<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 September 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: 13,659,926 shares of no par common
stock as of September 30, 1998.
<PAGE>
HICKORY TECH CORPORATION
September 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
In Thousands except per share amounts For Quarter Ended For Nine Months Ended
----------------- ---------------------
9/30/98 9/30/97 9/30/98 9/30/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local Exchange Telephone $ 12,246 $ 11,166 $36,122 $31,414
Communication Services 3,389 - 5,717 -
Billing / Data Services 1,937 2,284 6,104 6,892
Communications Products 7,531 6,055 21,150 17,988
--------- --------- --------- ---------
TOTAL OPERATING REVENUES 25,103 19,505 69,093 56,294
COSTS AND EXPENSES
Cost of Sales 6,113 4,066 16,840 12,401
Operating Expenses 10,128 8,110 26,438 22,854
Depreciation 2,114 1,780 5,993 4,932
Amortization of Intangibles 595 323 1,218 873
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES 18,950 14,279 50,489 41,060
--------- --------- --------- ---------
OPERATING INCOME 6,153 5,226 18,604 15,234
OTHER INCOME 420 291 1,091 718
GAIN ON SALE OF ASSETS 1,363 215 1,363 541
GAIN ON SALE OF DIRECTV ASSETS - 6,345 - 6,345
INTEREST EXPENSE (1,326) (685) (3,361) (1,405)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 6,610 11,392 17,697 21,433
INCOME TAXES 2,662 4,730 7,211 8,893
--------- --------- --------- ---------
CONSOLIDATED NET INCOME $ 3,948 $ 6,662 $ 10,486 $ 12,540
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE $ 0.29 $ 0.49 $ 0.77 $ 0.90
--------- --------- --------- ---------
EARNINGS PER SHARE ASSUMING DILUTION $ 0.29 $ 0.49 $ 0.77 $ 0.90
--------- --------- --------- ---------
DIVIDENDS PER SHARE $ 0.11 $ 0.10 $ 0.33 $ 0.30
--------- --------- --------- ---------
</TABLE>
The accompany notes are an integral part of the financial statements.
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<PAGE>
HICKORY TECH CORPORATION
September 30, 1998
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
In Thousands 9/30/98 12/31/97
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 5,145 $ 1,219
Receivables, Net of Allowances of $549 in 1998 15,312 12,609
and $461 in 1997
Inventories 2,322 3,131
Deferred Tax Benefit and Other 1,762 1,314
---------- ----------
TOTAL CURRENT ASSETS 24,541 18,273
INVESTMENTS 3,856 3,657
PROPERTY, PLANT & EQUIPMENT
Telecommunications Plant 112,598 110,229
Other Property and Equipment 16,040 11,000
---------- ----------
TOTAL 128,638 121,229
Less Accumulated Depreciation 67,844 63,460
---------- ----------
PROPERTY, PLANT & EQUIPMENT, NET 60,794 57,769
INTANGIBLE ASSETS, NET 65,800 32,135
OTHER 542 550
TOTAL ASSETS $ 155,533 $ 112,384
---------- ----------
---------- ----------
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 6,769 $ 6,765
Accrued Interest 1,780 735
Accrued Taxes 1,585 191
Advanced Billings & Deposits 2,648 1,878
Current Maturities of Long-Term Debt 600 439
---------- ----------
TOTAL CURRENT LIABILITIES 13,382 10,008
LONG-TERM DEBT, NET OF CURRENT MATURITIES 74,382 41,525
DEFERRED INCOME TAXES 2,652 2,496
DEFERRED COMPENSATION AND OTHER 3,452 3,178
SHAREHOLDERS' EQUITY:
Common Stock 1,366 454
Restricted Stock (92) -
Additional Paid-In Capital 1,670 1,990
Reinvested Earnings 58,721 52,733
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 61,665 55,177
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 155,533 $ 112,384
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
HICKORY TECH CORPORATION
September 30, 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Nine Months Ended
------------------------
In Thousands 9/30/98 9/30/97
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,486 $ 12,540
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 7,211 5,937
Equity in income of non-consolidated affiliates (859) (569)
Provision for Losses on Notes Rec. and Investments - 375
Gain resulting from disposition of assets (1,363) (6,886)
Changes in Operating Assets and Liabilities:
Receivables (2,669) (3,065)
Inventories (130) 491
Accounts Payable and Accrued Liabilities 3,131 (1,774)
Advance Billings & Deposits 746 217
Deferred Income Taxes (73) (49)
Other (281) 54
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,199 7,271
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (6,485) (21,119)
Purchase of Intangible Assets (333) (22,750)
Increase in Notes Receivable and Investments (287) (40)
Distributions from non-consolidated affiliates 459 -
Proceeds from sale of assets 5,516 7,533
Acquisition, Net of Cash Acquired (39,997) -
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (41,127) (36,376)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 38,017 40,000
Repayments of debt (5,000) (51)
Proceeds from issuance of common stock 335 309
Retirement of common stock - (7,711)
Dividends Paid (4,498) (4,168)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,854 28,379
--------- ---------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 3,926 (726)
CASH AND CASH EQUIVALENTS At Beginning of Period 1,219 2,954
--------- ---------
CASH AND CASH EQUIVALENTS At End of Period $ 5,145 $ 2,228
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
HICKORY TECH CORPORATION
SEPTEMBER 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 nine wholly-owned
operating subsidiaries. The companies and operations of the Registrant are
grouped into four business sectors.
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.
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
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<PAGE>
in January 1998. Crystal markets resale long distance service to the
Registrant's Local Exchange Telephone Sector's southern Minnesota and
northwestern Iowa subscribers. In addition, Crystal offers 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. This alternative choice,
known as CLEC operations (Competitive Local Exchange Carrier) in the
telecommunications industry, is currently being offered by Crystal to
customers in Nicollet, MN, with additional opportunities being pursued in
communities in Minnesota and Iowa.
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. The Communications Products
sector also included the operations of Digital Techniques, Inc. (DTI) through
September 30, 1998. The Registrant sold DTI at the end of the third quarter. The
year to date operations of DTI are included in the Registrant's consolidated
third quarter financial statements. DTI designed, assembled and distributed
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 Nine Months Ended
--------------------- ---------------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 13,641,593 13,674,393 13,629,194 13,882,737
Stock options 27,082 4,063 26,517 941
Stock subscribed (ESPP) 360 262 120 87
---------- ---------- ---------- ----------
Total dilutive shares outstanding 13,669,035 13,678,718 13,655,831 13,883,765
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
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<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, second and third quarters of 1998 and 1997 were as follows after
restating for a three-for-one stock split effective August 17, 1998:
<TABLE>
<CAPTION>
Shares Outstanding on Record Date 1998 1997
--------------------------------- ---- ----
<S> <C> <C>
1st Quarter (Feb. 15) 13,628,016 14,201,943
2nd Quarter (May 15) 13,631,136 13,826,772
3rd Quarter (Aug 15) 13,634,445 13,654,650
</TABLE>
NOTE 3. INVENTORIES
Inventories are stated at the lower of average cost or market
and consist of the following:
<TABLE>
<CAPTION>
(In Thousands) 9/30/98 12/31/97
------- --------
<S> <C> <C>
Finished Goods $ 0 $ 264
Work in Process 0 210
Materials and Supplies 2,322 2,657
------ ------
Total $2,322 $3,131
------ ------
------ ------
</TABLE>
NOTE 4. COMMON STOCK
The Registrant's common stock has no par value. There are 25,000,000
shares authorized. On August 17, 1998, the Registrant declared a
three-for-one stock split. The Registrant has retained the stated value of
the common stock at $0.10 per share before and after the August 1998 stock
split. This added $909,000 to Common Stock and reduced $909,000 from
Additional Paid-In Capital to the Shareholders' Equity section of the Balance
Sheet. There were 13,659,926 shares outstanding on September 30, 1998, and
13,602,357 shares outstanding on December 31, 1997, after restating for the
stock split.
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.
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<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 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 was approximately $40,300,000. The Registrant
financed $38,000,000 of the acquisition from a new revolving credit facility
and paid the remainder in cash generated from internal operations. 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.
Unaudited Pro Forma Summary:
(In Thousands, except for per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenues $71,562 $61,705
Net income $10,113 $11,598
Basic earnings per share $0.74 $0.84
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OPERATING REVENUES
Operating Revenues were 28.7% higher for the quarter ended September 30,
1998, than for the quarter ended September 30, 1997, as illustrated in 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.
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<PAGE>
<TABLE>
QUARTERS TREND IN OPERATING REVENUES
(thousands)
1998 1997
---- ----
<S> <C> <C>
1st Quarter $20,678 $17,490
2nd Quarter $23,312 $19,299
3rd Quarter $25,103 $19,505
</TABLE>
BUSINESS SECTOR OPERATING REVENUES
(thousands)
<TABLE>
<CAPTION>
For Quarter Ended For Nine Months Ended
---------------------- ----------------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local Exchange Telephone $12,246 $11,166 $36,122 $31,414
Communication Services 3,389 - 5,717 -
Billing / Data Services 1,937 2,284 6,104 6,892
Communications Products 7,531 6,055 21,150 17,988
------- ------- ------- -------
Total Operating Revenues 25,103 19,505 69,093 56,294
</TABLE>
NET INCOME
Consolidated net income for the quarter ended September 30, 1998 was
40.7% lower than the same period in 1997 as illustrated by the following
table. Without the gain on the sale of the DirecTV assets ($3,720,000 after
tax) in the third quarter of 1997 and without the gain on sale of assets
($811,000 after tax) in the third quarter 1998, consolidated net income for
the quarter ended September 30, 1998, was 6.6% higher than the same period in
1997. The primary reason for the increase in profitability (after the removal
of the gains) for the Registrant in the third quarter was the increased
profitability of its Local Exchange Telephone Sector. Through 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 early 1998, this core sector of the Registrant
continued its profitability growth.
<TABLE>
<CAPTION>
QUARTERS TREND IN NET INCOME
(thousands) 1998 1997
---- ----
<S> <C> <C>
1st Quarter $3,042 $2,722
2nd Quarter $3,496 $3,156
3rd Quarter $3,948 $6,662
</TABLE>
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<PAGE>
Net Income by Business Sectors described in following discussions are
shown prior to intercompany eliminations.
BUSINESS SECTOR NET INCOME
(thousands)
<TABLE>
<CAPTION>
For Quarter Ended For Nine Months Ended
---------------------- ----------------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME
Local Exchange Telephone $3,432 $2,955 $10,154 $8,552
Communication Services 151 - 117 -
Billing / Data Services 274 (31) 1,028 720
Communications Products 334 416 1,057 975
Corporate, including gains and interest (243) 3,322 (1,870) 2,293
------- ------- ------- -------
Total Net Income 3,948 6,662 10,486 12,540
</TABLE>
A. Material changes in results of operations:
1. LOCAL EXCHANGE TELEPHONE - Operating Revenues for the third quarter
of 1998 increased $1,080,000 or 9.7% compared with the same period in 1997.
For the nine months ended September 30, 1998, Operating Revenues were
$4,708,000 or 15.0% higher than the same period in 1997. Local service rate
increases in late first quarter 1998 account for approximately one-third of
the third quarter revenue increase over the third quarter of 1997. Access
line growth and network usage account for the remaining revenue increase of
the third quarter. The revenue growth for the first nine months of 1998, as
compared to 1997, was primarily due to the April 1997 addition of Heartland
Telecommunications Company of Iowa (Heartland). New fiber optic cable
networks providing additional toll transport revenue and local service rate
increases, access line growth, and network usage growth also contributed the
overall revenue growth. Without the April 1997 addition of Heartland, the
base local exchange telephone sector's Operating Revenues would have
increased $1,533,000 or 5.6% for the nine months ended September 30, 1998,
compared to the same period in 1997.
Net Income from this business sector increased $477,000 or 16.1% for the
third quarter 1998 compared to the same period in 1997. This incremental
profit increase is primarily due to the local service rate increase at the
Registrant's Minnesota local exchange telephone companies. For the nine
months ended September 30, 1998, Net Income increased $1,602,000 or 18.7% as
compared to the same period of 1997 and 14.3% without the impact of Heartland
Telecommunications Company of Iowa for the same nine-month period. The
primary reason for the nine month net income increase is the local service
rate increase. Also, 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 third
quarter 1998, the combined operations of these new businesses generated
revenues of $3,389,000 and $151,000 of net income despite start up expenses.
For the nine month period ended September 30, 1998, the combined operating
revenues were $5,717,000 with a combined net income of $117,000. Crystal's
(start-up CLEC and Long Distance business) nine month period revenues were
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<PAGE>
$899,000 producing a year to date loss of $607,000. MSWC's (CellularOne) year
to date revenues (five months, acquired May 1, 1998) were $4,818,000 and a
year to date net income of $724,000. There were no comparable amounts for
1997 for this sector.
3. BILLING / DATA SERVICES - Operating Revenues for the third quarter of
1998 decreased $347,000 or 15.2% compared with the same period in 1997. For
the nine months ended September 30, 1998, Operating Revenues were $788,000 or
11.4% lower than the nine months ended September 30, 1997. This decline was
due to less contract programming services as compared to the same period in
the prior year. The Net Income for the third quarter of 1998 increased
$305,000 or 983.9% as compared with the same period in 1997. For the nine
months ended September 30, 1998, Net Income was $308,000 or 42.8% higher than
the nine months ended September 30, 1997. During the third quarter of 1997,
the Sector had a nonrecurring expenditure of $446,000 (after tax) associated
with the development of the new software platform with SePRO Telecom of
Dublin, Ireland. The SePRO partnership will produce the Sector's next
software product offering, WRITE2K. WRITE2K is a wireless/wireline convergent
billing system. Beta testing on this new product will be performed during
fourth quarter 1998 and first quarter 1999, with product sales beginning in
1999.
4. COMMUNICATIONS PRODUCTS - Operating Revenues for this sector for the
third quarter of 1998 increased $1,476,000 or 24.4% compared with the same
period in 1997. For the nine months ended September 30, 1998, Operating
Revenues were $3,162,000 or 17.6% higher than the nine months ended September
30, 1997. The primary contributor to the revenue growth was the addition of
Datacomm Products to Collins on October 30, 1997. Without the addition of
Datacomm, Operating Revenues would have increased $590,000 or 9.7% for the
three month period ending September 30, 1998 and have increased $507,000 or
2.8% for the nine months ended September 30, 1998 compared to the same
periods in 1997. The Net Income for the third quarter of 1998 decreased
$82,000 or 19.7% as compared with the same period in 1997. For the nine
months ended September 30, 1998, Net Income was $82,000 or 8.4% higher than
the nine months ended September 30, 1997. Without Datacomm, Net Income for
the third quarter of 1998 would have decreased $72,000 or 17.3% and have
increased $52,000 or 5.3% for the nine month period ending September 30, 1998
as compared to the same periods in 1997. Gross margins in the Communications
Products Sector for the year are 3.8% 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. The net
profit increase is due to expense management and control, to offset the lower
sales volumes.
On September 30, 1998, Digital Techniques, Inc. (DTI), the Registrant's
Texas based business telephone system developer and distributor, was sold.
DTI's year to date operating revenues were $5,580,000 with a year to date net
income of $372,000.
5. COST OF SALES - Consolidated Cost of Sales increased $2,047,000 or
50.3% for the quarter ended September 30, 1998, compared with the same period
in 1997. For the nine months ended September 30, 1998, Cost of Sales were
$4,439,000 or 35.8% higher than the nine months ended September 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 63.8%
for the nine months ended September 30, 1998, compared to 60.0% for the same
period in 1997. Cost of Sales from the remaining Sectors increased from
$1,602,325 for the nine month period ending September 30, 1997 to $3,346,820
for the nine month period ending September 30, 1998. The Registrant's Local
Exchange Telephone and Communications Services Sectors experienced increased
demand for customer premise equipment (CPE), and this contributes increased
cost of sales to otherwise "service only" businesses. The profit margins
experienced from these sectors on their CPE sales have been comparable to the
Communications Products Sector's.
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<PAGE>
6. OPERATING EXPENSES - Operating Expenses for the quarter ended
September 30, 1998, increased $2,018,000 or 24.9% compared with the same
period in 1997. For the nine months ended September 30, 1998, Operating
Expenses were $3,584,000 or 15.7% higher than the nine months ended September
30, 1997. Without the addition of Heartland, Datacomm, Crystal, and MSWC,
Operating Expenses would have decreased $1,464,000 or 6.4% for the nine
months ended September 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.
7. DEPRECIATION - Depreciation Expense for the quarter ended September
30, 1998 was $334,000 or 18.8% higher than for the same period in 1997. For
the nine months ended September 30, 1998, Depreciation Expense was $1,061,000
or 21.5% higher than for the same period in 1997. Without the addition of
Heartland, Datacomm, Crystal, and MSWC, Depreciation Expense would have
increased $18,000 or 0.4% for the nine month period ending September 30,
1998.
8. GAIN ON SALE OF ASSETS - On September 30, 1998, the Registrant sold
100% of its ownership in Digital Techniques, Inc. (DTI), of Allen, Texas to a
DTI employee group and Troy Holding International, a computer telephony
product firm with operations in Toronto, Detroit and the United Kingdom. The
Registrant recorded a pre-tax gain on the sale of the stock of $319,575 from
the sale price of $4,500,000. Additionally, in September 1998, the Registrant
sold its stock investments in Illuminet Holdings, Inc., a telecommunications
network service provider. A pre-tax gain of $1,043,000 was recorded on the
sale from cash proceeds of $1,531,000.
9. INTEREST EXPENSE - Interest Expense increased $641,000 for the
quarter ended September 30, 1998, compared to the same period last year. For
the nine months ended September 30, 1998, Interest Expense was $1,956,000
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 (nine month expense in 1998 versus six months
expense in 1997) and the use of $38,000,000 from a $45,000,000 revolving
credit agreement initiated in May 1998 for the acquisition of Minnesota
Southern Wireless Company. The revolving credit line has been paid down and
had an outstanding balance of $33,0000,000 on September 30, 1998 with a
weighted average interest rate of 6.43%.
B. Material changes in financial condition:
1. CAPITAL STRUCTURE - The total capital structure for the Registrant was
$136,000,000 at September 30, 1998, reflecting 45.3% equity and 54.7% debt. This
compares to a capital structure of $97,000,000 at December 31, 1997, reflecting
57.1% equity and 42.9% debt. Management believes adequate internal and external
resources are available to finance ongoing operating requirements, including
capital expenditures, business development, debt service and the payment of
dividends.
2. CASH FLOWS - Cash provided from operations was $16,199,000 for the nine
month period ending September 30, 1998 compared to $7,271,000 for the nine month
period ending September 30, 1997. The increase reflects the growth in operating
income, decreased working capital requirements and the timing of additional
income tax payments associated with gains realized from the sale of the DirecTV
rights.
-11-
<PAGE>
Cash flows used in investing activities were $41,127,000 for the nine
months ended September 31, 1998 as compared to $36,376,000 for the same
period in 1997. In May 1998, the Registrant used net cash of $39,997,000 in
the acquisition of the cellular property in southern Minnesota (MSWC). In
April 1997, $35,271,000 was used to acquire telephone exchanges in northwest
Iowa (Heartland). Capital expenditures associated to ongoing business were
$6,485,000 during the first nine months of 1998 as compared to $8,598,000 for
the same period in 1997. The Registrant funds the majority of capital
expenditures through internally generated funds. Capital expenditures were
incurred to modernize and upgrade the Registrant's telecommunications network
and to construct additional network facilities to provide telecommunications
services to non-franchised exchange area customers (Competitive Local
Exchange Carrier, CLEC). In addition cash flows from investing activities for
the nine month period ending September 30, 1998 include net cash proceeds of
$3,952,000 from the sale of DTI and $1,531,000 from the sale of Illuminet
stocks. Cash flows from investing activities for the nine month period ending
September 30, 1997 include proceeds from the sale of DirecTV distribution
rights of $7,136,000. The proceeds from these 1998 asset sales were used
primarily to reduce borrowings under the Registrant's revolving credit
agreement.
Included in cash flows from financing activities are debt borrowings and
payments, dividend payments, and common stock issuance and retirements.
During the first nine months of 1998, the Registrant incurred borrowings of
$38,017,000 under a $45,000,000 revolving credit agreement utilized primarily
in the acquisition of the cellular property in southern Minnesota (MSWC). The
Registrant has made $5,000,000 debt payments on this agreement in the first
nine months of 1998. The September 30, 1998 outstanding balance on the
revolving credit facility was $33,000,000. During the first nine months of
1997, the Registrant incurred borrowings of $40,000,000 in long term debt
instruments to fund the $35,271,000 acquisition of telephone exchanges in
northwest Iowa (Heartland). Dividend payments for the first nine months of
1998 were $4,498,000 as compared to $4,168,000 for the same period in 1997.
The increase in dividend payments reflect the increase in the quarterly
dividends from $.10 per share in 1997 to $.11 per share in 1998. Under a
share repurchase program initiated in 1996 and expanded in 1997, the
Registrant repurchased 269,000 shares of common stock at a total cost of
$7,711,000 during the first nine months of 1997. The Registrant did not
repurchase any of its common stock during the first nine months of 1998.
3. WORKING CAPITAL - Current Assets exceeded Current Liabilities by
$11,159,000 as of September 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 1.8:1.0 as of September 30, 1998 as well as on December 31, 1997.
4. LONG-TERM DEBT - The Registrant's Long-Term Debt as of September 30,
1998, was $74,382,000.
In April 1998, the Registrant obtained a $45,000,000 revolving credit
facility with a syndicate of banks to finance the $40,000,000 acquisition of
the Minnesota cellular property. The weighted average interest rate
associated with this credit facility varies with LIBOR rates and is currently
6.43%. There are no mandatory principal repayment terms. The unsecured
credit facility has a termination date of April 29, 2003. As of September
30, 1998, the Registrant has drawn $33,000,000 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.
-12-
<PAGE>
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 September 30, 1998,
$473,000 is included in Long-Term Debt.
As of September 30, 1998, the Registrant has $909,000 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 with cash and debt. 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.
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 Issue" is the result of computer
programs that were written using two digits rather than four to define the
applicable year. If the Registrant's computer programs with date-sensitive
functions are not Year 2000 compliant, they may recognize a date using "00"
as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
-13-
<PAGE>
Each of the Registrant's business sectors has organized a committee to
analyze Year 2000 compliance.
TELEPHONE SECTOR The Telephone Sector has identified 134 software and
hardware products used in its operations and is in the process of contacting
the vendors to verify Year 2000 compliance. Responses have been received on
66% of the products. The Telephone Sector has identified which software
upgrades, to its predominant NORTEL switching and transport network, are
necessary to become Year 2000 compliant and intends to have all the upgrades
ordered by the end of 1998. The switching upgrades are part of an ongoing
contract that is entered into every three years to keep the network up to
current standards. The Telephone Sector would normally be entering into these
contracts in 1999 and will not need to accelerate any upgrades to become Year
2000 compliant.
The Telephone Sector's internal business software consists of a
proprietary software package created and maintained by the Registrant's
Billing / Data Services Sector. This software package (Intelesystem) is not
currently Year 2000 compliant and was in the process of being replaced as
part of a planned business software replacement. The Telephone Sector will be
converted to WRITE2K (billing software being co-developed by the Billing /
Data Services Sector) by mid-1999. The WRITE2K software is Year 2000
compliant. In addition, the Telephone Sector will be converting to Great
Plains Dynamics for accounting and financial reporting purposes in mid-1999.
The conversion to Great Plains Dynamics is part of a three-year migration the
Registrant has been performing for all their sectors beginning in 1996. Great
Plains Dynamics is Year 2000 compliant. For the remainder of the Telephone
Sector's business software needs, various Year 2000 compliant software will
be integrated with WRITE2K and Great Plains Dynamics by mid-1999.
The Year 2000 compliance specific expenditures associated with the
Telephone Sector are estimated to be less than $500,000 since the majority of
the upgrades are normal course-of-business expenses.
COMMUNICATION SERVICES SECTOR Similar to the Telephone Sector, the
Communication Services Sector will be converted to the Billing / Data Services
Sector's new billing software, WRITE2K, by mid-1999. The Sector is already using
Great Plains Dynamics, which is Year 2000 compliant, for accounting and
financial reporting responsibilities.
MSWC will be updating its NORTEL switch in the first quarter 1999 to make
it Year 2000 compliant. MSWC has contacted NORTEL to upgrade the software and
hardware in order to bring its switch into compliance. MSWC's voicemail system
will also be upgraded in the first quarter 1999 in order to bring it into
compliance.
Crystal uses the same software and hardware used by the Telephone Sector
and is relying on the work being done by that Sector to achieve Year 2000
compliance.
The total cost of upgrading the Communication Services Sector for Year 2000
compliance is estimated at $750,000, with most of this associated with the MSWC
NORTEL switch.
BILLING / DATA SERVICES SECTOR NIBI utilizes Great Plains Dynamics,
which is Year 2000 compliant, as its internal business software. The Sector
has a manual billing system that is Year 2000 compliant. No upgrades are
needed to this Sector's internal business software.
-14-
<PAGE>
All of NIBI's billing platforms for its customers will be Year 2000
compliant by December 1998, with the exception of Intelesystem. The
Registrant's Telephone Sector is the only customer on the Intelesystem
platform. Intelesystem had been planned to be replaced by NIBI's WRITE2K in
mid-1999. A determination will be made in January 1999 as to whether the
conversion to WRITE2K can take place in a timely fashion or if NIBI must
dedicate itself to making Intelesystem Year 2000 compliant. If Intelesystem
is to be made Year 2000 compliant, internal resources will be used to make
the necessary changes.
The costs of internal resources potentially dedicated to Year 2000
compliant remediation are estimated to be less than $100,000 for the
Billing/Data Services Sector.
COMMUNICATION PRODUCTS SECTOR Collins is currently using a UNIX-based
system for its internal business software. Plans were made in 1997 to convert
Collins to Great Plains Dynamics, with the actual conversion scheduled to
take place in the first quarter 1999. This conversion is taking place in the
normal course of business and was not influenced by the Year 2000 issue.
The information presented above sets forth the key steps taken by the
Registrant to address the Year 2000 issue. There can be no absolute assurance
that third parties will convert their systems in a timely manner and in a way
that is compatible with the Registrant's systems. The Registrant believes
that its actions with vendors and customers will minimize these risks and
that the cost of Year 2000 compliance for its information and operation
systems will not be material to its consolidated results of operations and
financial position. The information presented above also represents
management's best estimates at the present time, and could change. The
estimates are based upon assumptions as to future events. There can be no
guarantee that these assumptions will prove accurate, and actual results
could differ from those estimated if these assumptions prove inaccurate.
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.
-15-
<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.
None.
Item 3. DEFAULT UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS OF FORM 8-K.
On October 5, 1998, the Registrant filed a Form 8-K. The Form 8-K
reported that on September 30, 1998, the Registrant completed a stock sale of
Digital Techniques, Inc., to Troy Holdings International, a telephony product
firm with operations in Toronto, Detroit and the United Kingdom.
-16-
<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: November 6, 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
-17-
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