<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
COMMISSION FILE NUMBER: 0-13721
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HICKORY TECH CORPORATION
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MINNESOTA 41-1524393
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(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
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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
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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]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $155,982,696 (exclusive of voting stock owned by Registrant's
Directors and Officers) based on the last reported sale price by Nasdaq National
Market on November 30, 1998.
The total number of shares outstanding of the Registrant's common stock as
of November 30, 1998: 13,660,602 (note August 17, 1998 three-for-one split of
common stock.)
Documents Incorporated by Reference: None.
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The Form 10-K for the year ended December 31, 1997 has been amended for Part II
Items 7 and 8 to reflect (i) expanded discussion in the Management's Discussion
and Analysis of Financial Condition and Results of Operations concerning EBITDA
presentation as well as further discussion of cash flows from operating,
investing, and financing activities and (ii) expanded disclosures to Note 5 of
the Consolidated Financial Statements pertaining to SFAS No. 123, "Accounting
for Stock-Based Compensation". There was no change to net revenues, net income
or net earnings per share for the years ended December 31, 1997, 1996 nor 1995
as a result of this amendment.
TABLE OF CONTENTS
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Item Page
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PART II
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations II-3
8. Financial Statements and Supplementary Data II-14
</TABLE>
II-2
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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 northwestern 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 primarily in
Minneapolis/St. Paul, 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 1997, the Company's consolidated net income increased to $15,479,000, up
from $10,419,000 in 1996 and $9,900,000 in 1995. This represents an increase of
48.6% in 1997 compared to an increase of 5.2% in 1996. The Company's
consolidated net income in 1997 included a net of tax gain of $3,712,000 from
selling its DirecTV assets. Net income excluding the DirecTV gain in 1997 was
$11,767,000, which is an 12.9% increase over 1996. All four segments experienced
increased profitability versus 1996. Earnings per share (EPS) in 1997 increased
to $3.36, up from $2.09 in 1996 and $1.93 in 1995, reflecting an increase of
60.8% in 1997 compared to an increase of 8.3% in 1996. EPS excluding the DirecTV
gain in 1997 was $2.55, an increase of 22.0% over 1996. The increase in EPS
reflects the net income increase of 12.9% and the 7.6% decrease in weighted
average shares outstanding.
Total operating revenues for 1997 increased to $76,462,000, up from
$66,562,000 in 1996 and $62,847,000 in 1995. This represents an increase of
14.9% in 1997 compared to an increase of 5.9% in 1996. The Company's core
Telephone Segment revenues increased 24.8% in 1997, while the three
non-telephone Segments combined for 4.3% revenue growth in 1997. Total costs and
expenses other than depreciation and amortization were $47,816,000 in 1997, up
from $42,931,000 in 1996 and $39,880,000 in 1995. This represents an increase of
11.4% in 1997 compared to an increase of 7.7% in 1996.
A measure of the Company's pre-tax operating cash flow is EBITDA(1)
(Earnings Before Interest, Taxes, Depreciation and Amortization). EBITDA
increased to $30,408,000 in 1997, up from $24,286,000 in 1996 and $23,891,000 in
1995. This represents an increase of 25.2% in 1997 compared to an increase of
1.7% in 1996. The Company's EBITDA increase would have
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(1) EBITDA represents income from operations plus depreciation and amortization
expense. EBITDA, which is not a measure of financial performance or liquidity
under generally accepted accounting principles, is provided because the Company
understands that such information is used by certain investors when analyzing
the financial position and performance of the Company. Because of the variety of
methods used by companies and analysts to calculate EBITDA, and the fact that
EBITDA calculations may not accurately measure a company's ability to meet debt
service requirements, caution should be used in relying on any EBITDA
presentation. The Company sees value in disclosing its calculation of EBITDA for
the financial community and in displaying the change in EBITDA. The Company
believes an increasing EBITDA depicts increased ability to attract financing and
increased valuation of the Company's business.
II-3
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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 $20,656,000 in 1997,
up from $16,773,000 in 1996 and $15,779,000 in 1995. This is an increase of
23.2% in 1997 compared to an increase of 6.3% in 1996. Non-cash costs of
depreciation and amortization totaled $7,990,000 in 1997, $6,858,000 in 1996
and $7,188,000 in 1995. Amortization expense is declining for the Company
since some intangible assets have become fully amortized.
CONSOLIDATED REVENUES
The revenues of the Company, after intercompany eliminations, are
classified into major service categories in the following table. In 1997,
Consolidated Operating Revenues increased $9,900,000 or 14.9%.
<TABLE>
<CAPTION>
(IN 000s) % %
1997 Change 1996 Change 1995
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<S> <C> <C> <C> <C> <C>
Telephone Operations $42,835 24.8% $34,334 5.3% $32,600
Billing and Data Services 9,474 (1.0%) 9,573 (8.0%) 10,405
Equipment Sales 16,034 (0.7%) 16,153 33.4% 12,111
Telecommunications
Product Development 8,119 24.9% 6,502 (15.9%) 7,731
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TOTAL REVENUES $76,462 14.9% $66,562 5.9% $62,847
</TABLE>
TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
(In Thousands)
1997 1996 1995
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<S> <C> <C> <C>
Revenues Before Eliminations $42,912 $34,479 $32,929
Net Operating Income 19,169 16,044 15,118
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) (1) 25,887 20,615 19,739
Capital Expenditures 11,431 9,536 5,438
</TABLE>
Telephone revenues represent 56% of 1997 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 11.5% compounded annually over a five year period from 1992 to 1997.
Without the acquisition of Heartland in 1997, the five year compound annual
growth rate would have been 7.9%.
II-4
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Local service revenue increased in the Telephone Segment by 24.8% for 1997
over 1996. After removing the effect of the Heartland acquisition in 1997, the
local service revenue increase for 1997 was 6.7%. This increase and the 13%
local service revenue increase for 1996 are significant considering these
increases exceeded the growth in access lines served, and they were done without
price increases. The revenue increases resulted from the Telephone Segment's
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
(without the 12,900 access lines acquired in the Heartland transaction) was 3.9%
in 1997 and 3.8% in 1996. Over a five year period since 1992, total access line
growth (outside of the Heartland acquisition) has been approximately 4.4%,
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 ongoing reductions in volume sensitive elements of
network access, while enhancing fixed fee recurring revenues. Access minutes in
1997 (without the effect of the 48,000,000 minutes of use from the Heartland
acquisition) increased by 6.5% over 1996 and 1996 increased 1.3% over 1995. 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 1997 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 1997 due to new directory sales campaigns. The Telephone Segment experienced
significant expansion of its non-regulated lines of business (primarily customer
premises equipment sales and voice-mail). Due to the sale of its DirecTV (DBS)
television service, there was a decline in revenue from this Telephone product
line. In 1997, DirecTV service revenues were $713,000, with $10,000 of EBITDA(1)
in six months of operations before the sale.
The Telephone net operating income for 1997 grew 19.5% and in 1996 it
increased 6.1%. This growth corresponds closely with revenue growth in both
years.
BILLING AND DATA SERVICES
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<CAPTION>
(In Thousands)
1997 1996 1995
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<S> <C> <C> <C>
Revenues Before Eliminations $11,821 $11,769 $12,437
Net Operating Income 1,795 658 721
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) (1) 2,658 2,597 2,505
Capital Expenditures 258 62 328
</TABLE>
II-5
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Billing and Data Services revenues represent approximately 12% of 1997
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, 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.
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. NIBI is actively
seeking more midsize 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.
The batch processing service to long-distance resellers has become a high
growth market, representing 16% of NIBI's Operating Revenue after eliminations
in 1997.
Consolidated revenues after eliminations for the Billing and Data Services
Segment have grown 1.1% compounded annually over a five year period from 1992 to
1997. Revenues for this Segment were higher in 1995 than either 1996 or 1997 due
to the turnkey software sales to a large IXC, but otherwise have been
consistent. Net operating income in this Segment increased significantly in 1997
because of decreases in management and overhead expenses. This Segment's
depreciation and amortization expense for 1997 declined $1,076,000 because of
fully amortized software balances.
NIBI made a $750,000 payment to SePRO Telecom Int. Ltd. of Dublin, Ireland
in 1997 in formation of a joint software development agreement which was a
direct charge to earnings in 1997.
EQUIPMENT SALES
<TABLE>
<CAPTION>
(In Thousands)
1997 1996 1995
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<S> <C> <C> <C>
Revenues Before Eliminations $16,034 $16,153 $12,111
Net Operating Income 1,485 1,410 112
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) (1) 1,667 1,514 635
Capital Expenditures 260 204 120
</TABLE>
II-6
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Equipment Sales Segment revenues represent approximately 21% of 1997
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
were completed. In 1997, Collins was able to match 1996's level of revenues,
with many smaller sized applications. The customers in this Segment's market are
the individual commercial/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 1997 were
substantially the same as 1996. The 33% increase in revenues in 1996 over 1995
was due to significant increases in volume of business in everyday operations.
The 1997 results included $609,000 of revenue after the acquisition of DataComm
Products, a new division of Collins, in November 1997. The Equipment Sales
Segment's consolidated revenues after eliminations have grown 0.6% compounded
annually over a five year period from 1992 to 1997. The Equipment Sales Segment
produced net operating income which was $75,000 higher than 1996, which had a
$1,300,000 improvement over 1995. This comparison was affected by operations in
California (sold in 1995) which had a pre-tax loss of $440,000 in 1995.
TELECOMMUNICATIONS PRODUCT DEVELOPMENT
<TABLE>
<CAPTION>
(In Thousands)
1997 1996 1995
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<S> <C> <C> <C>
Revenues Before Eliminations $8,119 $6,502 $7,731
Net Operating Income (Loss) 640 (403) 1,129
Earnings Before Interest, Taxes
Depreciation and Amortization
(EBITDA) (1) 783 (272) 1,267
Capital Expenditures 103 97 123
</TABLE>
Telecommunications Product Development Segment revenues represent
approximately 11% of 1997 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 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
II-7
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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. In 1997, DTI returned to profitability with an 18.5%
increase in standard product sales, a 35% increase in OEM sales, increased
profit margins and a reduction in operating expenses. DTI's consolidated
revenues after eliminations have grown 2.3% compounded annually over a five
year period from 1992 to 1997. As DTI enters 1998, it carries a strong
backlog and a plan to balance its OEM business with the new standard products
it is launching.
TOTAL COSTS AND EXPENSES
Total consolidated costs and expenses of $55,806,000 increased 12.1% in
1997, less than the 14.9% increase in operating revenues. Consolidated costs and
expenses other than depreciation and amortization were $47,816,000 in 1997,
compared with $42,931,000 in 1996, an increase of 11.4%. The margin from
operations in 1997 has improved over 1996 and 1995 because of 1997 profitability
of the Telecommunications Product Development Segment, and improved margins in
the Equipment Sales Segment.
OTHER INCOME AND INTEREST EXPENSE
Other income (primarily interest and equity in LLC income) was $1,107,000
higher in 1997 than 1996. Included in other income is the Company's 6.3% equity
interest in Midwest Cellular LLC. In 1997, this LLC income increased $500,000,
after having increased $74,000 in 1996 over 1995. The remaining portion of the
1997 increase in other income was for gains on sales of certain assets during
1997, such as the CATV assets of two small rural communities, a former
operations facility for the Billing and Data Services Segment and a contract
settlement with an Iowa coalition of telephone companies.
Interest expense increased by $2,149,000 in 1997 due to the new $40 million
in senior indebtedness initiated in April 1997. The new long-term debt
instruments accrue interest at 7.11%. The proceeds of the debt were for the
Heartland acquisition and for working capital uses.
GAIN ON SALE OF ASSETS
The 1997 gain on sale of assets of $6.3 million is recognition of the $7.2
million proceeds from selling the Company's DirecTV DBS assets in July 1997,
when its amortized book value was $0.9 million.
INCOME TAXES
The effective tax rate in 1997 was 41.5%, versus 39.7% in 1996 and 40.5% in
1995. The effective rate in each year was affected by the proportionate amount
of operations in the various states the Company does business, and their varying
state income tax rates. The effective tax rate in 1997 was also influenced by
the Company's increased level of acquisitions, and the need for a corresponding
level of tax accrual.
II-8
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REVIEW OF CASH FLOW ACTIVITY
The Company's net working capital of $8,265,000 at December 31, 1997, is an
increase of $1,986,000 from 1996. The Company and its subsidiaries operate in
capital intensive businesses. Cash Flows from Operating Activities for the year
ended December 31, 1997 was consistent with the same period for 1996. Cash Flows
used in Investing Activities in 1997 increased by $43,165,000 due primarily to
the acquisition of the telephone exchanges in Iowa. Over the past three years,
Additions to Property, Plant and Equipment were the Company's largest investing
activity, using $40,023,000 of working capital (including $12,499,000 for assets
acquired in the Iowa telephone exchange transaction). The Cash Flows from
Financing Activities increased $43,849,000 in 1997 as compared to 1996 due
mainly to debt borrowings associated with the Iowa telephone exchange
transactions. The proceeds from the issuance of debt totaled $42,512,000 in
1997. The Company used $7,716,000 and $10,786,000 to purchase outstanding shares
of its common stock in 1997 and 1996, respectively, 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 financial strength continues
to be supported by its 1997 current ratio (1.83 to 1), its EBITDA(1)
($30,408,000 in 1997) and its proven access to debt markets.
DIVIDENDS
The Company paid dividends of $5,529,000 in 1997. This was a dividend of
$1.20 per share, a 9.1% increase over the $1.10 per share in 1996. The Company's
reinvested growth in equity has come about while increasing dividends to
shareholders consistently. The annual dividend per share has increased at a
compound annual rate of 10% in the ten year period since 1987. The Company has
announced another 10% increase in dividends for 1998. This increase is not
expected to affect the liquidity of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain state-of-the-art technology in its core
business. Management believes the Company will generate sufficient working
capital internally from operations to meet its operating needs and sustain
historical dividend and fixed asset addition levels, and the new debt service
levels.
The Telephone Segment capital expenditures of approximately $11.4 million
for 1997 and $9.5 million for 1996 were higher than usual because of unique
requirements associated with the new acquisition from US West in 1997 and unique
building construction requirements in 1996. The Company utilized approximately
$18.5 million in 1997 and 1996 to repurchase shares of its common stock 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, 1997, there were no outstanding
borrowings under this arrangement.
The Company's purchase of assets of eleven rural telephone exchanges in the
State of Iowa from US West Communications, Inc. was funded by new long-term debt
instruments, which the Company has secured from institutional sources in a
private placement. The financing transaction
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for this US West acquisition closed in April 1997.
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. Based on Company EBITDA(1) levels and
existing loan covenants, there is sufficient ability to raise capital in order
to fulfill Company corporate development goals.
SHARE REPURCHASE PROGRAM
The Company's Board of Directors authorized management to repurchase shares
of Company common stock in the open market or through private transactions.
During 1997, pursuant to this authorization, the Company repurchased 269,672
shares for $7.7 million, and in 1996 the Company repurchased 366,366 shares for
$10.8 million. Management has the authority to repurchase approximately 370,000
additional shares, with no definite timetable.
REGULATORY
The Company's largest telephone subsidiary, Mankato Citizens Telephone
Company (MCTC), increased local rates, effective January 1, 1995, adding
approximately $600,000 of revenues. 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 two Minnesota telephone subsidiaries
fall under this reduced level of regulation. In 1998, the Company's telephone
subsidiaries will implement increases in their local service rates, which are
substantially lower than most neighboring telephone companies. These rate
changes have been filed with the State and are approved.
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. This Minnesota access charge agreement is due for
reconsideration in 1998. At this time, management is not able to predict the
outcome, if any, of access charge reform in Minnesota. In the state of Iowa, the
Company's operations fall below the 15,000 access line minimum level for
regulation by the Iowa Utilities Board. No regulatory matters in Iowa affect the
Company's current operation.
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
was received from the Federal Communications Commission in February 1997.
In January 1998, the Company made application with the Federal
Communications Commission to transfer the license of the Minnesota rural
cellular property known as RSA 10. The Company has entered into a definitive
agreement with Frontier Corporation to acquire the stock of its subsidiaries,
which presently owns and operates this cellular "A-side" license. Approval of
this license transfer is expected in March 1998. No state regulatory approvals
are needed for this cellular transfer.
II-10
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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 1996
Telecommunications 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 go
head-to-head in offering voice, video and information services. The new law sets
guidelines to open the local exchange market, preserves universal service
objectives, and allows 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
such things as wholesale prices for the reselling of local service, mechanisms
for unbundling the local network and interconnection rules. In addition to
requiring the FCC to preside over the provisions of the Telecommunications Act,
Congress granted state PUC's 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 for opening up local telephone service
to competition. There have been judicial cases filed to investigate these
federal versus state matters. Although it is too early to witness notable
changes in both local and long distance industries, the 1996 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 expects to experience 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 causes
of increasing competition in the telecommunications industry. The 1996
Telecommunications Act opened up the local network to competition, and required
all incumbent LECs to take steps in making it feasible for new entrants to
compete. It also removed 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 begun to respond with active programs to market products and engineer
its infrastructure to be an active participant in the new environment. In the
Telephone Segment's service territories, although other competitive telephone
service providers have petitioned for the right to serve in the Segment's
territories, none have delivered service yet. 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.
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The Company operates businesses in several different markets. Each of the
businesses has fluctuations in revenues and operating earnings as the result of
the overall level, timing and terms of many contracts. The Company monitors the
technological changes and 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
In 1997, the Company adopted the provisions of Financial Accounting
Standard No. 128, "Earnings per Share." The Company has retroactively restated
earnings per share for all periods reported. In 1996, the Company evaluated
Financial Accounting Standard No. 121, "Accounting for the impairment of
Long-Lived Assets to be Disposed of" and No. 123, "Stock-Based Compensation".
In 1997, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 establishes standards for reporting and display of comprehensive income and
its components in the financial statements. FAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The adoption of this standard will have no impact on the Company's results of
operations, financial position or cash flows.
In 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131).
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
expects changes in its disclosure. The adoption of FAS 131 will have no impact
on the Company's consolidated results of operations, financial position or cash
flows.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue concerns the inability of computerized
information systems to properly recognize and process date-sensitive information
as the year 2000 approaches. The Company has taken actions to understand the
nature and extent of the work required to make its systems, products and
infrastructure, in those situations in which the Company is required to do so,
Year 2000 compliant. The Company continues to evaluate the estimated costs
associated with these efforts based on actual experience. The most vital facets
of the Company's data processing are the telephone network (central office
switching), the backbone customer record system of the telephone operation and
the basic software platforms of the Billing and Data Processing Segment. The
Company believes, based on available information, that the costs of measuring
and adjusting Year 2000 compliance will not have a materially adverse effect on
its results of operations.
II-12
<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. 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(1) 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 Financial Condition, and 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-13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Independent Auditor's Report II-15
Consolidated Balance Sheet II-16
Consolidated Statement of Income II-17
Consolidated Statement of Shareholders' Equity II-18
Consolidated Statement of Cash Flows II-19
Business Segment Data II-20
Notes to Consolidated Financial Statements II-21
</TABLE>
II-14
<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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
January 30, 1998
II-15
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,219 $ 2,954
Receivables, Net of Allowance for
Doubtful Accounts of $461 and $114 12,609 10,782
Inventories 3,131 2,859
Deferred Tax Benefit and Other 1,314 1,372
-------- -------
TOTAL CURRENT ASSETS 18,273 17,967
INVESTMENTS 3,657 2,980
NET PROPERTY, PLANT AND EQUIPMENT 57,769 40,873
OTHER ASSETS:
Intangible Assets 32,135 8,735
Notes Receivable -- 230
Miscellaneous 550 478
-------- -------
TOTAL OTHER ASSETS 32,685 9,443
TOTAL ASSETS $112,384 $71,263
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 6,765 $ 8,671
Accrued Taxes 191 722
Accrued Interest 735 3
Advanced Billings and Deposits 1,878 2,080
Current Maturities of Long-Term Debt 439 212
-------- -------
TOTAL CURRENT LIABILITIES 10,008 11,688
LONG-TERM DEBT, Net of Current Maturities 41,525 877
DEFERRED CREDITS:
Investment Tax Credits 88 153
Income Taxes 2,408 2,768
Compensation, Benefits and Other 3,178 3,150
-------- -------
TOTAL DEFERRED CREDITS 5,674 6,071
SHAREHOLDERS' EQUITY:
Common Stock 454 479
Additional Paid-In Capital 1,990 1,778
Retained Earnings 52,733 50,370
-------- -------
TOTAL SHAREHOLDERS' EQUITY 55,177 52,627
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $112,384 $ 71,263
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-16
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Telephone $ 42,835 $ 34,334 $ 32,600
Billing and Data Services 9,474 9,573 10,405
Equipment Sales 16,034 16,153 12,111
Telecommunications Product
Development 8,119 6,502 7,731
----------- ----------- ----------
TOTAL OPERATING REVENUES 76,462 66,562 62,847
COSTS AND EXPENSES:
Cost of Sales 16,503 15,792 13,830
Operating Expenses 31,313 27,139 26,050
Depreciation 6,761 5,055 5,291
Amortization of Intangibles 1,229 1,803 1,897
----------- ----------- ----------
TOTAL COSTS AND EXPENSES 55,806 49,789 47,068
OPERATING INCOME 20,656 16,773 15,779
OTHER INCOME 1,762 655 924
GAIN ON SALE OF DIRECTV ASSETS 6,345 -- --
INTEREST EXPENSE (2,292) (143) (77)
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 26,471 17,285 16,626
INCOME TAXES 10,992 6,866 6,726
----------- ----------- ----------
NET INCOME $ 15,479 $ 10,419 $ 9,900
----------- ----------- ----------
----------- ----------- ----------
EARNINGS PER SHARE $ 3.36 $ 2.09 $ 1.93
----------- ----------- ----------
----------- ----------- ----------
EARNINGS PER SHARE ASSUMING DILUTION $ 3.36 $ 2.09 $ 1.93
----------- ----------- ----------
----------- ----------- ----------
DIVIDENDS PER SHARE $ 1.20 $ 1.10 $ 1.00
----------- ----------- ----------
----------- ----------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,603,957 4,980,006 5,127,470
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-17
<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, 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
Long-Term Incentive Plan 3,155 86 86
Employee Stock Purchase Plan 9,426 1 199 200
Director Stock Purchase Plan 981 1 29 30
Retirement of Stock (269,672) (27) (102) (7,587) (7,716)
Net Income 15,479 15,479
Dividends Paid (5,529) (5,529)
----------- ------- ---------- -------- --------
BALANCE AT DECEMBER 31, 1997 $ 4,534,119 $ 454 $ 1,990 $ 52,733 $ 55,177
----------- ------- ---------- -------- --------
----------- ------- ---------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-18
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 15,479 $ 10,419 $ 9,900
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 8,198 7,076 7,401
(Gain) Loss Resulting from Disposition of Assets (6,925) -- 415
Provision for Losses on Notes Receivable and Investments 265 260 324
Equity in Partnership Income (1,046) (503) (597)
-------- -------- --------
Cash Provided From Operations Before Changes
in Assets and Liabilities 15,971 17,252 17,443
Changes in Assets and Liabilities Net of
Effects of Acquisitions and Dispositions:
(Increase) Decrease in:
Receivables (1,827) (1,401) (2,123)
Inventories (102) (13) 1
Increase (Decrease) in:
Accounts Payable and Accrued Taxes 1,113 551 1,272
Advanced Billings and Deposits (202) 401 384
Deferred Income Taxes and Investment Tax Credits (518) (1,339) (676)
Other 107 (53) 1,043
-------- -------- --------
Net Cash Provided by Operating Activities 14,542 15,398 17,344
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment (26,796) (7,282) (5,945)
Increase in Notes Receivable and Investments (27) (113) (68)
Redemption of Investments 361 200 275
Change in Temporary Cash Investments -- 7,176 (5,289)
Purchase of Intangible Assets (23,568) (1,081) (1,114)
Acquisitions, Net of Cash Acquired (2,513) -- --
Proceeds from Sale of Assets 8,320 -- --
Other -- 42 67
-------- -------- --------
Net Cash Used in Investing Activities (44,223) (1,058) (12,074)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Debt 42,512 -- --
Repayments of Debt (1,637) (204) (983)
Proceeds from Issuance of Common Stock 316 568 292
Retirement of Common Stock (7,716) (10,786) --
Dividends Paid (5,529) (5,481) (5,127)
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities 27,946 (15,903) (5,818)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,735) (1,563) (548)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,954 4,517 5,065
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,219 $ 2,954 $ 4,517
-------- -------- --------
-------- -------- --------
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 1,372 $ 143 $ 134
Cash Paid for Income Taxes $ 11,575 $ 8,203 $ 7,240
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-19
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Telephone $ 92,617 $ 52,239 $ 50,339
Billing and Data Services 4,371 4,964 7,725
Equipment Sales 8,444 6,888 5,214
Telecommunications Product Development 4,670 4,180 3,417
Corporate 2,282 2,992 7,243
--------- -------- --------
Total Assets $ 112,384 $ 71,263 $ 73,937
--------- -------- --------
--------- -------- --------
REVENUES BEFORE INTERSEGMENT ELIMINATION:
Telephone $ 42,912 $ 34,479 $ 32,929
Billing and Data Services 11,821 11,769 12,437
Equipment Sales 16,034 16,153 12,111
Telecommunications Product Development 8,119 6,502 7,731
Intersegment Elimination (2,424) (2,341) (2,361)
--------- -------- --------
Total Revenues $ 76,462 $ 66,562 $ 62,847
--------- -------- --------
--------- -------- --------
INTERSEGMENT REVENUES:
Telephone $ 77 $ 145 $ 329
Billing and Data Services 2,347 2,196 2,032
--------- -------- --------
Total Intersegment Revenues $ 2,424 $ 2,341 $ 2,361
--------- -------- --------
--------- -------- --------
OPERATING INCOME:
Telephone $ 19,169 $ 16,044 $ 15,118
Billing and Data Services 1,795 658 721
Equipment Sales 1,485 1,410 112
Telecommunications Product Development 640 (403) 1,129
Corporate (2,433) (936) (1,301)
--------- -------- --------
Total Operating Income $ 20,656 $ 16,773 $ 15,779
--------- -------- --------
--------- -------- --------
DEPRECIATION AND AMORTIZATION:
Telephone $ 6,718 $ 4,571 $ 4,621
Billing and Data Services 863 1,939 1,784
Equipment Sales 182 104 523
Telecommunications Product Development 143 131 138
Corporate 84 113 122
--------- -------- --------
Total Depreciation and Amortization $ 7,990 $ 6,858 $ 7,188
--------- -------- --------
--------- -------- --------
CAPITAL EXPENDITURES:
Telephone $ 11,431 $ 9,536 $ 5,438
Assets acquired from US West 12,499 -- --
Billing and Data Services 258 62 328
Equipment Sales 260 204 120
Telecommunications Product Development 103 97 123
Corporate 83 201 12
--------- -------- --------
Total Capital Expenditures $ 24,634 $ 10,100 $ 6,021
--------- -------- --------
--------- -------- --------
</TABLE>
II-20
<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 and LLCs 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.
Certain amounts in the 1996 and 1995 financial statements and notes have been
reclassified to conform with the 1997 presentation.
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:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
-------- -------
<S> <C> <C>
Telephone Plant $110,229 $78,132
Other Property and Equipment 11,000 9,464
-------- -------
Total 121,229 87,596
Less Accumulated Depreciation 63,460 46,723
-------- -------
Net Property, Plant and Equipment $ 57,769 $40,873
-------- -------
-------- -------
</TABLE>
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, 1997, were 6.4%, 6.1%, 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.
II-21
<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:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
------ ------
<S> <C> <C>
Finished Goods $ 264 $ 211
Work in Process 210 156
Materials and Supplies 2,657 2,492
------ ------
Total $3,131 $2,859
------ ------
------ ------
</TABLE>
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 $1,288,000 and
$4,213,000. The excess of cost over fair value of net assets acquired relating
to acquisitions is being amortized over forty years. As of December 31, 1997 and
1996, unamortized excess costs over fair value of assets acquired were
$30,435,000 and $6,409,000 respectively. Contract rights and covenants not to
compete associated with acquisitions are being amortized over three to twenty
years.
CAPITALIZED SOFTWARE COSTS
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, 1997 and 1996 were $0 and
$492,000, respectively, and are included in Intangible Assets in the
Consolidated Balance Sheets. Amortization expenses related to capitalized
software costs were $492,000 in 1997, $1,500,000 in 1996, and $1,193,000 in
1995. Capitalized costs are amortized on a product-by-product basis over the
remaining estimated economic life of the product.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Shares
used in the earnings per share assuming dilution calculation are based on the
weighted average number of shares of common stock outstanding during the year
increased by dilutive potential common shares. Dilutive potential common shares
include stock options and stock subscribed, under the employee stock purchase
plan (ESPP).
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding 4,603,957 4,980,006 5,127,470
Stock options 1,322 -- 544
Stock subscribed (ESPP) 463 527 510
--------- --------- ---------
Total dilutive shares outstanding 4,605,742 4,980,533 5,128,524
--------- --------- ---------
--------- --------- ---------
</TABLE>
Options to purchase 18,728 shares were not included in the 1997 computation of
earnings per share assuming dilution because including them would have been
antidilutive.
II-22
<PAGE>
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
On April 10, 1997, the Company acquired the assets of eleven rural telephone
exchanges in northwest Iowa from US West Communications, Inc. ("US West") for
$35,271,000. The eleven exchanges contain approximately 12,500 telephone
access lines. The new exchanges are reported as operations of Heartland
Telecommunications Company of Iowa, a wholly-owned subsidiary of the Company
and included in the Telephone Segment. The acquisition was structured as a
purchase of telephone assets from US West and $22,772,000 of costs in excess
of net assets acquired was recorded. The acquisition was financed by new
long-term debt instruments from seven institutional investors in a private
debt placement. A total of $40,000,000 in senior unsecured notes was funded.
On July 15, 1997, the Company sold its exclusive DirecTV distribution rights in
seven counties in southern Minnesota, along with related assets, to Golden Sky
Systems, Inc. in exchange for $7,200,000. The Company recorded a pre-tax gain on
the sale of the assets of $6,345,000. The DirecTV distribution rights had been
acquired by the Company from National Rural Telecommunications Cooperative in
1993. The amount of net operating revenue and income before income tax
associated with the Company's operation of its DirecTV business have not been
material to the Company.
On October 30, 1997, the Company acquired the assets of DataComm Products
(DataComm). DataComm is a data networking business based in Brooklyn Park,
Minnesota with a customer base spanning the Midwest. The operations of the
acquisition are included in the Equipment Sales Segment. The purchase price of
$2,573,000 is scheduled to be paid over three years with $1,600,000 paid in
1997. A final contingent payment is possible on November 1, 2000. The Company
attributed $1,877,000 of the purchase price as costs in excess of net assets
acquired. In the acquisition, there were no liabilities assumed or cash
acquired. The amount of net operating income, income before income tax, and
earnings per share associated with this acquisition are not material to the
Company.
NOTE 3 - BUSINESS SEGMENTS AND CONCENTRATIONS
The Company's operations are conducted in four business segments. The Telephone
Segment provides telephone services to Mankato and adjacent areas of south
central Minnesota, to the Amana Colonies in east central Iowa and to eleven
communities in northwest Iowa. The Telephone Segment also operates fiber optic
cable transport facilities and holds a minority interest in a rural cellular
limited liability company, both in southern Minnesota. The Billing and Data
Services Segment provides data processing service to local telephone companies,
interexchange long distance companies and enhanced service providers throughout
the United States. The Equipment Sales Segment designs, sells, installs and
services voice and data communications equipment in the retail market in the
Minneapolis/St. Paul area. 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. Refer to page II - 20 for a schedule of business segment
information.
NOTE 4 - FINANCIAL INSTRUMENTS AND INVESTMENT SECURITIES
The carrying value of cash and cash equivalents 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
$41,065,000 at December 31, 1997 and $775,000 at December 31, 1996, compared to
carrying values of $41,525,000 and $877,000 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, 1997, employees had subscribed to purchase approximately 9,700 shares in the
current plan year ended August 31, 1998.
II-23
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and unrestricted stock
awards. The plan includes stock performance awards based on Company growth in
pre-tax net income. Stock performance awards distributed under the plan amounted
to 3,155 and 3,152 in 1997 and 1996. Options may be exercised no later than ten
years after the date of grant, with one-third of the options vesting each year.
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.
During 1996, the Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, the
Company has elected not to recognize compensation cost related to stock options,
but applies Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its plans.
If the Company had elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS No. 123, the following results would
have occurred using the Black-Scholes option-pricing model with the listed
assumptions:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Compensation Cost $114 $55 $37
Pro Forma Net Income $15,365 $10,364 $9,863
Pro Forma Basic EPS $3.34 $2.08 $1.92
Pro Forma Diluted EPS $3.34 $2.08 $1.92
Volatility 13.4% 12.5% 12.5%
Dividend Yield 4.2% 3.8% 3.8%
Risk-Free Interest Rates 6.7% 6.8% 6.2%
Expected Life in Years 7 7 7
</TABLE>
A summary of the stock option activity of the plan is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 29,728 18,728 15,433 $ 30.57 $ 32.01 $ 32.21
Granted 12,600 11,000 6,645 28.375 28.13 31.625
Forfeited -- -- (3,350) 32.20
-------------------------
Outstanding at end
of year 42,328 29,728 18,728 $ 29.92 $ 30.57 $ 32.01
-------------------------
-------------------------
Exercisable at end of year 20,183 12,329 6,085 $ 31.34 $ 31.87 $ 31.72
Weighted average fair value
of options granted during
the year $ 9.04 $ 5.01 $ 5.51
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$28.125 to $33.75. The weighted average remaining contractual life of those
options is 7.8 years.
II-24
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
------- -------
<S> <C> <C>
Senior Notes to Institutional Investors, 7.11%
Due April 2012 $40,000 $ --
Notes Payable for DataComm Acquisition,
5.69% Imputed Interest Due November 2000 912 --
Notes Payable to Rural Utilities Service, 2%
Due November 2003 919 935
Notes Payable to Rural Telephone Bank, 4%
Due April 2007 133 154
------- -------
Total 41,964 1,089
Less Current Maturities 439 212
------- -------
Long-Term Debt $41,525 $ 887
------- -------
------- -------
</TABLE>
In April 1997, the Company obtained $40,000,000 senior unsecured notes with 15
year maturities to fund the $35,271,000 acquisition of the US West telephone
exchanges in Iowa. The notes accrue interest at 7.11%. No principal payments are
due during the first four years. Provisions of the debt instruments contain
covenants relating to liens, consolidated net worth and cash flow coverage. The
Company is in compliance with all financial debt covenants.
In October 1997, the Company acquired the assets of DataComm Products. The terms
of the purchase agreement require the Company to make annual payments in 1998
and 1999 on an unsecured note. An additional contingent payment is due in
November 2000.
As of December 31, 1997, the Company has $1,052,000 of outstanding debt
remaining with the Rural Utilities Service and the Rural Telephone Bank for the
financing of telephone property, plant and equipment of Mid-Communications, Inc.
Annual requirements for principal payments for the four years subsequent to 1998
are as follows: 1999 - $675,500; 2000 - $207,400; 2001 - $242,300 and 2002 -
$3,853,600.
In July, 1997, the Company obtained a $10 million unsecured 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 in participating companies 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% of the employee's
basic compensation, based on the employee's voluntary contribution. The Company
also offers an employee profit sharing provision with the plan 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 contributes up to 2% of the eligible employee group total base
compensation into retirement savings plan accounts if the participating
companies achieve specific earnings targets. Company contributions and costs for
the total retirement savings plan were $937,000 in 1997, $751,000 in 1996 and
$774,000 in 1995.
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-25
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic postretirement benefit expense was $256,000 in 1997, $249,000 in
1996 and $334,000 in 1995. Accrued postretirement benefit cost was $1,033,000 as
of December 31, 1997 and $839,000 as of December 31, 1996. The unrecognized
transition obligation is being amortized over 20 years. The unrecognized
liability as of December 31, 1997 is $900,000 and was $960,000 as of December
31, 1996.
The health care cost trend rates used in determining the accumulated
postretirement benefit obligations were 9% decreasing to 6% in year 10 and later
for December 31, 1997 and 10% decreasing to 6% in year 10 and later for the
obligations on December 31, 1996. An increase of one percentage point in the
assumed health care cost trend rates would increase the accumulated
post-retirement benefit obligations at December 31, 1997 by $338,000 and the net
periodic postretirement benefits cost for the year then ended by $48,000.
A weighted average discount rate of 8.00% was used to develop the net periodic
postretirement benefit cost and the actuarial present value of accumulated
benefit obligations.
II-26
<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) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current Income Taxes:
Federal $ 9,133 $ 6,394 $ 5,769
State 2,377 1,811 1,633
Deferred Income Taxes:
Federal (348) (976) (446)
State (104) (284) (126)
Investment Tax Credit:
Amortized (66) (79) (104)
-------- -------- --------
Total Income Tax Expense $ 10,992 $ 6,866 $ 6,726
-------- -------- --------
-------- -------- --------
</TABLE>
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996
-------- --------
<S> <C> <C>
Tax Liabilities Associated with:
Depreciation and Fixed Assets $ 3,370 $ 3,540
Intangible Assets 639 469
Investments 109 174
Other -- 23
-------- --------
Gross Deferred Tax Liability 4,118 4,206
-------- --------
Tax Assets Associated with:
Deferred Benefit Plans 1,455 1,085
Receivables and Inventory 515 360
Accrued Liabilities 491 577
Investments 255 290
Other -- 40
-------- --------
Gross Deferred Tax Assets 2,716 2,352
-------- --------
Net Deferred Tax Liability 1,402 1,854
Net Current Deferred Tax Asset 1,006 914
-------- --------
Net Non-Current Deferred
Tax Liability $ 2,408 $ 2,768
-------- --------
-------- --------
</TABLE>
The differences which cause the effective tax rate to vary from the statutory
federal income rates are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory Tax Rate 35.0% 35.0% 35.0%
Effect of:
State Income Taxes Net of
Federal Tax Benefit 5.6 5.8 5.9
Amortization of Investment
Tax Credit (0.3) (0.5) (0.6)
Other, Net 1.2 (0.6) 0.2
-------- -------- --------
Effective Tax Rate 41.5% 39.7% 40.5%
-------- -------- --------
-------- -------- --------
</TABLE>
II-27
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONSTRUCTION COMMITMENTS
The construction and facilities program for 1998 is approximately $8,100,000.
Normal purchase commitments have or will be made for planned expenditures.
NOTE 10 - CORPORATE DEVELOPMENT
The Company has entered into an agreement to purchase the stock of Frontier
Corporation's Minnesota RSA 10 cellular property in a cash transaction. The
property comprises the counties of Blue Earth, Faribault, Freeborn, Le Sueur,
Rice, Steele, and Waseca. The population of the serving area is 230,000. The
Company is awaiting approval from the Federal Communications Commission. It is
anticipated that the purchase will be completed by the close of the second
quarter of 1998 and will be accounted for under the purchase method of
accounting.
The Company will utilize new long-term debt instruments to fund the majority of
the $40,000,000 acquisition price for the Frontier Corporation cellular
property. Negotiations are presently taking place to secure funding. No
difficulty is anticipated in obtaining this financing.
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (Not Audited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
------------------------------------------------------------------
Total 4th 3rd 2nd 1st
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 76,462 $ 20,168 $ 19,505 $ 19,299 $ 17,490
Operating Income 20,656 5,422 5,226 5,663 4,345
Net Income 15,479 2,939 6,662 3,156 2,722
Earnings Per Share $3.36 $.64 $1.46 $.68 $.58
Dividends Per Share $1.20 $.30 $.30 $.30 $.30
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
</TABLE>
II-28
<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 amended report on Form
10-K for the year ended December 31, 1997, to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: December 9, 1998 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/ Starr J. Kirklin
---------------------------------
Starr J. Kirklin, Director
/s/ R. Wynn Kearney, Jr.
---------------------------------
R. Wynn Kearney, Jr., Director
/s/ Lyle T. Bosacker
---------------------------------
Lyle T. Bosacker, Director
/s/ David A Christensen
---------------------------------
David A Christensen, Secretary,
Vice President, Chief Financial Officer
and Treasurer
II-29
