<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------
Commission file number 0-13721
HICKORY TECH CORPORATION
P.O. Box 3248
221 East Hickory Street
Mankato, Minnesota 56002-3248
(800) 326-5789
Incorporated in Minnesota IRS Employer Identification
41-1524393
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X]
The number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date: 4,543,960 shares of no par common
stock as of June 30, 1998.
<PAGE>
HICKORY TECH CORPORATION
June 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
In Thousands except per share amounts For Quarter Ended For Six Months Ended
----------------- --------------------
6/30/98 6/30/97 6/30/98 6/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local Exchange Telephone $ 12,207 $ 11,232 $ 23,877 $ 20,248
Communication Services 2,153 - 2,328 -
Billing / Data Services 2,008 2,304 4,166 4,608
Communications Products 6,944 5,763 13,619 11,933
-------- -------- -------- --------
TOTAL OPERATING REVENUES 23,312 19,299 43,990 36,789
COSTS AND EXPENSES
Cost of Sales 5,590 4,015 10,727 8,335
Operating Expenses 8,440 7,540 16,309 14,744
Depreciation 2,021 1,729 3,879 3,152
Amortization of Intangibles 422 352 624 550
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 16,473 13,636 31,539 26,781
-------- -------- -------- --------
OPERATING INCOME 6,839 5,663 12,451 10,008
OTHER INCOME 324 421 671 753
INTEREST EXPENSE 1,263 664 2,035 720
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 5,900 5,420 11,087 10,041
INCOME TAXES 2,404 2,264 4,549 4,163
-------- -------- -------- --------
CONSOLIDATED NET INCOME $ 3,496 $ 3,156 $ 6,538 $ 5,878
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE $ 0.77 $ 0.68 $ 1.44 $ 1.26
-------- -------- -------- --------
EARNINGS PER SHARE ASSUMING DILUTION $ 0.77 $ 0.68 $ 1.44 $ 1.26
-------- -------- -------- --------
DIVIDENDS PER SHARE $ 0.33 $ 0.30 $ 0.66 $ 0.60
-------- -------- -------- --------
</TABLE>
The accompany notes are an integral part of the financial statements.
-1-
<PAGE>
HICKORY TECH CORPORATION
June 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In Thousands 6/30/98 12/31/97
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $3,953 $1,219
Receivables, Net of Allowances of $679 in 1998 13,469 12,609
and $461 in 1997
Inventories 4,015 3,131
Deferred Tax Benefit and Other 1,726 1,314
-------- --------
TOTAL CURRENT ASSETS 23,163 18,273
INVESTMENTS 3,970 3,657
PROPERTY, PLANT & EQUIPMENT
Telecommunications Plant 113,071 110,229
Other Property and Equipment 20,099 11,000
-------- --------
TOTAL 133,170 121,229
Less Accumulated Depreciation 70,903 63,460
-------- --------
PROPERTY, PLANT & EQUIPMENT, NET 62,267 57,769
INTANGIBLE ASSETS, NET 65,858 32,135
OTHER 950 550
TOTAL ASSETS $156,208 $112,384
-------- --------
-------- --------
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $7,228 $6,765
Accrued Interest 1,088 735
Accrued Taxes 1,056 191
Advanced Billings & Deposits 2,012 1,878
Current Maturities of Long-Term Debt 439 439
-------- --------
TOTAL CURRENT LIABILITIES 11,823 10,008
LONG-TERM DEBT, NET OF CURRENT MATURITIES 79,536 41,525
DEFERRED INCOME TAXES 2,452 2,496
DEFERRED COMPENSATION AND OTHER 3,328 3,178
SHAREHOLDERS' EQUITY:
Common Stock 454 454
Additional Paid-In Capital 2,342 1,990
Reinvested Earnings 56,273 52,733
-------- --------
TOTAL SHAREHOLDERS' EQUITY 59,069 55,177
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $156,208 $112,384
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
-2-
<PAGE>
HICKORY TECH CORPORATION
June 30, 1998
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For Six Months Ended
-----------------------
In Thousands 6/30/98 6/30/97
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $6,538 $5,878
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 4,531 3,790
Equity in income of non-consolidated affiliates (499) (372)
Provision for Losses on Notes Rec. and
Investments - 375
Gain resulting from disposition of assets - (326)
Changes in Operating Assets and Liabilities:
Receivables (271) (1,085)
Inventories (682) 243
Accounts Payable and Accrued Liabilities 1,901 (1,764)
Advance Billings & Deposits 109 (155)
Deferred Income Taxes (44) (32)
Other (377) 10
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,206 6,562
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (3,416) (17,795)
Purchase of Intangible Assets - (23,560)
Increase in Notes Receivable and Investments (78) (118)
Distributions from non-consolidated affiliates 265 77
Proceeds from sale of assets 13 397
Acquisition, Net of Cash Acquired (40,281) -
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (43,497) (40,999)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 38,010 40,000
Repayments of debt - (51)
Proceeds from issuance of common stock 14 100
Retirement of common stock - (5,773)
Dividends Paid (2,999) (2,803)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,025 31,473
-------- --------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 2,734 (2,964)
CASH AND CASH EQUIVALENTS At Beginning of Period 1,219 2,954
-------- --------
CASH AND CASH EQUIVALENTS At End of Period $3,953 $(10)
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
HICKORY TECH CORPORATION
JUNE 30, 1998
PART 1. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The preceding, unaudited, Consolidated Statements of Income, Balance Sheets
and Statements of Cash Flows contain all adjustments, representing normal
recurring items, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods being reported.
NOTE 1. BASIS OF CONSOLIDATION
The Registrant is a communications holding company headquartered in
Mankato, Minnesota. The consolidated financial statements of the Registrant
include Hickory Tech Corporation, the parent company, and its ten wholly-owned
operating subsidiaries. The companies and operations of the Registrant have been
restructured into four business sectors in the second quarter of 1998 to more
closely reflect the Registrant's management of the available resources and
capital.
The accounting policies of the Registrant 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. All intercompany transactions have been eliminated from the
consolidated financial statements. Certain balances for 1997 have been
reclassified to conform with the 1998 presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Registrant's December 31, 1997 Form 10-K.
LOCAL EXCHANGE TELEPHONE
MANKATO CITIZENS TELEPHONE COMPANY, MID-COMMUNICATIONS, INC., AMANA
COLONIES TELEPHONE COMPANY and HEARTLAND TELECOMMUNICATIONS COMPANY OF IOWA are
local exchange telephone companies. Mankato Citizens Telephone Company and
Mid-Communications, Inc. provide telephone service in south central Minnesota,
specifically, Mankato (population 42,000) and eleven communities surrounding
Mankato. Amana Colonies Telephone Company provides telephone service for the
seven communities of the Amana Colonies in east central Iowa. Heartland
Telecommunications Company of Iowa provides telephone service for eleven
communities in northwest Iowa. CABLE NETWORK, INC. owns and operates fiber optic
cable facilities in southern Minnesota which are used to transport interexchange
communications as a service to telephone exchange carriers. It also holds a
minority ownership interest in a rural cellular limited liability company in
south central Minnesota. These five subsidiaries comprise the Registrant's
Local Exchange Telephone Sector.
-4-
<PAGE>
COMMUNICATIONS SERVICES
MINNESOTA SOUTHERN WIRELESS COMPANY (MSWC) owns and operates the cellular
property known as Minnesota's Rural Service Area (RSA) 10 under the business
name of CellularOne. This property, acquired on May 1, 1998, is the "A-side"
FCC license encompassing seven counties in south central Minnesota. The property
overlaps and is larger than the telephone line serving area of the Registrant's
Minnesota telephone property. CRYSTAL COMMUNICATIONS, INC. (Crystal), began
operations in January 1998. Crystal currently markets resale long distance
service to the Registrant's Local Exchange Telephone Sector's southern Minnesota
and northwestern Iowa subscribers. In addition, Crystal is exploring
opportunities to become an alternative choice for telecommunications service on
a local service basis to customers in towns in southern Minnesota and Iowa not
currently in the Registrant's Local Exchange Telephone Sector's service area.
BILLING / DATA SERVICES
NATIONAL INDEPENDENT BILLING, INC. (NIBI) provides data processing service
to local telephone companies, interexchange long distance companies and enhanced
service providers throughout the United States. NIBI also provides standard
batch processing of telephone billing and rating in large volume applications,
as well as specialized contract data processing services.
COMMUNICATIONS PRODUCTS
COLLINS COMMUNICATIONS SYSTEMS CO. (Collins) sells, installs and services
telecommunications equipment in the retail market in the metropolitan
Minneapolis/St. Paul area. Collins primarily installs and maintains Nortel PBX
and key system equipment and integrated software. DIGITAL TECHNIQUES, INC. (DTI)
designs, assembles and distributes unique business telecommunications components
for business telephone systems throughout North America, the United Kingdom and
the Pacific Rim.
NOTE 2. EARNINGS AND CASH DIVIDENDS PER COMMON 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>
For Quarter Ended For Six Months Ended
----------------- --------------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 4,543,316 4,613,091 4,540,964 4,662,495
Stock options 10,472 143 9,286 -
Stock subscribed (ESPP) 5,802 6,800 4,814 5,608
----- ----- ----- -----
Total dilutive shares outstanding 4,559,590 4,620,034 4,555,064 4,668,103
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
-5-
<PAGE>
Cash dividends are based on the number of common shares outstanding at the
respective record dates. The number of shares outstanding as of the record date
for the first and second quarters of 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Shares Outstanding on Record Date 1998 1997
--------------------------------- ---- ----
<S> <C> <C>
1st Quarter (Feb. 15) 4,542,672 4,733,981
2nd Quarter (May 15) 4,543,712 4,608,924
</TABLE>
NOTE 3. INVENTORIES
Inventories are stated at the lower of average cost or market and consist
of the following:
<TABLE>
<CAPTION>
(In Thousands) 6/30/98 12/31/97
------- --------
<S> <C> <C>
Finished Goods $211 $264
Work in Process 197 210
Materials and Supplies 3,607 2,657
----- -----
Total $4,015 $3,131
------ ------
------ ------
</TABLE>
NOTE 4. COMMON STOCK
The Registrant's common stock has no par value. The common stock has a
stated value of $0.10 per share. There are 25,000,000 shares authorized. There
were 4,543,960 shares outstanding on June 30, 1998, and 4,534,119 shares
outstanding on December 31, 1997.
In 1997, the Board of Directors of the Registrant adopted a new share
repurchase program authorizing the Registrant to repurchase up to 500,000
additional shares, which represented 10.8% of its outstanding common stock. This
new repurchase program followed the repurchase program which the Registrant
announced on April 8, 1996. Due to the completion of the initial repurchase
program in February 1997, the Registrant began the new repurchase program
effective February 17, 1997. This program was reported on Form 8-K dated
February 17, 1997. Through June 30, 1998, 120,738 shares of common stock have
been repurchased under the February 17,1997 repurchase program. No common stock
was purchased during the first six months of 1998.
NOTE 5. CORPORATE DEVELOPMENT
On April 10, 1997, the Registrant 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 access
lines. The new exchanges are reported as operations of Heartland
Telecommunications Company of Iowa, a wholly-owned subsidiary of the Registrant
and included in the Local Exchange Telephone Sector. The acquisition was
structured as a purchase of telephone assets from US West. 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. This acquisition was reported on Form 8-K dated April 25, 1997.
On July 15, 1997, the Registrant sold its exclusive DirecTV distribution
rights in seven counties in southern Minnesota, along with related assets, to
Golden Sky Systems, Inc. The Registrant recorded a pre-tax gain on the sale of
the assets of $6,345,000. The sale was reported on Form 8-K dated July 15,
1997.
-6-
<PAGE>
On October 30, 1997, the Registrant 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 reported as a division of Collins and included in the
Communications Products Sector. 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. This acquisition was reported on Form
8-K dated November 17, 1997.
On May 1, 1998, the Registrant, under terms of a purchase agreement dated
December 17, 1997, completed a stock purchase of cellular property from Frontier
Corporation in southern Minnesota. The cellular property, known in the industry
as Minnesota's Rural Service Area (RSA) 10, is the "A-side" FCC license
encompassing seven counties of south central Minnesota. The population of the
serving area is 230,000 and overlaps the telephone line serving area of the
Registrant's Minnesota telephone property. The acquisition was accounted for
under the purchase method of accounting. The total purchase price approximated
$40,300,000. The Registrant financed $38,000,000 of the acquisition from a new
revolving credit facility and paid the remainder in cash. The operations of the
acquisition are included in the Communications Services Sector. This acquisition
was reported on Form 8-K dated May 15, 1998.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisition had occurred at the beginning of the
periods shown after taking into account the effect of certain adjustments and
eliminations as discussed in the Registrant's Report on Form 8-K/A filed on July
15, 1998. This summary is not necessarily indicative of what the results of
operations of the Registrant and the cellular acquisition would have been if
they were a single entity during such periods, nor does it purport to represent
results of operations for any future periods.
<TABLE>
<CAPTION>
Unaudited Pro Forma Summary:
(In Thousands, except for per share amounts)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Total revenues $46,459 $40,184
Net income $6,165 $5,147
Basic earnings per share $1.36 $1.10
</TABLE>
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OPERATING REVENUES
Operating Revenues were 20.8% higher for the quarter ended June 30, 1998,
than for the quarter ended June 30, 1997, as illustrated by the following table.
The revenue increase was primarily due to the growth in the Local Exchange
Telephone Sector as well as the cellular acquisition and start-up business in
the Communications Services Sector.
<TABLE>
<CAPTION>
OPERATING REVENUES
QUARTERS TREND
(thousands) 1998 1997
---- ----
<S> <C> <C>
1st Quarter $20,678 $17,490
2nd Quarter $23,312 $19,299
</TABLE>
<TABLE>
<CAPTION>
BUSINESS SECTOR OPERATING REVENUES
In Thousands For Quarter Ended For Six Months Ended
----------------- --------------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local Exchange Telephone $12,207 $11,232 $23,877 $20,248
Communication Services 2,153 - 2,328 -
Billing / Data Services 2,008 2,304 4,166 4,608
Communications Products 6,944 5,763 13,619 11,933
TOTAL OPERATING REVENUES 23,312 19,299 43,990 36,789
</TABLE>
NET INCOME
Consolidated net income for the quarter ended June 30, 1998, was 10.8%
higher than the same period in 1997, as illustrated by the following table. The
primary reason for the increase in profitability for the Registrant overall in
the second quarter is the increased profitability of its Local Exchange
Telephone Sector. The combination of expenses being held to a consistent level
with the prior year, normal growth in access lines and network usage, as well as
the benefit of basic/local rate increases in 1998 has made this core business of
the Registrant more profitable.
<TABLE>
<CAPTION>
CONSOLIDATED NET INCOME
QUARTER TREND
(thousands) 1998 1997
---- ----
<S> <C> <C>
1st Quarter $3,042 $2,722
2nd Quarter $3,496 $3,156
</TABLE>
-8-
<PAGE>
Net Income by Business Sectors described in following discussions are shown
prior to intercompany eliminations.
<TABLE>
<CAPTION>
BUSINESS SECTOR NET INCOME
In Thousands For Quarter Ended For Six Months Ended
---------------------------------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME
Local Exchange Telephone $3,380 $3,058 $6,722 $5,597
Communication Services 151 - (34) -
Billing / Data Services 355 397 753 751
Communications Products 451 311 723 559
Corporate (841) (610) (1,626) (1,029)
------- ------- ------- -------
TOTAL NET INCOME 3,496 3,156 6,538 5,878
</TABLE>
A. Material changes in results of operations:
1. LOCAL EXCHANGE TELEPHONE - Operating Revenues for the second quarter
of 1998 increased $975,000 or 8.7% compared with the same period in 1997. For
the six months ended June 30, 1998, Operating Revenues were $3,629,000 or 17.9%
higher than the same period in 1997. Local service rate increases in late first
quarter of 1998 account for approximately one-third of the second quarter
revenue increase over the second quarter of 1997. Access line growth and network
usage account for the remaining revenue increase of the second quarter. The
revenue growth for the first six months of 1998 as compared to 1997 was
primarily due to the April 1997 addition of Heartland Telecommunications Company
of Iowa (Heartland) and new fiber optic cable networks providing additional toll
transport revenue as well as the local service rate increases, access line
growth and network usage growth. Without the April 1997 addition of Heartland,
the base local exchange telephone sector's Operating Revenues would have
increased $682,000 or 3.7% for the six months ended June 30, 1998, compared to
the same period in 1997.
Net Income from this business sector increased $322,000 or 10.5% for the
second quarter 1998 compared to the same period in 1997. This incremental profit
increase is primarily due to the local service increase at the Registrant's
Minnesota local exchange telephone companies. The Net Income results without the
impact of Heartland for the second quarter 1998 would have increased $418,000 or
16.1%. For the six months ended June 30, 1998, Net Income increased $1,125,000
or 20.1% as compared to the same period of 1997 and 12.3% without the impact of
Heartland Telecommunications Company of Iowa for the same six month period.
Costs in 1998 have not increased over 1997 levels. The margin in this business
sector has improved over 1997.
2. COMMUNICATIONS SERVICES - The newly organized Communications Services
Sector operates the Registrant's entry into the long distance business, its
start up efforts in the competitive local exchange business, and its newly
acquired wireless communications business. For the second quarter 1998, the
combined operations of these new businesses generated revenues of $2,153,000 and
$151,000 of net income despite start up expenses. There were no comparable
amounts for 1997 for this sector.
-9-
<PAGE>
3. BILLING / DATA SERVICES - Operating Revenues for the second quarter of
1998 decreased $296,000 or 12.8% compared with the same period in 1997. For the
six months ended June 30, 1998, Operating Revenues were $442,000 or 9.6% lower
than the six months ended June 30, 1997. This decline was due to less contract
programming services as compared to the same period in the prior year. Although
the revenues were lower, the higher margins associated with processing the
sector's growing volume of service bureau transactions moderated the decline in
profitability for this sector. The Net Income for the second quarter of 1998
decreased $42,000 or 10.6% as compared with the same period in 1997. For the
six months ended June 30, 1998, Net Income was $2,000 or 0.3% higher than the
six months ended June 30, 1997.
4. COMMUNICATIONS PRODUCTS - The reorganized Communications Products
Sector includes the equipment sales operation of Collins and the product
development operation of DTI. Operating Revenues for this sector for the second
quarter of 1998 increased $1,181,000 or 20.5% compared with the same period in
1997. For the six months ended June 30, 1998, Operating Revenues were $1,686,000
or 14.1% higher than the six months ended June 30, 1997. The primary
contributor to the revenue growth was the addition of Datacomm Products to
Collins. Without the addition of Datacomm, Operating Revenues would have
increased $426,000 or 7.4% for the three month period ending June 30, 1998 and
have decreased $83,000 or 0.7% for the six months ended June 30, 1998 compared
to the same periods in 1997. The Net Income for the second quarter of 1998
increased $140,000 or 45.0% as compared with the same period in 1997. For the
six months ended June 30, 1998, Net Income was $164,000 or 29.3% higher than the
six months ended June 30, 1997. Without Datacomm, Net Income for the second
quarter of 1998 would have increased $132,000 or 42.4% and have increased
$124,000 or 22.2% for the six month period ending June 30, 1998 as compared to
the same periods in 1997. Gross margins in the Communications Products Sector
for the year are 2.0% lower than 1997, however, operating expenses have been
significantly lower, which led to the increase in net profitability. The margin
decrease is due primarily to product mix, and management anticipates this
decrease may be negated in future quarters. This profit increase is due to
expense management and control, to offset the lower sales volumes.
5. COST OF SALES - Consolidated Cost of Sales increased $1,575,000 or
39.2% for the quarter ended June 30, 1998, compared with the same period in
1997. For the six months ended June 30, 1998, Cost of Sales were $2,392,000 or
28.7% higher than the six months ended June 30, 1997. In terms of percentage of
Operating Revenues from the Communications Products Sector (which generated most
of the Cost of Sales), Cost of Sales was 62.9% for the six months ended June 30,
1998, compared to 60.9% for the same period in 1997. Cost of Sales from the
remaining Sectors increased from $1,064,000 for the six month period ending June
30, 1997 to $2,154,870 for the six month period ending June 30, 1998. The
Registrant's Local Exchange Telephone and Communications Services Sectors
experienced increased demand for customer premise equipment, and this
contributes increased cost of sales to an otherwise "service only" business. The
profit margins experienced from these sectors have been comparable to the
Communications Products Sector's.
-10-
<PAGE>
6. OPERATING EXPENSES - Operating Expenses for the quarter ended June 30,
1998, increased $900,000 or 11.9% compared with the same period in 1997. For
the six months ended June 30, 1998, Operating Expenses were $1,565,000 or 10.6%
higher than the six months ended June 30, 1997. Without the addition of
Heartland, Datacomm, Crystal, and MSWC, Operating Expenses would have decreased
$698,000 or 4.7% for the six months ended June 30, 1998. This decrease is a
result of various cost control measures implemented corporate-wide over the last
two years. As employee staffing position vacancies are filled, the operating
expense advantage may decline or reverse in the future quarters of 1998.
7. DEPRECIATION - Depreciation Expense for the quarter ended June 30,
1998 was $292,000 or 16.9% higher than for the same period in 1997. For the six
months ended June 30, 1998, Depreciation Expense was $727,000 or 23.1% higher
than for the same period in 1997. Without the addition of Heartland, Datacomm,
Crystal, and MSWC, Depreciation expense would have decreased $23,000 or 0.8%
for the six month period ending June 30, 1998.
8. INTEREST EXPENSE - Interest Expense increased $599,000 for the quarter
ended June 30, 1998, compared to the same period last year. For the six months
ended June 30, 1998, Interest Expense was $1,315,000 higher than for the same
period in 1997. The increase in Interest Expense was due to the new $40,000,000
in senior indebtedness initiated in April 1997 for the Heartland acquisition and
the draw of $38,000,000 from a $45,000,000 revolving credit agreement initiated
in May 1998 for the acquisition of Minnesota Southern Wireless Company.
B. Material changes in financial condition:
1. CASH FLOWS - Cash and Cash Equivalents increased $2,734,000 for the six
months ended June 30, 1998, compared with a decrease of $2,964,000 for the same
period in 1997. The primary source for the increase in cash in 1998 was from the
Registrant's internal operations. The primary uses of cash in the first six
months of 1998 were the acquisition of cellular property for $40,281,000 after a
draw of $38,000,000 from a revolving credit agreement, the additions to
Property, Plant and Equipment of $3,416,000 and Dividends Paid of $2,999,000.
For the six month period ended June 30, 1997, additions to Property, Plant and
Equipment were $4,846,000 excluding property acquired from US WEST which was
financed entirely from the proceeds of the issuance of long term debt. The
Dividends Paid for the six month period ending June 30, 1998 equaled $2,803,000.
The net change in cash flows from a decrease of $2,964,000 during the first six
months of 1997 to an increase of $2,734,000 in 1998 is mainly due to $5,773,000
of common stock retired under the Registrant's Stock Repurchase Plan during the
first six months of 1997 as compared to no common stock repurchased in 1998.
2. WORKING CAPITAL - Current Assets exceeded Current Liabilities by
$11,340,000 as of June 30, 1998, compared to a working capital surplus of
$8,265,000 as of December 31, 1997. The primary source of working capital was
internal operations. The ratio of current assets to current liabilities was
2.0:1.0 as of June 30, 1998 compared to 1.8:1.0 as of December 31, 1997.
-11-
<PAGE>
3. USES OF WORKING CAPITAL - One of the largest uses of internal capital
during the six months ended June 30, 1998 was the common stock dividends paid by
the Registrant. Dividends paid used $2,999,000 of capital during the first six
months. Additions to Property, Plant and Equipment, excluding acquisitions,
have historically been the Registrant's largest investing activity, using
$20,900,000 for the two years ended December 31, 1997. During the first six
months of 1998, $3,416,000 of working capital was used to purchase fixed assets.
4. LONG-TERM DEBT - The Registrant's Long-Term Debt as of June 30, 1998,
was $79,536,000.
In April 1998, the Registrant obtained a $45,000,000 revolving credit
facility with a national banking syndicate to finance the $40,000,000
acquisition of the Minnesota cellular property. The interest rate associated
with this credit facility varies with LIBOR rates and is currently 6.49%. There
are no mandatory principal repayment terms. The unsecured credit facility has a
termination date of April 29, 2003. As of June 30, 1998, the Registrant has
drawn $38,000,000 on this credit facility.
In April 1997, the Registrant obtained $40,000,000 senior unsecured notes
with 15 year maturities to fund the $35,271,000 acquisition of the telephone
exchanges in Iowa. The remaining proceeds from the note were used to fund
capital expenditure needs. The notes accrue interest at 7.11%. No principal
payments are due during the first four years.
In October 1997, the Registrant acquired the assets of Datacomm Products.
The terms of the purchase agreement require the Registrant to make annual
payments in 1998 and 1999 on an unsecured note. On June 30, 1998, $473,000 is
included in Long-Term Debt.
As of June 30, 1998, the Registrant has $1,063,000 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.
Provisions of the various notes and credit facilities contain covenants
relating to liens, consolidated net worth and cash flow coverage. The Registrant
is in compliance with all financial debt covenants.
5. CAPITAL FROM OPERATIONS - Management believes the Registrant will be
able to generate sufficient working capital internally from operations to meet
its immediate operating needs, and sustain its historical dividend levels. The
Registrant has completed several acquisitions in the previous six years which
were funded out of existing cash balances. The April 1997 acquisition of Iowa
rural telephone assets and the May 1998 acquisition of Minnesota cellular
property required external debt financing. Growth plans and acquisitions in the
future will require additional debt financing. Should the Registrant have a need
to secure additional senior debt financing as a result of pursuing additional
corporate acquisitions, the management believes through its strong relationship
with its financial capital sources, that no funding difficulty will be
anticipated.
The Registrant's stock repurchase program has been funded with internal
cash and advances on a revolving credit facility to date. It is anticipated the
same sources will be utilized for financing any future stock repurchases.
-12-
<PAGE>
6. ACCOUNTING PRONOUNCEMENTS In 1997, the Financial Accounting Standards
Board (FASB) issued Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting
and displaying 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 had no impact on
the Registrant'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. Adoption of FAS
131 is not required on interim financial statements in 1998. The Registrant is
currently evaluating the requirements of FAS 131, and upon adoption, disclosure
changes may be made.
7. 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 Registrant 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
Registrant is required to do so, Year 2000 compliant. The Registrant continues
to evaluate the estimated costs associated with these efforts based on actual
experience. The most vital facets of the Registrant'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/Data Services Sector. The Registrant believes, based on available
information, that the costs of measuring and achieving Year 2000 compliance will
not have a materially adverse effect on its results of operations, financial
position or cash flows.
8. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of
Results of Operations and Financial Condition, and other sections of this Form
10-Q filing contain forward-looking statements that are based on current
expectations, estimates and projections about the industry in which the
Registrant operates, management's beliefs, and assumptions made by Registrant
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.
9. SUBSEQUENT EVENTS On July 20, 1998, the Registrant announced that it
would split its shares of common stock on a three-for-one basis. Effective
August 17, 1998, each shareowner on record on August 3, 1998 will be issued two
additional shares of common stock. Share and per share amounts reflected in this
Form 10Q have not been restated for the upcoming stock split.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time, the Registrant or a subsidiary of the Registrant is
involved in litigation incidental to its business, including administrative
hearings of state public utility commissions, actions relating to employee
claims and miscellaneous routine lawsuits. Based on the information currently
available, the Registrant believes that none of such current proceedings,
individually or in the aggregate, will have a material adverse effect on their
financial positions, results of operations or cash flows.
Item 2. CHANGES IN SECURITIES.
The Board of Directors of the Registrant has approved a three-for-one split
of common stock. Effective August 17, 1998, each shareowner on record on August
3, 1998 will be issued two additional shares of common stock.
Item 3. DEFAULT UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a. The annual shareholders' meeting was held on April 13, 1998.
b. Three directors were elected to serve three year terms. The names of
the directors elected at the annual meeting and the applicable votes
were as follows:
<TABLE>
<CAPTION>
BROKER
DIRECTOR FOR AGAINST WITHHELD NONVOTES
-------- --- ------- -------- --------
<S> <C> <C> <C> <C>
James H. Holdrege 3,345,093 253,101 3,545 None
Lyle G. Jacobson 3,347,998 253,101 640 None
Starr J. Kirklin 3,335,202 253,101 13,436 None
</TABLE>
The other directors of the Registrant are as follows:
Robert D. Alton, Jr. Robert K. Else
R. Wynn Kearney, Jr. Lyle T. Bosacker
Brett M. Taylor, Jr.
c. The Hickory Tech Corporation Directors' Stock Option Plan was also
approved at the annual meeting. The votes to approve this plan were
as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NONVOTES
--- ------- ------- --------
<S> <C> <C> <C>
3,028,327 508,408 56,193 None
</TABLE>
-14-
<PAGE>
d. PricewaterhouseCoopers LLP, formerly Coopers & Lybrand L.L.P., was
also confirmed as the auditors for the Registrant for 1998 at the
annual meeting. The votes regarding the selection of the auditors
were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NONVOTES
--- ------- ------- --------
<S> <C> <C> <C>
3,539,887 22,259 19,599 None
</TABLE>
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS OF FORM 8-K.
On May 15, 1998, the Registrant filed a Form 8-K. The Form 8-K reported that on
May 1, 1998, the Registrant, under terms of a purchase agreement dated December
17, 1997, completed a stock purchase of cellular property from Frontier
Corporation in southern Minnesota. The cellular property, known in the industry
as Minnesota's Rural Service Area (RSA) 10, is the "A-side" FCC license
encompassing seven counties in south central Minnesota.
On July 15, 1998, the Registrant filed a Form 8-K/A. The Form 8-K/A presented
the audited financial statements and pro forma financial information as of and
for the year ended December 31, 1997 for the cellular property purchased on
May 1, 1998, along with interim financial statements and a pro forma statement
of operations as of and for the three months ended March 31, 1998.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: August 13, 1998 HICKORY TECH CORPORATION
----------------
By /s/ Robert D. Alton, Jr.
-----------------------------------------
Robert D. Alton, Jr., Chief Executive Officer
By /s/ David A. Christensen
-----------------------------------------
David A. Christensen, Chief Financial Officer
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,953
<SECURITIES> 0
<RECEIVABLES> 14,148
<ALLOWANCES> 679
<INVENTORY> 4,015
<CURRENT-ASSETS> 23,163
<PP&E> 133,170
<DEPRECIATION> 70,903
<TOTAL-ASSETS> 156,208
<CURRENT-LIABILITIES> 11,823
<BONDS> 79,536
0
0
<COMMON> 454
<OTHER-SE> 58,615
<TOTAL-LIABILITY-AND-EQUITY> 156,208
<SALES> 13,619
<TOTAL-REVENUES> 43,990
<CGS> 10,727
<TOTAL-COSTS> 31,539
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,035
<INCOME-PRETAX> 11,087
<INCOME-TAX> 4,549
<INCOME-CONTINUING> 6,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,538
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
</TABLE>
