnesota. DTI has
its facilities in the Dallas, Texas area and distributes its products throughout
North America, the United Kingdom and the Pacific Rim.
I-10
<PAGE>
ITEM 2. PROPERTIES.
The Company's business is primarily in the service industry and its
properties are used for administrative support and to store and safeguard
equipment. At December 31, 1996, the gross book value of $87,596,000, consisted
primarily of telephone plant and equipment. The two telephone subsidiaries of
the Company in Minnesota own dial central offices with associated real estate in
all of the communities mentioned in Item 1(c)1.(i) above, except Judson,
Minnesota. The Company owns the telephone property, plant and equipment which
it utilizes to operate its telephone systems. It is the opinion of the Company's
management that the properties of the Company are suitable and adequate to
provide modern and effective telecommunications services within its franchised
areas, including both local and long distance service. The capacity for
furnishing these services, both currently and for forecasted growth, are under
constant surveillance by the engineering staff. Facilities are put to full
utilization after installation and appropriate testing, according to two, three
and five year construction plans.
The Company's principal properties are the following:
(1) MCTC's general offices and principal central office exchange building
are located at 221 East Hickory Street, Mankato, Minnesota. This is a
three-level brick and stone building containing approximately 60,000 square feet
of floor space. A portion of this building is leased to the parent company for
its general offices, and to CSI for its data processing equipment. MCTC also
owns a building containing approximately 17,000 square feet, which was
completely renovated in 1996, adjacent to its principal office building. This
building will be used for future expansion.
(2) MCTC's main warehouse is located on Summit Avenue, Mankato, Minnesota.
The warehouse, built in 1996, is a one story concrete building containing
approximately 48,000 square feet. The warehouse is used to store vehicles and
supplies and is also used as office space for engineering and outside telephone
personnel.
(3) ACTC leases general office and telephone central office equipment
space in Homestead, Iowa.
(4) CSI owns a one-story building in Mankato, Minnesota. The building
contains 16,300 square feet. CSI also owns a main frame computer and associated
peripheral equipment which it uses to provide data processing services for the
Company and other customers. CSI also leases an operations office in
Minneapolis, Minnesota.
(5) The Company leases building and warehouse space for Collins in St.
Paul, Minnesota and office production space for DTI in Allen, Texas.
I-11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor its subsidiaries are engaged in any material
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this 1996 Annual Report on Form
10-K.
I-12
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
a) Prior to March, 1995, the Company's common stock was traded by
local brokers in over-the-counter trading. In March 1995, the Company listed its
common stock on NASDAQ's National Market Trading System.
Quarterly market price information in 1996 was as follows:
QUARTER HIGH LOW END OF QTR.
4th $28.50 $25.25 $27.375
3rd $30.00 $24.50 $25.50
2nd $31.00 $26.00 $28.125
1st $31.50 $26.75 $27.50
Quarterly market price information in 1995 was as follows:
QUARTER HIGH LOW END OF QTR.
4th $34.00 $ 30.50 $ 31.25
3rd $35.50 $ 31.00 $ 33.25
2nd $35.75 $ 28.00 $32.625
1st $35.50 $31.625 $ 34.25
b) The total number of individual shareholders with a security
position in the Company as of March 7, 1997 was 1,848.
c) The Company declared dividends for the two years ended December
31, 1996 as follows:
QUARTER 1996 1995
First $ .275 $ .25
Second $ .275 $ .25
Third $ .275 $ .25
Fourth $ .275 $ .25
On January 29, 1997, the Board of Directors of the Company announced a
quarterly cash dividend of $ .30 per share of common stock, which is a 9%
increase over the previous quarter. The dividend was payable on March 5, 1997,
to stockholders of record at the close of business on February 15, 1997.
II-1
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
FOR THE YEAR: (A)
<S> <C> <C> <C> <C> <C>
Operating Revenues
Telephone $31,887 $30,209 $26,869 $24,547 $24,876
Computer 9,573 10,405 7,846 8,442 8,953
Equipment 18,600 14,502 15,430 14,471 15,565
Telecommunications
Product Development 6,502 7,731 8,063 5,081 7,241
------- ------- ------- ------- -------
Total Operating Revenue $66,562 $62,847 $58,208 $52,541 $56,635
Net Income $10,419 $ 9,900 $ 9,147 $ 8,341 $ 7,887
PER SHARE:
Earnings Per Share $ 2.09 $ 1.93 $ 1.78 $ 1.62 $ 1.54
Dividends Per Share $ 1.10 $ 1.00 $ 0.87 $ 0.84 $ 0.80
Book Value Per Share $ 10.99 $ 11.28 $ 10.31 $ 9.49 $ 8.68
AT YEAR END:
Total Assets $71,263 $73,937 $67,780 $62,618 $63,382
Shareholders' Equity $52,627 $57,907 $52,842 $48,824 $44,601
Long-term Debt $ 877 $ 1,087 $ 1,295 $ 1,524 $ 4,920
Equity Ratio 98.4% 98.2% 97.6% 97.0% 90.1%
OTHER DATA:
Employees 412 438 425 405 435
Return on Average Equity 18.9% 17.9% 18.0% 17.9% 18.5%
Capital Expenditures $10,100 $ 6,021 $ 6,204 $ 5,476 $ 4,876
Telephone Plant $78,132 $71,259 $66,314 $58,149 $52,803
Access Lines Served 44,583 42,954 41,326 38,519 37,319
Shares Outstanding 4,790,229 5,134,021 5,124,291 5,143,829 5,136,756
</TABLE>
(A) The acquisitions of Amana Colonies Telephone Company in 1994 has contributed
to the Company's revenue growth for years after 1993.
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company is a diversified communications holding company, with four
main business segments, encompassing eight operating companies. The Telephone
Segment provides service to its franchised territories in south central
Minnesota and east central Iowa. The Billing and Data Services Segment provides
data processing service to independent telephone companies and national long
distance service providers. The Equipment Sales Segment sells and services
telecommunication equipment in Minneapolis/St. Paul and in southern Minnesota.
The Telecommunications Product Development Segment designs, assembles and
distributes unique telecommunications components for business telephone systems
throughout North America, the United Kingdom and the Pacific Rim from its
facility in Texas.
OVERVIEW OF OPERATIONS
In 1996, the Company's consolidated net income increased to $10,419,000, up
from $9,900,000 in 1995 and $9,147,000 in 1994. This represents an increase of
5.2% in 1996 compared to an increase of 8.2% in 1995. Declines in revenue in two
of the Company's non-telephone Segments prevented 1996 from increasing net
income to the extent of 1995. Earnings per share (EPS) in 1996 increased to
$2.09, up from $1.93 in 1995 and $1.78 in 1994, reflecting an increase of 8.3%
in 1996 compared to an increase of 8.4% in 1995. The combined impact of the net
income increase for 1996 and a reduction of 147,464 average shares outstanding
caused primarily by the Company's share repurchase program, made the EPS
increase in 1996 comparable to 1995.
Total operating revenues for 1996 increased to $66,562,000, up from
$62,847,000 in 1995 and $58,208,000 in 1994. This represents an increase of 5.9%
in 1996 compared to an increase of 8.0% in 1995. The Company's core Telephone
Segment revenues increased 5.6% in 1996, while the three non-telephone Segments
combined for 6.2% revenue growth in 1996. Total costs and expenses other than
depreciation and amortization were $42,931,000 in 1996, up from $39,880,000 in
1995 and $37,072,000 in 1994. This represents an increase of 7.7% in 1996
compared to an increase of 7.6% in 1995.
A measure of the Company's pre-tax operating cash flow is EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization). EBITDA increased to
$24,286,000 in 1996, up from $23,891,000 in 1995 and $21,437,000 in 1994. This
represents an increase of 1.7% in 1996 compared to an increase of 11.4% in 1995.
The Company's EBITDA increase would have been 8.1% in 1996 if it had not been
for the Telecommunications Product Development Segment's EBITDA decline of
$1,539,000. Consolidated operating income after depreciation and amortization
increased to $16,773,000 in 1996, up from $15,779,000 in 1995 and $14,506,000 in
1994. This is an increase of 6.3% in 1996 compared to an increase of 8.8% in
1995. Non-cash costs of depreciation and amortization totaled $6,858,000 in
1996, $7,188,000 in 1995 and $6,630,000 in 1994. Amortization expense is
declining for the Company since some intangible assets have become fully
amortized.
II-3
<PAGE>
CONSOLIDATED REVENUES
The revenues of the Company, after intercompany eliminations, are
classified into major service categories in the following table. In 1996,
Consolidated Operating Revenues increased $3,715,000 or 5.9%.
<TABLE>
<CAPTION>
(IN 000S) % %
1996 CHANGE 1995 CHANGE 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Telephone Operations $31,887 5.6% $30,209 12.4% $26,869
Billing and Data Services 9,573 (8.0%) 10,405 32.6% 7,846
Equipment Sales 18,600 28.3% 14,502 (6.0%) 15,430
Telecommunications
Product Development 6,502 (15.9%) 7,731 (4.1%) 8,063
------- ------ ------- ----- -------
TOTAL REVENUES $66,562 5.9% $62,847 8.0% $58,208
</TABLE>
<TABLE>
<CAPTION>
TELEPHONE OPERATIONS
(In Thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues Before Eliminations $32,032 $30,538 $26,987
Net Operating Income 15,432 14,648 12,721
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) 19,860 19,269 16,864
Capital Expenditures 9,536 5,438 5,317
</TABLE>
Telephone revenues represent 48% of 1996 consolidated operating revenues
after eliminations. Revenues are earned primarily by providing customers access
to the local network, and by providing interexchange access for long-distance
network carriers.
The Telephone Segment also earns revenue through use of its fiber optic
transport network, operator services, network tandem switching, directory
advertising, cellular communications and direct broadcast satellite television
services. The Telephone Segment's consolidated revenues after eliminations have
grown 6.2% compounded annually over a five year period from 1991 to 1996.
Local service revenue increases in the Telephone Segment of 13% for 1996
and 24% for 1995 are significant considering these increases exceeded the growth
in access lines served. In 1995, the Telephone Segment was able to achieve
considerable growth due to an increase in local rates in January, 1995. In 1996,
additional growth resulted from the marketing efforts to sell its custom calling
services, CLASS services, Centrex, voice mail and cellular equipment and agent
fees. Services to an adjoining US West exchange were converted from long
distance to Extended Area Service (EAS) in 1996 which contributed to local
service revenue growth. Access line growth was 3.8% in 1996 and 3.9% in 1995.
Over a five year period since 1991, total access line growth has been a steady
4.1%, compounded annually.
Network access revenues were positively affected by the continued growth in
access minutes, offset by overall lower rates charged for access service.
Customer selection of dedicated trunk lines over the switched access services
(i.e. bypass) also caused reductions in volume sensitive elements of network
access, while enhancing fixed fee recurring revenues. Access
II-4
<PAGE>
minutes increased by only 1.3% in 1996 compared to 7.8% in 1995, including the
minutes acquired in Amana. It would have increased 6.8% in 1995 without
considering the impact of the Amana acquisition in 1994. The impact of the 1996
transition to EAS with an adjoining US West exchange was a reduction of volume
sensitive network access revenues in 1996.
Ancillary services to interexchange network carriers include the billing
and collection function. Further reductions in 1996 occurred as more of these
services were taken back by interexchange carriers and no longer performed by
the Telephone Segment. Another ancillary service, directory revenues, increased
in 1996 due to new directory sales campaigns and a new publisher. The Telephone
Segment experienced significant expansion of its nontraditional lines of
business due to the market penetration of its Direct Broadcast Satellite (DBS)
television service. The Telephone Sector's net income from its minority interest
in Midwest Wireless Communications L.L.C. increased 24% in 1996 due to the
cellular company's profitability and the Company's increased ownership
percentage.
The Telephone net operating income for 1996 grew 5.4% and in 1995 it
increased 15.1%. This growth corresponds closely with revenue growth in both
years.
BILLING AND DATA SERVICES
(In Thousands)
1996 1995 1994
---- ---- ----
Revenues Before Eliminations $11,769 $12,437 $9,817
Net Operating Income 658 721 763
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) 2,597 2,505 2,402
Capital Expenditures 62 328 668
Billing and Data Services revenues represent approximately 14% of 1996
consolidated operating revenues after eliminations. Revenues are earned
primarily by billing and accounting services to local exchange and municipal
customers, and specialized contract services to interexchange network carriers
(IXCs).
Computer data processing, the core service of this Segment, is a dynamic
business of standard programming services, with a base of existing customers,
comprised mostly of local telephone companies. However, there is turnover in
this base. New customers and services to existing customers are continually
being sought to offset the attrition of customers who establish in-house
systems.
Unique telephone industry data processing service to large, international
communications companies has become this Segment's largest business. The volume
of monthly processing with the IXCs relative to their long-distance business
under earlier contracts has declined over the three year reporting period. In
1995, CSI and its national marketing affiliate, NIBI, entered into new contracts
with a large IXC which provided for the development and sale of software, as
well as consulting and processing services in the new competitive local service
market. The fluctuations of revenue in this Segment are more pronounced because
of the large size and small quantity of IXC contracts.
II-5
<PAGE>
Turnkey sales of small systems are no longer a major portion of this
Segment's business. In 1995, NIBI sold two significant software platforms to a
large IXC, which initiated a long-term service relationship. CSI is actively
seeking more mid-size installations of its turnkey data processing systems into
the newly developing, competitive aspects of the telecommunications business.
These proposals have very long customer acceptance cycles.
Consolidated revenues after eliminations for the Billing and Data Services
Segment have grown 3% compounded annually over a five year period from 1991 to
1996. Revenues for this Segment were higher in 1995 due to the turnkey software
sales to a large IXC, but otherwise have been consistent. Although net operating
income has been relatively consistent in 1994 through 1996, the cash operating
income from this Segment has increased steadily. This is due to recent
reorganizations and employee work force reductions.
EQUIPMENT SALES
(In Thousands)
1996 1995 1994
---- ---- ----
Revenues Before Eliminations $18,600 $14,502 $15,430
Net Operating Income 2,022 583 765
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) 2,126 1,106 1,296
Capital Expenditures 204 120 58
Equipment Sales Segment revenues represent approximately 28% of 1996
consolidated operating revenues after eliminations. Revenues are earned
primarily by sales, installation and service of business telephone systems in
two geographic markets of metropolitan Minneapolis/St. Paul and southern
Minnesota. The Equipment Segment sold the assets of its California division in
1995. The volume of business in the Minneapolis/St. Paul area through Collins
Communications Systems Co., was very strong in 1996. Two $1 million contracts
have been completed, and Collins' backlog of business remains high going into
1997. The customers in this Segment's market are the business end users of
telecommunications service with ongoing service needs. This Segment's products
consist of telecommunication platforms such as Nortel, Centigram and Rolm.
Revenues for 1996 were 28% higher than 1995 due to significant increases in
volume of business in everyday operations. The Equipment Sales Segment's
consolidated revenues after eliminations have grown 12.3% compounded annually
over a five year period from 1991 to 1996. The Equipment Sales Segment produced
net operating income which was $1,439,000 higher in 1996. This comparison was
affected by operations in California which had a pre-tax loss of $440,000 in
1995.
II-6
<PAGE>
TELECOMMUNICATIONS PRODUCT DEVELOPMENT
(In Thousands)
1996 1995 1994
---- ---- ----
Revenues Before Eliminations $6,502 $7,731 $8,063
Net Operating Income (Loss) (403) 1,129 845
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) (272) 1,267 975
Capital Expenditures 97 123 88
Telecommunications Product Development Segment revenues represent
approximately 10% of 1996 consolidated operating revenues after eliminations.
Revenues are earned by sales of unique business system interface devices through
distributors. Digital Techniques, Inc. (DTI) of Allen, Texas, designs, assembles
and distributes components for business systems such as Nortel. The customers of
this market are national and international distributors of large
telecommunications systems and other equipment manufacturers. DTI's products are
distributed throughout North America, in the United Kingdom and in the Pacific
Rim.
As a new product developer, DTI made deliberate steps to change its product
mix in 1995 and in 1996. In 1994, DTI experienced an extraordinary demand for
its products through Original Equipment Manufacturing (OEM) contracts and
royalty agreements. In 1995, DTI experienced a 29% growth in sales of its
standard products while it experienced a 53% decrease in OEM sales. DTI's
standard products earn a higher gross margin than OEM sales. Thus while
operating revenue went down 4% in 1995, gross margin increased 11%. This margin
increase and expense controls resulted in an increase in net operating income of
34% in 1995. In 1996, DTI made a commitment to growth in its standard product
line and to its national distributor network market strategy. Expenses and cost
of sales in this Segment increased as infrastructure was established for the
anticipated increase in business in 1996. Technical problems developed with
DTI's new key system call routing product and its release was delayed until late
in 1996. In addition, a primary customer of DTI's 911 call system suspended
orders for a portion of 1996 and then renewed late in 1996. The result was a
decline in operating revenues in 1996 when DTI was preparing for growth in
business. As a result, net operating income declined $1,532,000 in 1996. The
prospects for DTI's products look promising, and it is developing closer working
relationships with its primary vendor, Nortel. DTI's consolidated revenues after
eliminations have grown 11.1% compounded annually over a five year period from
1991 to 1996. As DTI enters 1997, it will renew its balance of OEM business to
complement the new standard products it is launching.
TOTAL COSTS AND EXPENSES
Total consolidated costs and expenses of $49,789,000 increased 5.8% in
1996, coinciding with the 5.9% increase in operating revenues. Consolidated
costs and expenses other than depreciation and amortization were $42,931,000 in
1996, compared with $39,880,000 in 1995, an increase of 7.7%. The margin from
operations is lower in 1996 because of the decline in profitability of the
Telecommunications Product Development Segment, and the fact that the Equipment
Sales Segment's growth was based on new installations at lower margins. Collins
should return to historic margin levels in 1997 and DTI is expected to show
improvement as well.
II-7
<PAGE>
OTHER INCOME AND INTEREST EXPENSE
Other income (primarily interest and equity in partnership income) was
lower than 1995 due to reduced balances of cash and temporary cash investments.
Cash was used in 1996 for the purchase of Company common stock under its share
repurchase program. Included in other income is the Company's equity interest in
Midwest Wireless Communications LLC.
REVIEW OF CASH FLOW ACTIVITY
The Company's net working capital of $6,279,000 at December 31, 1996, is a
decrease of $10,714,000 from 1995. The Company and its subsidiaries operate in
capital intensive businesses. Additions to Property, Plant and Equipment are the
Company's largest investing activity, using $19,601,000 of cash in the three
years ended 1996.
The Company used $10,786,000 to purchase outstanding shares of its common
stock in 1996 as part of its publicly announced share acquisition program. As a
result of this program, the Company has been able to more fully utilize its
available cash while creating increased value for its current shareholders. The
Company's primary source of working capital has been its operations, primarily
the Telephone Segment. In 1994, the Company acquired the assets of the Amana
Colonies Telephone Company in east-central Iowa for $6.5 million in cash, and it
was paid from internal Company funding. The Company's 1996 current ratio of 1.54
to 1, its annual EBITDA in excess of $24 million, and its proven access to debt
markets continues to provide financial support for its operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's reinvested growth in equity has come about while increasing
dividends to shareholders from $2,251,000 in 1986 to $5,481,000 in 1996, a 9.3%
compound annual growth rate over 10 years. The Company has announced a dividend
increase of 9.1% for 1997. This increase is not expected to affect the liquidity
of the Company. Management believes the Company will generate sufficient working
capital internally from operations to meet its operating needs and sustain its
historical dividend, debt service and equipment addition levels.
The Telephone Segment capital expenditures of approximately $9.5 million
for 1996 and the anticipated program of approximately $12 million for 1997 are
higher than usual because of building construction in 1996 and the acquisition
from US West in 1997. The Company utilized approximately $10.8 million to
repurchase shares of its common stock in 1996 under its publicly announced share
repurchase program. The Company has a $10 million bank line-of-credit
arrangement to utilize for short term needs of cash. As of December 31, 1996,
there were no outstanding borrowings under this arrangement.
The Company has entered into agreements to purchase the assets of eleven
rural telephone exchanges in the State of Iowa from U S WEST Communications,
Inc. ("US WEST") for $35,271,000. The eleven exchanges contain approximately
12,500 access lines. The acquisitions will be structured as a purchase of
telephone assets from US WEST. The purchase has been approved by all required
regulatory bodies. The transaction is scheduled to close in April, 1997. The
acquisition will be funded by new long-term debt instruments, which the Company
has secured commitments from institutional sources in a private placement. The
financing transaction for this US West acquisition will close in April, 1997.
Seven institutional investors have pledged
II-8
<PAGE>
a total of $40 million in senior unsecured notes with final maturity in 15 years
and principal payments starting in the fifth year. The interest rate will be
fixed at 7.11%.
The Company is in a position to be able to borrow from institutional
sources on an unsecured basis or from banks on a secured or unsecured basis
because of its high level of cash flow. This condition will still exist even
after the higher levels of debt the Company will incur in 1997 for the
acquisition from US West.
REGULATORY
The Company's largest telephone subsidiary, Mankato Citizens Telephone
Company (MCTC), increased local rates, effective January 1, 1995, adding
approximately $600,000 in 1995. The Minnesota Department of Public Service has
the authority to investigate rates and profits of telephone companies in
Minnesota. The Minnesota state telephone industry mobilized efforts to change
the regulatory legislation in Minnesota in 1995. The initiative changed the law
so that companies with less than 50,000 customers have their prices regulated
instead of their profits. The Company's Minnesota telephone subsidiaries fall
under this reduced level of regulation. In 1994, all LECs in Minnesota agreed on
a three-year intrastate access charge limitation on their composite access
rates. The Company's two Minnesota telephone subsidiaries are incurring declines
in access revenue resulting from this limitation. In 1995, the subsidiaries
received approval to offer Custom Local Area Signaling Services (CLASS) in
Mankato and surrounding exchanges. The subsidiaries were the first to test the
services and helped the Minnesota Public Utilities Commission develop safeguards
for these Caller I.D. Services. In the state of Iowa, the Company's operations
fall below the 15,000 access line minimum level for regulation. No regulatory
matters in Iowa affect the Company's Iowa telephone subsidiary operations.
In 1996, the Company filed and received state regulatory approval for its
purchase of the assets of eleven rural telephone exchanges in the state of Iowa
from US West Communications, Inc. State approvals were obtained in Iowa,
Minnesota and South Dakota due to customer location. Approval of this transfer
has been received from the Federal Communications Commission in February 1997.
The Company expects to receive transfer of ownership of this property in April
1997.
In February 1996, federal telecommunications reform legislation was signed
into law addressing competitive and regulatory issues in local and long distance
telephone, cable television and information services industries. The Telecom Act
overhauls years of telecommunications law and the restrictions of the 1984
antitrust consent decree. The law replaces government regulation with
competition as the chief way of assuring that telecommunications services are
delivered to customers. It removes many of the barriers to competition between
segments of the industry, enabling companies to compete in voice, video and
information service markets. The new law sets guidelines to open the local
exchange market, preserve universal service objectives, and allow for more
competition in the cable television and long distance telephone markets. The FCC
continues to refine and determine exactly how competition is introduced to the
local service market. It must determine wholesale prices for the reselling of
local service, methods for unbundling the local network and the establishment of
interconnection rules. In addition to requiring the FCC to preside over the
provisions of the Telecom Act, Congress granted state PUCs the authority to
oversee LEC operations and play a role in this deregulation. It is possible that
FCC rulings will preempt state regulation of LECs. The FCC has suggested that it
will largely preempt state regulators and establish national rules
II-9
<PAGE>
for opening up local telephone service to competition. This will ensure a
uniform national policy is implemented, advancing rapid deployment of
technologies. Although it is too early to witness notable changes in both local
and long distance industries, the Telecom Act is certain to result in a much
more competitive environment for all telecommunications companies. Management of
the Company expects to see continued movement toward a fully competitive
telecommunications marketplace. The Telephone Segment's ability to compete is
dependent on its commitment to quality service in selected markets. Recent FCC
decisions appear to have opened the doors to larger telecommunications markets.
Management believes there to be more opportunities than threats from these
sweeping changes.
COMPETITION
Regulatory, legislative and judicial decisions, new technologies and the
convergence of other industries with the telecommunications industry are
providing the framework for competition in the telecommunications industry. The
Telecom Act opened up the local network to competition, and requires all
incumbent LECs to take steps making it feasible for new entrants to compete. It
also removes restrictions prohibiting electric utilities from providing
telecommunications services. Competition is less likely to be a factor in rural
areas because population densities are much lower and rural LECs such as the
Company's telephone subsidiaries are very advanced in terms of digital
switching, fiber optic networks and advanced services. The Telephone Segment has
already began to respond with active programs to market products and engineer
their infrastructure to be an active participant in the new environment. The
Company is evaluating future avenues of growth including developing competitive
local exchange company operations in areas where the Company's telephone
subsidiaries are not the incumbents. Industry analysts agree that the FCC's
order and interpretations create a more favorable scenario for new entrants than
for incumbent LECs. The Company has unique advantages in its existing host
switching network, its customer service systems, its existing account
relationships, its billing and data management expertise, and its experience in
telephone system engineering and interconnection negotiation. The Company's
endeavors in this newly-competitive market will complement its existing
business. The Company operates businesses in several different markets. Each
experiences fluctuations in revenues and operating earnings. The Company
monitors technological changes as well as the competitive and regulatory
environment of the telecommunications business, and develops strategies to
address these changes. The Company evaluates the way it conducts business in
order to further improve customer responsiveness and quality. Also, the Company
evaluates productivity improvement programs that could involve retraining of
employees, re-engineering of systems, restructure of its resource levels and
operating costs.
ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standard No. 121, "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", is effective for
calendar year 1996. This standard requires the Company to evaluate in certain
circumstances whether an asset's book value exceeds its expected future
undiscounted cash flows. This standard has not had an impact on the Company's
financial statements.
Financial Accounting Standard No. 123, "Stock-Based Compensation", is
effective for calendar year 1996. The Company has adopted the pro forma
disclosure method and continues to record compensation cost under Accounting
Principles Board Opinion No. 25, "Accounting for stock issued to employees."
II-10
<PAGE>
BUSINESS OUTLOOK
The Company operates businesses in several different markets. Management
reacts to the competitive market forces of its businesses which have
fluctuations in revenues and operating earnings as the result of volume, timing
and terms of many individual contracts. The Company monitors the technological
changes and competitive and regulatory environment of the telecommunications
business and develops strategies to address these changes in ways unique to the
telecommunications business.
The Company has consistently maintained high EBITDA margins by running its
telephone operations efficiently while prudently diversifying into other
profitable niches in telecommunications. The diversification into non-telephone
Segments provides greater opportunities for dynamic internal growth, and offers
the Company unique service capabilities to utilize in competitive expansions
within the Telephone Segment. The diversification of the Company reduces the
dependence of the Company on any one market, business, economy or regulatory
environment. In order to achieve the Company's continuous growth objectives, it
will rely on the maturation of the business plans for its existing four
segments, the start-up of competitive operations in the telephone local exchange
business, and continued research of the many telephone industry acquisition
candidates for those that are strategic to the Company in profitability terms.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and
Financial Condition, as well as other sections of this Annual Report, contain
forward-looking statements that are based on current expectations, estimates and
projections about the industry in which the Company operates, management's
beliefs and assumptions made by Company management. Words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates", variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and probabilities which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements, whether as a result of new information, future events or otherwise.
II-11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
DESCRIPTION PAGE
Independent Auditor's Report II-13
Consolidated Balance Sheet II-14
Consolidated Statement of Income II-15
Consolidated Statement of Shareholders' Equity II-16
Consolidated Statement of Cash Flows II-17
Business Segment Data II-18
Notes to Consolidated Financial Statements II-19
II-12
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Hickory Tech Corporation
We have audited the consolidated balance sheet of Hickory Tech Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hickory Tech
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
January 31, 1997
II-13
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,954 $ 4,517
Temporary Cash Investments - 7,176
Receivables, Net of Allowance for Doubtful Accounts of $114 and $167 10,782 9,381
Inventories 2,859 2,846
Deferred Tax Benefit and Other 1,372 985
------- -------
TOTAL CURRENT ASSETS 17,967 24,905
INVESTMENTS 2,980 2,714
NET PROPERTY, PLANT AND EQUIPMENT 40,873 36,088
OTHER ASSETS:
Intangible Assets 8,735 9,457
Notes Receivable 230 340
Miscellaneous 478 433
------- -------
TOTAL OTHER ASSETS 9,443 10,230
TOTAL ASSETS $71,263 $73,937
------- -------
------- -------
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 8,674 $ 5,568
Accrued Taxes 722 459
Advanced Billings and Deposits 2,080 1,679
Current Maturities of Long-Term Debt 212 206
------- -------
TOTAL CURRENT LIABILITIES 11,688 7,912
LONG-TERM DEBT, Net of Current Maturities 877 1,087
DEFERRED CREDITS:
Investment Tax Credits 153 233
Income Taxes 2,768 3,735
Compensation, Benefits and Other 3,150 3,063
------- -------
TOTAL DEFERRED CREDITS 6,071 7,031
SHAREHOLDERS' EQUITY:
Common Stock 479 2,294
Additional Paid-In Capital 1,778 -
Retained Earnings 50,370 55,613
------- -------
TOTAL SHAREHOLDERS' EQUITY 52,627 57,907
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $71,263 $73,937
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-14
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
OPERATING REVENUES:
Telephone $ 31,887 $ 30,209 $ 26,869
Billing and Data Services 9,573 10,405 7,846
Equipment Sales 18,600 14,502 15,430
Telecommunications Product Development 6,502 7,731 8,063
---------- ---------- ----------
TOTAL OPERATING REVENUES 66,562 62,847 58,208
COSTS AND EXPENSES:
Cost of Sales 15,792 13,830 14,406
Operating Expenses 27,139 26,050 22,666
Depreciation 5,055 5,291 4,985
Amortization of Intangibles 1,803 1,897 1,645
---------- ---------- ----------
TOTAL COSTS AND EXPENSES 49,789 47,068 43,702
OPERATING INCOME 16,773 15,779 14,506
OTHER INCOME 655 924 301
INTEREST EXPENSE 143 77 102
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 17,285 16,626 14,705
INCOME TAXES 6,866 6,726 5,558
---------- ---------- ----------
NET INCOME $ 10,419 $ 9,900 $ 9,147
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER SHARE $ 2.09 $ 1.93 $ 1.78
---------- ---------- ----------
---------- ---------- ----------
DIVIDENDS PER SHARE $ 1.10 $ 1.00 $ .87
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,980,006 5,127,470 5,128,147
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-15
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------- Paid-In Retained Shareholders'
(DOLLARS IN THOUSANDS) Shares Amount Capital Earnings Equity
------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 5,143,829 $ 2,671 $ - $ 46,153 $ 48,824
Employee Stock Purchase Plan 8,181 231 231
Director Stock Purchase Plan 1,281 42 42
Retirement of Stock (29,000) (942) (942)
Net Income 9,147 9,147
Dividends Paid (4,460) (4,460)
--------- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1994 5,124,291 2,002 - 50,840 52,842
Employee Stock Purchase Plan 8,205 242 242
Director Stock Purchase Plan 1,525 50 50
Net Income 9,900 9,900
Dividends Paid (5,127) (5,127)
--------- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1995 5,134,021 2,294 - 55,613 57,907
Declaration of Common Stock Stated Value (1,429) 1,429 -
Stock Issued to Complete Prior Acquisition 6,757 1 196 197
Long-Term Incentive Plan 3,152 93 93
Employee Stock Purchase Plan 11,094 1 235 236
Director Stock Purchase Plan 1,571 13 29 42
Retirement of Stock (366,366) (494) (111) (10,181) (10,786)
Net Income 10,419 10,419
Dividends Paid (5,481) (5,481)
--------- -------- ------ -------- --------
BALANCE AT DECEMBER 31, 1996 4,790,229 $ 479 $ 1,778 $ 50,370 $ 52,627
--------- -------- ------ -------- --------
--------- -------- ------ -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-16
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,419 $ 9,900 $ 9,147
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 7,076 7,401 6,800
Loss Resulting from Disposition of Assets - 415 -
Provision for Losses on Notes Receivable and Investments 260 324 -
Equity in Partnership Income (503) (597) (273)
--------- -------- --------
Cash Provided From Operations Before Changes
in Assets and Liabilities 17,252 17,443 15,674
Changes in Assets and Liabilities Net of
Effects of Acquisitions and Dispositions:
(Increase) Decrease in:
Receivables (1,401) (2,123) 663
Inventories (13) 1 (618)
Increase (Decrease) in:
Accounts Payable and Accrued Taxes 551 1,272 483
Advanced Billings and Deposits 401 384 76
Deferred Income Taxes and Investment Tax Credits (1,339) (676) (786)
Other (53) 1,043 577
--------- -------- --------
Net Cash Provided by Operating Activities 15,398 17,344 16,069
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment (7,282) (5,945) (6,374)
Increase in Notes Receivable and Investments (113) (68) (341)
Redemption of Investments 200 275 127
Change in Temporary Cash Investments 7,176 (5,289) (186)
Purchase of Intangible Assets (1,081) (1,114) (1,346)
Acquisitions, Net of Cash Acquired - - (6,500)
Other 42 67 (189)
--------- -------- --------
Net Cash Used in Investing Activities (1,058) (12,074) (14,809)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Debt - - 763
Repayments of Debt (204) (983) (307)
Proceeds from Issuance of Common Stock 568 292 273
Retirement of Common Stock (10,786) - (942)
Dividends Paid (5,481) (5,127) (4,460)
--------- -------- --------
Net Cash Used in Financing Activities (15,903) (5,818) (4,673)
--------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,563) (548) (3,413)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,517 5,065 8,478
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,954 $ 4,517 $ 5,065
--------- -------- --------
--------- -------- --------
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 143 $ 134 $ 103
Cash Paid for Income Taxes $ 8,203 $ 7,240 $ 5,229
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-17
<PAGE>
HICKORY TECH CORPORATION
BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Telephone $ 51,020 $ 49,435 $ 46,967
Billing and Data Services 4,964 7,725 6,856
Equipment Sales 8,079 6,089 6,694
Telecommunications Product Development 4,180 3,417 3,634
Corporate 3,020 7,271 3,629
-------- -------- --------
Total Assets $ 71,263 $ 73,937 $ 67,780
-------- -------- --------
-------- -------- --------
REVENUES BEFORE INTERSEGMENT ELIMINATION:
Telephone $ 32,032 $ 30,538 $ 26,987
Billing and Data Services 11,769 12,437 9,817
Equipment Sales 18,600 14,503 15,430
Telecommunications Product Development 6,502 7,731 8,063
Intersegment Elimination (2,341) (2,362) (2,089)
-------- -------- --------
Total Revenues $ 66,562 $ 62,847 $ 58,208
-------- -------- --------
-------- -------- --------
INTERSEGMENT REVENUES:
Telephone $ 145 $ 330 $ 118
Billing and Data Services 2,196 2,032 1,971
-------- -------- --------
Total Intersegment Revenues $ 2,341 $ 2,362 $ 2,089
-------- -------- --------
-------- -------- --------
OPERATING INCOME:
Telephone $ 15,432 $ 14,648 $ 12,721
Billing and Data Services 658 721 763
Equipment Sales 2,022 583 765
Telecommunications Product Development (403) 1,129 845
Corporate (936) (1,302) (588)
-------- -------- --------
Total Operating Income $ 16,773 $ 15,779 $ 14,506
-------- -------- --------
-------- -------- --------
DEPRECIATION AND AMORTIZATION:
Telephone $ 4,571 $ 4,621 $ 4,143
Billing and Data Services 1,939 1,784 1,639
Equipment Sales 104 523 531
Telecommunications Product Development 131 138 130
Corporate 113 122 187
-------- -------- --------
Total Depreciation and Amortization $ 6,858 $ 7,188 $ 6,630
-------- -------- --------
-------- -------- --------
CAPITAL EXPENDITURES:
Telephone $ 9,536 $ 5,438 $ 5,317
Billing and Data Services 62 328 668
Equipment Sales 204 120 58
Telecommunications Product Development 97 123 88
Corporate 201 12 73
-------- -------- --------
Total Capital Expenditures $ 10,100 $ 6,021 $ 6,204
-------- -------- --------
-------- -------- --------
</TABLE>
II-18
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
The accounting policies of Hickory Tech Corporation are in conformity with
generally accepted accounting principles and, where applicable, conform to the
accounting principles as prescribed by federal and state telephone utility
regulatory authorities. The Company presently gives accounting recognition to
the actions of regulators where appropriate, as prescribed by Financial
Accounting Standards Board Statement No. 71 (SFAS 71), "Accounting for the
Effects of Certain Types of Regulation." A significant example includes the
amount charged as depreciation expense, which reflects estimated lives and
methods prescribed by regulators rather than those that might otherwise apply to
unregulated enterprises.
BASIS OF CONSOLIDATION
The consolidated financial statements of the Company include Hickory Tech
Corporation, its subsidiaries, and majority-owned partnerships. Investments in
20% to 50% owned entities and all unconsolidated partnerships are accounted for
using the equity method. All intercompany transactions have been eliminated from
the consolidated financial statements.
FINANCIAL STATEMENT PRESENTATION
Telephone revenues are derived from charges for network access to the Company's
local exchange network, from subscriber line charges and from contractual
arrangements for services such as billing and collection and directory
advertising. Certain of these revenues are realized under pooling arrangements
with other telephone companies and are divided among the companies based on
respective costs and investments to provide the services. Management believes
that recorded amounts represent reasonable estimates of the final distribution
from these pools. Revenue in the Equipment Sales Segment earned on major
installation and change contracts is recognized using the percentage of
completion method.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and disclosure of contingent assets and liabilities. The
estimates and assumptions used in the accompanying consolidated financial
statements are based upon management's evaluation of the relevant facts and
circumstances as of the date of the financial statements. Actual results may
differ from the estimates and assumptions used in preparing the accompanying
consolidated financial statements.
PROPERTY AND DEPRECIATION
Property, plant and equipment are recorded at original cost of acquisition or
construction. When telephone assets are sold or retired, the assets and related
accumulated depreciation are removed from the accounts and no gains or losses
are recorded.
The components of Net Property, Plant and Equipment are summarized as follows:
(Dollars in Thousands) 1996 1995
---- ----
Telephone Plant $78,132 $71,259
Other Property and Equipment 9,464 9,336
------- -------
Total 87,596 80,595
Less Accumulated Depreciation 46,723 44,507
------- -------
Net Property, Plant and Equipment $40,873 $36,088
------- -------
------- -------
Depreciation for financial statement purposes is determined using the
straight-line method based on the lives of the various classes of depreciable
assets. The composite depreciation rates on depreciable telephone plant for the
three years ended December 31, 1996, were 6.1%, 6.6%, and 6.6%. Other equipment
is depreciated over estimated useful lives of three to fifteen years, and the
associated building is depreciated over its estimated useful life of thirty-five
years.
CASH INVESTMENTS
Cash and cash equivalents include general funds and short-term investments with
original maturities of three months or less. Investments with original
maturities of three months to twelve months are classified as temporary cash
investments.
II-19
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS
Other investments are carried at lower of cost or net realizable value.
INVENTORIES
Inventories are stated at the lower of average cost or market and consist of the
following:
(Dollars in Thousands) 1996 1995
---- ----
Finished Goods $ 211 $ 344
Work in Process 156 142
Materials and Supplies 2,492 2,360
------ ------
Total $2,859 $2,846
------ ------
------ ------
INCOME TAXES
The provision for income taxes consists of an amount for taxes currently payable
and a provision for tax consequences deferred to future periods. Deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. For financial statement purposes,
deferred investment tax credits and excess deferred income taxes relating to
depreciation of regulated assets are being amortized as a reduction of the
provision for income taxes over the estimated useful or remaining lives of the
related property, plant and equipment.
INTANGIBLE ASSETS
Intangible assets are shown net of accumulated amortization of $4,213,000 and
$2,433,000. The excess of cost over fair value of net assets acquired relating
to acquisitions is being amortized over forty years. As of December 31, 1996 and
1995, amortized excess costs over fair value of assets acquired were $6,409,000
and $5,565,000 respectively. Contract rights and covenants not to compete
associated with acquisitions are being amortized over three to twenty years.
Capitalized software costs consist of costs to develop software internally for
the Company's Billing and Data Services Segment. Capitalization of internally
developed software begins upon the establishment of technological feasibility
and continues until the product becomes available for general release to
customers. Unamortized software costs at December 31, 1996 and 1995 were
$492,000 and $1,991,000, respectively, and are included in Intangible Assets in
the Consolidated Balance Sheets. Amortization expenses related to capitalized
software costs were $1,500,000 in 1996, $1,193,000 in 1995, and $1,032,000 in
1994. Capitalized costs are amortized on a product-by-product basis over the
remaining estimated economic life of the product.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of common
stock outstanding during the year. The effect of the common stock equivalents
(common stock options) is insignificant.
NOTE 2 - ACQUISITIONS
In 1994 the Company purchased the telephone exchange assets of Amana Society,
Inc. in Amana, Iowa for $6,500,000. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets have been recorded at their
estimated fair values at the date of acquisition. The purchase price exceeded
the fair value of the assets by $4,400,000.
II-20
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BUSINESS SEGMENTS
The Company's operations are conducted in four business segments. The Telephone
Segment provides telephone services to Mankato and adjacent areas of Blue Earth
and Nicollet counties in southern Minnesota and to the Amana Colonies in east
central Iowa. The Telephone Segment also operates fiber optic cable transport
facilities in southern Minnesota, participates in a cellular company, and
operates direct broadcast satellite television service, all in southern
Minnesota. The Billing and Data Services Segment provides data processing and
related services primarily to telecommunications companies. Its customers are
local exchange telephone companies and interexchange network carriers with
operations across the country. The Equipment Sales Segment sells, installs and
services communications equipment in the retail market. It has many ongoing
business contracts with large business customers in Minneapolis/St. Paul and
southern Minnesota. The Telecommunications Product Development Segment designs,
manufactures and distributes communications equipment through, primarily, large
distributors across the country. Refer to page II - 18 for a schedule of
business segment information.
NOTE 4 - FINANCIAL INSTRUMENTS AND INVESTMENT SECURITIES
The carrying value of cash and temporary cash investments approximates their
fair value due to the short maturity of the instruments. Investments include
investments accounted for using the equity method of accounting and investments
which do not have a readily determinable fair market value. The fair value of
the Company's long-term debt, after deducting current maturities, is estimated
to be $775,000 at December 31, 1996 and $924,000 at December 31, 1995, compared
to carrying values of $877,000 and $1,087,000 respectively. The fair value
estimates are based on the overall weighted rates and maturity compared to rates
and terms currently available in the long-term financing markets.
NOTE 5 - COMMON STOCK
The Company's common stock has no par value. There are 25,000,000 shares
authorized.
On April 1, 1996, a stated value of $0.10 per share was established for the
common stock which resulted in a reclassification of $1,429,000 from common
stock to additional paid-in capital.
Under the terms of an employee stock purchase plan, participating employees may
acquire shares of common stock through payroll deductions of not more than 10%
of compensation. The price at which the shares can be purchased is 85% of the
fair market value for such shares on the lesser of two specified dates in each
plan year. There were 300,000 common shares reserved for this plan. At December
31, 1996, employees had subscribed to purchase approximately 8,000 shares in the
current plan year ended August 31, 1997.
Under the terms of a corporate retainer stock plan for directors, participating
directors may acquire shares of common stock in exchange for their quarterly
retainers. The price at which the shares can be purchased is 100% of the fair
market value for such shares on a specified date in each quarter. There were
100,000 common shares reserved for this plan.
A long-term incentive award plan for officers provides for the granting of
incentive stock options, non-qualified stock options, restricted and
unrestricted stock awards. The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans.
The plan includes stock performance awards based on Company growth in pre-tax
net income. In 1996, the first stock performance awards were distributed under
the plan, amounting to 3,152 shares reflecting compensation expense of $93,000.
If the Company had elected to recognize compensation cost for the stock options
granted based on the fair value at the grant dates using the Black-Scholes
option-pricing model, net income would have decreased by $55,000 in 1996 and
$37,000 in 1995.
Options may be exercised no later than ten years after the date of grant. All
shares available for grant in any year which are not granted under the plan
shall be available for grant in subsequent years. There were 250,000 common
shares reserved for this plan.
II-21
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock options activity of the plan is as follows:
Number of Option
SHARES PRICES
---------- ------
Options Outstanding at December 31, 1993 7,899 $30.75
Granted in 1994 7,534 $33.75
Granted in 1995 6,645 $31.625
Expired in 1995 (3,350) $30.75-$33.75
Granted in 1996 11,000 $28.125
----------
Options Outstanding at December 31, 1996 29,728 $28.125-$33.75
----------
----------
Options Exercisable at December 31, 1996 12,329 $30.75-$33.75
----------
----------
NOTE 6 - DEBT
Long-term debt consists of the following:
(Dollars in Thousands) 1996 1995
---- ----
Notes Payable to Rural Utilities
Service, 2% Due November 2003 $ 935 $1,119
Notes Payable to Rural Telephone Bank,
4% Due April 2007 154 174
------ ------
Total 1,089 1,293
Less Current Maturities 212 206
------ ------
Long-Term Debt $ 887 $1,087
------ ------
------ ------
The collateral for the notes payable to the Rural Utilities Service (RUS) and
the Rural Telephone Bank (RTB) is exclusively the property, plant and equipment
of Mid-Communications, Inc.
Annual requirements for principal payments for the four years subsequent to 1997
are as follows: 1998 - $217,100; 1999 - $222,900; 2000 - $229,800 and 2001 -
$237,700.
In July, 1996, the Company secured a $10 million line of credit arrangement with
a local bank. This line of credit will be used for general corporate purposes
including interim financing for acquisitions. The line of credit provides for
borrowing at a variable annual rate of LIBOR plus 1.5%. There are no material
compensating balances or commitment fee requirements under this arrangement.
NOTE 7 - EMPLOYEE RETIREMENT BENEFITS
Employees who meet certain service requirements are covered under a defined
contribution retirement savings plan which include IRS Section 401(k)
provisions. The Company contributes up to 6.0% of the employees' basic
compensation, based on the employees' voluntary contribution. In 1995, the
Company added an employee profit sharing provision to the plan. The provision is
for all employees who are eligible to participate in the employee retirement
savings plan and are not covered by other types of incentive pay plans. Under
this provision, the Company will contribute up to 2.0% of the eligible employee
group total base compensation into retirement savings plan accounts if specific
earnings targets are achieved. The offering of this provision is contingent upon
annual Board of Directors' approval. The Company contributions and costs for the
total retirement savings plan were $751,000 in 1996, $774,000 in 1995 and
$446,000 in 1994.
In addition to providing retirement savings benefits, the Company provides
postretirement health care and life insurance benefits for certain employees.
The Company is not currently funding these benefits.
II-22
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic postretirement benefit expense was $249,000 in 1996, $334,000 in
1995 and $290,000 in 1994. Accrued postretirement benefit cost was $839,000 as
of December 31, 1996 and $686,000 as of December 31, 1995. The unrecognized
transition obligation is being amortized over 20 years. The unrecognized
liability as of December 31, 1996 is $960,000 and was $1,020,000 as of December
31, 1995.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligations were 10% reducing to 6% in year 10 and later
for December 31, 1996 and 15% reducing to 6% in year 10 and later for the
obligations on December 31, 1995.
Assumptions used to develop net periodic postretirement benefit cost and the
actuarial present value of accumulated benefit obligations:
Weighted average discount rate: 8.00%
Weighted average long-term rate of return on
plan assets: 5.00%
II-23
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
The income tax provisions include the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
<S> <C> <C> <C>
Current Income Taxes:
Federal $6,394 $5,769 $4,897
State 1,811 1,633 1,447
Deferred Income Taxes:
Federal (976) (446) (498)
State (284) (126) (167)
Investment Tax Credit:
Amortized (79) (104) (121)
------ ------ ------
Total Income Tax Expense $6,866 $6,726 $5,558
------ ------ ------
------ ------ ------
Deferred tax liabilities and assets are comprised of the following:
(Dollars in Thousands) 1996 1995
------ ------
Tax Liabilities Associated with:
Depreciation and Fixed Assets $3,540 $3,650
Intangible Assets 469 990
Investments 174 64
Other 23 -
------ ------
Gross Deferred Tax Liability 4,206 4,704
------ ------
Tax Assets Associated with:
Deferred Benefit Plans 1,085 845
Receivables and Inventory 360 209
Accrued Liabilities 577 412
Investments 290 101
Other 40 23
------ ------
Gross Deferred Tax Assets 2,352 1,590
------ ------
Net Deferred Tax Liability 1,854 3,114
Net Current Deferred Tax Asset 914 621
------ ------
Net Non-Current Deferred
Tax Liability $2,768 $3,735
------ ------
------ ------
The differences which cause the effective tax rate to vary from the statutory
federal income rates are as follows:
1996 1995 1994
------ ------ ------
Statutory Tax Rate 35.0% 35.0% 35.0%
Effect of:
State Income Taxes Net of
Federal Tax Benefit 5.8 5.9 5.6
Amortization of Investment
Tax Credit (0.5) (0.6) (0.8)
Prior Year Tax Adjustment - - (2.7)
Other, Net (0.6) 0.2 0.4
------ ------ ------
Effective Tax Rate 39.7% 40.5% 37.5%
------ ------ ------
------ ------ ------
</TABLE>
II-24
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONSTRUCTION COMMITMENTS
The construction and facilities program for 1997 is approximately $12,000,000.
Normal purchase commitments have or will be made for planned expenditures. The
1997 program includes approximately $3,700,000 for the new Iowa property to be
acquired from US West and approximately $1,200,000 to finish building
construction started in 1996.
NOTE 10 - CORPORATE DEVELOPMENT
The Company has entered into agreements to purchase the assets of eleven rural
telephone exchanges in the State of Iowa from US West Communications, Inc. ("US
West") for $35,271,000. The eleven exchanges contain approximately 12,500 access
lines. The acquisitions will be structured as a purchase of telephone assets
from US West. Approvals have been received by the Public Utilities Boards of
Iowa, South Dakota, and Minnesota, as well as the Federal Communications
Commission. It is anticipated that the purchase of the exchanges will be
completed in April 1997.
The Company will utilize new long-term debt instruments to fund the $35,271,000
acquisition price for the US West property. A private placement of unsecured
senior notes for such funding is in process. The Company expects the notes will
bear interest equal to a 10-year U.S. Treasury security plus 0.75% and have
15-year maturities.
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (Not Audited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996
------
Total 4th 3rd 2nd 1st
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 66,562 $ 18,440 $ 16,639 $ 15,942 $ 15,541
Operating Income 16,773 5,427 4,182 3,310 3,854
Net Income 10,419 3,199 2,633 2,171 2,416
Earnings Per Share $2.09 $.65 $.54 $.43 $.47
Dividends Per Share $1.10 $.275 $.275 $.275 $.275
1995
----
Total 4th 3rd 2nd 1st
-------- -------- -------- -------- --------
Operating Revenues $ 62,847 $ 16,756 $ 15,871 $ 15,573 $ 14,647
Operating Income 15,779 4,553 3,697 3,914 3,615
Net Income 9,900 2,798 2,376 2,505 2,221
Earnings Per Share $1.93 $.55 $.46 $.49 $.43
Dividends Per Share $1.00 $.25 $.25 $.25 $.25
</TABLE>
II-25
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in accountants and no disagreement with the
accountants regarding accounting or financial disclosures within the twenty-four
month period ending December 31, 1996.
II-26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
MEMBERS OF THE BOARD OF DIRECTORS
ROBERT D. ALTON, JR. has served as a director since 1993. His present term
expires in 1999. Mr. Alton became President and Chief Executive Officer of the
Company in 1993. Mr. Alton, age 48, is the former President of Telephone
Operations of Contel Corporation and was employed in various executive and
financial capacities at Contel Corporation for twenty-one years.
LYLE T. BOSACKER has served as a director since 1988. His present term expires
this year and he is a nominee. Mr. Bosacker, age 54, is a management consultant
and President of CEO Advisors, Inc. Mr. Bosacker served as the Director of
Corporate Information Services for International Multifoods from 1991 to 1993
and as its Director of Corporate Information Systems Planning from 1987 to 1991.
ROBERT K. ELSE has served as a director since 1990. His present term expires in
1999. Mr. Else, age 61, has been the President of EI Microcircuits, Inc. in
Mankato, Minnesota, since 1984. EI Microcircuits manufactures and assembles
electronic circuit boards.
JAMES H. HOLDREGE has served as a director since 1992. His present term expires
in 1998. Mr. Holdrege, age 58, has been the General Manager of KATO Engineering
Division, Reliance Electric Co. since 1984. KATO Engineering is a manufacturer
of synchronous generators, power conditioning equipment and associated controls.
LYLE G. JACOBSON has served as a director since 1989. His present term expires
in 1998. Mr. Jacobson, age 55, has been the President and Chief Executive
Officer of Katolight Corporation in Mankato, Minnesota, since 1985. Katolight
Corporation is a manufacturer of emergency generator sets and generator
controls.
R. WYNN KEARNEY, JR. has served as a director since 1993. His present term
expires in 1999. Dr. Kearney, age 53, has been in private practice with the
Orthopaedic & Fracture Clinic, P.A., in Mankato, Minnesota, since 1972 and is
President-elect of the Minnesota Orthopaedic Society. Dr. Kearney, a minority
owner of the Minnesota Timberwolves, presently serves as President of the
Mankato State University Foundation. Dr. Kearney is also a director of
Exactech, Inc. of Gainesville, Florida.
STARR J. KIRKLIN has served as a director since 1989. His present term expires
in 1998. Mr. Kirklin, age 60, retired from First Bank System, Inc. in February
of 1996. Mr. Kirklin is now employed as Director of Development for Mankato
State University.
BRETT M. TAYLOR, JR. has served as a director since 1970. His present term
expires this year and he is a nominee. Mr. Taylor, age 67, is the retired
Chairman of Brett's Department Stores, Co. and previously served as its
President from 1971 to 1987.
III-1
<PAGE>
OTHER EXECUTIVE OFFICERS
JON L. ANDERSON, age 44, has served as a Vice President since 1995. Mr.
Anderson has served as President of Collins Communications Systems Co. since
1994 and was its Vice President and General Manager from 1991 to 1994.
DAVID A. CHRISTENSEN, age 44, has served as Secretary since 1993, Vice President
and Chief Financial Officer since 1989, and Treasurer since 1986.
THOMAS R. BORCHERT, age 60, has served as Vice President since 1986. Mr.
Borchert has served as President of Mankato Citizens Telephone Company since
1984.
MARY T. JACOBS, age 39, has served as a Vice President since 1996 and has been
the Director of Human Resources since 1993. Ms. Jacobs was the Director of
Human Resources at Pueringer/Multifoods from 1991 to 1993. Pueringer/Multifoods
is a food service distributor.
BRUCE H. MALMGREN, age 52, has served as a Vice President of the Company and as
President of Computoservice, Inc. since 1995. Mr. Malmgren was Senior Vice
President of Sales and Marketing and National Sales Manager for Dataserv, Inc.
from 1992 to 1995. Dataserv, Inc. provides technical services for commercial
personal computer systems. From 1990 to 1992, Mr. Malmgren was Vice President
of Sales and Marketing for Facility Systems, Inc., a provider of business
furniture and design systems. Prior to this, beginning in 1968, Mr. Malmgren
held various sales and managerial positions in Xerox Corporation.
DAVID H. ROWLEY, age 56, has served as a Vice President since 1995 and President
of Digital Techniques, Inc. since 1993. Mr. Rowley served as an Assistant Vice
President for GTE Corp. from 1991 to 1993. GTE Corp. provides local and long
distance telephone services.
There are no present family relationships between the executive officers, nor
between the executive officers and the directors.
III-2
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The remuneration paid or accrued to the Chief Executive Officer and each of the
other four most highly compensated executive officers of the Company whose
aggregate remuneration exceeded $100,000 in 1996 is as follows:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ----------------------
Restricted Securities All
Name and Stock Underlying Other
Principal Awards Options/ Compensation
Position YEAR SALARY ($) BONUS($)(2) ($) SARS (#) ($)
- -------- ---- ---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
ROBERT D. ALTON, JR. 1996 $213,050(1) $110,530 $60,000(4) 5,400 $ 7,923 (5)
Director, Chairman, 1995 $205,800(1) $113,740 $41,145(4) 3,486 $ 8,625 (5)
President and Chief 1994 $194,775(1) $ 87,990 $39,567(3) 3,092 $ 8,295 (5)
Executive Officer
THOMAS R. BORCHERT 1996 $ 153,800 $ 84,956 $21,000(4) 2,000 $ 8,389 (5)
Vice President 1995 $ 147,900 $ 83,182 $20,670(4) 1,754 $ 8,177 (5)
1994 $ 142,200 $ 62,237 $19,893(3) 1,580 $ 7,880 (5)
DAVID A. CHRISTENSEN 1996 $ 122,900 $ 57,135 $ 9,000(4) 800 $ 7,211 (5)
Vice President, 1995 $ 118,500 $ 51,139 $16,250(4) 1,405 $ 6,511 (5)
Chief Financial 1994 $ 112,000 $ 39,959 $15,614(3) 1,244 $ 1,492 (5)
Officer, Secretary
and Treasurer
BRUCE H. MALMGREN 1996 $ 119,600 $ 64,314 $12,000(4) 800 $ 3,561 (6)
Vice President 1995 $ 110,100 $ N/A N/A N/A N/A
DAVID H. ROWLEY 1996 $ 110,000 $ 47,737 $12,000(4) 1,000 $15,488 (6)
Vice President 1995 $ 104,500 $ 64,333 N/A N/A N/A
</TABLE>
(1) Includes deferred compensation of $9,275 in 1994, $9,800 in 1995 and $10,145
in 1996 pursuant to a Supplemental Retirement Agreement with the Company. Each
year Mr. Alton accrues benefits equal to five percent (5%) of his base salary.
This accumulation of benefits will occur for a maximum of ten (10) years of
service commencing January 1, 1993. Benefits are paid upon termination of
employment commencing on the earlier of Mr. Alton's 62nd birthday or his date of
death.
(2) The Company and its subsidiaries have an Executive Incentive Plan whereby
key executives may receive additional compensation based on annual performance
and set goals of the Company, its subsidiaries and the individual executive. In
addition to cash compensation, each executive receives a performance award equal
to one-half of the cash compensation. The cash award and performance award
credit are shown in this column. The performance award is credited to the
executive's performance account. The performance account is annually credited
with interest equal to the rate for a ten year Treasury Bond. One-fourth (1/4)
of the performance account is vested immediately and an additional one-fourth
(1/4) vests each of the succeeding three years.
(3) Awards actually granted under the Company's 1994 Stock Award Programs and
distributed to participants in 1997.
(4) Restricted Stock Awards under the Company's 1995 and 1996 Stock Award
Programs will only be issued, if the Company and its subsidiaries achieve
established goals of pre-tax net income growth for the three (3) year periods
ending December 31, 1997 and December 31, 1998, respectively. Certain
assumptions have been made in estimating the amount of compensation associated
with the Restricted Stock Awards. These assumptions include: a 4% compound
annual growth rate in salaries for the individuals in the Programs, that all
financial targets are met, and that the Committee approves a 100% payout of the
awards to each participant. The awards will be paid in stock of the Company,
not in cash. See the Long Term Incentive Plan table and associated footnotes on
page III - 4.
(5) Employer contributions to 401(k) Plans.
(6) Includes $6,600 contribution to 401(k) Plan and $8,888 in discretionary
Stock Award in 1996 under the Company's Stock Award Plan for Mr. Rowley, and
$598 contribution to 401(k) Plan and $2,963 in discretionary Stock Award in 1996
under the Company's Stock Award Plan for Mr. Malmgren.
III-3
<PAGE>
LONG TERM INCENTIVE PLANS
AWARDS IN LAST FISCAL YEAR
Stock Award Programs (the "Programs") were implemented in 1993, 1994, 1995 and
1996 pursuant to the terms of the Company's 1993 Stock Award Plan. This Plan
was approved by the shareholders in 1993 and since amended. Each Program
established a pool of shares that may be issued to the executives of the Company
contingent upon achievement of performance objectives over a three year period.
The objectives are based on compound annual increases in the earnings of the
Company and its subsidiaries. The restricted shares established in the 1994
Stock Award Program were distributed to the participants in February of 1997.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED PLANS
---------------------------------
Number of Performance of
Shares, Units Other Period
or Other Until Maturation
NAME Rights (#)(1) or Payout Threshold(2) Target(3) Maximum(4)
- ---- ------------- ---------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Alton 1,372 1 year 1,372 1,372 2,058
2,000 2 years 1,400 2,000 3,000
Anderson 400 1 year 200 400 600
Borchert 689 1 year 689 689 1,033
700 2 years 500 700 1,050
Christensen 542 1 year 542 542 813
300 2 years 100 300 450
Malmgren 400 2 years 200 400 600
Rowley 400 2 years 200 400 600
</TABLE>
(1) Under the terms of the Programs, shares will only be issued if the Company
and its subsidiaries achieve established goals of compound annual growth in
pre-tax net income for the three year periods ending December 31, 1997 and 1998,
respectively. It is not possible to predict future salaries, stock prices or
the financial results of the Company and its subsidiaries, therefore, certain
assumptions have been made to estimate the outcome of the Programs. These
assumptions include: a 4% compound annual growth rate in salaries for the
individuals in the Programs, all financial objectives being achieved, the
Committee approving a payout for each participant and a potential market value
of the Company's stock of $30.00 per share in both 1998 and 1999. The Company
is making no representations as to market appreciation potential for the
Company's stock in these calculations.
(2) No restricted shares will be issued unless the Company and its subsidiaries
achieve the performance objectives. The number of shares in the "Threshold"
column indicates the minimum number of shares to be awarded if the Company and
subsidiary performance objectives have been achieved.
(3) The number of shares in the "Target" column are the same as the shares in
the "Threshold" column for the 1995 Stock Program because there is a
predetermined number of restricted shares that will be issued if the performance
objectives are achieved. Beginning in 1996, there is a potential range of
shares established for each participant under the Program. The range has a
separate threshold and target number of shares that can be awarded once the
pre-established performance objectives of the Company and subsidiaries have been
achieved. The number of shares in the "Target" column are the high end of this
range, without consideration of footnote (4) below. No shares under the Program
will be issued if pre-established performance objectives are not achieved.
(4) The Programs allow the Committee the authority to reward outstanding
individual performance by issuing restricted shares to an individual in an
amount not to exceed 150% of the number of shares the individual would have
received under the targeted level. The shares in the "Maximum" column assumes
the Committee will issue 150% of the target number of shares to all
participants.
III-4
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM ($)
------------------------------------------------- --------------------------------
%OF TOTAL
OPTIONS
OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME # (1) FISCAL YEAR ($/SHARE) DATE 5%(2) 10%(2)
- ---- ------- ------------ ---------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alton 5,400 49.1% $28.125 May 31, 2006 $95,580 $242,325
Anderson 1,000 9.1% $28.125 May 31, 2006 $17,700 $44,875
Borchert 2,000 18.1% $28.125 May 31, 2006 $35,400 $89,750
Christensen 800 7.3% $28.125 May 31, 2006 $14,160 $35,900
Malmgren 800 7.3% $28.125 May 31, 2006 $14,160 $35,900
Rowley 1,000 9.1% $28.125 May 31, 2006 $17,700 $44,875
</TABLE>
(1) The options were granted at the fair market value of the shares on May 31,
1996. The options may be exercised for one-third (1/3) of the shares after May
31, 1997, one-third (1/3) of the shares after May 31, 1998, and one-third (1/3)
of the shares after May 31, 1999. All options expire on May 31, 2006 and in the
event the optionee is no longer employed by the Company. All options vest upon
the occurrence of an Event (as described in the 1993 Stock Award Plan). Shares
acquired by the optionees are subject to rights of repurchase by the Company in
the event the optionee terminates employment with the Company or wishes to
transfer the shares.
(2) The exercise price was compounded at 5% and 10% over the ten (10) year term
of the options. The resulting stock price was reduced by the exercise price to
determine the potential realizable gain at the assumed rates of appreciation.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END AT FY-END
# $(1)
----------------------- --------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Alton 6,425 8,754 $0 $0
Anderson 0 1,000 $0 $0
Borchert 3,306 3,695 $0 $0
Christensen 2,598 2,150 $0 $0
Malmgren 0 800 $0 $0
Rowley 0 1,000 $0 $0
(1) Value of unexercised options equals fair market value of shares underlying
in-the-money options at December 31, 1996 ($27.00), less the exercise price
times the number of in-the-money options outstanding.
III-5
<PAGE>
COMPENSATION OF DIRECTORS
Directors received $350 for each Board and committee meeting they attended. In
1996, the Directors were paid an annual retainer of $10,000. These fees are
waived if the individual is a paid employee of the Company.
401(k) PLANS
Hickory Tech Corporation and all of its subsidiaries (the "Companies") have a
Retirement Savings Plan ("401(k) Plan"). Participation in the 401(k) Plans is
open to each employee of the Companies who has completed three (3) months of
continuous employment. Participation in the 401(k) Plans is optional.
Employees may participate beginning with any pay period after completion of
eligibility requirements. As of December 31, 1996, there were 356 employees
eligible to participate in the 401(k) Plans. All but 31 eligible employees
participated in the 401(k) Plans in 1996.
A participant may elect to defer, on a pre-tax basis, up to 15% of annual base
compensation limited to $9,500 in 1996. The Companies will make an
employer-matching contribution of up to 6% of the participant's pre-tax
contribution.
In 1996, the Companies contributed $683,748 to the accounts of all eligible
employees.
CHANGE OF CONTROL
The Company has change of control agreements with the following named executive
officers: Robert D. Alton, Jr., Thomas R. Borchert, David A. Christensen, Bruce
H. Malmgren and David H. Rowley. These agreements provide that in the event
there is a change in control of the Company, the officers shall receive pay for
the following number of years, unless they are released for cause, are disabled
or die: 2.99 years for Robert D. Alton, Jr., and two (2) years for Thomas R.
Borchert, David A. Christensen, Bruce H. Malmgren and David H. Rowley. If the
officers are released within three (3) years after change in control, for a
reason other than cause, death or disability, they shall be paid their salary
for the designated time periods. In the event of a change in control of the
Company and the simultaneous release of the officers, the approximated maximum
amount of salary that would be paid to Messrs. Alton, Borchert, Christensen,
Malmgren and Rowley under their current agreements would be $1,215,000,
$527,000, $382,000, $404,000 and $357,000, respectively.
SEVERANCE PAY
The Company has an agreement with Robert D. Alton, Jr. that if he is discharged
by the Company, he will receive severance pay equal to twelve (12) times his
then current monthly base salary. The current maximum amount payable under this
agreement would be $211,000. No payments will be made to Mr. Alton if he is
discharged for fraud, misappropriation of funds, embezzlement, or the commission
of a work related felony.
III-6
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation program for executives is the responsibility of the
Compensation Committee of the Board of Directors. In 1996, this Committee was
composed of three outside directors, Messrs. Bosacker, Jacobson and Taylor. Mr.
Bosacker is Chairperson of this Committee.
The Board of Directors has established the following ongoing principles and
objectives for the Company's executive compensation program:
1. Provide compensation opportunities that will attract, motivate and retain
highly qualified managers and executives.
2. Link executives' total compensation to the Company's financial performance
and individual job performance.
3. Provide a balance between incentives focused on achievement of annual
objectives and longer term incentives linked to increases in earnings and
shareholders' value.
There are three elements to the compensation plan: annual base salary, cash
bonuses (the "Executive Incentive Plan") and longer term incentives (the "Stock
Award Plan").
Annual base salaries are somewhat influenced by the pay practices of comparable
companies so that the Company remains reasonably competitive with what others
are doing.
The Executive Incentive Plan has both an annual and a long-term component. The
Executive Incentive Plan rewards an executive with a cash bonus for attainment
of annually established financial objectives based on a combination of revenue,
pre-tax earnings and/or return on equity. The individual executive's
performance is also factored into awards made under the Executive Incentive
Plan. In addition to the payment of a cash bonus, an account is established for
each executive equal to 50% of the cash bonus. The account is increased
annually based on interest equal to the rate on a ten year Treasury Bond.
One-fourth of this account is vested immediately and an additional one-fourth
vests each of the succeeding three years.
The Stock Award Plan allows the Company to issue restricted shares, unrestricted
shares, incentive stock options and non-qualified stock options to officers of
the Company. The 1996 Stock Award Program that was adopted pursuant to the
Stock Award Plan issued incentive stock options to six officers of the Company.
The incentive stock options vest over a three year period and must be exercised
within ten years of their issuance. The stock options reward the executives in
the event they increase the fair market value of the shares of the Company. The
1996 Stock Award Program also established a range of restricted shares that may
be issued to each officer under the Program contingent upon the achievement of
performance objectives over a three year period. The objectives are based on
increases in the earnings of the Company and its subsidiaries.
The Committee applied the above-described principles and objectives in
determining the compensation for the Chief Executive of the Company, Mr. Alton.
In setting the 1996 salary, the Committee reviewed Mr. Alton's total
compensation program to make sure that it was closely related to the performance
of the Company in 1995. In establishing salary for 1996, the Committee
specifically considered the satisfactory results of the Company in 1995 as
compared to targeted goals in the areas of annual revenue, pre-tax
profitability, return on equity and rate of growth. The Committee also reviewed
the compensation of the CEO to determine that the compensation was competitive
for similar positions in comparable companies and was equitable for the Company
and its shareholders.
COMPENSATION COMMITTEE
Lyle T. Bosacker
Lyle G. Jacobson
Brett M. Taylor, Jr.
III-7
<PAGE>
FIVE YEAR SHAREHOLDER RETURN PERFORMANCE PRESENTATION
The line graph presentation compares cumulative, five-year shareholder returns
on an indexed basis. The graph shows the value at each year of $100 invested in
the Company's stock or the index at December 31, 1991 and assumes the
reinvestment of all dividends. The Board of Directors has approved a peer group
of four (4) independent telecommunications companies which have been used for
purposes of this performance comparison. These companies were selected because
they have a similar proportion of core business in regulated telephone
operations, a similar pattern of internal diversification and moderate external
acquisition activity. The companies selected to be in the peer group are
identified below. The following graph compares the cumulative five year
performance of the Company's common stock to the S&P Composite and to an index
of peer companies.
TOTAL RETURN TO SHAREHOLDERS
DECEMBER 1991 TO DECEMBER 1996
(Following are the tables in the proxy which describe the points of the graph.)
ANNUAL RETURNS (BASED ON DIVIDENDS REINVESTED MONTHLY)
<TABLE>
<CAPTION>
RETURN RETURN RETURN RETURN RETURN
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Hickory Tech 7.75 7.51 (1.17) 1.45 (8.93)
S&P 500 Comp-Ltd. 7.62 10.08 1.32 37.58 22.96
Peer Group Index Average 10.85 16.81 (3.74) 51.43 6.81
Indexed Returns (12/31/91=100)
VALUE AT DECEMBER 31
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Hickory Tech 100 107.75 115.84 114.49 116.15 105.78
S&P 500 Comp-Ltd. 100 107.62 118.46 120.03 165.13 203.05
Peer Group Index Average 100 110.85 129.49 124.65 188.76 201.61
</TABLE>
Companies in selected Peer Group are:
Aliant Communications, Inc. (Name Change from Lincoln
Telecommunications Company)
Cincinnati Bell, Inc.
Frontier Corporation.
Southern New England Telecommunications Corporation
III-8
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
a. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 13, 1997, no person owned five percent or more of any
class of the Company's voting securities.
III-9
<PAGE>
b. SECURITY OWNERSHIP OF MANAGEMENT
Directors, nominees and named executive officers of the Company own the
following securities of the Company:
NAME OF AMOUNT & NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP COMMON STOCK
Robert D. Alton, Jr. 13,317 (a) *
Lyle T. Bosacker 118,756 (b) 2.5%
Robert K. Else 2,858 *
James H. Holdrege 1,108 *
Lyle G. Jacobson 7,696 (c) *
R. Wynn Kearney, Jr. 22,311 (d) *
Starr J. Kirklin 1,258 *
Brett M. Taylor, Jr. 28,778 (e) *
Thomas R. Borchert 5,888 (a) *
David A. Christensen 4,450 (a) *
David H. Rowley 3,914 (f) *
Bruce H. Malmgren 164 *
All of the above and other executive
officers as a group (14 persons) 211,737 4.5%
* Less than 1%
(a) Includes shares which may be acquired within 60 days after March 18, 1997
through the exercise of stock options. The persons who have such options and
the number of shares which may be so acquired are as follows: Mr. Alton, 7,455;
Mr. Borchert, 3,832; and Mr. Christensen, 3,012.
(b) Includes 113,702 shares held by Mrs. Bosacker.
(c) Includes 6,588 shares held by Mrs. Jacobson.
(d) Includes 3,306 shares held in a Profit Sharing Trust.
(e) Includes 16,962 shares held in a partnership, 11,816 shares in a trust for
which Mr. Taylor is co-trustee.
(f) Includes 3,614 shares held in a family trust.
III-10
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
No reportable transactions occurred in 1996 involving directors,
management or shareholders.
III-11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is given
in the financial statements or notes thereto.
2. EXHIBITS
Exhibit 10(k) Company's 1993 Stock Award Plan
Exhibit (21) contains a listing of the Subsidiaries of the Company.
Exhibit (23) contains the Consent of Independent Accountants regarding
the Registration Statement of Hickory Tech Corporation on Form S-8.
(b) 1. REPORTS ON FORM 8-K
On February 17, 1997, the Company filed a Form 8-K. Item 5 (Other
Events) was reported on the Form 8-K. The Form 8-K reported that on
January 29, 1997, the Board of Directors of the Company adopted a new
share repurchase program authorizing the Company to repurchase up to
500,000 additional shares of its outstanding common stock. This new
repurchase program follows the repurchase program which the Company
announced on April 8, 1996.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
Dated: MARCH 26, 1997 HICKORY TECH CORPORATION
--------------------------------
By: /s/ Robert D. Alton, Jr.
______________________________
Robert D. Alton, Jr.
Chairman, President and
Chief Executive Officer
/s/ Robert K. Else
______________________________
Robert K. Else, Director
/s/ James H. Holdrege
______________________________
James H. Holdrege, Director
/s/ Lyle G. Jacobson
______________________________
Lyle G. Jacobson, Director
/s/ Starr J. Kirklin
______________________________
Starr J. Kirklin, Director
/s/ David A. Christensen
______________________________
David A. Christensen, Secretary,
Vice President, Chief Financial
Officer and Treasurer
IV-2
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
Exhibit Index to
Form 10-K for the Year Ended December 31, 1996
Filed in Filed in
Regulation S-K Securities Exchange
Reference Title of Document Act Form Act Form
- --------------- ------------------ ---------- --------
3(a) Articles of Incorporation S-8 dated
June 22, 1993
3(b) By-Laws S-8 dated
June 22, 1993
10(a) & (b) Supplemental Retirement S-8 dated
Agreements June 22, 1993
10(c) Company's Executive S-8 dated
Incentive Plan June 22, 1993
10(d) Change of Control Agreements S-8 dated
June 22, 1993
10(h) Employment Agreement S-8 dated
June 22, 1993
10(i) Company's Retirement S-8 dated
Savings Plan and Trust June 22, 1993
10(j) Employee Stock Purchase Plan S-8 dated
June 22, 1993
10(k) Company's 1993 Stock Award Filed
Plan herewith
at page
IV-4
10(l) Company's Stock Plan for S-8 dated
Directors June 22, 1993
21 Subsidiaries of the Company Filed
herewith
at page
IV-13
23 Consent of Independent Filed
Accountants herewith
at page
IV-14
IV-3
<PAGE>
HICKORY TECH CORPORATION 1993 STOCK AWARD PLAN
(AMENDED AND RESTATED EFFECTIVE JANUARY 29, 1997)
1. PURPOSE. The purpose of the Hickory Tech Corporation 1993 Stock Award Plan
(the "Plan") is to motivate key employees of Hickory Tech Corporation (the
"Company") and its subsidiaries to produce a superior return to the shareholders
of the Company by offering such employees an opportunity to acquire a
proprietary interest in the Company and thereby develop a stronger incentive to
put forth maximum effort for the continued success and growth of the Company and
its subsidiaries. The Plan is also intended to facilitate recruiting and
retaining key personnel of outstanding ability by providing such an acquisition
opportunity.
2. DEFINITIONS.
2.1 The terms defined in this section are used (and capitalized) elsewhere in
the Plan.
a. "Agreement" means a written contract entered into between the Company and a
Participant containing the terms and conditions of an Award in such form and not
inconsistent with this Plan as the Committee (as defined in Section 3.1) shall
approve from time to time, together with all amendments thereto, which
amendments may be unilaterally made by the Company (with the approval of the
Committee) unless such amendments are deemed by the Committee to be materially
adverse to the Participant and are not required as a matter of law.
b. "Award" means a grant made under this Plan in the form of Restricted Stock
or options.
c. An "Event" shall be deemed to have occurred if:
(i) a majority of the directors of the Company shall be persons other than
those:
(a) for whom election proxies shall have been solicited by the Board of
Directors of the Company (the "Board"); or
(b) who are then serving as directors appointed by the Board to fill vacancies
on the Board caused by death or resignation (but not by removal) or to fill
newly-created directorships.
(ii) 30% or more of the outstanding voting stock of the Company is acquired or
beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended, or any successor rule thereto) by any person (other than
the Company or a subsidiary of the Company) or group of persons acting in
concert (other than the acquisition and beneficial ownership by a parent
corporation or its wholly-owned subsidiaries, of 100% of the outstanding voting
stock of the Company as a result of a merger which complies with paragraph
subsection (iii) (A) (2) below in all respects),
(iii) the shareholders of the Company approve a definitive agreement or plan
to:
(A) Merge or consolidate the Company with or into another corporation (other
than (1) a merger or consolidation with a subsidiary of the Company of (2) a
merger in which the Company is the surviving corporation and either (A) no
outstanding voting stock of the Company (other than fractional shares) held by
shareholders immediately prior to the merger is converted into
IV-4
<PAGE>
cash, securities or other property, or (B) all holders of outstanding voting
stock of the Company (other than fractional shares) immediately prior to the
merger have substantially the same proportionate ownership of the voting stock
of the Company or its parent corporation immediately after the merger),
(B) Exchange, pursuant to the statutory exchange of shares of voting stock of
the Company held by stockholders immediately prior to the exchange, shares of
one or more classes or series of voting stock of the Company for cash,
securities or other property,
(C) Sell or otherwise dispose of all or substantially all of the assets of the
Company (in one transaction or a series of transactions); or
(D) Liquidate or dissolve the Company.
Notwithstanding the above, an Event shall not be deemed to occur with respect to
a recipient of an Award if the acquisition of the 30% or greater interest
referred to in subsection (ii) above is by the recipient or a group, acting in
concert, that includes the recipient or if a majority of the voting stock (or
the voting equity interest) of the surviving corporation or its parent
corporation or any corporation (or other entity) acquiring all or substantially
all of the assets of the Company (in the case of a merger, consolidation or
disposition of assets) or the Company or its parent corporation (in the case of
a statutory share exchange) is, immediately following the merger, consolidation,
statutory share exchange or disposition of assets, beneficially owned by such
recipient or by a group acting in concert, that includes the recipient.
d. "Fair Market Value" as of any date shall mean an average of the closing
price per Share of Common Stock, no par value (a "Share"), of the Company on
each of the five business days immediately preceding the date on which a price
determination is to be made. The closing prices shall be the closing prices as
published in The Wall Street Journal. In the absence of trading in the Shares
on any of the five immediately preceding business days, the calculation will be
based on the closing price for the five business days preceding the date on
which a price determination is to be made on which there were actual trades of
the Shares.
e. "Participant" means an employee to whom an Award is made.
f. "Restricted Stock" means Shares granted under Section 7 so long as such
Shares remain subject to restrictions.
g. "Successor" means the legal representative of the estate of a deceased
Participant or the person or persons who may, by request or inheritance, or
pursuant to the terms of an Award or of forms submitted by the Participant to
the Committee pursuant to Section 18, acquire the right to exercise an option or
to receive Shares issuable in satisfaction of an Award in the event of a
Participant's death.
2.2 GENDER AND NUMBER. Except when otherwise indicated by context, reference
to the masculine gender shall include, when used, the feminine gender, and any
term used in the singular shall also include the plural.
IV-5
<PAGE>
3. ADMINISTRATION.
3.1 AUTHORITY OF COMMITTEE. The Plan shall be administered by a committee of
two or more persons (the "Committee") appointed by the Board. No person shall
serve as a member of the Committee unless such person shall be a "Non-Employee
Director" as that term is defined in Rule 16b-3(b)(3)(i), promulgated under the
Exchange Act, or any successor statute or regulation comprehending the same
subject matter. A majority of the members of the Committee shall constitute a
quorum for any meeting of the Committee and the acts of a majority of the
members present at any meeting at which a quorum is present or the acts
unanimously approved in writing by all members of the Committee shall be the
acts of the Committee. Subject to the provisions of the Plan, the Committee may
from time to time adopt such rules for the administration of this Plan as it
deems appropriate.
3.2 INDEMNIFICATION. To the full extent permitted by law, (i) no member of the
Committee shall be liable for any action or determination taken or made in good
faith with respect to the Plan or any Award made under the Plan, and (ii) the
members of the Committee shall be entitled to indemnification by the Company
with regard to such actions and determinations.
4. SHARES AVAILABLE UNDER THE PLAN. The number of Shares available for
distribution under the Plan shall not exceed 250,000 (subject to adjustment
pursuant to Section 13). Any Shares subject to the terms and conditions of an
Award under the Plan which are not used because the terms and conditions of the
Award are not met may again be used for an Award under the Plan.
5. ELIGIBILITY. Participation in the Plan shall be available to all employees
of the Company and its subsidiaries.
6. GENERAL TERMS OF AWARDS.
a. AMOUNT OF AWARD. Each Agreement shall set forth the number of Shares of
Restricted Stock or the number of Shares to which the option subject to such
Agreement applies, as the case may be.
b. TERM. Each Agreement shall set forth the term of the option or Restricted
Stock Award, as the case may be. Subject to the requirements of the Plan, an
Agreement may permit an acceleration of the expiration of the applicable term
upon such terms and conditions as shall be set forth in the Agreement.
c. TRANSFERABILITY. During the lifetime of a Participant to whom an Award is
granted, only such Participant (or such Participant's legal representative) may
exercise an option. No Award of Restricted Stock (prior to the expiration of
the restrictions) or option may be sold, assigned, transferred, exchanged or
otherwise encumbered, and any attempt to do so shall be of no effect.
Notwithstanding the immediately preceding sentence, an Agreement may provide
that the Award subject to the Agreement shall be transferable to a Successor in
the event of a Participant's death.
d. TERMINATION OF EMPLOYMENT. No option may be exercised by a Participant
and all Restricted Stock held by a Participant shall be forfeited if the
Participant's employment with the Company or its subsidiaries shall be
voluntarily terminated or involuntarily terminated with or without cause prior
to the expiration of the term of the option or the Restricted Stock, as the case
may be except as, and to the extent, provided in the Agreement applicable to
that Award. An option may be exercised by the Successor of a Participant
following the death of such Participant
IV-6
<PAGE>
to the extent, and during the period of time, if any, provided in the applicable
Agreement.
7. STOCK AWARDS.
7.1 RESTRICTED STOCK AWARDS. An Award of Restricted Stock under the Plan shall
consist of Shares subject to restrictions on transfer and conditions of
forfeiture, which restrictions and conditions shall be included in the
applicable Agreement. Except as otherwise provided in the applicable Agreement,
each certificate representing shares issued in respect to an Award of Restricted
Stock shall either be deposited with the Company or its designee, together with
an assignment separate from such certificate, in blank, signed by the
participant, or bear such legends with respect to the restricted nature of the
Restricted Stock evidenced thereby as shall be provided in the applicable
Agreement. The agreement shall describe terms and conditions by which the
restrictions upon awarded Restricted Stock shall lapse. Upon the lapse of the
restrictions, Shares free of restrictive legends, if any, relating to such
restrictions shall be issued to the Participant or his Successor. A Participant
with a Restricted Stock Award shall have all the other rights of a shareholder
including, but not limited to the right to receive dividends and the right to
vote the Shares of Restricted Stock.
7.2 UNRESTRICTED STOCK AWARDS. Notwithstanding any other provision of the
Plan, the Company may issue Shares directly to employees of the Company as part
of any compensation arrangement. Shares so issued need not be subject to an
Agreement or to the provisions of Sections 6, 7.1, 14, 15, 16 or 18 hereof, but
unless otherwise specified by the Committee, such Shares shall be subject to the
provisions of Sections 6, 7.1, 14, 15, 16 or 18. The certificate for any such
Shares shall contain a restrictive legend to the extent of any applicable
restriction.
7.3 EXECUTIVE INCENTIVE PLAN. Notwithstanding any other provision of the Plan,
the Company may issue Shares to the Trustee referred to in the Company's
Executive Incentive Plan, as it may be amended from time to time. Shares so
issued need not be subject to an Agreement and shall not be subject to the
provisions of Sections 6, 7.1, 14, 15, 16 or 18 hereof, but instead shall be
governed by the provisions of the Executive Incentive Plan.
8. STOCK OPTIONS.
8.1 TERMS OF ALL OPTIONS. An option shall be granted pursuant to an Agreement
as either an Incentive Stock Option (as that term is defined in Section 422 of
the Internal Revenue Code or any amendment thereto ("the Code") or a
Non-Qualified Stock Option (an option granted under the Plan that is not
intended to be an Incentive Stock Option). The purchase price of each Share
subject to an option shall be determined by the Committee and set forth in the
Agreement, but shall not be less than 100% of the Fair Market Value of a Share
as of the date the option is granted. The purchase price of the Shares with
respect to which an Option is exercised shall be payable in full at the time of
exercise. The purchase price may be payable in cash, in Shares having a Fair
Market Value equal to the purchase price of the Shares being purchased pursuant
to the option as of the date the option is exercised, or a combination thereof,
as determined by the Committee and provided in the Agreement. Each option shall
be exercisable in whole or in part on the terms provided in the Agreement. In
no event shall any option be exercisable at any time after its expiration date.
When an option is no longer exercisable, it shall be deemed to have lapsed or
terminated.
8.2 INCENTIVE STOCK OPTIONS. In addition to the other terms and conditions
applicable to all options.
IV-7
<PAGE>
(i) The aggregate Fair Market Value (determined as of the date the option
is granted) of the Shares with respect to which Incentive Stock Options held by
an individual first become exercisable in any calendar year (under this Plan and
all other incentive stock option plans of the Company) shall not exceed $100,000
(or such other limit as may be required by the Code) if such limitation is
necessary to qualify the option as an Incentive Stock Option;
(ii) An Incentive Stock Option shall not be exercisable more than ten years
after the date of grant (or such other limit as may be required by the Code) if
such limitation is necessary to qualify the option as an Incentive Stock Option;
(iii) At the time the Incentive Stock Option is granted, if the eligible
employee owns stock of the Company possessing more than ten percent of the total
combined voting power of all classes of stock therein, (A) the purchase price of
each Share covered by the option shall not be less than 110% of the Fair Market
Value of a Share on the date of grant, and (B) the term of the option shall not
be greater than five years from the date of grant;
(iv) The Participant must remain continuously employed by the Company
and/or its subsidiaries from the date of grant until the effective date of
exercise unless such exercise occurs within the period, if any, allowed
following termination of employment by the Code and by the Agreement; and
(v) The Agreement covering an Incentive Stock Option shall contain such
other terms and provisions which the Committee determines necessary to qualify
such option as an Incentive Stock Option.
If any option is not granted, exercised or held in accordance with the
provisions set forth above in this Section 8.2, it will be considered to be a
Non-Qualified Stock Option to the extent that it is in conflict with these
provisions.
9. DURATION OF THE PLAN. The Plan shall remain in effect until all Shares of
Common Stock subject to it shall have been distributed or until all Awards have
expired or lapsed, or the Plan is terminated pursuant to Section 13. The date
and time of approval by the Committee of the granting of an Award shall be
considered the date and time at which such Award is made or granted.
10. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan shall confer upon any
Participant the right to continue in the employment of the Company or any
subsidiary or affect any right which the Company or any subsidiary may have to
terminate the employment of the Participant with or without cause.
11. TAX WITHHOLDING. The Company shall have the right to require a Participant
or other person receiving Shares under the Plan to pay the Company a cash amount
sufficient to cover any required withholding taxes. In lieu of all or any part
of such a cash payment from a person receiving Shares under the Plan, the
Committee may permit the individual to elect to cover all or any part of the
required withholdings, and to cover any additional withholdings up to the amount
needed to cover the individual's full FICA, federal, state, and local income tax
with respect to income arising from payment of the Award, through a reduction of
the number of Shares delivered to him or a subsequent return to the Company of
Shares held by the Participant in each case valued in the same manner as used in
computing the withholding taxes under the applicable
IV-8
<PAGE>
laws.
12. AMENDMENT, MODIFICATION AND TERMINATION OF PLAN. The Board may at any time
terminate, suspend or modify the Plan. Amendments are subject to approval of
the shareholders of the Company only if such approval is necessary to maintain
the Plan in compliance with the requirements of Exchange Act Rule 16b-3 Internal
Revenue Code Section 422, its successor provisions or any other applicable law
or regulation. No termination, suspension or modification of the Plan will
materially and adversely affect any right acquired by any Participant (or his
legal representative) or any Successor under an Award granted before the date of
termination, suspension or modification, unless otherwise agreed to by the
Participant in the Agreement or otherwise or required as a matter of law; but it
will be conclusively presumed that any adjustment for changes in capitalization
provided for in Section 13 will not adversely affect any right.
13. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Subject to Section 14,
appropriate adjustments in the aggregate number and type of Shares available for
Awards under the Plan and in the number and type of Shares subject to Awards
then outstanding and in the option price as to any outstanding options may be
made by the Committee in its sole discretion to give effect to adjustments made
in the number of type of Shares of the Company through a dissolution or
liquidation of the Company, a sale of substantially all of the assets of the
Company, a merger or consolidation of the Company with or into any other
corporation, regardless of whether the Company is the surviving corporation, or
a statutory share exchange involving capital stock of the Company (each of the
foregoing a "Fundamental Change"), recapitalization, reclassification, stock
dividend, stock split, stock combination or other relevant change, provided that
fractional Shares shall be rounded to the nearest whole share.
14. FUNDAMENTAL CHANGE. In the event of a proposed Fundamental Change, the
Committee may, but shall not be obligated to:
a. If the Fundamental Change is a merger or consolidation or statutory share
exchange, make appropriate provision for the protection of the outstanding
options granted under the Plan by the substitution, in lieu of such options, of
options to purchase appropriate voting common stock (the "Survivor's Stock") of
the corporation surviving any merger or consolidation or, if appropriate, the
parent corporation of the Company or such surviving corporation, or,
alternatively, by the delivery of a number of shares of the Survivor's Stock
which has a Fair Market Value as of the effective date of the Fundamental Change
equal to the product of (i) the amount by which the Event Proceeds per Share (as
defined in 14(b) below) exceeds the option price per share times (ii) the number
of Shares covered by the option, or
b. At least ten days prior to the actual effective date of a Fundamental
Change, declare, and provide written notice to each optionee of the declaration,
that each outstanding option, whether or not then exercisable, shall be canceled
at the time of, or immediately prior to the occurrence of the Fundamental Change
(unless it shall have been exercised prior to the occurrence of the Fundamental
Change) in exchange for payment to each option holder, within ten days after the
Fundamental Change, of cash equal to the amount (if any), for each Share covered
by the canceled option, by which the Event Proceeds per Share (as hereinafter
defined) exceeds the exercise price per Share covered by such option. At the
time of the declaration provided for in the immediately preceding sentence, each
option shall immediately become exercisable in full and each person holding an
option shall have the right, during the period preceding the time of
cancellation of the option, to exercise his option as to all or any part of the
Shares covered thereby. In the event of a declaration pursuant to this Section
14b, each
IV-9
<PAGE>
outstanding option granted pursuant to the Plan, that shall not have been
exercised prior to the Fundamental Change, shall be canceled at the time of, or
immediately prior to, the Fundamental Change as provided in the declaration, and
the Plan shall terminate at the time of such cancellation, subject to the
payment of obligations of the Company provided in this Section 14b. For
purposes of this Section 14b, "Event Proceeds" per Share shall mean the cash
plus the Fair Market Value, as determined in good faith by the Committee, of the
non-cash consideration to be received per Share by the shareholders of the
Company upon the occurrence of the Fundamental Change.
15. ACCELERATION. Upon the Occurrence of an Event, (i) an option held by a
Participant under this Plan that shall not have expired shall become immediately
exercisable in full, and (ii) all restrictions applicable to outstanding
Restricted Stock Awards shall be deemed to have immediately lapsed.
16. REPURCHASE RIGHTS OF THE COMPANY.
16.1 TERMINATION OF EMPLOYMENT. If, for any reason, an employee who has
received Shares pursuant to an Award granted hereunder ("Awarded Shares") ceases
to be employed by the Company or a subsidiary, such employee (or his legal
representative or beneficiaries if the employee is deceased or mentally
incapacitated) shall offer such Awarded Shares (including any Shares purchased
subsequent to termination pursuant to the applicable Agreement) for sale to the
Company on the date that such employee ceases to be employed by the Company
and/or a subsidiary or on the date immediately after exercise of an Award
permitted by the applicable Agreement subsequent to termination.
16.2 RIGHT OF FIRST REFUSAL. In the event that any employee who has received
Awarded Shares desires to sell, transfer, exchange or otherwise dispose of
(whether by gift or otherwise), or pledge or otherwise encumber, all or any part
of such Awarded Shares, he shall first offer such Shares for sale to the
Company.
16.3 INVOLUNTARY TRANSFER. In the event of any involuntary transfer of all or
any part of the Awarded Shares by reason of sale pursuant to a levy of
execution, foreclosure of pledge, garnishment, attachment, transfer pursuant to
a divorce decree or other legal process, the transferee or transferees of such
acquired Shares or other successor in title to such Shares shall offer such
Shares for sale to the Company.
16.4 TERMS OF COMPANY PURCHASE. All offers under this Section 16 shall be made
to the Company at its registered office. With respect to a proposed transfer
under Subsection 16.2 above, the notice shall contain the name and address of
each person to whom the employee (or his legal representative of beneficiaries)
intends to dispose of or encumber all or any part of the Awarded Shares and the
price and other terms and conditions of the proposed transfer or encumbrance.
In addition, prior to the purchase of Awarded Shares under Subsection 16.2
above, the Company may require evidence of a bona fide offer to purchase or take
a security interest in such Shares. After receipt of any such written offer
under this Section 16, the Company shall have the option for a period of sixty
(60) days thereafter to purchase, at the price and on the terms specified below,
all but not less than all of the Shares offered to it by accepting such offer in
writing; PROVIDED HOWEVER, that notwithstanding anything to the contrary stated
below, if the employee (or his legal representative or beneficiaries) is
offering such Shares under Subsection 16.2 above, the Company may instead elect
to purchase such Shares at the price and on the terms and conditions of the
intended sale, exchange or encumbrance as stated in the
IV-10
<PAGE>
employee's (or his legal representative's or beneficiaries') offer, for which
purpose the price of any Shares which the employee (or his legal representative
or beneficiaries) intends to encumber shall be the Fair Market Value of the
property to be received upon the security of such Shares (as determined in good
faith by the Committee); and PROVIDED FURTHER, that notwithstanding anything to
the contrary provided below, the Company may elect to purchase Shares being
offered by a transferee or successor in title to such Shares under Subsection
16.3 above on the terms and conditions under which such Shares were acquired by
the transferee or successor in title to the Shares.
The exercise of any option by the Company pursuant to this Section 16 shall be
by the Company mailing written notice of such exercise to the employee whose
Shares are subject to such option or his legal representative or beneficiaries,
as the case may be, within the applicable 60-day period. Notice to the employee
shall be addressed to employee's last known address appearing in the personnel
records of the Company, and notice to the employee's legal representative or
beneficiaries shall be addressed to the last known address of such legal
representative or beneficiaries or, if none is known, to the employee's last
known address.
Subject to the alternative purchase prices provided for above, the purchase
price of Awarded Shares purchased pursuant to this Section 16 shall be the Fair
Market Value of such Shares.
The Company, at its option, may elect to pay the entire purchase price for any
shares subject to purchase pursuant to this Section 16 in cash or to make
payment in installments by delivery of a promissory note of the Company,
subordinated to all indebtedness of the Company for money borrowed, payable in
three equal annual installments, commencing on the date of tender as provided
below, and bearing interest at the rate of ten percent per annum, with optional
prepayment, in whole or in part, by the Company without penalty, at any time.
Within fifteen days after the Company gives notice of exercise of its option as
provided above in this Section 16, the Company shall tender to the employee,
legal representative or beneficiary or other offeror, as the case may be, the
purchase price for such Shares in cash or as otherwise provided above.
Simultaneously with the payment of said purchase price, the employee, legal
representative, beneficiary or other offeror shall deliver the certificate or
certificates representing such Shares to the Company, duly endorsed in blank for
transfer of record upon the books of the Company (accompanied in the case of
purchase from a legal representative or beneficiary by a duly certified copy of
authority), and all assignments and other documents of transfer and release
reasonably required by the Company to effect the transfer of the Shares to the
Company free and clear of any liens, encumbrances or other defects of title.
In the event that the Company does not exercise any option granted to the
Company pursuant to Subsection 16.2 above, the selling employee may dispose of
the Shares not purchased pursuant to the exercise of such option without regard
to the provisions of this Section 16, but only (a) during a period of 30 days
following the Company's 60-day option period, (b) to the persons or entities
listed in the offer to the Company, and (c) at a price and upon terms not less
advantageous to the selling employee than the price and terms stated in the
offer to the Company. If the disposition is not consummated within such 30-day
period, such Shares shall again be subject to all the requirements of this
Section 16.
16.5 WRITTEN CONSENT TO AGREEMENT. No sale, transfer, assignment, exchange or
other disposition of Awarded Shares shall be made by any employee or his legal
representative or beneficiaries to any person (including any individual,
partnership, corporation or other entity) unless and until such person shall
agree in writing to take such Shares subject to, and shall
IV-11
<PAGE>
subscribe to the terms and conditions of, this Section 16. Any person who
agrees in writing to take Shares subject to, and subscribes to the terms and
conditions of, this Section 16 shall be and become entitled to the benefits of,
and shall be bound by, this Section 16.
17. OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits
received by a Participant under an Award made pursuant to the Plan shall not be
deemed a part of a Participant's regular, recurring compensation for purposes of
the termination, indemnity or severance pay law of any country and shall not be
included in, nor have any effect on, the determination of benefits under any
other employee benefit plan, contract or similar arrangement provided by the
Company or a subsidiary unless expressly so provided by such other plan,
contract or arrangement, or unless the Committee expressly determines that an
Award or portion of an Award should be included to accurately reflect
competitive compensation practices or to recognize that an Award has been made
in lieu of a portion of competitive cash compensation.
18. BENEFICIARY UPON PARTICIPANT'S DEATH. To the extent that the transfer of a
Participant's Award at his death is permitted under an Agreement, (i) a
Participant's Award shall be transferable at his death to the beneficiary, if
any, designated on forms prescribed by and filed with the Committee and (ii)
upon the death of the Participant, such beneficiary shall succeed to the rights
of the Participant to the extent permitted by law. If no such designation of a
beneficiary has been made, the Participant's legal representative shall succeed
to the Awards which shall be transferable by will or pursuant to laws of descent
and distribution to the extent permitted under an Agreement.
19. GOVERNING LAW. To the extent that Federal laws do not otherwise control,
the Plan and all determinations made and actions taken pursuant to the Plan
shall be governed by the laws of Minnesota and construed accordingly.
IV-12
<PAGE>
Exhibit 21
SUBSIDIARIES OF HICKORY TECH CORPORATION
Jurisdiction of
Subsidiaries Incorporation
------------ ---------------
Mankato Citizens Telephone Company Minnesota
Mid-Communications, Inc. Minnesota
Cable Network, Inc. Minnesota
Amana Colonies Telephone Company Minnesota
Computoservice, Inc. (a) Minnesota
Collins Communications Systems Co. Minnesota
Digital Techniques, Inc. Texas
All such subsidiaries are 100%-owned by Hickory Tech Corporation. The financial
statements of all such subsidiaries are included in the Consolidated Financial
Statements of Hickory Tech Corporation.
(a) Includes a wholly owned subsidiary, National Independent Billing,
Inc., a Minnesota corporation.
IV-13
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Hickory Tech Corporation on Form S-8 of our report dated January 31, 1997,
appearing in this Annual Report on Form 10-K of Hickory Tech Corporation and its
subsidiaries for the year ended December 31, 1996.
/s/ Olsen Thielen & Co., Ltd.
March 26, 1997 OLSEN THIELEN & CO., LTD.
St. Paul, Minnesota
IV-14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2954
<SECURITIES> 2980
<RECEIVABLES> 10896
<ALLOWANCES> 114
<INVENTORY> 2859
<CURRENT-ASSETS> 17967
<PP&E> 87596
<DEPRECIATION> 46723
<TOTAL-ASSETS> 71263
<CURRENT-LIABILITIES> 11688
<BONDS> 0
0
0
<COMMON> 479
<OTHER-SE> 52148
<TOTAL-LIABILITY-AND-EQUITY> 71263
<SALES> 25102
<TOTAL-REVENUES> 66562
<CGS> 15792
<TOTAL-COSTS> 49789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 17285
<INCOME-TAX> 6866
<INCOME-CONTINUING> 10419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10419
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
</TABLE>
