<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-13721
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HICKORY TECH CORPORATION
------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1524393
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
221 East Hickory Street
Mankato, Minnesota 56002-3248
------------------ ----------
(Address of principal executive offices) (Zip Code)
(800) 326-5789
--------------
(Registrant's telephone number, including area code)
------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes __X__ No _____
The number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 13,742,773 shares of no par
common stock as of June 30, 1999.
<PAGE>
HICKORY TECH CORPORATION
June 30, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
In Thousands Except Per Share Amounts For Quarter Ended For Six Months Ended
--------------------------- ---------------------------
6/30/99 6/30/98 6/30/99 6/30/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local Exchange Telephone $ 12,789 $ 12,207 $24,858 $ 23,877
Communications Services 4,436 2,153 7,818 2,328
Billing/Data Services 1,083 2,008 2,211 4,166
Communications Products 6,880 6,944 12,460 13,619
-------- -------- -------- --------
TOTAL OPERATING REVENUES 25,188 23,312 47,347 43,990
COSTS AND EXPENSES
Cost of Sales 6,809 5,590 11,914 10,727
Operating Expenses 10,138 8,440 19,298 16,309
Depreciation 2,234 2,021 4,374 3,879
Amortization of Intangibles 569 422 1,055 624
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 19,750 16,473 36,641 31,539
-------- -------- -------- --------
OPERATING INCOME 5,438 6,839 10,706 12,451
OTHER INCOME 193 324 792 671
GAIN ON SALE OF ASSETS 9,207 - 9,207 -
INTEREST EXPENSE (1,429) (1,263) (2,631) (2,035)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 13,409 5,900 18,074 11,087
INCOME TAXES 5,765 2,404 7,631 4,549
-------- -------- -------- --------
NET INCOME $ 7,644 $ 3,496 $10,443 $ 6,538
-------- -------- -------- --------
-------- -------- -------- --------
- ---------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.56 $ 0.26 $ 0.76 $ 0.48
-------- -------- -------- --------
Weighted Average Common
Shares Outstanding 13,741 13,630 13,723 13,623
-------- -------- -------- --------
- ---------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.56 $ 0.26 $ 0.76 $ 0.48
-------- -------- -------- --------
Weighted Average Common and
Equivalent Shares Outstanding 13,788 13,690 13,767 13,675
-------- -------- -------- --------
- ---------------------------------------------------------------------------------------------------------
Dividends Per Share $ 0.11 $ 0.11 $ 0.22 $ 0.22
------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
2
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HICKORY TECH CORPORATION
June 30, 1999
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Dollars In Thousands 6/30/99 12/31/98
------------------ ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $1,473 $ 1,133
Receivables, Net of Allowance for Doubtful Accounts 15,785 18,345
of $676 and $618
Taxes Receivable - 310
Inventories 3,282 2,302
Deferred Tax Benefit and Other 1,823 2,094
------------------ ------------------
TOTAL CURRENT ASSETS 22,363 24,184
INVESTMENTS 793 4,007
PROPERTY, PLANT & EQUIPMENT 146,164 133,079
Less ACCUMULATED DEPRECIATION (72,809) (68,615)
------------------ ------------------
PROPERTY, PLANT & EQUIPMENT, NET 73,355 64,464
OTHER ASSETS
Intangible Assets, Net 101,425 65,337
Deposit on Pending Acquisition - 2,812
Miscellaneous 642 625
------------------ ------------------
TOTAL OTHER ASSETS 102,067 68,774
------------------ ------------------
TOTAL ASSETS $198,578 $ 161,429
------------------ ------------------
------------------ ------------------
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $6,947 $ 10,506
Accrued Taxes 284 -
Accrued Interest 1,036 970
Advanced Billings and Deposits 2,529 3,047
Current Maturities of Long-Term Debt 682 680
------------------ ------------------
TOTAL CURRENT LIABILITIES 11,478 15,203
LONG-TERM DEBT, Net of Current Maturities 108,256 75,362
DEFERRED CREDITS
Income Taxes 3,985 3,985
Compensation, Benefits and Other 2,576 3,250
------------------ ------------------
TOTAL DEFERRED CREDITS 6,561 7,235
SHAREHOLDERS' EQUITY:
Common Stock, no par value, $.10 stated value
Shares authorized: 100,000,000
Shares outstanding: 1999, 13,742,773; 1998, 13,662,216 1,374 1,366
Additional Paid-In Capital 3,227 2,005
Retained Earnings 67,682 60,258
------------------ ------------------
TOTAL SHAREHOLDERS' EQUITY 72,283 63,629
------------------ ------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $198,578 $ 161,429
------------------ ------------------
------------------ ------------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
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HICKORY TECH CORPORATION
June 30, 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For Six Months Ended
------------------------------------
Dollars In Thousands 6/30/99 6/30/98
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $10,443 $ 6,538
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 5,429 4,531
Equity in Net Income of Investees (486) (499)
Gain Resulting from Sale of Assets (9,207) -
Changes in Operating Assets and Liabilities Net
of Effects of Acquisitions and Dispositions:
Receivables 2,540 (271)
Inventories (980) (682)
Accounts Payable and Accrued Liabilities (2,662) 1,901
Advance Billings & Deposits (518) 109
Deferred Income Taxes - (44)
Other 526 (377)
----------------- ----------------
Net Cash Provided by Operating Activities 5,085 11,206
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant & Equipment (7,928) (3,416)
Increase in Investments (50) (78)
Distributions from Investees 193 265
Proceeds from Sale of Assets 12,868 13
Acquisitions, Net of Cash Acquired (39,718) (40,281)
----------------- ----------------
Net Cash Used In Investing Activities (34,635) (43,497)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of Debt (103) -
Borrowings on Line of Credit 43,000 38,010
Repayments on Line of Credit (10,000) -
Proceeds from Issuance of Common Stock 12 14
Dividends Paid (3,019) (2,999)
----------------- ----------------
Net Cash Provided by Financing Activities 29,890 35,025
----------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 340 2,734
CASH AND CASH EQUIVALENTS At Beginning of Period 1,133 1,219
----------------- ----------------
CASH AND CASH EQUIVALENTS At End of Period $1,473 $ 3,953
----------------- ----------------
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
<PAGE>
HICKORY TECH CORPORATION
JUNE 30, 1999
PART 1. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The preceding, unaudited, Consolidated Statements of Income, Balance Sheets
and Statements of Cash Flows contain all adjustments, representing normal
recurring items, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods being reported.
The accounting policies of the Company 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. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates. The preceding interim results are not necessarily indicative of
results for a full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1998 Form
10-K.
NOTE 1. BASIS OF CONSOLIDATION
The Company is a communications holding company headquartered in
Mankato, Minnesota. The consolidated financial statements of the Company
include Hickory Tech Corporation and its subsidiaries. The subsidiaries and
operations of Hickory Tech Corporation are grouped into four business
sectors. All intercompany transactions have been eliminated from the
consolidated financial statements.
The Company's operations are conducted in the following four sectors:
LOCAL EXCHANGE TELEPHONE SECTOR
The Company's Local Exchange Telephone Sector provides local exchange
telephone service and owns and operates fiber optic cable facilities. MANKATO
CITIZENS TELEPHONE COMPANY (MCTC), MID-COMMUNICATIONS, INC. (Mid-Com), AMANA
COLONIES TELEPHONE COMPANY and HEARTLAND TELECOMMUNICATIONS COMPANY OF IOWA
are local exchange telephone companies. Mankato Citizens Telephone Company
and Mid-Communications, Inc. provide telephone service in south central
Minnesota, specifically, Mankato and eleven communities surrounding Mankato.
Amana Colonies Telephone Company provides telephone service for the seven
communities of the Amana Colonies in east central Iowa. Heartland
Telecommunications Company of Iowa provides telephone service for eleven
communities in northwest Iowa. CABLE NETWORK, INC. owns and operates fiber
optic cable facilities in southern Minnesota which are used to transport
interexchange communications as a service to telephone exchange companies,
primarily MCTC and Mid-Com.
COMMUNICATIONS SERVICES SECTOR
MINNESOTA SOUTHERN WIRELESS COMPANY (MSWC) owns and operates a cellular
phone business for Minnesota's Rural Service Area (RSA) 10, under the
business name of CellularOne. This business, acquired on May 1, 1998, holds
100% of the "A-side" FCC license for seven counties in
5
<PAGE>
south central Minnesota. The service area overlaps and is larger than the
Company's Minnesota telephone line service area. MSWC also owns and operates
a cellular phone business around the Minneapolis/St. Paul, Minnesota area.
CRYSTAL COMMUNICATIONS, INC. (Crystal) offers an alternative choice for local
telecommunications service, known as CLEC (Competitive Local Exchange
Carrier) service in the telecommunications industry, to customers in towns in
Minnesota and Iowa not currently in the Company's Local Exchange Telephone
Sector's service area. In addition, Crystal markets resale long distance
service to the Company's Local Exchange Telephone Sector's southern Minnesota
and northwestern Iowa subscribers.
BILLING / DATA SERVICES SECTOR
Through NATIONAL INDEPENDENT BILLING, INC. (NIBI), the Company's
Billing/Data Services Sector provides data processing and related services,
principally for the Company, other local exchange telephone companies, CLECs,
interexchange network carriers, municipalities and utilities. NIBI's
principal activity is the provision of monthly batch processing of
computerized data. NIBI is currently developing a software platform for
future sales on a turnkey or a service bureau basis.
COMMUNICATIONS PRODUCTS SECTOR
Through COLLINS COMMUNICATIONS SYSTEMS COMPANY (Collins), the Company's
Communications Products Sector sells, installs and services business
telephone systems and data communications equipment in metropolitan
Minneapolis/St. Paul, Minnesota.
NOTE 2. EARNINGS AND CASH DIVIDENDS PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter and for the six month-period ended. Shares used in the earnings per
share assuming dilution calculation are based on the weighted average number
of shares of common stock outstanding increased by potentially dilutive
shares. Potentially dilutive shares include stock options, stock acquired
under the employee stock purchase plan (ESPP) and the accrued shares under
incentive stock awards.
<TABLE>
<CAPTION>
For Quarter Ended For Six Months Ended
---------------------------- ----------------------------
6/30/99 6/30/98 6/30/99 6/30/98
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 13,741,200 13,629,948 13,723,004 13,622,892
Stock options 9,279 20,318 17,122 18,466
Stock subscribed (ESPP) 19,682 17,408 16,285 14,441
Accrued Incentive Stock 17,474 22,718 10,704 19,159
---------- ---------- ---------- ----------
Total dilutive shares outstanding 13,787,635 13,690,392 13,767,115 13,674,958
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Cash dividends are based on the number of common shares outstanding at
the respective record dates. Listed below are the number of shares
outstanding as of the record date for the first and second quarters of 1999
and 1998. The 1998 shares were restated for a three-for-one stock split
effective August 17, 1998:
<TABLE>
<CAPTION>
Shares Outstanding on Record Date 1999 1998
- --------------------------------- ---- ----
<S> <C> <C>
First Quarter (Feb. 15) 13,708,231 13,628,016
Second Quarter (May 15) 13,741,018 13,631,136
</TABLE>
6
<PAGE>
NOTE 3. DEBT
The Company entered into a new unsecured revolving credit facility with
a syndicate of banks for $90,000,000. This new credit facility replaced the
previous $45,000,000 credit facility from the same syndicate of banks. The
increase of funds available was used for the $41,500,000 cellular phone
business acquisition in the Minneapolis/St. Paul, Minnesota area. The Company
closed on the new credit facility on May 28, 1999 and the cellular
acquisition on June 1, 1999. The new credit facility has no mandatory
principal repayment terms and has a termination date of five years after the
closing date. The weighted average interest rate associated with the new
credit facility varies with LIBOR and was 6.51% on June 30, 1999. On June 30,
1999, $22,500,000 of the $90,000,000 credit facility was available for use.
NOTE 4. COMMON STOCK
The Company's common stock has no par value. There are 100,000,000
shares authorized with a stated value of $0.10 per share. There were
13,742,773 shares outstanding on June 30, 1999, and 13,631,880 shares
outstanding on June 30, 1998, after restating for a three-for-one stock split
on August 17, 1998.
In February 1999, the Board of Directors of the Company adopted a
Shareholder Rights Plan wherein shareholders of the Company received rights
to purchase the Company's common stock at a discount in the event of an
acquisition of 15% or more of the Company's outstanding common stock by any
person or group in a transaction not approved by the Board. The rights expire
in March 2009.
NOTE 5. ACQUISITIONS AND DISPOSITIONS
On May 1, 1998, the Company completed a stock purchase transaction in
which it acquired a 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 service area was
230,000, and the service area overlapped the telephone line service 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 Sector.
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. 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 Sector.
On May 12, 1999, the Company sold its 6.4% equity interest in Midwest
Wireless Communications, LLC (MWC), a rural cellular telecommunications
provider in southern Minnesota. The Company sold its interest directly back
to MWC and recorded a pre-tax gain on the sale of $9,207,000 from the sale
price of $12,764,000. The investment was accounted for under the equity
method and was included with Investments as of December 31, 1998.
7
<PAGE>
On June 1, 1999, the Company completed a cash transaction in which it
acquired cellular property in the Minneapolis/St. Paul, Minnesota area from
McElroy Technologies, Inc. The property surrounds the metropolitan Twin
Cities area and is located in five Minnesota counties (Chisago, Wright,
Carver, Scott and Dakota) and in one Wisconsin county (St. Croix). The
population of the serving area is 200,000. The acquisition was accounted for
under the purchase method of accounting. The total purchase price was
approximately $41,500,000. The Company attributed $36,600,000 of the purchase
price as cost in excess of net assets acquired. The Company financed
$30,000,000 of the acquisition from a new revolving credit facility, forgave
a $4,000,000 loan to the seller and paid the remainder in cash generated from
internal operations. The operations of the acquisition are reported as a
division of MSWC and are included in the Communications Services Sector.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisition had occurred at the beginning of
the periods shown after taking into account the effect of certain adjustments
and eliminations as discussed in the Company's Report on Form 8-K filed on.
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>
Six Months Ended June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Total revenues $ 47,506 $ 43,990
Net income $ 9,479 $ 5,623
Basic earnings per share $ .69 $ .41
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
This Management's Discussion and Analysis of Results of Operations and
Financial Condition, and other sections of this Form 10-Q filing contain
forward-looking statements that are based on current expectations, estimates
and projections about the industry in which the 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 are
made. The Company undertakes no obligation to update any of its
forward-looking statements for any reason.
OPERATING REVENUES
Operating revenues were 8.0% higher for the quarter ended June 30, 1999,
than for the quarter ended June 30, 1998, as illustrated in the following
table. The revenue increase was primarily due to
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the growth in the Local Exchange Telephone Sector and the May 1998 and June
1999 cellular property acquisitions as well as the continued growth of the
CLEC business in the Communications Services Sector.
<TABLE>
<CAPTION>
OPERATING REVENUES
QUARTER TREND
(thousands) 1999 1998
---- ----
<S> <C> <C>
1st Quarter $ 22,159 $ 20,678
2nd Quarter $ 25,188 $ 23,312
</TABLE>
<TABLE>
<CAPTION>
BUSINESS SECTOR OPERATING REVENUES
(thousands)
For Quarter Ended For Six Months Ended
----------------------------------- ------------------------------------
6/30/99 6/30/98 6/30/99 6/30/98
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Local Exchange Telephone $12,789 $12,207 $24,858 $23,877
Communications Services 4,436 2,153 7,818 2,328
Billing / Data Services 1,083 2,008 2,211 4,166
Communications Products 6,880 6,944 12,460 13,619
---------------- ---------------- ----------------- ----------------
Total Operating Revenues 25,188 23,312 47,347 43,990
</TABLE>
<TABLE>
<CAPTION>
BUSINESS SECTOR OPERATING REVENUES
(thousands)
For Quarter Ended For Six Months Ended
---------------------------------- -----------------------------------
6/30/99 6/30/98 6/30/99 6/30/98
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES PRIOR
TO INTERSEGMENT ELIMINATIONS:
Local Exchange Telephone $15,330 $13,596 $ 28,956 $ 26,596
Communications Services 4,521 2,153 7,903 2,328
Billing / Data Services 1,794 2,608 3,568 5,437
Communications Products 6,880 6,944 12,460 13,619
Intersegment Eliminations (3,337) (1,989) (5,540) (3,990)
--------------- --------------- ---------------- ----------------
Total Operating Revenues 25,188 23,312 47,347 43,990
</TABLE>
NET INCOME
Consolidated net income for the quarter ended June 30, 1999 was 118.6%
higher than the same period in 1998 as illustrated by the following table.
The increase was caused by the after-tax gain of $5,213,000 on the sale of
the Company's interest in Midwest Wireless Communications, LLC. Without the
effects of the gain, consolidated net income would have decreased 30.5% in
the second quarter of 1999 compared to the same quarter in 1998. The primary
reason for the decrease in profitability for the Company was the net loss
recorded by the Billing/Data Services Sector, as it recorded lower revenues
and maintained costs at its historic levels by shifting them to the
development of its new WRITE2k product. Also contributing to the decline in
profitability is the continuing start-up expenses associated with the CLEC
operations of the Communications Services Sector.
9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED NET INCOME
QUARTER TREND
(thousands) 1999 1998
---- ----
<S> <C> <C>
1st Quarter $ 2,799 $ 3,042
2nd Quarter (includes gain in 1999) $ 7,644 $ 3,496
</TABLE>
Net Income by Business Sectors described in following discussions are
shown prior to intercompany eliminations.
<TABLE>
<CAPTION>
BUSINESS SECTOR NET INCOME
(thousands) For Quarter Ended For Six Months Ended
------------------------------- -------------------------------
6/30/99 6/30/98 6/30/99 6/30/98
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
NET INCOME
Local Exchange Telephone $3,574 $3,380 $7,440 $6,722
Communications Services (277) 151 (434) (34)
Billing / Data Services (167) 355 (324) 753
Communications Products 315 451 452 723
Corporate, including gains and interest 4,199 (841) 3,309 (1,626)
-------------- --------------- --------------- --------------
Total Net Income 7,644 3,496 10,443 6,538
</TABLE>
Key operating statistics and trends for the Local Exchange Telephone and
Communications Services Sectors are shown in the following table.
OPERATING STATISTICS
<TABLE>
<CAPTION>
For Quarter Ended For Quarter Ended
---------------------------- -----------------------------
3/31/99 3/31/98 6/30/99 6/30/98
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Telephone Access Lines 61,685 59,158 61,138 60,158
Telephone Minutes of Use 79,755,666 76,019,718 80,523,688 80,046,582
Wireless Access Lines 16,315 N/A 17,424 14,919
Wireless Minutes of Use 4,269,812 N/A 5,931,670 2,406,328
CLEC Access Lines 1,125 N/A 1,711 N/A
</TABLE>
A. Material changes in results of operations:
1. LOCAL EXCHANGE TELEPHONE - Operating revenues for the second quarter
of 1999 after intercompany eliminations increased $582,000 or 4.8% compared
with the same period in 1998. For the six months ended June 30, 1999,
operating revenues after eliminations were $981,000 or 4.1% higher than the
same period in 1998. Local service rates were increased late in the first
quarter of 1998. This increase, along with access line growth, accounted for
a large part of the increased revenues for the first two quarters of 1999.
Increased network usage, internet revenue and intralata long distance revenue
accounted for the remaining revenue increase for the respective periods.
Net income from this business sector prior to intercompany eliminations
increased $194,000 or
10
<PAGE>
5.7% for the second quarter of 1999 compared to the same period in 1998. For
the six months ended June 30, 1999, net income prior to eliminations
increased $718,000 or 10.7% as compared to the same period of 1998. This
incremental profit increase was due to the local service rate increase at the
Company's Minnesota local exchange telephone companies, improved margins and
expense containment.
2. COMMUNICATIONS SERVICES - The Communications Services Sector operates
the Company's start-up efforts in the competitive local exchange carrier
(CLEC) business, its long distance business and its newly acquired wireless
communications business.
For the second quarter of 1999, operating revenues for Crystal
Communications, Inc. (CLEC business and long distance) after intercompany
eliminations were $622,000 compared to $368,000 for the second quarter of
1998. For the six months ended June 30, 1999, operating revenues after
eliminations were $1,100,000 compared to $543,000 for the first six months of
1998. This increase was attributable to operating in more markets and
increasing customer penetration. Despite the increase in revenues, continuing
start-up expenses offset the revenue increase. As Crystal enters each market,
it encounters interconnection and logistical costs, sometimes months in
advance of revenues from a market. The second quarter 1999 loss for Crystal
prior to intercompany eliminations was $624,000 compared to a second quarter
1998 loss of $122,000. For the six months ended June 30, 1999, Crystal's loss
prior to eliminations was $1,103,000 compared to a loss of $307,000 for the
six months ended June 30, 1998.
Minnesota Southern Wireless Company (southern Minnesota cellular
business) was purchased in the second quarter of 1998. The Minneapolis/St.
Paul, Minnesota area cellular business was purchased on June 1, 1999. For the
second quarter of 1999, MSWC generated revenues after intercompany
eliminations of $3,814,000 compared to $1,759,000 for the second quarter of
1998. Net income for MSWC for the second quarter of 1999 prior to
intercompany eliminations was $347,000 compared to $273,000 for the same
period in 1998. For the six months ended June 30, 1999, operating revenues
and net income for MSWC were $6,717,000 and $669,000, respectively, as
compared to $1,759,000 and $273,000, respectively, for the same period in
1998.
3. BILLING / DATA SERVICES - Operating revenues for the second quarter
of 1999 after intercompany eliminations decreased $925,000 or 46.1% compared
with the same period in 1998. For the six months ended June 30, 1999,
operating revenues after eliminations were $1,955,000 or 46.9% lower than the
six months ended June 30, 1998. This decline was due to lower contract
services as compared to the same period in the prior year. The decline was
primarily due to the loss of contract programming and carrier access billing
services to a large interexchange carrier. Net income for the second quarter
of 1999 prior to intercompany eliminations decreased $522,000 or 147.0% as
compared with the same period in 1998. For the six months ended June 30,
1999, net income prior to eliminations decreased $1,077,000 or 143.0% as
compared to the same period in 1998. The decline in net income was largely
attributable to the expenses associated with the development of a new
software platform with Sepro Telecom International Limited of Dublin, Ireland
and the fact that these expenses have not gone down in conjunction with the
contract programming revenue decline. The Sepro partnership will produce the
sector's next software product offering, WRITE2k. WRITE2k is a
wireless/wireline convergent billing system. Beta testing on the new wireless
product will be performed during third quarter 1999, and the Company
currently anticipates that product sales of the wireless WRITE2K will begin
later in 1999. Development of the wireline WRITE2K product will continue into
2000.
4. COMMUNICATIONS PRODUCTS - Operating revenues for this sector for the
second quarter of 1999 decreased $64,000 or 0.9% compared with the same
period in 1998. For the six
11
<PAGE>
months ended June 30, 1999, operating revenues decreased $1,159,000 or 8.5%
compared with the same period in 1998. The primary reason for the revenue
decline was the sale of Digital Techniques, Inc. (DTI), on September 30,
1998. Without the sale of DTI, operating revenues would have increased
$2,586,000 or 26.2% for the six months ended June 30, 1999. Net income for
the second quarter of 1999 decreased $136,000 or 30.2% as compared with the
same period in 1998. For the six months ended June 30, 1999, net income
decreased $271,000 compared with the same period in 1998. Without the sale of
DTI, net income for the first six months of 1999 would have increased $7,000
or 1.6% as compared to the same period in 1998.
5. COST OF SALES - Consolidated cost of sales increased $1,219,000 or
21.8% for the quarter ended June 30, 1999, compared with the same period in
1998. For the six months ended June 30, 1999, cost of sales were $1,187,000
or 11.1% higher than the six months ended June 30, 1998. Without the sale of
DTI, consolidated cost of sales would have increased $2,771,000 or 30.3% for
the six months ended June 30, 1999. Cost of sales as a percentage of
operating revenues for the Communications Products Sector (which generated
most of the cost of sales) was 71.7% for the six months ended June 30, 1999,
compared to 70.8% for the same period in 1998 after excluding DTI operations
in 1998. The cost of sales for the Company's other sectors increased from
$2,155,000 for the six month period ended June 30, 1998 to $2,980,000 for the
six month period ended June 30, 1999. The increase was mostly attributable to
new customer premise equipment (CPE) sales from the Company's CLEC business
in the Communications Services Sector.
6. OPERATING EXPENSES - Operating expenses for the quarter ended June
30, 1999, increased $1,698,000 or 20.1% compared with the same period in
1998. For the six months ended June 30, 1999, operating expenses were
$2,989,000 or 18.3% higher than the six months ended June 30, 1998. Without
the addition of MSWC and the sale of DTI, operating expenses would have only
increased $1,219,000 or 8.9% for the six months ended June 30, 1999. The
increase in operating expenses is primarily due to the start-up operations of
the CLEC business and the increase in WRITE2k development expenses in the
Billing/Data Services Sector.
7. DEPRECIATION - Depreciation expense for the quarter ended June 30,
1999 was $213,000 or 10.5% higher than for the same period in 1998. For the
six months ended June 30, 1999, depreciation expense was $495,000 or 12.8%
higher than the same period in 1998. This increase was attributable to the
addition of MSWC and the plant additions in Crystal.
8. GAIN ON SALE OF ASSETS - On May 12, 1999, the Company sold its 6.4%
equity interest in Midwest Wireless Communications, LLC (MWC), a rural
cellular telecommunications provider in southern Minnesota. The Company sold
its interest directly back to MWC and recorded a pre-tax gain on the sale of
$9,207,000 from the sale price of $12,764,000. The investment was accounted
for under the equity method and was included with Investments as of December
31, 1998.
9. INTEREST EXPENSE - Interest expense increased $166,000 for the
quarter ended June 30, 1999, compared to the same period last year. For the
six months ended June 30, 1999, interest expense was $596,000 higher than for
the same period in 1998. The increase in interest expense was due to the
Company's $45,000,000 revolving credit facility obtained in April 1998 being
replaced with a new $90,000,000 revolving credit facility in May 1999. The
new revolving credit facility had a weighted average interest rate of 6.51%
on June 30, 1999 and was used for the acquisition of the cellular property in
the Minneapolis/St. Paul, Minnesota area. The outstanding balance of the
revolving credit facility was $67,500,000 on June 30, 1999 and $34,500,000 on
December 31, 1998.
B. Material changes in financial condition:
12
<PAGE>
1. CAPITAL STRUCTURE - The total capital structure for the Company was
$181,221,000 at June 30, 1999, reflecting 39.9% equity and 60.1% debt. This
compares to a capital structure of $139,671,000 at December 31, 1998,
reflecting 45.8% equity and 54.2% debt. Management believes adequate internal
and external resources are available to finance ongoing operating
requirements, including capital expenditures, business development, debt
service and the payment of dividends.
2. CASH FLOWS - Changes in operating assets and liabilities (net of
effects of acquisitions and dispositions) from ordinary operating activities
used $1,094,000 of cash from operations for the six-month period ended June
30, 1999. This compared to changes in operating assets and liabilities
providing cash of $636,000 for the same period in 1998. The increase in cash
use reflects an increase in inventory and a decrease in accounts payable off
set by a decrease in receivables. Cash provided from operations was also
affected by a decrease of $1,308,000 in net income from operations before
gain on sale of assets for the six months ended June 30, 1999 as compared to
the same period in 1998. Overall, cash provided by operating activities was
$5,085,000 for the six-month period ended June 30, 1999 compared to
$11,206,000 for the six-month period ended June 30, 1998.
Cash flows used in investing activities were $34,635,000 for the six
months ended June 30, 1999 compared to $43,497,000 for the same period in
1998. Capital expenditures relating to ongoing businesses were $7,928,000
during the first six months of 1999 as compared to $3,416,000 for the same
period in 1998. The Company funds the majority of its capital expenditures
through internally generated funds. Capital expenditures were incurred to
modernize and upgrade the Company's telecommunications network, to construct
additional network facilities to provide CLEC services and to improve the
wireless network of RSA10. The primary reasons for the increase in the first
six months of 1999 compared to the first six months of 1998 were capital
expenditures used to convert the cellular network from analog to digital, an
increase in cellular towers and an increase in building CLEC networks. For
the six months ended June 30, 1999, cash used in investing activities
included $39,718,000 for the acquisition of the cellular property in the
Minneapolis/St. Paul, Minnesota area. The same period in 1998 included
$40,281,000 used to purchase cellular property in southern Minnesota. Also
included in cash flows from investing activities for the six months ended
June 30, 1999 were cash proceeds of $12,868,000 from the sale of assets and
investments. The sale of the MWC investment yielded $12,764,000 in cash
proceeds.
Included in cash flows from financing activities are debt borrowings and
repayments and dividend payments. During the first six months of 1999, the
Company borrowed $43,000,000 under the revolving credit facility to cover
short-term cash requirements and pay for the acquisition of the cellular
property in the Minneapolis/St. Paul area. The Company also made $10,000,000
of debt repayments on the revolving credit facility. Dividend payments for
the first six months of 1999 were $3,019,000 compared to $2,999,000 for the
same period in 1998.
3. WORKING CAPITAL - Current assets exceeded current liabilities by
$10,885,000 as of June 30, 1999, compared to a working capital surplus of
$8,981,000 as of December 31, 1998. The primary source of working capital was
internal operations. The ratio of current assets to current liabilities was
1.9:1.0 as of June 30, 1999 compared to 1.6:1.0 as of December 31, 1998.
4. LONG-TERM DEBT - The Company's long-term debt as of June 30, 1999,
was $108,256,000.
In May 1999, the Company obtained a $90,000,000 unsecured revolving
credit facility with a syndicate of banks to finance the $41,500,000
acquisition of the Minneapolis/St. Paul cellular property and future capital
expenditures of the Communications Services Sector. Proceeds from this credit
facility were also used to close out the Company's previous $45,000,000
revolving credit facility with the same syndicate of banks. The previous
$45,000,000 credit facility was used to finance the
13
<PAGE>
$40,300,000 acquisition of the southern Minnesota cellular property known as
RSA10. The weighted average interest rate associated with the $90,000,000
credit facility varies with LIBOR rates and was 6.51% at June 30, 1999. There
are no mandatory principal repayment terms. The unsecured credit facility has
a termination date of May 28, 2004. As of June 30, 1999, the Company had
drawn $67,500,000 on this credit facility.
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 telephone
exchanges in Iowa. The notes accrue interest at 7.11%. No principal payments
are due during the first four years.
As of June 30, 1999, the Company has $756,000 of long term outstanding
debt remaining with the Rural Utilities Service and the Rural Telephone Bank
for the financing of telephone property, plant and equipment of
Mid-Communications, Inc.
Provisions of the various notes and credit facilities contain covenants
relating to liens, consolidated net worth and cash flow coverage. The Company
is in compliance with all debt covenants.
5. CAPITAL FROM OPERATIONS - Management believes the Company will be
able to generate sufficient working capital internally from operations to
meet its immediate operating needs and sustain its historical dividend
levels. The Company has completed several acquisitions in the previous six
years, which were funded with cash and debt. Growth plans and acquisitions in
the future may require additional use of the revolving credit facility. Based
on the Company's banking relationships and the level of financing activity
taking place in the Company's industry, the Company believes it will continue
to be able to obtain required debt financing.
The Company's stock repurchase program has been funded with internal
cash. It is anticipated the same sources will be utilized for financing any
future stock repurchases. No shares were repurchased during 1998 or 1999.
6. 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.
Each of the Company's business sectors has organized a committee to
analyze Year 2000 compliance.
LOCAL EXCHANGE TELEPHONE The Telephone Sector has identified 160 software and
hardware products used in its operations and has contacted the vendors to
verify Year 2000 compliance. Assessments have been performed or received on
all 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 all upgrades have been
performed. 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 did 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 in the
process of being replaced as part of a planned business software upgrade. The
Telephone Sector is scheduled to convert to WRITE2k (billing software being
co-developed by the Billing/Data Services Sector) in 2000. The Intelesystem
software package is being made Year 2000 compliant, with expected completion
during the third quarter 1999.
14
<PAGE>
The Year 2000 compliance expenditures associated with the Telephone
Sector are expected to be less than $500,000, because the majority of the
upgrades are normal course-of-business expenses.
COMMUNICATIONS SERVICES The Company expects that Minnesota Southern Wireless
Company will convert to the Billing/Data Services Sector's wireless billing
software version of WRITE2k by third quarter 1999. WRITE2k is Year 2000
compliant. Crystal Communications will continue to use the Billing/Data
Services Sector's billing software package called EasyTel2000, which is
anticipated to be Year 2000 compliant in the third quarter of 1999. The
Communications Services Sector is using the Great Plains software system for
accounting and financial reporting. In 1996, the Company began a three-year
migration plan to convert all of the Company's sectors to the Great Plains
System for accounting and financial reporting purposes. The Great Plains
software system is Year 2000 compliant.
A software upgrade to the Nortel switch of the wireless operations in
the second quarter of 1999 included software to ensure the switch was Year
2000 compliant. The switch upgrade was part of the Company's ongoing network
enhancement program. The wireless operations voicemail system was also
enhanced in the second quarter 1999 in order to make it Year 2000 compliant.
The Communications Services Sector's expenses associated with Year 2000
compliance are estimated to not exceed $100,000.
BILLING/DATA SERVICES NIBI utilizes the Great Plains software system as its
internal business software system. This system is Year 2000 compliant. The
Company anticipates that all of NIBI's billing platforms for its customers
will be Year 2000 compliant by the end of the third quarter of 1999.
The costs of internal resources dedicated to Year 2000 remediation are
estimated to be less than $200,000 for the Billing/Data Services Sector.
COMMUNICATIONS PRODUCTS Collins converted its internal business software to
the Great Plains software system in the second quarter of 1999. This
conversion took 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 2. CHANGES IN SECURITIES.
In April 1999, the Company's Articles of Incorporation were amended to
increase the number of authorized shares from 25,000,000 to 100,000,000.
Item 3. DEFAULT UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a. The annual shareholders' meeting was held on April 12, 1999.
b. Four directors were elected to serve three-year terms. The names of
the directors elected at the annual meeting and the applicable votes
were as follows:
<TABLE>
<CAPTION>
BROKER
DIRECTOR FOR WITHHELD NONVOTES
-------- --- -------- --------
<S> <C> <C> <C>
Robert D. Alton, Jr. 10,551,715 92,320 NONE
Robert K. Else 10,543,974 100,061 NONE
R. Wynn Kearney 10,530,665 113,370 NONE
Robert E. Switz 10,562,196 81,839 NONE
</TABLE>
c. The Company's Articles of Incorporation were also amended at the
annual meeting to increase the number of authorized of shares from
25,000,000 to 100,000,000. The votes to approve this amendment were as
follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NONVOTES
--- ------- ------- --------
<S> <C> <C> <C>
9,274,639 1,261,850 107,546 NONE
</TABLE>
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS OF FORM 8-K.
(a) Exhibit 27. Financial Data Schedule
(b) The Company filed a report on Form 8-K dated May 21, 1999
announcing the sale of its 6.4% ownership in Midwest Wireless
Communications L.L.C.
(c) The Company filed a report on Form 8-K dated June 15, 1999
relating to the completion of the acquisition of the cellular
property in the Minneapolis/St. Paul, Minnesota metropolitan
area from McElroy Electronics Corporation.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: AUGUST 13, 1999 HICKORY TECH CORPORATION
By /s/ Robert D. Alton, Jr.
---------------------------------------------
Robert D. Alton, Jr., Chief Executive Officer
By /s/ David A. Christensen
---------------------------------------------
David A. Christensen, Chief Financial Officer
17
<PAGE>
HICKORY TECH CORPORATION AND SUBSIDIARIES
Exhibit Index to
Form 10-Q for the Quarter Ended June 30, 1999
<TABLE>
<CAPTION>
Exhibit Number Document Description
- -------------- --------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,473
<SECURITIES> 0
<RECEIVABLES> 16,461
<ALLOWANCES> 676
<INVENTORY> 3,282
<CURRENT-ASSETS> 22,363
<PP&E> 146,164
<DEPRECIATION> 72,809
<TOTAL-ASSETS> 198,578
<CURRENT-LIABILITIES> 11,478
<BONDS> 108,256
0
0
<COMMON> 1,374
<OTHER-SE> 70,909
<TOTAL-LIABILITY-AND-EQUITY> 198,578
<SALES> 12,460
<TOTAL-REVENUES> 47,347
<CGS> 11,914
<TOTAL-COSTS> 36,641
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,631
<INCOME-PRETAX> 18,074
<INCOME-TAX> 7,631
<INCOME-CONTINUING> 10,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,443
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.76
</TABLE>
