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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
COMMISSION FILE NUMBER: 0-13721
HICKORY TECH CORPORATION
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 VALUE
PREFERRED STOCK PURCHASE RIGHTS
-------------------------------
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. [ ]
As of March 5, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $164,570,400.
The total number of shares outstanding of the Registrant's common stock as of
March 5, 1999: 13,708,231.
Documents Incorporated by Reference: Portions of the Annual Report to
Shareholders for the year ended December 31, 1998 are incorporated by
reference into Parts I and II of this Form 10-K. Hickory Tech Corporation's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
on April 12, 1999 is incorporated by reference into Part III of this Form
10-K.
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TABLE OF CONTENTS
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Item Page
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PART I
1. Business I-1
2. Properties I-9
3. Legal Proceedings I-10
4. Submission of Matters to a Vote of Security Holders I-10
PART II
5. Market for Company's Common Equity and Related Stockholder
Matters II-1
6. Selected Financial Data II-1
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations II-1
7A. Quantitative and Qualitative Disclosures About Market Risk II-2
8. Financial Statements and Supplementary Data II-2
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-2
PART III
10. Directors and Executive Officers of the Company III-1
11. Executive Compensation III-1
12. Security Ownership of Certain Beneficial Owners and Management III-1
13. Certain Relationships and Related Transactions III-1
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Hickory Tech Corporation (the Company) is a holding company with subsidiaries
operating predominantly in the telecommunications industry. In the
telecommunications industry, local exchange companies (LECs) generate the
largest share of total revenues. The Company's core business is the operation
of four LECs. This business consists of connecting customers to the telephone
network, providing switched service and dedicated private lines, connecting
customers to long distance service providers and providing many other
services associated with LECs. The Company also provides wireless
telecommunications services to customers in and in the area surrounding its
LEC service territory in Minnesota, provides data processing services to the
telecommunications industry and installs and maintains telephone systems. In
addition, the Company undertook business startup initiatives in long
distance, internet access and competitive local exchange carrier (CLEC)
businesses in 1998.
In a 1985 reorganization, the Company became a holding company for the
Company's subsidiaries. The Company's predecessor as the parent holding
company, Mankato Citizens Telephone Company, has been in business since 1898,
and remains as one of the Company's subsidiaries. The Company has the nine
operating subsidiaries listed below:
-Mankato Citizens Telephone Company (MCTC), a Minnesota corporation;
-Mid-Communications, Inc. (Mid-Comm), a Minnesota corporation;
-Heartland Telecommunications Company of Iowa (Heartland), a Minnesota
corporation;
-Amana Colonies Telephone Company (ACTC), a Minnesota corporation;
-Cable Network, Inc. (CNI), a Minnesota corporation;
-Crystal Communications, Inc. (Crystal), a Minnesota corporation;
-Minnesota Southern Wireless Company (MSWC), a Minnesota corporation;
-National Independent Billing, Inc. (NIBI), a Minnesota corporation; and
-Collins Communications Systems Co. (Collins), a Minnesota corporation.
The Company and its subsidiaries are engaged in businesses that provide
services to their customers for a fee. These services are repetitive and
recurring, and, as a result, backlog orders and seasonality are not
significant factors. Working capital requirements primarily involve the
funding of the construction and maintenance of telephone fixed assets, the
payroll costs of highly skilled labor and the inventory to service its
telephone equipment customers.
The materials and supplies which are necessary for the operation of the
businesses of the Company and its subsidiaries are available from a variety
of sources, and no future supply problems are anticipated. All of the
Company's LEC central office switches, and a majority of the Company's
equipment sold in its Communications Products Segment, are the Nortel brand.
Nortel is a leading supplier of telecommunications equipment, and the
Company's dependence on this brand is not viewed as a significant risk.
As of December 31, 1998, the Company and its subsidiaries had 479 full-time
equivalent employees.
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FORWARD-LOOKING STATEMENTS
This report on Form 10-K and other documents filed by the Company under the
federal securities laws, including Form 10-Q and Form 8-K, and future oral or
written statements by the Company and its management, may include
forward-looking statements. These statements may include, without limitation,
statements with respect to anticipated future operating and financial
performance, growth opportunities and growth rates, acquisition and
divestiture opportunities, business strategies, business and competitive
outlook, Year 2000 compliance and other similar forecasts and statements of
expectation. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates and should and variations of these words and similar
expressions are intended to identify these forward-looking statements. Such
forward-looking statements are subject to uncertainties that could cause the
Company's actual results to differ materially from such statements.
Uncertainties causing differing results from those expressed in the
forward-looking statements include, but are not limited to, those
uncertainties set forth below:
-The effects of on-going deregulation in the telecommunications industry
as a result of the Federal Telecommunications Act of 1996 (the
"Telecommunications Act") (which allows competition among telephone
companies for the rights to offer telephone service to customers in a
franchised service area) and other similar federal and state legislation
and regulations, including, without limitation, (i) greater than
anticipated competition in the Company's predominately rural local
exchange telephone markets, (ii) greater than anticipated reductions in
revenues received from federal and state access charges for switching
long distance traffic, (iii) the final outcome of regulatory and judicial
proceedings with respect to interconnection agreements and access charge
reforms, and (iv) future state regulatory actions taken in response to
the Telecommunications Act.
-The Company's ability to successfully introduce new products and
services, including, without limitation, (i) the ability of Crystal
(which started its CLEC business in January 1998) to provide
competitive local service in new markets, (ii) the ability of NIBI (which
is a billing and data services company) to implement, market, and sell
their new WRITE2k billing system, (iii) the ability of MSWC (a cellular
telephone company purchased in May 1998) to successfully implement,
market, and sell its new digital wireless network products and service,
(iv) the ability of the Company to offer bundled service packages on
terms attractive to its customers, (v) the ability of the Company to
expand successfully its long distance and Internet offerings to new
markets and (vi) the ability of the Company to introduce and sell the
equipment and systems of Nortel, Bay Networks and Cisco versus the
competitive alternatives of other suppliers.
-Possible changes in the demand for the Company's products and services,
including, without limitation, lower than anticipated demand for,
(i) premium telephone services, additional access lines per household or
minutes of use volume associated with telephone service, (ii) wireless
telephone service, installations and/or the traffic associated with
service, (iii) data processing services or billing systems, and (iv)
communication and data equipment.
-The effects of greater than anticipated competition, including, without
limitation, competition requiring new pricing or marketing strategies or
new product offerings and
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the attendant risk that the Company will not be able to respond on a timely
or profitable basis.
-The risks inherent in rapid technological change, including, without
limitation, the risk that technologies will not be developed by the Company
on a timely or cost-effective basis or perform according to expectations.
-Regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.
-The Company's ability to effectively manage its growth, including,
without limitation, the Company's ability to (i) integrate the operations
of Crystal and MSWC into the Company's operations, (ii) manage NIBI's
development of and migration to WRITE2k as its new primary software
platform, (iii) achieve projected economies of scale and cost savings,
(iv) meet pro forma cash flow projections developed by management in
valuing newly-acquired businesses, and (v) implement necessary internal
controls and retain and attract key personnel.
-Any difficulties in the Company's ability to expand through additional
acquisitions, whether caused by financing constraints, a decrease in the
pool of attractive target companies, or competition for acquisitions from
other interested buyers.
-The lack of assurance that the Company can compete effectively against
superior capitalized competitors, or competitors with a larger national
or regional market niche.
-The effects of more general factors, including, without limitation:
-Changes in general industry and market conditions and growth rates.
-Changes in interest rates or other general national, regional, or
local economic conditions.
-Changes in legislation, regulation or public policy, including changes
in federal rural financing programs.
-Unanticipated increases in capital, operating or administrative costs,
or the impact of new business opportunities requiring significant
up-front investments.
-The continued availability of financing in amounts, terms and
conditions necessary to support the Company's operations.
-Changes in the Company's relationships with vendors.
-Changes in the Company's debt ratios and the resultant effect on debt
ratings.
-Unfavorable outcomes of regulatory or legal proceedings.
-Changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.
For additional information, see the description of the Company's business
included below. Due to the uncertainties listed above and the fact that
these forward-looking statements by the Company and its management are
based on estimates, projections, beliefs and assumptions of management
and are not guarantees of future performance, the Company disclaims any
obligation to update or revise any forward-looking statements based on
the occurrence of future events, the receipt of new information, or
otherwise.
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ACQUISITIONS
On May 1, 1998, the Company completed a stock purchase of MSWC, a cellular
phone company in southern Minnesota, from Frontier Corporation. The service
area for MSWC is known as Minnesota's Rural Service Area (RSA) 10, and MSWC
holds the "A-side" FCC license for seven counties in south central Minnesota.
The population of the service area is 230,000, and it overlaps the telephone
wireline service area of the Company's Minnesota LEC service territory.
In December 1998, the Company announced that it had entered into a purchase
agreement to acquire an additional cellular phone business in a part of the
metropolitan Minneapolis/St. Paul area with a service area population of
200,000. The Company is awaiting approval from the Federal Communications
Commission, and anticipates completing the purchase in the second quarter
of 1999.
DISPOSITIONS
On September 30, 1998, the Company sold 100% of its ownership in Digital
Techniques, Inc. of Allen, Texas to a DTI employee group and Troy Holding
International.
START-UP BUSINESS
In January 1998, the Company established Crystal Communications, Inc. as a
startup company and initiated long distance and internet services. Crystal
offers telephone service as a CLEC.
INDUSTRY SEGMENTS FINANCIAL DATA
Financial information about the industry segments is included on pages 20 to
43 of the annual report to shareholders, which part of the annual report is
incorporated by reference.
INDUSTRY SEGMENTS
The Company's operations are conducted in the following four segments:
Telephone Segment
MCTC, Mid-Comm, Heartland, ACTC and CNI provide telephone-related services
and are combined into the Company's Telephone Segment. None of the companies
in the Telephone Segment experienced major changes in scope or direction of
their operations during the past year. MCTC owns and operates an independent
telephone system serving the cities of Mankato and North Mankato and adjacent
rural areas in Blue Earth and Nicollet Counties in south central Minnesota,
approximately 75 miles south of Minneapolis/St. Paul. Mid-Comm provides
telephone services to the communities of Amboy, Cambria, Eagle Lake, Garden
City, Good Thunder, Judson, Lake Crystal, Madison Lake, Mapleton, Pemberton,
St. Clair and Vernon Center and to the surrounding rural areas located
primarily in Nicollet and Blue Earth Counties in south central Minnesota. The
Mid-Comm service territory is adjacent to and surrounds the MCTC service
territory. Heartland provides service to the northwest Iowa communities of
Akron, Bancroft, Boyden, Doon, Hawarden, Hull, Ireton, Lakota, Rock Rapids,
Rock Valley and Sibley. ACTC provides telephone services to the Amana
Colonies in east central Iowa. CNI owns and operates
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fiber optic cable facilities in southern Minnesota, which are used to
transport interexchange communications as a service to telephone exchange
companies, primarily to MCTC and Mid-Comm. CNI also holds a minority
ownership interest in a rural cellular limited liability company that
operates in southern Minnesota.
MCTC derives its principal revenues and income from local services charged to
subscribers in its service area and from the operation of a toll tandem
switching center in Mankato, Minnesota. Revenues and income for Mid-Comm are
also derived from local service charges in its area of operation and from
providing access to long distance services for its subscribers through the
toll center in Mankato. Local and interexchange telephone access for the two
companies are provided on an integrated basis. The local and interexchange
telephone access for both telephone companies utilize the same facilities and
equipment and are managed and maintained by the same work force. Heartland
and ACTC derive their principal revenues and income from local services
charged to subscribers in their respective service areas in Iowa and from
providing interexchange access for their subscribers. Interexchange telephone
access is provided by all four of the Company's telephone subsidiaries by
connecting the communications networks of interexchange and cellular carriers
with the equipment and facilities of end users by use of its switched
networks or private lines.
MCTC and Mid-Comm are Minnesota public utilities operating pursuant to
Indeterminate Permits issued by the Minnesota Public Utilities Commission.
Heartland and ACTC are also public utilities, which operate pursuant to
Certificates of Public Convenience and Necessity issued by the Iowa Utilities
Board. These state agencies regulate the services provided by MCTC, Mid-Comm,
Heartland and ACTC. None of CNI's operations are subject to regulation by the
Minnesota Public Utilities Commission. Due to the size of the Company's
operations in Minnesota and in Iowa, these state agencies do not regulate the
rate of return or profits of the Company's telephone operations. Local
service rates are filed as tariffs with the applicable state regulatory
authority. At the present time, Iowa's level of regulation of local service
rates is less restrictive than Minnesota's. Regardless of whether a
particular rate is subject to regulatory review, the Company's ability to
change rates will be determined by various factors, including economic and
competitive circumstances. Due to the rural nature of the Company's service
territory and the relatively small size of the Company's service territory in
each state, management does not expect state or federal regulation to
materially impact the Company's operations in the near future. The Company's
telephone subsidiaries are exempt from certain obligations of the
Telecommunications Act, unless, in response to a bona fide request, a state
regulatory commission removes the exemption.
As local exchange telephone companies, MCTC, Mid-Comm, Heartland and ACTC
provide end office switching and ancillary services to long distance
interexchange carriers, such as AT&T, US West, MCI and Sprint. These
relationships allow the Company's telephone subscribers to place long
distance telephone calls. By paying long distance access charges for all of
the individual customers who use their service, the long distance
interexchange carriers are large customers of the Company, but individually
none of them represent more than ten percent of the Company's consolidated
revenues.
Competitors of the Company now offer private line switched voice and data
services in or adjacent to the territories served by the Company, which
permits the bypassing of local telephone facilities. In addition, microwave
transmission services, wireless communications, fiber optic and coaxial cable
deployment and other services permit bypass of the local exchange network.
These alternatives to local exchange service represent a potential threat to
the Company's long-term ability to provide local exchange service at
economical rates.
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In order to meet this competition, the Company has deployed new technology
for its local exchange network to increase operating efficiencies and to
provide new services to its customers. These new technologies include the
latest release of digital switching technology on all of the Company's
switches, remote switching technology to within 12,000 feet of every customer
in the local network, installation of over 450 miles of fiber optic cable and
installation of SS7 (an out-of-band system) for all of its access lines. The
Company has also protected its interexchange network with fiber-ring
(redundant route designs which allow traffic to re-route if trouble appears
in the line), which allows the Company to provide a very reliable level of
service to its customers.
Competition exists for some of the services provided to interexchange
carriers, such as customer billing services, operator services, and network
switching. This competition comes primarily from the interexchange carriers
themselves. The provision of these services is of a contractual nature and is
primarily controlled by the interexchange carriers. Other services, such as
directory advertising, local private line transport and cellular
communications, are open to competition. Competition is based primarily on
service and experience.
Competition is less likely to be a factor in rural areas because population
densities are much lower and rural LECs, such as the ones operated by the
Company, are advanced in terms of technology. The Company has already begun
to respond to competitive changes with active programs to market products and
to engineer its infrastructure.
Communications Services Segment
MSWC owns and operates a cellular phone business for Minnesota's Rural
Service Area (RSA) 10, under the business name of Cellular One. This
business, acquired on May 1, 1998, holds the "A-side" FCC license for seven
counties in south central Minnesota. The area overlaps and is larger than the
telephone line service area of the Company's Minnesota telephone service
area. Crystal began operations in January 1998 as a new startup business.
Crystal markets resale long distance service to the Company's Telephone
Segment's southern Minnesota and northwestern Iowa subscribers. In addition,
Crystal offers an alternative choice for local telecommunications service to
customers in towns in southern Minnesota and Iowa not currently in the
Company's Telephone Segment's service area. This alternative service is
currently being offered by Crystal to customers in Nicollet, Janesville and
New Richland, Minnesota. Additional opportunities are being pursued in
communities in Minnesota and Iowa.
MSWC derives its principal revenues and income from providing cellular
telephone service to the seven counties in south central Minnesota. Revenues
and income for Crystal are derived from local service charges in its area of
operation, providing long distance and telecommunication services for its
subscribers and providing interexchange access for their subscribers.
The telephone companies in the Communications Services Segment are not
subject to regulation by the public utilities commissions in the states it
serves regarding rates and service quality. The CLEC activities of Crystal do
require it to file for authority to operate in each state it enters.
The businesses of the Company's Communications Services Segment are not
dependent upon any single customer or small group of customers. These service
activities are more of a commodity relationship and tend to provide more
customers with smaller individual transactions than the Company's LEC
business. There is no one customer that accounts for ten percent or more of
the Company's consolidated revenue.
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The passage of the Telecommunications Act created the opportunity for the
Company to offer communications service in territories served by other
telephone companies. In 1998, Crystal began offering local dial tone, long
distance and local call internet access services to select markets as a CLEC
business. Crystal competes directly against existing LECs in the areas in
which Crystal operates. Crystal will continue to offer services to other
markets and will require additional investment of assets to be competitive in
those markets. MSWC competes against one local cellular company and multiple
non-local cellular companies offering service in its area. In December 1998,
MSWC announced that it had entered into a purchase agreement to acquire a
cellular phone business in a part of the metropolitan Minneapolis/St. Paul
with a service area population of 200,000 in the second quarter of 1999. MSWC
will require additional investment of assets to build the infrastructure to
provide service to this service area.
Billing/Data Services Segment
Through NIBI, the Company's Billing/Data Services Segment provides data
processing and related services, principally for the Company, other local
exchange telephone companies, CLECs, interexchange network carriers,
municipalities and utilities. The computer operations of NIBI are considered
a separate segment of business in the Company's consolidated financial
statements. NIBI's principal activity is the provision of monthly batch
processing of computerized data. Services for telephone company customers
include the processing of long distance telephone calls from data sources and
telephone switches, the preparation of the subscriber telephone bills,
customer record keeping and general accounting and payroll services. NIBI
also provides certain billing clearinghouse functions for interexchange
carriers. NIBI obtains specialty programming contracts with these carriers
due to its expertise in the telecommunications field. The provision of
programming and consulting services in connection with telecommunications
data processing has become a primary source of revenue for NIBI. Services for
municipal customers consist of preparation of utility bills, payroll and fund
accounting, as well as a full array of turnkey management systems. NIBI
generates revenues from the initial sale of software products as well as
related support and contract programming services.
There are a number of companies engaged in supplying data processing services
comparable to those furnished by NIBI. Competition is based primarily on
price and service. There are some companies of much larger size that dominate
certain aspects of this field. Local telephone service companies are entering
this business as CLECs require facilities for rating, billing and other
related services. NIBI is in a position to provide these services for the
CLECs.
In September 1997, NIBI signed a joint software development agreement with
Sepro Telecom Int. Ltd. of Dublin, Ireland to co-develop a new billing
product called WRITE2k. Its first application will be in the wireless
telecommunications market. The Company considers the wireless market, whether
it is cellular, personal communications services (PCS) or paging, an
important component in the future of telecommunications. WRITE2k, scheduled
for release in 1999, should enable NIBI to become a full-service billing
provider for all aspects of the telecommunications industry.
NIBI is currently developing services to become more attractive to new
entrants in the telecommunications markets. Entities such as wireless
communications companies, CLECs, electric utilities and cable providers are
moving toward convergent billing operations but do not have in-house
facilities and operations to accommodate these requirements. Convergent
billing entails the billing and marketing of multiple elements, and the
ability to bundle, discount and tally
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the charges for the services of these similar but unrelated businesses. NIBI
is well positioned in this market because of its technical expertise in
communications, its proprietary software, its experience and existing
customer base of LECs, municipal power companies, long distance companies,
CLECs and its ability to tailor products to an end-user.
Communications Products Segment
Through Collins, the Communications Products Segment activities are centered
on the sale, installation and service of business telephone systems and data
communications equipment in metropolitan Minneapolis/St. Paul, Minnesota. The
customers in the Communications Products Segment's market are the individual
business end users of telecommunications service with ongoing service needs.
Products consist of telecommunication platforms such as Nortel and Octel on
the voice side of Collin's business, and Cisco and Bay (Nortel) equipment on
the data side of its business. Collins specializes in the quality custom
installation and maintenance of wide area networking, local networking and
transport solutions in telecommunications for end user customers.
Revenues are primarily earned by the sales, installation and service of
business telephone systems. Collins continues its commitment to service and
support of its core product, Nortel, while identifying new opportunities such
as call centers, Meridian Link, computer telephone integration voice mail and
interactive voice response systems.
The Company's Communications Products Segment is not dependent upon any
single customer or small group of customers. Its activities are more of a
commodity business and no one customer accounts for ten percent or more of
the Company's consolidated revenues in the Communications Products Segment.
There are several companies competing in the communications products market
in which Collins operates. Competition is based primarily on price and
service. No one company is dominant in this field. Collins offers customer
premises telephone equipment through well-trained and experienced market
representatives with long-term customer relationships. It also enjoys a very
strong reputation for quality service. Collins has built a strong base of
customers, and most of its recurring revenues are attributable to this base.
OTHER REGULATION
There are no material portions of the businesses of the Company or its
subsidiaries that may be terminated or adversely affected by government
regulations.
The Company and its subsidiaries do not anticipate any material effects on
their capital expenditures, earnings or competitive position because of laws
pertaining to the protection of the environment.
OTHER COMPETITION
Since the mid-1980's, the Company's business strategy has been to position
itself as a "one-stop" telecommunications services provider. Long-term
business relationships with its customers have strengthened the Company's
business position. The Company believes that its customers value the fact
that it is the "local company" whose goal is to meet the customers' total
communications needs.
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The Company has several competitive advantages: its prices and costs are low;
its service reputation is high; its investment in technology has been strong
and it has a direct billing relationship with almost all of the customers in
its service territories.
The long-range effect of competition on the provision of telecommunications
services and equipment will depend on technological advances, regulatory
actions at both the state and federal levels, court decisions, and possible
additional future state and federal legislation. The trend resulting from
past legislation has been to expand competition in the telecommunications
industry. It is imperative to the Company that competition in this industry
is open on an equal basis to all providers. The Company has chosen to
participate in the competitive trend by establishing its Communications
Services Segment, particularly Crystal.
ITEM 2. PROPERTIES.
The Company's business is primarily focused on the provision of services and
its properties are used for administrative support and to store and safeguard
equipment. At December 31, 1998, the Company's gross book value of
$133,079,000 consisted primarily of telephone plant and equipment. The
Company owns or leases the telephone property, plant and equipment which it
utilizes to operate its telephone systems. The four telephone subsidiaries of
the Company in Minnesota and Iowa own central telephone offices with related
real estate in all of the communities they serve. It is the opinion of the
Company's management that the properties of the Company are suitable and
adequate to provide modern and effective telecommunications services within
its service areas, including both local and long distance service. The
capacity for furnishing these services both currently and in the future are
under ongoing review by the Company's engineering staff. Facilities are
placed in full use after installation and appropriate testing according to
two, three and five year construction plans.
The Company's principal properties are the following:
(1) MCTC's general offices and principal central office exchange
building are located in downtown Mankato, Minnesota. This facility is a
three-level brick and stone building containing approximately 60,000 square
feet of floor space. Portions of this building are leased to the Company for
its general offices and to NIBI for its data processing equipment.
(2) MCTC's main warehouse is located in Mankato, Minnesota. The
warehouse, built in 1996, is a one-story concrete building containing
approximately 48,000 square feet. The warehouse is used to store vehicles and
supplies and is also used as office space for engineering and outside
telephone personnel.
(3) Heartland's main central office equipment is located in a
one-story brick structure in Rock Rapids, Iowa.
(4) ACTC leases general office and telephone central office
equipment space in Homestead, Iowa.
(5) NIBI owns a three-story building in Mankato, Minnesota. The
building contains 17,000 square feet. NIBI also owns a mainframe computer and
related peripheral equipment that it uses to provide data processing services
for the Company and other customers. NIBI also leases an operations office in
Minneapolis, Minnesota.
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(6) The Company leases building and warehouse space for Collins in
Roseville and Brooklyn Park, Minnesota.
(7) The Company leases office space for MSWC and Crystal in Mankato,
Minnesota.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company or one of its subsidiaries is involved in
litigation incidental to its business, including administrative hearings of
state public utility commissions, actions relating to employee claims and
miscellaneous other lawsuits. Based on the information currently available,
the Company 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this 1998 Annual Report on Form 10-K.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company has traded on the NASDAQ National Market
Trading System under the symbol HTCO since March 1995. Previously, it was
traded on the over-the-counter market.
Quarterly market price information in 1998 was as follows:
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Quarter High Low End of Qtr.
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<S> <C> <C> <C>
4th $13.0000 $11.0000 $12.6250
3rd $15.5625 $10.6250 $12.3750
2nd $14.6875 $12.2500 $13.4375
1st $12.8125 $11.6875 $12.3750
</TABLE>
Quarterly market price information in 1997 was as follows:
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Quarter High Low End of Qtr.
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4th $11.9375 $10.9375 $11.6875
3rd $10.9375 $9.0625 $10.6875
2nd $10.0000 $8.9375 $9.2500
1st $10.1875 $9.0000 $9.4375
</TABLE>
The amounts shown above have been restated for the three-for-one stock split
which occurred in August 1998. The total number of registered shareholders
with a security position in the Company as of March 5, 1999, was
approximately 2,500.
The Company declared dividends for the two years ended December 31, 1998 as
follows:
<TABLE>
<CAPTION>
Quarter 1998 1997
------- ---- ----
<S> <C> <C>
First $ .11 $ .10
Second $ .11 $ .10
Third $ .11 $ .10
Fourth $ .11 $ .10
</TABLE>
On February 10, 1999, the Board of Directors of the Company announced a
quarterly cash dividend of $ .11 per share of common stock. The dividend was
payable on March 5, 1999, to stockholders of record at the close of business
on February 15, 1999.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data is included on page 43 of the annual report to
shareholders, which is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included on pages 21 to 28 of the annual report to
shareholders, which is incorporated by reference.
II-1
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and Supplementary Data is included on pages 29 to 42 of
the annual report to shareholders, which is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
There has been no disagreement with the accountants regarding accounting or
financial disclosures within the 24 month period ending December 31, 1998.
On March 11, 1998, the Company filed a Current Report on Form 8-K (the "Form
8-K"). The Form 8-K reported that on March 5, 1998, the Company had notified
Olsen, Thielen & Co., Ltd. of their dismissal as the Company's certifying
independent accountants effective April 13, 1998. There were no disagreements
with the accountants or reportable events (as described in Regulation S-K
Item 304 (a)(1)(v)). The Company had provided a copy of the Form 8-K to
Olsen, Thielen & Co., Ltd. and this firm furnished a letter addressed to the
Securities and Exchange Commission stating their agreement with the
statements concerning their firm in the Form 8-K.
On April 14, 1998, the Company filed another Current Report on Form 8-K. This
Current Report on Form 8-K reported that on April 13, 1998, the shareholders
of the Company confirmed the Board of Directors' selection of
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand L.L.P.) as the
Company's auditors for 1998.
II-2
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information as to Directors and Executive Officers of the Company is
included on pages 3 and 5 of the Proxy Statement, which is incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information as to Executive Compensation is included on pages 6 to 10 of
the Proxy Statement, which is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
On March 5, 1999, no person is known to the Company to be the beneficial
owner of more than five percent of any class of the Company's voting
securities.
SECURITY OWNERSHIP OF MANAGEMENT
The information as to Security Ownership of Management is included on page 4 of
the Proxy Statement, which is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
No reportable transactions occurred in 1998 involving directors, management
or shareholders.
III-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page(s)
in 1998 Annual
Report to Shareholders
----------------------
<S> <C>
Financial Section Index 20
Management's Discussion and Analysis 21-28
Report of Management and Report of
Independent Accountants 29
Consolidated Statements of Income
Years Ended December 31, 1998, 1997, and 1996 30
Consolidated Balance Sheets
December 31, 1998 and 1997 31
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 32
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997, and 1996 33
Business Segment Data 34
Notes to Consolidated Financial Statements 35-42
Selected Financial and Operating Data 43
</TABLE>
2. Financial Statement Schedules
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is given
in the financial statements or notes thereto.
3. Exhibits
Exhibit 13(a) contains certain financial and other financial sections
(pages 20 - 43) of the Annual Report to Shareholders for the year ended
December 31, 1998.
Exhibit 13(b) contains the Report of Independent Accountants for the
years ended December 31, 1997 and 1996.
Exhibit 21 contains a listing of the Subsidiaries of the Company.
Exhibits 23(a) and 23(b) contain the Consent of Independent Accountants
regarding the Registration Statement of Hickory Tech Corporation on
Form S-8.
Exhibit 27 contains the financial data schedules.
IV-1
<PAGE>
Other exhibits incorporated by reference are listed on the exhibit
index on pages IV-4 and IV-5.
(b) 1. REPORTS ON FORM 8-K
On March 3, 1999, the Company filed a Current Report on Form 8-K.
The Form 8-K reported that on February 25, 1999, the Board of
Directors of the Company adopted a Shareholders Rights Plan. This
plan gives each shareholder the right to purchase shares of a newly
authorized series of preferred stock in the event that a tender
offer for the Company is announced, or an acquirer purchases at
least 15 percent of the Company's common stock.
On January 22, 1999, the Company filed a Current Report on Form 8-K.
The Form 8-K reported that on January 21, 1999, the Company issued a
press release announcing earnings for the fourth quarter of 1998.
On December 28, 1998, the Company filed a Current Report on Form
8-K. The Form 8-K reported that on December 22, 1998, the Company
issued a press release announcing the signing of a definitive
agreement to purchase a cellular property from McElroy Electronics
Corporation. Under the agreement, the Company will acquire the
assets and license of this cellular property in a cash transaction.
The cellular property is a portion of the Minneapolis/St. Paul
metropolitan service area (MSA) and consists generally of a ring
around the metropolitan Twin Cities area. The cellular property
consists of six counties in Minnesota and one county in Wisconsin.
It covers a population of approximately 200,000 people. The
transaction is expected to close by the second quarter of 1999 once
the Federal Communications Commission approval has been received.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Company has duly caused this report
to be signed on its behalf by the undersigned, thereto duly authorized.
Dated: March 26, 1999 HICKORY TECH CORPORATION
------------------
By: /s/ David A Christensen
----------------------------------
David A Christensen, Secretary,
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert D. Alton, Jr. March 31, 1999
------------------------------
Robert D. Alton, Jr.
Chairman, President and Chief Executive Officer
(principal executive officer)
/s/ Lyle T. Bosacker March 31, 1999
------------------------------
Lyle T. Bosacker, Director
/s/ Robert K. Else March 31, 1999
------------------------------
Robert K. Else, Director
/s/ James H. Holdrege March 31, 1999
------------------------------
James H. Holdrege, Director
/s/ R. Wynn Kearney, Jr. March 31, 1999
------------------------------
R. Wynn Kearney, Jr., Director
/s/ David A Christensen March 31, 1999
------------------------------
David A Christensen, Secretary,
Vice President, Chief Financial Officer and Treasurer
(principal financial officer and principal accounting officer)
IV-3
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Filed in Filed in
Regulation S-K Securities Exchange
Reference Title of Document Act Form Act Form
- -------------- --------------------- -------------- --------
<S> <C> <C> <C>
3(a) Articles of Incorporation S-8 dated
June 22, 1993
3(b) By-Laws S-8 dated
June 22, 1993
4 Shareholder Rights Agreement Form 8-A dated
March 9, 1999
10(a) & (b) Supplemental Retirement S-8 dated
Agreements June 22, 1993
10(c) Company's Executive S-8 dated
Incentive Plan June 22, 1993
10(d) Change of Control Agreements S-8 dated
June 22, 1993
10(h) Employment Agreement S-8 dated
June 22, 1993
10(i) Company's Retirement S-8 dated
Savings Plan and Trust June 22, 1993
10(j) Employee Stock Purchase Plan S-8 dated
June 22, 1993
10(k) Company's 1993 Stock Award Form 10-K dated
Plan March 26, 1997
10(l) Company's Stock Plan for S-8 dated
Directors June 22, 1993
10(m) Company's Directors' S-8 dated
Stock Option Plan December 28, 1998
13(a) Section (pages 20 - 43) Filed herewith
of the Annual Report to Shareholders at page IV-6
13(b) Report of Former Independent Filed herewith
Accountants at page IV-30
</TABLE>
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX TO
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Filed in Filed in
Regulation S-K Securities Exchange
Reference Title of Document Act Form Act Form
- -------------- --------------------- -------------- --------
<S> <C> <C> <C>
21 Subsidiaries of the Company Filed herewith
at page IV-31
23(a) Consent of Independent Filed herewith
Accountants at page IV-32
23(b) Consent of Former Independent Filed herewith
Accountants at page IV-33
27 Financial Data Schedule Filed herewith
at page IV-34
</TABLE>
IV-5
<PAGE>
Exhibit 13(a)
FINANCIAL SECTION INDEX
<TABLE>
<S> <C>
Management's Discussion and Analysis ................................... 21-28
Report of Management and Report of Independent Accountants ............. 29
Statements of Income ................................................... 30
Balance Sheets ......................................................... 31
Statements of Cash Flows ............................................... 32
Statements of Shareholders' Equity ..................................... 33
Business Segment Data .................................................. 34
Notes to Financial Statements .......................................... 35-42
Selected Financial and Operating Data .................................. 43
</TABLE>
20
IV-6
<PAGE>
LINE OF BUSINESS
Hickory Tech Corporation (the Company) is a holding company with subsidiaries
operating predominantly in a single industry - telecommunications. Among the
participants in the industry, local exchange companies (LECs) generate the
largest share of total telecommunications revenues. The Company's core
business is the operation of four LECs. This consists of connecting customers
to the telephone network, providing switched service and dedicated private
lines, connecting customers to long distance service providers, and many
other services associated with local telephone companies. The Company also
provides data processing services to the telecommunications industry and
installs and maintains telephone systems. During 1998, the Company acquired a
wireless telecommunications business which encompasses its existing LEC
service territory in southern Minnesota, it sold its telecommunications
product development business in Texas, and it entered into an agreement to
acquire a wireless telecommunications business in metropolitan
Minneapolis/St. Paul. In addition, the Company undertook business startup
initiatives in long distance, internet access and competitive local exchange
carrier (CLEC) businesses.
THE COMPANY
Hickory Tech Corporation is diversified into four operating business sectors,
encompassing nine operating companies. The TELEPHONE SECTOR provides service
to its franchised territories in south central Minnesota, east central Iowa
and northwestern Iowa. The COMMUNICATIONS SERVICES SECTOR provides cellular
telephone service in south central Minnesota, resells long distance service
in southern Minnesota and northwestern Iowa and offers an alternative choice
for telecommunications service on a local service basis to customers in
southern Minnesota and Iowa who are not currently in the Telephone Sector's
service area. The BILLING/DATA SERVICES SECTOR provides data processing
service to independent telephone companies, national long distance service
providers, CLEC's, municipalities and utilities. The COMMUNICATIONS PRODUCTS
SECTOR sells and services telecommunication equipment primarily in
Minneapolis/St. Paul, Minnesota.
TELEPHONE
Mankato Citizens Telephone Company
Mid-Communications, Inc.
Amana Colonies Telephone Company
Heartland Telecommunications Company of Iowa, Inc.
Cable Network, Inc.
COMMUNICATIONS SERVICES
Minnesota Southern Wireless Company
Crystal Communications, Inc.
BILLING/DATA SERVICES
National Independent Billing, Inc.
COMMUNICATIONS PRODUCTS
Collins Communications Systems Co.
CORPORATE DEVELOPMENTS
1998 In January, initiated long distance and internet services and
established Crystal Communications as a startup company to offer
competitive telephone service as a CLEC.
In May, acquired 16,000 customer, 230,000 Pop., cellular business,
Minnesota RSA 10.
In September, sold Digital Techniques Inc. subsidiary.
In December, announced purchase agreement for additional 200,000 Pop.
cellular business in metropolitan Minneapolis/St. Paul area, to be
acquired second quarter 1999.
1997 In April, acquired 13,000 access lines from U.S. West in Iowa,
Heartland Telecommunications.
In July, sold DBS- DirecTV rights in seven Minnesota counties.
In November, acquired data equipment sales business (Datacomm Products)
in metropolitan Minneapolis/St. Paul.
FORWARD-LOOKING STATEMENTS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS 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, AND VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING
STATEMENTS ARE SUBJECT TO UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S FUTURE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH 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. YOU ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
ON WHICH THEY WERE MADE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
OF ITS FORWARD LOOKING STATEMENTS FOR ANY REASON.
21
IV-7
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
- - 1998 Consolidated Revenues were $94.6 million, compared with $76.5 million
in 1997, an increase of $18.1 million or 23.7%. The Communications Services
Sector provided $9.5 million of the increase with the acquisition in 1998
of Minnesota Southern Wireless Company and the activity of the new start-up
company, Crystal Communications. The acquisition of Datacomm Products in
November 1997 provided another $5.6 million of the increase. The Telephone
Sector provided an additional $3.3 million of the increase, based on the
full year impact of the Heartland acquisition in April 1997. The sale of
Digital Techniques, Inc. in September 1998 caused a decline in revenues of
$2.5 million from the Communications Products Sector in 1998 versus 1997.
The overall increase in Consolidated Revenues would have been 4.6% without
the effects of these acquisitions and disposition.
- - 1998 Consolidated Net Income of $13.5 million (including $12.7 million
before gains and $0.8 million from gain on sale of DTI and unrelated
securities) compared with $15.5 million (including $11.8 million before
gains and $3.7 million from gain on sale of DirecTV assets) in 1997. The
increase before gains was $941,000, or 8.0%.
- - 1998 Consolidated Earnings Per Share were $0.99 (including $0.93 before
gains and $0.06 from sale of DTI and unrelated securities) compared with
$1.12 (including $0.85 before gains and $0.27 from sale of DirecTV assets)
in 1997. The increase in Earnings Per Share before gains of $0.08 or 9.4%
reflects the increase in Net Income before gains of 8.0%.
- - The 1998 Gain on Sale of Assets resulted from the sale of HTC's 100%
ownership in Digital Techniques, Inc. (DTI) of Texas in September. Proceeds
of the sale were $4.25 million, and the pre-tax gain was $320,000. HTC also
sold its stock investment in Illuminet Holdings, Inc. A pre-tax gain of
$1,043,000 was recorded on the sale from cash proceeds of $1,486,000.
- - 1997 (the prior year) Consolidated Revenues increased $9.9 million or 14.9%
over 1996. The increase was primarily in the Telephone Sector, with the
Heartland acquisition providing $6,431,000 of the increase.
Without the effects of Heartland, the increase would have been 5.2%.
- - 1997 (the prior year) Consolidated Net Income of $15.5 million (including
$11.8 before gains and $3.7 from sale of DirecTV assets) compared with
$10.4 million Net Income in 1996. The increase before gains was $1,355,000,
or 13.0%. All operating Sectors experienced increased profitability in 1997
versus 1996.
- - 1997 (the prior year) Consolidated Earnings Per Share before gains
increased $0.15 or 21.4% over 1996. This reflected 13.0% Net Income
increase and 7.6% decrease in weighted average shares outstanding.
In the Sector operation discussions which follow, specific explanations for
year-to-year changes are given. An overall review of the year-to-year changes in
Company operations is provided in the following table.
OVERALL SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating Income
Telephone $ 22,274 $ 19,203 $ 16,044
Communications Services 258 -- --
Billing/Data Services 1,776 1,795 658
Communications Products 2,396 2,198 1,072
Corporate (2,012) (2,540) (1,001)
-------------------------------------------------
24,692 20,656 16,773
Other Income 1,445 1,762 655
Interest Expense (4,596) (2,292) (143)
Income Taxes (8,826) (8,352) (6,866)
-------------------------------------------------
Net Income Before Gains * $ 12,715 $ 11,774 $ 10,419
=================================================
Earnings Per Share Before Gains $ 0.93 $ 0.85 $ 0.70
=================================================
Earnings Per Share from Gain on Sale of Assets $ 0.06 $ 0.27 $ --
=================================================
Weighted Average Shares Outstanding 13,637,058 13,811,871 14,940,018
=================================================
</TABLE>
* Not including gains from sale of assets, $811,000 net of tax in 1998 and
$3,705,000 in 1997.
Net income adjusted for acquisitions, asset dispositions and non-recurring
items is summarized in the following table.
NORMALIZED NET INCOME
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Net Income, as reported $ 13,526 $ 15,479 $ 10,419
Addition of Heartland (1,676) (1,185) ---
Addition of Datacomm (91) (41) ---
Addition of wireless business (1,085) --- ---
Start-up Activity of Crystal 922 --- ---
Disposition of DTI (347) (356) 288
Gain on Sale of Assets, net of tax (811) (3,705) ---
Interest Expense, Senior Notes, net of tax 1,686 1,216 ---
Interest Expense, Revolving Credit Facility, net of tax 916 --- ---
---------------------------------------------------
Net Income, as adjusted $ 13,040 $ 11,408 $ 10,707
===================================================
</TABLE>
The net income impact of these unique changes has been presented as
supplemental information only. The individual components of these changes are
discussed in the following Sector operation discussions
22
IV-8
<PAGE>
TELEPHONE OPERATIONS
Telephone revenues represent 51% of 1998 consolidated operating revenues
after eliminations. They are earned primarily by providing customers access
to the Company's 61,000 access line local network, and in providing
interexchange access for long-distance network carriers. The Telephone Sector
also earns revenue through use of its fiber optic transport network, network
tandem switching and directory advertising. Total Telephone Sector
consolidated revenues after eliminations have grown 12.9% compounded annually
over a five year period from 1993 to 1998. Without the acquisition of
Heartland in 1997, the five year compound annual growth rate would have been
7.9%.
TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Revenues Before Eliminations
Local Service $ 11,460 $ 8,817 $ 6,670
Network Access 28,696 25,594 19,459
Other 8,939 8,501 8,350
-------------------------------------------------
49,095 42,912 34,479
-------------------------------------------------
Cash Operating Expenses 19,237 17,025 13,864
Non-Cash Operating Expenses 7,584 6,684 4,571
-------------------------------------------------
26,821 23,709 18,435
-------------------------------------------------
Operating Income $ 22,274 $ 19,203 $ 16,044
Net Income $ 13,790 $ 11,879 $ 9,885
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) (1) $ 29,858 $ 25,887 $ 20,615
Capital Expenditures $ 7,572 $ 11,431 $ 9,536
</TABLE>
From the table above, Telephone Revenues Before Eliminations increased 14.4%
in 1998 and 24.5% in 1997. The Heartland acquisition in April 1997 added $6.4
million to Revenues in 1997 and an additional $3.3 million in 1998. Without
the effect of Heartland, the Telephone Revenue increase would have been 6.7%
in 1998 and 5.8% increase in 1997.
Local Service revenue increased in the Telephone Sector by 30.0% for 1998
over 1997 and 32.2% for 1997 over 1996. The Heartland effect on Local Service
revenue was $2,627,000 in 1998 and $1,780,000 in 1997. After removing the
effect of the Heartland acquisition, the Local Service revenue increase for
1998 was 25.5%, and 5.5% in 1997. The increases are significant considering
they exceeded the growth in access lines served. The revenue increases were
accomplished with promotion and packaging of vertical services to supplement
basic line charges. Access line growth was 3.6% in 1998 and 3.9% (without the
12,900 access lines acquired in the Heartland transaction) in 1997. Over a
five year period since 1993, total access line growth (outside of the
Heartland acquisition) has been approximately 4.6%, compounded annually. A
Local Service rate increase beginning in February 1998 provided $1,328,000 in
additional local revenues in 1998, and contributed to the higher revenue
increase.
Network Access revenue increased 12.1% in 1998 and 31.5% in 1997. The
Heartland effect on Network Access revenue was $6,307,000 in 1998 and
$4,176,000 in 1997. After removing the effect of the Heartland acquisition,
Network Access revenue would have increased 4.5% in 1998 and 10.1% in 1997.
Access minutes in 1998 (without the effect of the 75,000,000 minutes of use
from Heartland in 1998 and 48,000,000 in 1997) increased by 3.2% over 1997
and 1997 increased 6.5% over 1996. The negative effects of Network Access
pricing, a common industry trend, will erode the increases in volume of
switched minutes of use, minimizing future increases in Network Access
revenue.
Cash Operating Expenses increased 13.0% in 1998 and 22.8% in 1997. The
Heartland effect on Cash Operating Expenses was $4,317,000 in 1998 and
$2,667,000 in 1997. After removing the effect of the Heartland acquisition,
Cash Operating Expenses would have increased 3.9% in 1998 and 3.6% in 1997.
The Company is striving for cost efficiencies and technological improvements
to maintain its operating margins in the Telephone Sector.
The Telephone Sector Capital Expenditures for 1998 are more reflective of a
typical year. In 1997 and in 1996 the Telephone Sector had building projects
which added $1,400,000 in 1997 and $3,000,000 in 1996. Additionally, 1997
Capital Expenditures had approximately $3,500,000 for new Heartland central
office switching equipment.
(1) - EBITDA represents operating income 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.
23
IV-9
<PAGE>
(1) COMMUNICATIONS SERVICES
This Sector is new in 1998. Communications Services Sector revenues represent
approximately 10% of 1998 consolidated operating revenues after eliminations.
They are earned primarily by providing cellular telephone service to seven
counties in south central Minnesota, from reselling long distance service and
providing competitive local telephone service. The wireless business was
acquired in May of 1998 while the competitive local service and long distance
business was initiated in 1998 as a new business startup.
The Company is investing in new business development in this Sector. Its
Local Service and Long Distance business operated at negative EBITDA (1) of
$1,550,000 in 1998 and utilized $2,207,000 in capital expenditures. The
Company plans to continue this investment to a larger degree over the next
several years. Likewise, in the wireless business the Company sees a unique
opportunity to increase customer penetration levels and deploy new digital
service options to its customers. While the customer acquisition costs may be
high for the initial years of this aggressive growth plan, the long-term
benefits should be substantial.
In 1998, the Communications Services Sector spent $3,994,000 in capital
expenditures for its competitive local exchange and its cellular businesses.
In 1999, this Sector's capital expenditures are expected to be between $20
and $24 million, with 25% of this going to cellular digital upgrades and
towers, and the remainder for switching and transport routes for the
competitive local exchange business.
COMMUNICATIONS SERVICES
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 This Sector is
----------------- new in 1998.
<S> <C> <C>
Revenues Before Eliminations
Wireless $ 7,907
Long Distance 1,271
Local Service 360
-----------------
9,538
-----------------
Cash Operating Expenses 7,959
Non-Cash Operating Expenses 1,321
-----------------
9,280
-----------------
Operating Income $ 258
Net Income $ 177
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) (1) $ 1,579
Capital Expenditures $ 3,994
</TABLE>
BILLING/DATA SERVICES
Billing/Data Services represent approximately 9% of 1998 consolidated
operating revenues after eliminations. Revenues are earned primarily by
providing information management solutions to local telephone companies,
CLEC's, interexchange network carriers (IXCs), municipalities and utilities.
Computer data processing, the core service of this Sector, is primarily a
service bureau type of business, and also involves standard programming
services, and occasional turnkey software sales. National Independent
Billing, Inc. (NIBI) works 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. Most of
NIBI's new business has been established with IXC's and CLEC's. The batch
processing service to long distance resellers has become a high growth
market, representing 28% of NIBI's Operating Revenue after eliminations in
1998.
BILLING/DATA SERVICES
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Revenues Before Eliminations $ 10,533 $ 11,821 $ 11,769
-------------------------------------------------
Cash Operating Expenses 8,494 9,163 9,172
Non-Cash Operating Expenses 263 863 1,939
-------------------------------------------------
8,757 10,026 11,111
-------------------------------------------------
Operating Income $ 1,776 $ 1,795 $ 658
Net Income $ 1,184 $ 1,208 $ 496
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) (1) $ 2,039 $ 2,658 $ 2,597
Capital Expenditures $ 247 $ 258 $ 62
</TABLE>
From the table above, Billing/Data Services Revenues Before Eliminations
decreased 10.9% in 1998 after being relatively equal in 1997 and 1996. Unique
telephone industry data processing service to large, nationally based
communications companies has become this Sector's largest business. NIBI's
contracts represent specialized services to long distance communications
providers (IXCs). In 1995, NIBI entered into new contracts with a large IXC
which provided for the sale and development of software as well as consulting
and processing services in the new competitive local service market. The
fluctuations of revenue in this Sector are more pronounced because of the
size and quantity of IXC contracts. In 1998 the service to this large IXC
began to decline, and after 1998, this IXC plans to take its service inhouse
and not utilize the company's services. The amount of Revenues attributable
to this customer was $3,241,000 in 1998.
Non-Cash Operating Expenses in the Billing/Data Services Sector have declined
significantly in 1998 and in 1997 due to the completion of amortization of
previously capitalized software development costs. There are no capitalized
development costs on the Company balance sheet in 1998, and the Non-Cash
Operating Expense in 1998 is made up exclusively of depreciation of buildings
and equipment.
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.
24
IV-10
<PAGE>
COMMUNICATIONS PRODUCTS
Communications Products represent approximately 30% of 1998 consolidated
operating revenues after eliminations. Revenues are earned primarily by
sales, installation and service of business telephone systems and data
communications equipment in metropolitan Minneapolis/St. Paul, Minnesota. The
customers in this Sector's market are the individual commercial/business end
users of telecommunications service with ongoing service needs. This Sector's
products consist of telecommunication platforms such as Nortel and Octel on
the voice side of its business, and Cisco and Bay (Nortel) equipment on the
data side of its business. This Sector's expertise is the quality
installation, and maintenance of wide area networking, local networking and
transport solutions in telecommunications to end user customers.
COMMUNICATIONS PRODUCTS
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Revenues Before Eliminations
Installation $ 13,543 $ 5,362 $ 5,212
Service 9,598 10,672 10,941
DTI 5,580 8,119 6,502
-------------------------------------------------
28,721 24,153 22,655
-------------------------------------------------
Cash Operating Expenses 25,975 21,702 21,413
Non-Cash Operating Expenses 350 253 170
-------------------------------------------------
26,325 21,955 21,583
-------------------------------------------------
Operating Income $ 2,396 $ 2,198 $ 1,072
Net Income $ 1,323 $ 1,235 $ 530
Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) (1) $ 2,746 $ 2,451 $ 1,242
Capital Expenditures $ 345 $ 363 $ 301
</TABLE>
From the table above, Revenues for 1998 increased 18.9% over 1997. The
acquisition of Datacomm Products in 1997 provided an additional $6,160,000 in
revenue in 1998 and $609,000 in 1997. The Digital Techniques, Inc. (DTI)
operations were sold in September 1998. After removing the effect of the
acquisition of Datacomm Products and the sale of DTI, Revenue for this Sector
would have increased 10.1% in 1998 and decreased 4.5% in 1997. The operating
margin (Operating Income as a percentage of Revenues) for the Communications
Products Sector was 8.3% in 1998 compared with 9.1% in 1997. In 1998, the
Sector had more large installations of new systems, which are at a lower
gross profit margin than the recurring business with existing customers. In
1996, the operating margin was 4.7% primarily due to losses at Digital
Techniques, Inc. which was sold in September 1998.
Cash Operating Expenses from this Sector increased 19.7% in 1998 after being
approximately equal in 1997 and 1996. After removing the effect of the
acquisition of Datacomm Products and the sale of DTI, the increase in Cash
Operating Expenses in 1998 was 10.1%.
TOTAL COSTS AND EXPENSES
Total Consolidated Costs and Expenses after eliminations increased 25.2% in
1998. Depreciation and Amortization increased $1,735,000 in 1998 and
$1,132,000 in 1997 due primarily to acquisitions. Costs and Expenses other
than Depreciation and Amortization were $60,156,000 in 1998, compared with
$47,816,000 in 1997. The primary reasons for the changes, as explained in the
earlier Sector discussions, were the additions of Heartland and Datacomm in
1997 and the addition of cellular telephone and the internal startup of
Crystal in 1998. These effects were offset by the divestiture of Digital
Techniques in September 1998.
OTHER INCOME AND INTEREST EXPENSE
Other Income (primarily interest and equity in LLC income) was $317,000 lower
in 1998 than 1997. Included in other income is the Company's 6.4% equity
interest in Midwest Wireless Communications LLC. In 1998, this LLC income was
$1,026,000, an increase of $139,000 over 1997. In 1997, LLC income increased
$507,000 over 1996. The overall decrease in Other Income in 1998 resulted
from gains on sales of certain assets of $580,000 during 1997.
Interest Expense increased by $2,304,000 in 1998 due to the new $45 million
revolving credit facility obtained in April 1998 and the full year impact of
the $40 million senior indebtedness initiated in April 1997. The revolving
credit facility had a weighted average interest rate of 6.75% in 1998 and was
used for the acquisition of the Minnesota cellular property. The revolving
credit facility's weighted average interest rate is variable and was 6.18% at
December 31, 1998. The senior indebtedness accrues interest at a fixed rate
of 7.11% and was used for the Heartland acquisition and for working capital
uses.
GAIN ON SALE OF ASSETS
The 1998 Gain on Sale of Assets is recognition of two separate transactions.
In September 1998, the Company received proceeds of $4.25 million from
selling 100% of its ownership in DTI, resulting in a pre-tax gain of $0.3
million. Also in September 1998, the Company recorded a pre-tax gain of $1.0
million on proceeds of $1.5 million from the sale of its stock investment in
Illuminet Holdings, Inc. 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 1998 was 40.7%, versus 41.5% in 1997 and 39.7% in
1996. For additional information, see Note 8 of Notes to Consolidated
Financial Statements.
25
IV-11
<PAGE>
FINANCIAL CONDITION, RESOURCES AND COMMITMENTS
REVIEW OF CASH FLOWS
The Company's net working capital of $8,981,000 at December 31, 1998, is an
increase of $530,000 from 1997. The Company operates in capital intensive
businesses. Additions to Property, Plant and Equipment are the Company's
largest investing activity, using $33,769,000 of working capital in the three
years ended 1998. For cash flows from financing activities, aside from the
routine payment of shareholder dividends and the new levels of indebtedness
in 1997 and 1998 (see "Liquidity and Capital Resources" below), the Company
used $7,716,000 to purchase outstanding shares of its common stock in 1997,
and $10,786,000 in 1996, as part of its publicly announced share acquisition
program. The Company has not purchased its own stock since October, 1997.
Additionally, the Company completed the acquisition of cellular property in
southern Minnesota from Frontier Corporation for $40,300,000. The acquisition
was funded by a revolving credit facility with a bank syndication. In 1997,
the Company also completed the purchase of assets of eleven rural telephone
exchanges in the State of Iowa from US West Communications, Inc. for
$35,271,000. The acquisition was funded by long-term debt instruments, which
the Company secured from institutional sources in a private placement. The
Company's largest source of working capital has been its operations,
primarily the Telephone Sector. The Company's financial strength continues to
be supported by its 1998 current ratio (1.59 to 1), its EBITDA(1) and its
proven access to debt markets.
DIVIDENDS
The Company paid dividends of $6,001,000 in 1998. This was a dividend of
$0.44 per share, a 10.0% increase over the $0.40 per share in 1997. 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 10.4% in the ten year period since
1988. The Company has made no announcements or plans to increase the dividend
in 1999. Paying at the existing level of dividends is not expected to
negatively impact the liquidity of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's acquisition of cellular property in southern Minnesota from
Frontier Corporation was funded by a $45 million revolving credit facility.
The financing transaction for this acquisition closed in April 1998.
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 secured from institutional sources in a
private placement. The financing transaction for this US West acquisition
closed in April 1997.
Cash provided from operations and access to new debt continue to be the
Company's primary sources of funds. Cash Provided from Operations (before
changes in assets and liabilities) increased $4,475,000 in 1998. Proceeds
from non-recurring sales of assets also provided $5,483,000 in 1998 and
$8,320,000 in 1997. In 1997, the Company received proceeds of $42,512,000 in
debt and in 1998 it received another $34,538,000 in debt. As of December 31,
1998, after payments, total debt was $76,042,000. This relationship to
Company EBITDA (1) for 1998 is within the 3 to 1 terms of the Company's debt
covenants.
The Company uses a combination of variable rate short-term and fixed rate
long-term financial instruments as of December 31, 1998. The Company
continually monitors the interest rates on its short-term bank loans and
long-term senior indebtedness.
The Company has received debt commitments from bank sources to expand its
revolving credit line to finance its announced acquisition of additional
cellular property in 1999. This expanded revolving credit facility will also
be used for the capital expenditures of the Communications Services Sector. A
higher level of interest expense is likely to occur in 1999 because of
expanded use of the revolving credit facility and higher weighted average
rates. Based on the Company's banking relationships and the level of
financing activity taking place in the Company's industry, no difficulty in
corporate finance is anticipated by the Company.
The Company has not conducted a public equity offering. It operates with
original equity capital, retained earnings and recent additions to
indebtedness in the form of senior debt and bank lines of credit. The Company
will consider use of the public equity markets to fund its future growth
plans. The Company is comfortable with debt to total capital proportions of
55 to 65 percent.
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 809,016
shares for $7.7 million, and in 1996 the Company repurchased 1,099,098 shares
for $10.8 million. No shares were repurchased during 1998. Management has the
authority to repurchase approximately 1,110,000 additional shares, with no
definite timetable.
REGULATORY
The Company's Minnesota telephone subsidiaries increased local rates,
effective February, 1998, adding approximately $1,328,000 of revenues in
1998. The Minnesota Department of Public Service has the authority to
investigate rates and profits of telephone companies in Minnesota. The
Minnesota state telephone industry is regulated by 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. The Company's telephone subsidiaries' local
service rates are lower than most neighboring telephone companies. This
relieves the Company of substantial regulatory oversight. 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 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 1999. At this time, management is not able to predict
the outcome, if any, of access charge reform in Minnesota.
26
IV-12
<PAGE>
In March 1998, the Company received approval of the Federal Communications
Commission to transfer the license of the Minnesota rural cellular property
known as RSA 10. The Company completed its acquisition of this property and
started operations in May, 1998.
In December 1998, the Company made application with the Federal
Communications Commission to transfer the license of the Minnesota cellular
property which is part of the Minneapolis/St. Paul metropolitan service area.
The Company has entered into a definitive agreement with McElroy Electronics
to acquire the assets of this business, which presently is in the build-out
phase for this cellular "A-side" license. Approval of this license transfer
is expected in March 1999. No state regulatory approvals are needed for this
cellular transfer.
In 1997 the FCC adopted orders on access charge reform and a new universal
service program. The access charge reform order generally removed from
minute-of-use rates the costs which are not incurred on a per-minute-of-use
basis. The order also adopted changes to the interstate rate structure for
transport services which are designed to move the charges for these services
to more cost-based levels. The universal service order reformed the existing
system of universal service in a manner that will permit local telephone
markets to move to a competitive arena. The order provides continued support
to low income consumers and will help to connect eligible schools, libraries
and rural health care providers to the global telecommunications network.
Several parties have filed cases with the Courts on various issues within
these two orders. Some of the decisions of the Courts have upheld the FCC's
directives, and some of the decisions have asked the FCC to conduct further
study. Given the ongoing regulatory and judicial developments in these areas,
it is not yet possible to determine fully the impact of FCC regulatory
changes. The Telephone Sector's four local exchange telephone companies have
their interstate access rates established through nationwide average service
costs of other telephone companies in a nationwide pool of companies known as
National Exchange Carriers Association (NECA). These "average schedules"
implement the FCC rules and changes in regulation as they apply to the other
companies which are in the NECA pools, and ultimately establish the prices
which the Telephone Sector can charge for interstate access. There has been a
decline in the level of interstate access charges for several years, and the
Company foresees a continuation of this trend. None of the Telephone Sector's
four local exchange telephone companies receives any payments from the FCC
Universal Service Fund. They do participate in the funding of this Universal
Service Fund by the access charges they collect from interexchange carriers
and contribute part of these access charges to pools designed for reimbursing
high cost telecommunications areas.
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 Sector 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 Sector's service
territories, although other competitive telephone service providers have
petitioned for the right to serve in the Sector's territories, none have
delivered service yet. The Company's Communications Services Sector is
evaluating future avenues of growth including developing competitive local
exchange company operations in areas where the Company's telephone
subsidiaries are not the incumbents. Industry analysts agree that the FCC's
order and interpretations create a more favorable scenario for new entrants
than for incumbent LECs. The Company has unique advantages in its existing
host switching network, its customer service systems, its existing account
relationships, its billing and data management expertise, and its experience
in telephone system engineering and interconnection negotiation. The
Company's endeavors in this newly competitive market will complement its
existing business.
The Company operates businesses in several different markets. Each 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 and restructuring of its resource levels
and operating costs.
ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted the provisions of Financial Accounting Standards
(FAS) No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." The Company has presented its postretirement
benefit plan disclosures in accordance with FAS No. 132 for all periods
reported.
In 1998, the Company also adopted the provisions of FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
retroactively restated business segment data and disclosures for all periods
reported. Also in 1998, FAS No. 130, "Reporting Comprehensive Income," was
required to be adopted. The adoption of this standard had no impact on the
Company's results of operations, financial position or cash flows.
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
Company'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. These disruptions may include a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
27
IV-13
<PAGE>
Each of the Company's business sectors has organized a committee to analyze
Year 2000 compliance.
TELEPHONE The Telephone Sector has identified 146 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 74%
of the products. The Telephone Sector has identified which software upgrades
for its predominant Nortel switching and transport network are necessary to
become Year 2000 compliant and has ordered all upgrades. 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 Company'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 is scheduled to be
converted to WRITE2k (billing software being co-developed by the Billing/Data
Services Sector) prior to the end of 1999. The WRITE2k software is Year 2000
compliant. As a precaution, the Intelesystem software package is being made
Year 2000 compliant. This will be completed by July 1999. In addition, the
Telephone Sector will be converting to Great Plains software for accounting
and financial reporting purposes in 1999. The conversion to Great Plains is
part of a three-year migration the Company has been performing for all its
sectors beginning in 1996. The Great Plains software 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
in 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.
COMMUNICATIONS SERVICES Minnesota Southern Wireless Company will be
converting to the Billing/Data Services Sector's wireless billing software
version of WRITE2k by third quarter 1999. Crystal Communications will
continue to use the Billing/Data Services Sector's billing software package
called EasyTel2000, which will be Year 2000 compliant by mid-1999. The
Communications Services Sector is already using Great Plains for accounting
and financial reporting responsibilities.
The wireless operations will be updating its Nortel switch in the second
quarter 1999 to ensure Year 2000 compliance. The switch upgrade is included
in the ongoing revenue and network enhancements in order to keep the switch
and wireless services state of the art. The wireless operations voicemail
system will also be enhanced in the first quarter 1999 in order to bring it
into compliance.
The Communications Services Sector's specific expenses associated with Year
2000 compliance are estimated at $100,000.
BILLING/DATA SERVICES NIBI utilizes Great Plains software, which is Year 2000
compliant, as its internal business software. No upgrades are needed to this
Sector's internal business software. All of NIBI's billing platforms for its
customers will be Year 2000 compliant by July 1999.
The costs of internal resources potentially dedicated to Year 2000 compliant
remediation are estimated to be less than $200,000 for the Billing/Data
Services Sector.
COMMUNICATIONS PRODUCTS Collins is currently using a UNIX-based system for
its internal business software. Plans were made in 1997 to convert Collins to
Great Plains software, 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.
YEAR 2000 SUMMARY To date, the Company's business sectors have incurred less
than $100,000 for expenses associated with Year 2000 compliance.
The information presented above sets forth the key steps taken by the Company
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 Company's systems. The Company 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.
BUSINESS OUTLOOK
The Company operates in several different markets, primarily in the service
business. Management reacts to the competitive market forces of its customers
which have fluctuations in their own volume of telecommunications services
required, and this translates into fluctuations in volume of business for the
Company. 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 sectors
other than the Telephone Sector provides greater opportunities for dynamic
internal growth. 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 Sectors and
continued research of the many telephone industry acquisition candidates to
find those that are strategic to the Company.
28
IV-14
<PAGE>
REPORT OF MANAGEMENT
Management of Hickory Tech Corporation (HTC) is responsible for the
consolidated financial statements and the other financial information
contained in this Annual Report. The financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis. They are considered by management to present fairly the
company's financial position, results of operations and cash flows. In
preparing the financial statements, management is required to include amounts
based on estimates and judgments that it believes are reasonable under the
circumstances.
To provide reasonable assurance that assets are safeguarded against loss and
that accounting records are reliable for preparing financial statements, HTC
management maintains a system of internal controls. The Audit Committee of
the Board of Directors, which is composed of directors who are not officers
or employees, meets periodically with the independent accountants and
management to review the scope of internal controls, the manner in which they
perform their responsibilities, audit activities and financial reporting. The
Audit Committee provides a direct method of access from the Board of
Directors to the independent accountants and assures the objectivity of this
report's financial information.
The Company's financial statements have been examined by
PricewaterhouseCoopers LLP, independent accountants, whose appointment was
approved by the Company's shareholders. Management has made available to the
independent accountants all Company financial records and related data. Their
examinations, which included consideration of the internal controls,
culminated in their report which appears on this page.
Robert D. Alton David A. Christensen
Chairman, President and Chief President and Chief Financial Officer
Executive Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Hickory Tech Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Hickory
Tech Corporation and subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. 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 audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. The
consolidated balance sheet of Hickory Tech Corporation and subsidiaries as of
December 31, 1997 and the consolidated statements of income, cash flows and
shareholders' equity for the years ended December 31, 1997 and 1996, were
audited by other independent accountants whose report dated January 30, 1998
expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 29, 1999
29
IV-15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------- --------------
<S> <C> <C> <C>
OPERATING REVENUES:
Local Exchange Telephone $ 48,352 $ 42,835 $ 34,334
Communications Services 9,538 - -
Billing/Data Services 7,962 9,474 9,573
Communications Products 28,721 24,153 22,655
---------------- -------------- -----------------
TOTAL OPERATING REVENUES 94,573 76,462 66,562
COSTS AND EXPENSES:
Cost of Sales 24,268 16,503 15,792
Operating Expenses 35,888 31,313 27,139
Depreciation 8,021 6,761 5,055
Amortization of Intangibles 1,704 1,229 1,803
---------------- -------------- -----------------
TOTAL COSTS AND EXPENSES 69,881 55,806 49,789
---------------- -------------- -----------------
OPERATING INCOME 24,692 20,656 16,773
OTHER INCOME 1,445 1,762 655
GAIN ON SALE OF ASSETS 1,278 6,345 -
INTEREST EXPENSE (4,596) (2,292) (143)
---------------- -------------- -----------------
INCOME BEFORE INCOME TAXES 22,819 26,471 17,285
INCOME TAXES 9,293 10,992 6,866
---------------- -------------- -----------------
NET INCOME $ 13,526 $ 15,479 $ 10,419
================ ============== =================
---------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.99 $ 1.12 $ 0.70
================ ============== =================
Dividends Per Share $ 0.44 $ 0.40 $ 0.37
================ ============== =================
Weighted Average Common Shares Outstanding 13,637,058 13,811,871 14,940,018
================ ============== =================
---------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.99 $ 1.12 $ 0.70
================ ============== =================
Weighted Average Common and Equivalent
Shares Outstanding 13,686,185 13,844,850 14,960,448
================ ============== =================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
30
IV-16
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1998 1997
-------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,133 $ 1,219
Receivables, Net of Allowance for Doubtful Accounts of $618 and $461 18,345 12,609
Taxes Receivable 310 -
Inventories 2,302 3,131
Deferred Tax Benefit and Other 2,094 1,314
-------------- ---------------
TOTAL CURRENT ASSETS 24,184 18,273
INVESTMENTS 4,007 3,657
NET PROPERTY, PLANT AND EQUIPMENT 64,464 57,769
OTHER ASSETS:
Intangible Assets 65,337 32,135
Deposit on Pending Acquisition 2,812 -
Miscellaneous 625 550
-------------- ---------------
TOTAL OTHER ASSETS 68,744 32,685
TOTAL ASSETS $161,429 $112,384
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 10,506 $ 6,579
Accrued Taxes - 191
Accrued Interest 970 735
Advanced Billings and Deposits 3,047 1,878
Current Maturities of Long-Term Debt 680 439
-------------- ---------------
TOTAL CURRENT LIABILITIES 15,203 9,822
LONG-TERM DEBT, Net of Current Maturities 75,362 41,525
DEFERRED CREDITS:
Income Taxes 3,985 2,496
Compensation, Benefits and Other 3,250 2,979
-------------- ---------------
TOTAL DEFERRED CREDITS 7,235 5,475
SHAREHOLDERS' EQUITY:
Common Stock, no par value, $.10 stated value
Shares authorized: 25,000,000
Shares outstanding: 1998, 13,662,216; 1997(pre-split), 4,534,119 1,366 454
Additional Paid-In Capital 2,005 2,375
Retained Earnings 60,258 52,733
-------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 63,629 55,562
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $161,429 $112,384
============== ===============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
31
IV-17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 13,526 $ 15,479 $ 10,419
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 9,725 7,990 6,858
Gain Resulting from Sale of Assets (1,278) (6,345) -
Provision for Losses on Notes Receivables and Investments - 265 260
Equity in Net Income of Investees (1,155) (1,046) (503)
--------------- -------------- -------------
Cash Provided From Operations Before Changes
in Assets and Liabilities 20,818 16,343 17,034
Changes in Assets and Liabilities Net of
Effects of Acquisitions and Dispositions:
Increase in:
Receivables (5,752) (1,827) (1,401)
Inventories (109) (102) (13)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities 4,377 928 551
Advanced Billings & Deposits 1,144 (202) 401
Deferred Income Taxes and Investments Tax Credits 972 (518) (1,339)
Other (392) (80) 165
--------------- -------------- -------------
Net Cash Provided by Operating Activities 21,058 14,542 15,398
--------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant & Equipment (12,190) (14,297) (7,282)
Increase in Notes Receivable and Investments (288) (27) (113)
Redemption of Notes Receivable and Investments 605 361 200
Change in Temporary Cash Investments - - 7,176
Acquisitions, Net of Cash Acquired (40,353) (38,580) (1,081)
Deposit on Pending Acquisition (2,812) - -
Proceeds from Sale of Assets 5,483 8,320 -
Other - - 42
--------------- -------------- -------------
Net Cash Used in Investing Activities (49,555) (44,223) (1,058)
--------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Debt 38 42,512 -
Repayments of Debt (461) (1,637) (204)
Borrowings on Line of Credit 43,500 - -
Repayments on Line of Credit (9,000) - -
Proceeds from Issuance of Common Stock 335 316 568
Retirement of Common Stock - (7,716) (10,786)
Dividends Paid (6,001) (5,529) (5,481)
--------------- -------------- -------------
Net Cash Provided by (Used in) Financing Activities 28,411 27,946 (15,903)
--------------- -------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (86) (1,735) (1,563)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,219 2,954 4,517
--------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,133 $ 1,219 $ 2,954
=============== ============== =============
=====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 4,361 $ 1,372 $ 143
Cash Paid for Income Taxes $ 8,831 $ 11,575 $ 8,203
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
32
IV-18
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
--------------- ------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 5,134,021 $ 2,294 $ 134 $ 55,613 $ 58,041
Declaration of Common Stock
Stated Value (1,429) 1,429 -
Stock Issued to Complete
Prior Acquisition 6,757 1 196 197
Stock Incentive Plans 3,152 93 (25) 68
Employee Stock Purchase Plan 11,094 1 235 236
Directors' Stock Retainer 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 1,887 50,370 52,736
Stock Incentive Plans 3,155 362 362
Employee Stock Purchase Plan 9,426 1 199 200
Directors' Stock Retainer 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 2,375 52,733 55,562
3-for-1 Stock Split 9,068,238 908 (908) -
Stock Incentive Plans 20,223 2 257 259
Employee Stock Purchase Plan 24,666 2 203 205
Directors' Stock Retainer Plan 3,155 41 41
Stock Options Exercised 4,002 37 37
Issuance of Common Stock into Trust 7,813 -
Net Income 13,526 13,526
Dividends Paid (6,001) (6,001)
--------------- ------------- -------------- -------------- -----------------
BALANCE AT DECEMBER 31, 1998 13,662,216 $ 1,366 $ 2,005 $ 60,258 $ 63,629
=============== ============= ============== ============== =================
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
33
IV-19
<PAGE>
BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Comm. Billing/Data Comm.
Telephone Services Services Products Corporate Consolidated
------------ ----------- ------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
1998
Revenue from Unaffiliated Customers $ 48,352 $ 9,538 $ 7,962 $ 28,721 $ - $ 94,573
Intersegment Revenues 743 - 2,571 - - -
------------ ----------- ------------ ----------- ----------- ----------------
Total 49,095 9,538 10,533 28,721 - 94,573
Depreciation and Amortization 7,584 1,321 263 350 207 9,725
Operating Income 22,274 258 1,776 2,396 (2,012) 24,692
Equity in Net Income of Investees 1,026 - 129 - - 1,155
Income Tax Expense 9,544 125 840 904 (2,120) 9,293
Net Income 13,790 177 1,184 1,323 (2,948) 13,526
Identifiable Assets 94,029 45,695 4,568 13,432 3,705 161,429
Investment in Equity
Method Investees 3,304 - 680 - - 3,984
Capital Expenditures 7,572 3,994 247 345 32 12,190
====================================================================================================================
1997
Revenue from Unaffiliated Customers $ 42,835 $ - $ 9,474 $ 24,153 $ - $ .76,462
Intersegment Revenues 77 - 2,347 - - -
------------ ----------- ------------ ----------- ----------- ----------------
Total 42,912 - 11,821 24,153 - 76,462
Depreciation and Amortization 6,684 - 863 253 190 7,990
Operating Income 19,203 - 1,795 2,198 (2,540) 20,656
Equity in Net Income of Investees 887 - 159 - - 1,046
Income Tax Expense 8,433 - 855 843 861 10,992
Net Income 11,879 - 1,208 1,235 1,157 15,479
Identifiable Assets 91,174 - 4,371 10,780 6,059 112,384
Investment in Equity
Method Investees 2,572 - 551 - - 3,123
Capital Expenditures 11,431 - 258 363 83 12,135
====================================================================================================================
1996
Revenue from Unaffiliated Customers $ 34,334 $ - $ 9,573 $ 22,655 $ - $ 66,562
Intersegment Revenues 145 - 2,196 - - -
------------ ----------- ------------ ----------- ----------- ----------------
Total 34,479 - 11,769 22,655 - 66,562
Depreciation and Amortization 4,571 - 1,939 170 178 6,858
Operating Income 16,044 - 658 1,072 (1,001) 16,773
Equity in Net Income of Investees 380 - 123 - - 503
Income Tax Expense 6,756 - 349 379 (618) 6,866
Net Income 9,885 - 496 530 (492) 10,419
Identifiable Assets 52,211 - 4,964 8,661 5,427 71,263
Investment in Equity
Method Investees 2,397 - 392 - - 2,789
Capital Expenditures 9,536 - 62 301 201 10,100
====================================================================================================================
</TABLE>
Refer to page 37 for additional information regarding Business Segments
34
IV-20
<PAGE>
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 nonregulated enterprises.
BASIS OF CONSOLIDATION - The consolidated financial statements of the Company
include Hickory Tech Corporation, its subsidiaries and a majority owned
partnership. Investments in an unconsolidated partnership and an LLC 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 Communications Products Segment earned on major
installation and change contracts is recognized on 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 1997 and 1996 financial statements and notes have been
reclassified to conform with the 1998 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) 1998 1997
--------- ----------
<S> <C> <C>
Telephone Plant $115,352 $110,229
Other Property and Equipment 17,727 11,000
------ ------
Total 133,079 121,229
Less Accumulated Depreciation 68,615 63,460
------ ------
Net Property, Plant and Equipment $64,464 $57,769
======= =======
</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 telephone plant for the three
years ended December 31, 1998, were 6.2%, 6.4%, and 6.1%. Other equipment is
depreciated over estimated useful lives of three to fifteen years, and
buildings are depreciated over their estimated useful life of thirty-nine
years.
CASH INVESTMENTS - Cash and cash equivalents include general funds and
short-term investments with original maturities of three months or less.
INVESTMENTS - Investments primarily include investments accounted for using
the equity method of accounting. Other investments are carried at lower of
cost or net realizable value.
INVENTORIES - Inventories are stated at the lower of average cost or market.
There were no finished goods or work in process inventory at December 31,
1998. At December 31, 1997, finished goods and work in process inventory were
$264,000 and $210,000, respectively. At December 31, 1998 and 1997, materials
and supplies were $2,302,000 and $2,657,000, respectively.
35
IV-21
<PAGE>
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.
INTANGIBLE ASSETS - Intangible assets are shown net of accumulated
amortization of $2,724,000 and $1,288,000, as of December 31, 1998 and 1997,
respectively. The excess of cost over fair value of net assets acquired
relating to acquisitions is being amortized over forty years on a
straight-line basis. As of December 31, 1998 and 1997, unamortized excess
costs over fair value of assets acquired were $63,386,000 and $30,435,000
respectively.
CAPITALIZED SOFTWARE COSTS - Capitalized software costs consist of costs to
develop software internally for the Company's Billing/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. There were no unamortized
software costs at December 31, 1998 and 1997. Amortization expenses related
to capitalized software costs were $0 in 1998, $492,000 in 1997, and
$1,500,000 in 1996. Capitalized costs were amortized on a product-by-product
basis over the 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, stock
subscribed under the employee stock purchase plan (ESPP) and the accrued
shares of incentive based stock.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average
shares outstanding 13,637,058 13,811,871 14,940,018
Stock options 25,389 3,966 -
Stock subscribed (ESPP) 1,659 1,390 1,580
Accrued Incentive Stock 22,079 27,623 18,850
------ ------ ------
Total dilutive
shares outstanding 13,686,185 13,844,850 14,960,448
========== ========== ==========
</TABLE>
Options to purchase 33,000 shares in 1998 and 56,184 shares in 1997 were not
included in the computation of earnings per share assuming dilution because
including them would have been antidilutive.
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 Communications Products Segment. The purchase
price of $2,573,000 is scheduled to be paid over three years. 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 nor cash acquired. The
amount of net operating income, income before income tax, and earnings per
share associated with this acquisition will not be material to the Company.
36
IV-22
<PAGE>
On May 1, 1998, the Company 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 Company'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 Company attributed $34,100,000 of
the purchase price as cost in excess of net assets acquired. The Company
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
Segment.
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. This summary is not necessarily indicative of what the
results of operations of the Company 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>
Years Ended December 31
-----------------------
1998 1997
---- ----
<S> <C> <C>
Operating revenues $97,042 $83,455
Net income 13,123 14,349
Basic earnings per share .96 1.04
</TABLE>
On September 30, 1998, the Company 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 Company recorded a pre-tax gain
on the sale of the stock of $320,000 from the sale price of $4,250,000. The
operations of DTI were previously included in the Company's Communications
Products Segment.
On September 30, 1998, the Company sold its stock investment 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 $1,486,000.
Other gains and losses on sale of assets netted to a loss of $85,000 in 1998.
NOTE 3 - BUSINESS SEGMENTS AND CONCENTRATIONS
The Company's operations are conducted in four business segments. The Company
defines its business segments based on the internal organization that is used
by management for making operating decisions and assessing performance. 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
Communications Services Segment provides cellular telephone service to seven
counties in south central Minnesota. The Communications Services Segment also
resells long distance service in southern Minnesota and northwestern Iowa and
offers an alternative choice for telecommunications service on a local
service basis to customers in southern Minnesota and Iowa not currently in
the Telephone Segment's service area. The Billing/Data Services Segment
provides data processing service to local telephone companies, interexchange
long distance companies and enhanced service providers throughout the United
States. The Communications Products Segment designs, sells, installs and
services voice and data communications equipment in the retail market in the
Minneapolis/St. Paul area. Refer to page 34 for a schedule of business
segment information.
NOTE 4 - INVESTMENTS AND FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents approximates its 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 $74,447,000 at December 31, 1998 and $41,065,000 at December 31, 1997,
compared to carrying values of $75,362,000 and $41,525,000 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.
37
IV-23
<PAGE>
NOTE 5 - COMMON STOCK
On August 17, 1998, the Company declared a three-for-one stock split. The
Company has retained the stated value of the common stock at $0.10 per share
before and after the stock split. A reclassification of $908,000 from
additional paid-in capital to common stock was made as a result of the stock
split. All per share and number of share data have been restated to take into
account the three-for-one stock split, except for the Consolidated Balance
Sheets and Consolidated Statements of Shareholders' Equity.
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 900,000 common shares reserved for this
plan. At December 31, 1998, employees had subscribed to purchase
approximately 29,900 shares in the current plan year ended August 31, 1999.
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 300,000 common shares reserved for this plan.
The stock sward plan provides for the granting of incentive stock options,
non-qualified stock options and stock awards. The plan provides for stock
awards based on the attainment of certain financial targets and for
individual achievements. Also, for one component of the plan, the Company
utilizes a trust account for the funding of a long-term performance award. In
1998, the Company issued 7,813 shares to the newly established trust in
exchange for $93,000. The stock options issued under this plan may be
exercised no later than ten years after the date of grant, with one-third of
the options vesting each year. All options granted, which have not been
exercised under the provisions of the plan, shall be available for grant in
subsequent years. There were 750,000 common shares reserved for this plan.
During 1996, the Company adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has elected not to
recognize compensation cost in accordance with SFAS No. 123, but applies
Accounting Principles Board Opinion No. 25 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:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro Forma Net Income $ 13,366 $ 15,323 $ 10,318
Pro Forma Basic EPS $ 0.98 $ 1.11 $ 0.69
Pro Forma Diluted EPS $ 0.98 $ 1.11 $ 0.69
Volatility 20.7% 13.4% 12.5%
Dividend Yield 3.3% 4.2% 3.8%
Risk-Free Interest Rates 5.6% 6.7% 6.8%
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
------ --------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 126,984 89,184 56,184 $ 9.97 $ 10.19 $ 10.67
Granted 39,000 37,800 33,000 13.375 9.458 9.375
Exercised (4,002) - - 9.39 - -
Forfeited (7,998) - - 12.39 - -
--------------------------------
Outstanding at
end of year 153,984 126,984 89,184 $ 10.72 $ 9.97 $ 10.19
=================================
Exercisable at
end of year 86,802 60,549 36,987 $ 10.22 $ 10.45 $ 10.62
Weighted average fair
value of options granted
during the year $ 3.00 $ 1.56 $ 1.70
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$9.375 to $13.375. The weighted average remaining contractual life of those
options is 7.3 years.
Other stock award activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Stock awards granted 20,223 9,465 9,456
Weighted average fair
value of stock awards
granted during the year $ 12.04 $ 9.08 $ 8.94
</TABLE>
38
IV-24
<PAGE>
NOTE 6 - DEBT AND OTHER OBLIGATIONS Long-term debt consists of the
following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-------- ---------
<S> <C> <C>
Senior Notes to Institutional Investors,
7.11% Due April 2012 $40,000 $40,000
Revolving Credit Facility, 6.18%
Weighted Average Interest
Due April 2003 34,500 -
Notes Payable for Datacomm Acquisition,
5.69% Imputed Interest
Due November 2000 473 912
Notes Payable to Rural Utilities Service,
2% Due November 2003 958 919
Notes Payable to Rural Telephone Bank,
4% Due April 2007 111 133
--- ---
Total 76,042 41,964
Less Current Maturities 680 439
--- ---
Long-Term Debt $75,362 $41,525
======= =======
</TABLE>
In April 1998, the Company obtained a $45,000,000 unsecured revolving credit
facility with a syndicate of banks to finance the $40,300,000 acquisition of
the Minnesota cellular property. The weighted average interest rate
associated with this credit facility varies with LIBOR rates and is currently
6.18%. There are no mandatory principal repayment terms. The unsecured credit
facility has a termination date of April 29, 2003. As of December 31, 1998,
the Company has drawn $34,500,000 on this credit facility. Provisions of the
credit facility contain covenants relating to cash flow and total
capitalization. The Company is in compliance with the covenants.
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. An additional contingent payment is due in November 2000.
As of December 31, 1998, the Company has $1,069,000 of outstanding debt
remaining with 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
1999 are as follows: 2000 - $211,900; 2001 - $216,700; 2002 - $3,857,900 and
2003 -$3,847,600.
The Company owns most of its major facilities, but does lease certain office
space, land and equipment under principally noncancelable operating leases.
Rental expense was $1,140,000 in 1998, $482,000 in 1997 and $492,000 in 1996.
At December 31, 1998, future minimum lease obligations for the next five
years are as follows: 1999 - $1,453,000; 2000 - $1,387,000; 2001 - $825,000;
2002 -$298,000 and 2003 - $269,000.
39
IV-25
<PAGE>
NOTE 7 - EMPLOYEE RETIREMENT BENEFITS
Employees who meet certain service requirements are covered under a defined
contribution retirement savings plan which includes IRS Section 401(k)
provisions. The Company contributes up to 6.0% of the employee's eligible
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 2.0% of the eligible employee group
compensation into retirement savings plan accounts if the companies achieve
specific earnings targets. Company contributions and costs for the total
retirement savings plan were $871,000 in 1998, $937,000 in 1997 and $751,000
in 1996.
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.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in Benefit Obligation
Benefit Obligation at Beginning of Year $1,033 $839
Net Periodic Benefit Cost 317 256
Benefits Paid (121) (62)
----- ----
Benefit Obligation at End of Year 1,229 1,033
Accumulated Postretirement Benefit Obligation 2,510 2,193
Unrecognized Transition Obligation (840) (900)
Unrecognized Prior Service Cost 153 165
Unrecognized Cumulative Net Loss (594) (425)
----- -----
Accrued Benefit Cost 1,229 1,033
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service Cost 80 64 59
Interest Cost 172 142 140
Amortization of Unrecognized:
Transition Obligation 60 60 60
Prior Service Cost (12) (12) (12)
Cumulative Net Loss 17 2 2
----- ------ -----
Net Periodic Benefit Cost 317 256 249
</TABLE>
The health care cost trend rate used in determining the accumulated
postretirement benefit obligations was 9% grading to 8% in the year 2000 and
remaining at that level thereafter. An increase of one percentage point in
the assumed health care cost trend would increase the accumulated
postretirement benefit obligation at December 31, 1998 by $265,000 and the
net periodic post-retirement benefit cost for the year then ended by $45,000.
A decrease of one percentage point in the assumed health care cost trend
would decrease the accumulated postretirement benefit obligation at December
31, 1998 by $217,000 and the net periodic postretirement benefit cost for the
year then ended by $36,000.
A weighted average discount rate of 8.00% was used to develop net periodic
postretirement benefit cost and the actuarial present value of accumulated
benefit obligations.
40
IV-26
<PAGE>
NOTE 8 - INCOME TAXES
The income tax provisions include the following components:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current Income Taxes:
Federal $ 6,175 $ 9,133 $ 6,394
State 1,917 2,377 1,811
Deferred Income Taxes:
Federal 984 (348) (976)
State 305 (104) (284)
Investment Tax Credit:
Amortized (88) (66) (79)
--------- --------- ----------
Total Income Tax Expense $ 9,293 $ 10,992 $ 6,866
========== ========= ==========
</TABLE>
Deferred tax liabilities and assets are comprised of the following:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Tax Liabilities Associated with:
Depreciation and Fixed Assets $ 4,269 $ 3,370
Intangible Assets 1,175 639
Investments 186 109
Other (4) -
---------- ----------
Gross Deferred Tax Liability 5,626 4,118
--------- ----------
Tax Assets Associated with:
Deferred Benefit Plans 1,435 1,455
Receivables and Inventory 694 515
Accrued Liabilities 600 491
Investments 206 255
--------- -----------
Gross Deferred Tax Assets 2,935 2,716
--------- ----------
Net Deferred Tax Liability 2,691 1,402
Net Current Deferred Tax Asset 1,294 1,006
--------- ----------
Net Non-Current Deferred Tax Liability $ 3,985 $ 2,408
========= ==========
</TABLE>
The differences which cause the effective tax rate to vary from the statutory
federal income rates are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Statutory Tax Rate 35.0% 35.0% 35.0%
Effect of:
State Income Taxes Net of Federal Tax Benefit 6.8 5.6 5.8
Amortization of Investment Tax Credit (0.4) (0.3) (0.5)
Other, Net (0.7) 1.2 (0.6)
----- ---- -----
Effective Tax Rate 40.7% 41.5% 39.7%
===== ===== =====
</TABLE>
41
IV-27
<PAGE>
NOTE 9 - CORPORATE DEVELOPMENT
The Company has entered into an agreement to purchase certain undeveloped
cellular property in the Minneapolis/St. Paul, Minnesota area in a cash
transaction. The property is represented as a ring around the metropolitan
Twin Cities area and is in five Minnesota counties (Chisago, Wright, Carver,
Scott and Dakota) and one in Wisconsin (St. Croix). The population of the
serving area is 200,000. 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 1999 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 $37,500,000 acquisition price for the cellular property. Negotiations
are presently taking place to secure funding. No difficulty is anticipated
in obtaining this financing.
On December 22, 1998, the Company paid $2,812,000 into an escrow account as
part of the acquisition price for the cellular property. This escrow payment
is included in Deposit on Pending Acquisition on the Balance Sheet at
December 31, 1998.
NOTE 10 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Total 4th 3rd 2nd 1st
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating Revenues $94,573 $25,480 $25,103 $23,312 $20,678
Operating Income 24,692 6,088 6,153 6,839 5,612
Net Income 13,526 3,040 3,948 3,496 3,042
Earnings Per Share $.99 $.22 $.29 $.26 $.22
Dividends Per Share $.44 $.11 $.11 $.11 $.11
<CAPTION>
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 $1.12 $.21 $.49 $.23 $.19
Dividends Per Share $.40 $.10 $.10 $.10 $.10
</TABLE>
42
IV-28
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR: (A) 1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Telephone $48,352 $42,835 $34,334 $32,600 $29,127 $26,363
Communications Services 9,538 - - - - -
Billing/Data Services 7,962 9,474 9,573 10,405 7,846 8,442
Communications Products 28,721 24,153 22,655 19,842 21,235 17,736
------------ ------------ ------------ ------------ ----------- -----------
Total Operating Revenues $94,573 $76,462 $66,562 $62,847 $58,208 $52,541
ANNUAL GROWTH 23.7% 14.9% 5.9% 8.0% 10.8% -7.2%
Net Income $13,526 $15,479 $10,419 $9,900 $9,147 $8,341
Net Income Before Gains (B) $12,715 $11,774 $10,419 $9,900 $9,147 $8,341
PER SHARE:
Earnings Per Share Before Gains (B)(C) $0.93 $0.85 $0.70 $0.64 $0.59 $0.54
ANNUAL GROWTH 9.4% 22.0% 8.3% 8.4% 9.9% 5.2%
Dividends Per Share (C) $0.44 $0.40 $0.37 $0.33 $0.29 $0.28
ANNUAL GROWTH 10.0% 9.1% 10.0% 14.9% 3.6% 5.0%
Book Value Per Share $4.66 $4.08 $3.67 $3.77 $3.43 $3.17
ANNUAL GROWTH 14.2% 11.2% -2.7% 9.9% 8.2% 9.3%
AT YEAR END:
Total Assets $161,429 $112,384 $71,263 $73,973 $67,780 $62,618
Shareholders' Equity $63,629 $55,562 $52,736 $58,041 $52,842 $48,824
Long-term Debt $75,362 $41,525 $877 $1,087 $1,295 $1,524
Equity Ratio (D) 45.8% 57.2% 98.4% 98.2% 97.6% 97.0%
OTHER DATA:
Employees 479 452 425 447 425 405
Return on Beginning Equity (B) 22.9% 22.3% 18.0% 18.7% 18.7% 18.7%
Capital Expenditures (E) $12,190 $12,135 $10,100 $6,021 $6,204 $5,476
Telephone Plant $115,352 $110,229 $78,132 $71,259 $66,314 $58,149
Access Lines Served (F) 61,346 59,223 44,583 42,954 41,326 38,519
Shares Outstanding (adjusted for 13,662,216 13,602,357 14,370,687 15,402,063 15,372,873 15,431,487
split)
Share Price (G) $12.6250 $11.6875 $9.1250 $10.4375 $10.5625 $11.0000
</TABLE>
(A) Acquisitions of Amana Colonies Telephone Company in 1994, Heartland
Telecommunications Company of Iowa and Datacomm Products in 1997 and
Minnesota Southern Wireless Company in 1998 have contributed to the
Company's revenue growth.
(B) Excludes one-time gains in 1998 of $811,000 or $0.06 per share from
the sale of DTI and unrelated securities and one-time gain in 1997 of $3.7
million or $0.27 per share from the sale of DirecTV assets.
(C) In 1998, a 3-for-1 stock distribution was approved. The 1997, 1996,
1995, 1994 and 1993 earnings per share originally reported were $2.55,
$2.09, $1.93, $1.78 and $1.62, respectively. The 1997, 1996, 1995, 1994
and 1993 dividends per share originally reported were $1.20, $1.10, $1.00,
$0.87 and $0.84, respectively.
(D) Equity Ratio = Ending Shareholders' Equity / (Ending Shareholders'
Equity + Long-term Debt).
(E) The 1996 capital expenditures include $2,818,000 of assets purchased
in accounts payable.
(F) 1998 excludes access lines in the competitive local exchange market
served by Crystal Communications, Inc.
(G) Price is last five-day average.
43
IV-29
<PAGE>
Exhibit 13(b)
REPORT OF INDEPENDENT ACCOUNTANTS
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 the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1997 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
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 the results of
their operations and their cash flows for the years ended December 31 1997
and 1996, in conformity with generally accepted accounting principles.
St. Paul, Minnesota OLSEN THIELEN & CO., LTD.
January 30, 1998
IV-30
<PAGE>
Exhibit 21
SUBSIDIARIES OF HICKORY TECH CORPORATION
<TABLE>
<CAPTION>
Jurisdiction of
Subsidiaries Incorporation
------------ -------------
<S> <C>
Mankato Citizens Telephone Company Minnesota
Mid-Communications, Inc. Minnesota
Cable Network, Inc. Minnesota
Heartland Telecommunications Company of Iowa, Inc. Minnesota
Amana Colonies Telephone Company Minnesota
National Independent Billing, Inc. Minnesota
Collins Communications Systems Co. Minnesota
Crystal Communications, Inc. Minnesota
Minnesota Southern Wireless Company Minnesota
</TABLE>
All such subsidiaries are 100%-owned by Hickory Tech Corporation. The
financial statements of all such subsidiaries are included in the
Consolidated Financial Statements of Hickory Tech Corporation.
IV-31
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-69827) of Hickory Tech Corporation of our
report dated January 29, 1999, on our audit of the consolidated financial
statements of Hickory Tech Corporation and subsidiaries as of December 31,
1998, and for the year then ended, which report is included in this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 25, 1999
IV-32
<PAGE>
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of our report dated January 30, 1998, on our audits of the
consolidated financial statements of Hickory Tech Corporation and
subsidiaries as of December 31, 1997 and for the years ended December 31,
1997 and 1996, which report is included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
St. Paul, Minnesota OLSEN, THIELEN & CO., LTD
March 25, 1999
IV-33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
OF INCOME, BALANCE SHEETS AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,133
<SECURITIES> 0
<RECEIVABLES> 18,963
<ALLOWANCES> 618
<INVENTORY> 2,302
<CURRENT-ASSETS> 24,184
<PP&E> 133,079
<DEPRECIATION> 68,615
<TOTAL-ASSETS> 161,429
<CURRENT-LIABILITIES> 15,203
<BONDS> 75,362
0
0
<COMMON> 1,366
<OTHER-SE> 62,263
<TOTAL-LIABILITY-AND-EQUITY> 161,429
<SALES> 28,721
<TOTAL-REVENUES> 94,573
<CGS> 24,268
<TOTAL-COSTS> 69,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 746
<INTEREST-EXPENSE> 4,596
<INCOME-PRETAX> 22,819
<INCOME-TAX> 9,293
<INCOME-CONTINUING> 13,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,526
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
</TABLE>
