Item 1. Business.
GENERAL
Hickory Tech Corporation (HickoryTech) is
a diversified communications company headquartered in Mankato, Minnesota.
HickoryTech has over a 100-year history in the local telephone exchange
business. From those roots, it has expanded into five business segments and
eight operating companies. HickoryTech’s core business is the operation of
three incumbent local exchange carriers (ILECs). 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 commonly associated with ILECs. In
addition in 1998, HickoryTech undertook business startup initiatives in long
distance, internet access and competitive local exchange carrier (CLEC)
businesses. This business takes advantage of HickoryTech’s telecommunications
expertise and expands service into areas served by other ILECs. HickoryTech
also provides wireless telecommunications services to customers in and in the
area surrounding its ILEC service territory in Minnesota and also in an area
surrounding Minneapolis/St. Paul. As additional lines of business, HickoryTech
provides data processing services to the telecommunications industry and
installs and maintains telephone systems.
The eight subsidiaries of HickoryTech and the
business segments in which they operate are:
TELEPHONE SECTOR
• Mankato
Citizens Telephone Company (MCTC)
• Mid-Communications,
Inc. (Mid-Comm)
• Heartland
Telecommunications Company of Iowa (Heartland)
• Cable Network,
Inc. (CNI)
COMMUNICATIONS SERVICES SECTOR
• Crystal
Communications, Inc. (Crystal)
WIRELESS SERVICES SECTOR
• Minnesota
Southern Wireless Company (MSWC)
INFORMATION SOLUTIONS SECTOR
• National
Independent Billing, Inc. (NIBI)
ENTERPRISE SOLUTIONS SECTOR
• Collins
Communications Systems Co. (Collins)
HickoryTech 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 landline and wireless 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 HickoryTech and its subsidiaries are available from a variety of
sources, and no future supply problems are anticipated. All of HickoryTech’s
ILEC and CLEC central office switches and wireless switches, as well as a
majority of HickoryTech’s equipment sold in its Enterprise Solutions Sector,
are the Nortel brand. Nortel is a leading supplier of communications equipment,
and HickoryTech’s dependence on this brand is not viewed as a significant risk.
As of December 31, 2001, HickoryTech had
502 full-time equivalent employees.
ACQUISITIONS
On June 26, 2001, HickoryTech acquired two digital personal
communications services (PCS) licenses from McLeodUSA Incorporated for
$11,100,000 in cash. The PCS licenses
acquired by HickoryTech include the Minnesota Basic Trading Areas (BTAs) of
Mankato-Fairmont and Rochester-Austin-Albert Lea, an area covering a population
of approximately 493,000 people. The
acquisition was a purchase of the licenses only. There were no customers, existing revenue stream or physical
property and equipment included with this acquisition as the BTAs were
undeveloped. The operations of these
PCS licenses are included in the Wireless Services Sector. FCC PCS licenses are
forfeitable if minimum service coverage requirements are not met. The
Mankato-Fairmont BTA license minimum buildout requirement was met in 2001. The
Rochester-Austin-Albert Lea BTA license minimum buildout requirement deadline
is June 27, 2002. Management anticipates completing the minimum buildout before
the deadline.
On October 9, 2000, HickoryTech acquired the dial-up internet customer
accounts of Internet Connections, a Mankato-based internet service provider.
Internet Connections had approximately 5,000 internet customers in southern
Minnesota. The operations of this internet services business are integrated
with HickoryTech’s existing dial-up internet business in its Communications
Services Sector.
DISPOSITIONS
On August 6, 2001, HickoryTech closed on the
previously announced agreement to sell its local telephone exchange in Amana,
Iowa to South Slope Cooperative Telephone Company, Inc. for $6,500,000 in cash.
The Amana operation, known as Amana Colonies Telephone Company (ACTC), served
approximately 1,500 access lines in the seven communities of the Amana Colonies
in east central Iowa. HickoryTech
recorded a pre-tax gain on the sale of $1,015,000 ($566,000 net of tax). HickoryTech used the proceeds from the sale
to repay a portion of its outstanding debt. The operations of ACTC were
included in the Telephone Sector. For
the years ended December 31, 2001, 2000 and 1999, ACTC generated revenues of
$832,000, $1,467,000 and $1,461,000 and generated an operating income (loss) of
($13,000), $70,000 and $356,000, respectively.
INDUSTRY SEGMENTS FINANCIAL DATA
Financial information about HickoryTech’s
industry segments is included on pages 12 to 16 and 32 of this Form 10-K.
INDUSTRY SEGMENTS
HickoryTech’s operations are conducted in the
following five segments:
TELEPHONE SECTOR
MCTC, Mid-Comm and Heartland are ILECs and CNI is
a fiber optic network company. Together they provide telephone-related services
and collectively form HickoryTech’s Telephone Sector. The Telephone Sector also
included the operations of ACTC, which was sold on August 6, 2001. None of the
remaining companies in the Telephone Sector 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 eleven rural communities adjacent to Mankato in
south central Minnesota. Heartland provides service to eleven rural communities
in northwest Iowa. CNI owns and operates fiber optic cable facilities in
southern and central Minnesota, which are used to transport interexchange
communications as a service to telephone exchange companies, primarily to MCTC
and Mid-Comm.
MCTC derives its principal revenues and income
from local services charged to subscribers in its service area, from access
services charged to interexchange carriers 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 a common work force. Heartland
derives its principal revenues and income from local services charged to
subscribers in its service area in Iowa and from providing interexchange access
for its subscribers. Interexchange telephone access is provided by all three of
HickoryTech’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 is also a public utility, which operates
pursuant to a certificate of public convenience and necessity issued by the
Iowa Utilities Board. These state agencies regulate the services provided by
MCTC, Mid-Comm and Heartland. None of CNI’s operations are subject to
regulation by any state regulatory authority. Due to the size of MCTC, Mid-Comm
and Heartland, neither the Minnesota Public Utilities Commission nor the Iowa
Utilities Board regulates the rate of return or profits of each telephone company’s
operations. Instead, the Minnesota Public Utilities Commission regulates the
prices and services levels provided by MCTC and Mid-Comm because each company’s
operations fall below the 50,000 access line minimum level for rate regulation
in the state of Minnesota. In the state of Iowa, Heartland’s operations fall
below the 15,000 access line minimum level for rate regulation by the Iowa
Utilities Board. MCTC, Mid-Comm and Heartland are each required to file local
service rates as tariffs with the applicable state public utilities commission.
MCTC’s and Mid-Comm’s local service rates are below those of most Minnesota
ILECs, which relieves these companies of substantial regulatory oversight.
Regardless of whether a particular rate is subject to regulatory review, the
ability of HickoryTech and its subsidiaries to change rates will be determined
by various factors, including economic and competitive circumstances. Due to
the rural nature of HickoryTech’s service territory and the relatively small
size of HickoryTech’s service territory in each state, management does not
expect individual state or federal regulation to materially impact
HickoryTech’s operations in the near future.
As local exchange telephone companies, MCTC,
Mid-Comm and Heartland provide end office switching and ancillary services to
long distance interexchange carriers. These relationships allow HickoryTech’s
telephone subscribers to place long distance telephone calls. By paying access
charges on the long distance calls of all of the individual customers who use
their service, the long distance interexchange carriers are significant
customers of HickoryTech, but individually none of them represent more than ten
percent of HickoryTech’s consolidated revenues.
Alternatives to HickoryTech service include
customers leasing private line switched voice and data services in or adjacent
to the territories served by HickoryTech, 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 HickoryTech’s long-term
ability to provide local exchange service at economical rates.
In order to meet this competition, HickoryTech
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 HickoryTech’s switches, installation of over 500 miles of fiber optic cable
and installation of SS7 (an out-of-band system) for all of its access lines.
HickoryTech 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 HickoryTech to provide a very reliable level of service
to its customers. The utility of the local network is also enhanced by the
ability to offer high speed internet (digital subscriber line, or DSL) in over
70% of all HickoryTech territories, and over 95% of its largest exchange,
Mankato.
Competition in HickoryTech’s ILEC service area
has developed in one of Heartland’s exchanges. In the city of Hawarden, Iowa,
the municipal city government overbuilt the city’s telephone service
infrastructure and is providing an alternative to HickoryTech’s telephone
service. The Hawarden CLEC has acquired approximately 1,000 access lines or
approximately 59% of that city’s business from HickoryTech. The impact of this
competition is reflected in HickoryTech’s 2001, 2000 and 1999 financial results
and HickoryTech management does not believe there will be significant further
impact from competition in Hawarden. HickoryTech constantly responds to
competitive changes with active programs to market products and to engineer its
infrastructure for higher customer satisfaction.
Competition also exists for some of the services
provided to interexchange carriers, such as customer billing services,
dedicated private lines, 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, operator services and cellular communications,
are open to competition. Competition is based primarily on service and
experience.
COMMUNICATIONS SERVICES SECTOR
The passage of the Telecommunications Act created
the opportunity for HickoryTech to offer communications service in territories
served by other telephone companies, and Crystal began operations in January
1998 as a new start-up business. Crystal offers local service, long distance
and dial-up internet access services on a competitive basis to customers in
towns in southern Minnesota and Iowa not in HickoryTech’s Telephone Sector’s
service area. This service offers alternatives to the incumbent telephone
carrier in various communities and is offered under the trade name HickoryTech
wireline service. These services are currently being offered to customers in
eight rural communities in Minnesota, as well as six rural communities in Iowa.
Crystal’s primary strategy is to provide service by overbuilding the ILEC with
new telecommunications switching networks and telephone lines. The
Communications Services Sector also provides the long distance service and
dial-up internet access services to HickoryTech’s Telephone Sector’s
subscribers.
Crystal is not subject to regulation by the
public utilities commissions in the states it serves regarding rates and
services. The CLEC activities of Crystal do require it to file for authority to
operate with the appropriate public utilities commission in each state it
enters. Crystal competes directly against existing ILECs 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.
Crystal is not dependent upon any single customer
or small group of customers. No one customer accounts for ten percent or more
of HickoryTech’s consolidated revenues in the Communications Services Sector.
WIRELESS SERVICES SECTOR
HickoryTech, through its subsidiary MSWC, owns
and operates cellular telephone businesses in south central Minnesota and in
the Minneapolis/St. Paul area. In south central Minnesota, MSWC provides
cellular service for Minnesota’s Rural Service Area (RSA) 10, under the trade
name of HickoryTech Wireless. This business owns 100% of the “A-side” FCC cellular license to operate in
seven counties in south central Minnesota. The area overlaps and is larger than
the telephone line service area of HickoryTech’s Minnesota ILEC and CLEC
service areas and serves a population of approximately 230,000. This sector
also owns the Minneapolis/St. Paul Metro A-2 (Metro A-2) cellular license,
which was acquired on June 1, 1999. The Metro A-2 property surrounds the
metropolitan Minneapolis/St. Paul area and is located in five Minnesota
counties and in one Wisconsin county. Metro A-2 provides service to an area
with a population of approximately 170,000. In addition, this sector also owns
the newly acquired PCS licenses for the Minnesota BTAs of Mankato-Fairmont and
Rochester-Austin-Albert Lea. The two BTAs are located in 16 Minnesota counties
and one Iowa county and provide service to an area with a population of
approximately 493,000, some of which coincide with the previously mentioned
cellular RSA 10 population of 230,000.
MSWC derives its principal revenues and income
from providing cellular telephone service to the retail customers in seven
counties in south central Minnesota and roaming traffic. MSWC also derives
roaming revenue from the six counties surrounding the metropolitan
Minneapolis/St. Paul Metro A-2 area and roaming revenues from the 17 counties
which comprise the PCS service territory.
MSWC directly competes against local cellular and
PCS companies in southern Minnesota and in the Minneapolis/St. Paul area. MSWC
shares the market with other wireless providers and will require additional
investment of assets to build the infrastructure to provide high quality
service to this service area and to meet FCC mandates.
INFORMATION SOLUTIONS SECTOR
Through NIBI, HickoryTech’s Information Solutions
Sector provides data processing and related services, principally for
HickoryTech, other local exchange telephone companies, CLECs, interexchange
network carriers, wireless companies, municipalities and utilities. The
Information Solutions Sector’s principal activity is the provision of monthly
batch processing of computerized data for HickoryTech as well as non-affiliated
companies. 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, carrier
access bills and general accounting and payroll services. NIBI, under the trade
name HickoryTech Information Solutions, also provides certain billing
clearinghouse functions for interexchange carriers.
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 the billing and data
services business. There are many new market niches for telecommunications
billing and data services, including ILECs, CLECs and wireless carriers.
HickoryTech believes that NIBI is in a position to provide data processing
services for these companies.
HickoryTech’s Information Solutions Sector has
developed a new integrated billing and management system called SuiteSolution.
For internal use, SuiteSolution enables HickoryTech to become a full-service
billing provider for all aspects of the telecommunications industry on a fully
integrated basis. For external use, SuiteSolution can provide wireline or
wireless carriers the individual benefits of a billing platform, or to
integrated service providers, such as HickoryTech, a total system.
ENTERPRISE SOLUTIONS SECTOR
HickoryTech’s Enterprise Solutions’ activities
are focused on the sale, installation and service of business telephone systems
and data communications equipment to companies based in metropolitan
Minneapolis/St. Paul, Minnesota. This sector also supports the business
telephone system service for HickoryTech ILEC and CLEC operations in southern
Minnesota and in Iowa. The customers in the Enterprise Solutions Sector’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 the Enterprise Solutions’ business, and
Cisco and Bay Networks (Nortel) equipment on the data side of its business.
Enterprise Solutions 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. Enterprise Solutions continues
its commitment to service and support of its core product, Nortel, while
identifying new opportunities such as call centers, computer telephone
integration voice mail and interactive voice response systems.
HickoryTech’s Enterprise Solutions Sector is not
dependent upon any single customer or small group of customers. No one customer
accounts for ten percent or more of HickoryTech’s consolidated revenues in the
Enterprise Solutions Sector.
There are several companies competing in the
communications products market in which Enterprise Solutions operates.
Competition is based primarily on price and service. No one company is dominant
in this field. Enterprise Solutions offers customer premises telephone
equipment through well-trained and experienced market representatives with
long-term customer relationships. HickoryTech believes that its Enterprise
Solutions Sector enjoys a very strong reputation for quality service.
Enterprise Solutions has built a strong base of customers with recurring
telecommunications needs and it is Enterprise Solutions’ goal to derive 60-70%
of its revenue from sales to its base.
OTHER REGULATION
HickoryTech does not anticipate any material
effects on their earnings, capital expenditures or competitive position because
of laws pertaining to the protection of the environment.
OTHER
COMPETITION
Since the mid-1980’s, HickoryTech’s business
strategy has been to position itself as a “one-stop” telecommunications
services provider. Long-term business relationships with its customers have
strengthened HickoryTech’s business position. HickoryTech believes that its
customers value the fact that it is the “local company” whose goal is to meet
the customers’ total communications needs. HickoryTech has several competitive
advantages: its prices and costs are low; its service reputation is high; its
investment in technology is 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 HickoryTech
that competition in this industry remain open on an equal basis to all
providers. HickoryTech has chosen to participate in the competitive trend and
enhance its growth by establishing its Communications Services Sector.
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report, 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 HickoryTech operates and
management’s beliefs and assumptions. HickoryTech is developing several
internal growth businesses, including its Communications Services Sector, its
Wireless Services Sector and its SuiteSolution product in the Information
Solutions Sector, and in this Form 10-K is making certain forward-looking
statements about these growth businesses. Such forward-looking statements are
subject to uncertainties that could cause HickoryTech’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. Factors that might cause such a difference
include, but are not limited to, those contained in this Item 1, “Management’s
Discussion and Analysis” in Item 7 and Exhibit 99, which is incorporated herein
by reference. 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. Except as otherwise required by law,
HickoryTech undertakes no obligation to update any of its forward-looking
statements for any reason.
Item 2.
Item 2. Properties.
HickoryTech’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, 2001, HickoryTech’s gross property, plant and equipment
of $231,675,000 consisted primarily of telephone switches, cable and network
equipment. HickoryTech owns or leases the telephone property, plant and
equipment which it utilizes to operate its telephone systems. The three
telephone subsidiaries of HickoryTech in Minnesota and Iowa own central
telephone offices with related real estate in all of the communities they
serve. HickoryTech’s Telephone and Communications Services Sectors own the
telephone network, including telephone outside plant, fiber-optic cable and
central office equipment, over which they provide services to their customers.
HickoryTech’s Wireless Services Sector owns the switches and cellular/PCS radio
equipment which provides its unique wireless network. It is the opinion of
HickoryTech’s management that the properties of HickoryTech 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 HickoryTech’s engineering staff. Facilities are placed in full use
after installation and appropriate testing under the guidance associated with
multi-year capital expenditure plans.
HickoryTech’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
owned by MCTC and is a three-level brick and stone building containing
approximately 60,000 square feet of floor space. Portions of this building are leased to HickoryTech 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 owned by MCTC and is a two-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 owned by
Heartland in Rock Rapids, Iowa containing approximately 1,500 square feet.
Heartland also leases general office space in Rock Valley, Iowa.
(4) Crystal leases
office space in Mankato, Minnesota and West Des Moines, Iowa.
(5) MSWC leases
office space in Mankato, Minnesota for cellular switch equipment and
administration. MSWC also leases and owns various cellular and PCS tower sites
through southern Minnesota and the Minneapolis/St. Paul metropolitan area.
(6) NIBI owns a
three-story building in Mankato, Minnesota containing approximately 17,000
square feet.
(7) Collins leases
building and warehouse space in Roseville, Minnesota.
Item 3.
Item 3. Legal
Proceedings.
There is no material pending legal or governmental proceedings directly
involving HickoryTech or its subsidiaries, other than ordinary routine
litigation or ordinary routine utility matters, incidental to the business of
HickoryTech and its subsidiaries.
Item 4.
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 2001
Annual Report on Form 10-K.
PART II
Item 5.
Item 5. Market for
Registrant’s Common Equity and Related Stockholder Matters.
The common stock of HickoryTech is traded on The
Nasdaq National Market under the symbol “HTCO”.
The following table sets forth for the period
indicated, the high and low closing sales price of the common stock.
As of February 28, 2002, there were approximately 3,339 holders of
record of common stock, registered and in street name accounts.
HickoryTech has declared quarterly dividends on its common stock of
$0.11 per share during the two years ended December 31, 2001. A quarterly cash
dividend of $0.11 per share will be paid on March 5, 2002 to stockholders of
record at the close of business on February 15, 2002.
Item 6.
Item 6. Selected
Financial Data.
(A) Acquisitions of Heartland
Telecommunications Company of Iowa and Datacomm Products in 1997, Minnesota
Southern Wireless Company in 1998 and Metro A-2 (Minneapolis/St. Paul area)
cellular telephone business in 1999 and dispositions of HickoryTech’s
subsidiaries, Digital Techniques, Inc. (DTI) in 1998 and Amana Colonies
Telephone Company (ACTC) in 2001, have affected HickoryTech’s revenue trends.
(B) Excludes one-time after-tax gains in 2001
of $619,000 or $0.04 per share from sale of ACTC and unrelated assets and
investments; in 2000 of $161,000 or $0.01 per share adjustment to the 1998 sale
of DTI; in 1999 of $5.2 million or $0.38 per share from the sale of a cellular
partnership interest; in 1998 of $811,000 or $0.06 per share from the sale of
DTI and unrelated securities; in 1997 of $3.7 million or $0.27 per share from
the sale of DirecTV assets. 2000 also excludes $253,000 or $0.02 per share from
the extraordinary loss and cumulative effect charge.
(C) All per share
calculations and shares outstanding have been restated for the 1998 3-for-1
stock split.
(D) Debt Ratio =
Total Debt / (Total Debt + Ending
Shareholders’ Equity).
(E) ILEC Lines refer to the local exchange
telephone access lines in the Telephone Sector. ILEC Lines include ISDN (High
Speed Data) lines of 2,196 in 2001, 2,198 in 2000 and 1,683 in 1999.
(F) CLEC Lines refer
to the competitive local exchange telephone access lines in the Communications
Services Sector.
(G) Wireless
Customers refer to the cellular service subscribers in the Wireless Services
Sector.
(H) Internet Customers are dial-up internet
accounts within the Communications Services Sector, serving ILEC, CLEC or stand
alone dial-up accounts anywhere HickoryTech serves. 2000 includes 4,834
customers acquired from Internet Connections. This does not include DSL
customers.
(I) Long Distance
service accounts are provided in the Communications Services Sector to ILEC and
CLEC customers.
(J) Price is the last day closing price for
2001 through 1999 and the last five-day closing price average for the years
1998 and 1997.
(K) Number of Shareholders is approximate
total of Company registrations and street name accounts. Data prior to 2000 is
not available.
Item 7.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
BUSINESSES
HickoryTech operates in five business sectors. Its largest and oldest
business (since 1898) has been the operation of incumbent local exchange
carriers (ILECs) or traditional wired telephone service. This business is
HickoryTech’s Telephone Sector. In 1998, HickoryTech began its Communications
Services Sector, which is a competitive local exchange carrier (CLEC),
competing for the telephone dial tone, data and long distance calling business
in other ILECs’ territories. Also in 1998, HickoryTech began its Wireless Services
Sector by acquiring its first wholly-owned cellular service license, added to
that sector in 1999 with the acquisition of an additional cellular service
license and again in 2001 with the acquisition of two PCS licenses. Since 1964,
HickoryTech’s Information Solutions Sector has provided computer data
processing and software, predominantly to other telecommunications companies
and for its own operations. HickoryTech acquired its Enterprise Solutions
Sector in 1990. Since then, HickoryTech has operated as a leading
telecommunications and data equipment distributor from a base in
Minneapolis/St. Paul, Minnesota.
THE
COMPANY
The eight subsidiaries of HickoryTech, all of which publicly operate
and conduct business as HickoryTech, and the business sectors in which they
operate are:
TELEPHONE
Mankato Citizens Telephone Company
Mid-Communications, Inc.
Heartland Telecommunications Company of Iowa, Inc.
Cable Network, Inc.
COMMUNICATIONS SERVICES
Crystal Communications, Inc.
WIRELESS SERVICES
Minnesota Southern Wireless Company
INFORMATION SOLUTIONS
National Independent Billing, Inc.
ENTERPRISE SOLUTIONS
Collins Communications Systems Co.
CORPORATE
DEVELOPMENTS
2001 In June, HickoryTech acquired two PCS
licenses in southern Minnesota covering an area with a population of
approximately 493,000.
In August, HickoryTech sold Amana Colonies Telephone
Company (ACTC), a local telephone exchange serving approximately 1,500 access
lines in east central Iowa.
During 2001, HickoryTech grew internally by 800 ILEC
access lines (prior to sale of ACTC), 3,300 CLEC access lines, 500 wireless
customers, 700 internet customers and 5,900 long distance customers, a total of
8.6% growth internally in customer counts.
2000 In October, HickoryTech acquired approximately 5,000
dial-up internet customer accounts in southern Minnesota from Internet
Connections.
During 2000, HickoryTech grew internally by 2,200 ILEC
access lines, 4,500 CLEC access lines, 5,400 wireless customers, 1,300 internet
customers and 6,200 long distance customers, a total of 18.5% growth internally
in customer counts.
1999 In May, HickoryTech sold its 6.4% equity interest in
Midwest Wireless Communications, LLC, a rural cellular provider in southern
Minnesota.
In June, HickoryTech acquired 170,000 population equivalents
(pops) cellular license surrounding metropolitan Minneapolis/St. Paul.
CONSOLIDATED
RESULTS OF OPERATIONS
Compared to 2000
• 2001 consolidated operating revenues were $108.5
million, a $6.2 million or 6.0% increase over 2000. Excluding revenues of
$832,000 in 2001 and $1,467,000 in 2000 related to ACTC, which was sold in
2001, consolidated operating revenues in 2001 increased 6.7% over 2000.
• 2001 consolidated net income of $8.7 million
represents a $1.0 million or 13.4% increase from 2000. The 2001 net income
includes a $566,000 after-tax gain from the sale of ACTC. The 2001 net income
also includes a $53,000 after-tax gain from the sale of various property and
investments. The 2000 net income includes a $161,000 after-tax gain related to
final payment received from the 1998 sale of Digital Techniques, Inc. The 2000
net income also includes a $233,000 after-tax extraordinary loss related to the
early extinguishment of debt and a $20,000 after-tax loss from the cumulative
effect of a change in accounting principle. Without the effect of these gains
and other one-time items in either year, consolidated net income would have
increased 4.1% from 2000.
Compared to 1999
• 2000 consolidated operating revenues were $102.3
million, a $5.1 million or 5.2% increase over 1999. HickoryTech’s acquisition
of Metro A-2 contributed $3,569,000 to consolidated operating revenues for the
full year 2000 and $2,730,000 for the partial year 1999. Without the effect of
the acquisition of Metro A-2, consolidated operating revenues in 2000 would
have increased 4.5% over 1999.
• 2000 consolidated net income of $7.7 million
represents a $7.0 million or 47.5% decrease from 1999. The 2000 net income
includes a $161,000 after-tax gain related to final payment received from the
1998 sale of Digital Techniques, Inc. The 2000 net income also includes a
$233,000 after-tax extraordinary loss related to the early extinguishment of
debt and a $20,000 after-tax loss from the cumulative effect of a change in
accounting principle. The 1999 net income includes a $5.2 million after-tax
gain from the sale of HickoryTech’s equity interest in Midwest Wireless
Communications. Without the effect of these gains and other one-time items in
either year, consolidated net income would have decreased 17.5% from 1999.
OVERALL SUMMARY OF OPERATIONS
* Excludes net of tax gains from sale of assets of $619,000 in 2001, $161,000 in 2000 and
$5,213,000 in 1999, and after-tax extraordinary loss of $233,000 and after-tax
cumulative loss on accounting change of $20,000 in 2000.
TELEPHONE
Telephone Sector revenues represented 51% of 2001 consolidated
operating revenues after intersegment eliminations. They were earned primarily
by providing customers access to the Telephone Sector’s 66,393 ILEC access line
local network and by 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 revenues after intersegment eliminations have grown 9.9%
compounded annually over a five-year period from 1996 to 2001. Without the
acquisition of Heartland in 1997 and excluding the revenues from ACTC, which
was sold in 2001, the five-year compound annual growth rate would have been
6.3%.
TELEPHONE
(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 such
information is used by certain investors when analyzing the financial position
and performance of HickoryTech. 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. HickoryTech sees value in disclosing its calculation of EBITDA
for the financial community and in displaying the change in EBITDA. HickoryTech
believes an increasing EBITDA depicts increased ability to attract financing
and increased valuation of HickoryTech’s business.
From the table above, Telephone revenues before eliminations increased
6.2% in 2001 and 5.1% in 2000. Local service rates were increased in Heartland
in May 2001 and in MCTC and Mid-Comm in December 2001 and February 2000, which
contributed $128,000 and $744,000 to Telephone revenues in 2001 and 2000,
respectively. Without the local service
rate increases and excluding the revenues of ACTC, Telephone revenues before
eliminations would have increased 7.3% in 2001 and 3.7% in 2000.
Local service revenue increased in the Telephone Sector by 10.3% for
2001 over 2000 and 6.8% for 2000 over 1999. Without the impact of the local
service rate increases and excluding the revenues of ACTC, local service
revenue would have increased 9.9% in 2001 and 0.7% in 2000. Increased demand
for local private lines and higher penetration of vertical services such as
caller identification, call waiting and three-way calling was the primary
source of the growth in local service revenue in 2001. Access line growth of
1.2% in 2001 (prior to sale of ACTC) and 3.3% in 2000, along with the local
service rate increases, was also a contributor to higher local service revenue.
Network access revenue increased 1.2% in 2001 and 10.1% in 2000. Access
minutes in 2001 increased 0.6% over 2000 and in 2000 increased by 1.9% over
1999. Excluding the revenues of ACTC, network access revenue would have
increased 3.1% in 2001, and access minutes would have increased 2.0% in 2001
over 2000. Access revenues in 2000 were enhanced by high demand for dedicated
lines, high speed circuits and other non-usage based network connections. In
2001, the negative effects of network access pricing, a common industry trend,
began to erode the increases in network access revenue from the volume of
switched minutes of use.
Intersegment revenues increased 30.6% in 2001 over 2000 and decreased
19.9% in 2000 over 1999. The intersegment revenues are primarily related to
engineering assistance provided to construct the CLEC telephone network and the
use of the Telephone Sector’s telephone switch by the Communications Services
Sector. These revenues are eliminated from operating revenues on the
Consolidated Statements of Income.
Other revenues, which include directory advertising, billing and
collections revenue and large system sales, increased 11.3% in 2001 over 2000
and decreased 4.9% in 2000 over 1999. Other revenues increased in 2001 due to
higher demand for high speed data circuits and increased large system sales.
Cash operating expenses increased 6.5% in 2001 and 0.4% in 2000. The
increase in 2001 was caused primarily by higher corporate costs being allocated
to the Telephone Sector primarily related to the sale of ACTC, efforts made to
address access reform and industry issues. The increases in 2000 were due to
normal inflation. The Telephone Sector is striving for cost efficiencies and
technological improvement to maintain its operating margins.
The Telephone Sector capital expenditures in 2000 and 1999 include
$4,036,000 and $5,523,000, respectively, for the building of new fiber optic
routes outside of this sector’s service territory. Capital expenditures in 2000
also included $1,513,000 in host switch additions. The remainder of the 2000
and 1999 capital expenditures of $9,479,000 and $7,187,000, respectively, are
comparable to those in 2001 and consists primarily of additional service
connections and network upgrades.
COMMUNICATIONS
SERVICES
Communications Services Sector revenues represented approximately 10%
of 2001 consolidated operating revenues after eliminations. Revenues are earned
primarily by providing competitive local telephone service (CLEC), by providing
long distance service and dial-up internet access to both CLEC and ILEC
customers.
HickoryTech is developing new business with this sector. As a result of
this investment, this sector’s local service, long distance and internet
activities operated at negative EBITDA of $3,875,000 in 2001, $4,373,000 in
2000 and $3,826,000 in 1999. The sector also invested $19,626,000 in 2001 and
$19,197,000 in 2000 in capital expenditures. Access lines served in this sector
have grown to 11,573 at the end of 2001 from 3,704 at the end of 1999. Long
distance customers served in this sector have grown to 24,241 at the end of
2001 from 12,146 at the end of 1999. Internet customers served in this sector
have grown to 12,816 at the end of 2001 from 5,835 at the end of 1999.
HickoryTech is primarily a network overbuilder, as opposed to reselling other
ILEC services. While the customer acquisition costs may be high for this growth
plan, management believes the long-term benefits will be comparable to its
Telephone Sector operations because in essence, HickoryTech will be running its
ILEC and CLEC businesses in similar manner.
COMMUNICATIONS SERVICES
(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 such
information is used by certain investors when analyzing the financial position
and performance of HickoryTech. 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. HickoryTech sees value in disclosing its calculation of EBITDA
for the financial community and in displaying the change in EBITDA. HickoryTech
believes an increasing EBITDA depicts increased ability to attract financing
and increased valuation of HickoryTech’s business.
The significant increases in operating revenues and expenses in 2001
and 2000 were the result of the Communications Services Sector’s growth in CLEC
access lines and long distance and internet customers. One industry trend
impacting this sector is the decrease in average long distance revenue per
customer. This sector experienced a 32.0% increase in its long distance
customer base during 2001, with long distance revenues in 2001 increasing 3.8%
over 2000. This slower growth in long distance revenues is the result of the
decreasing long distance revenue per customer.
The Communications Services Sector’s growth costs include the hiring of staff and marketing expenses prior to
revenue streams and paying interconnection fees to incumbent carriers for
transferring customers to the CLEC telephone network.
WIRELESS
SERVICES
Wireless Services Sector revenues represented approximately 16% of 2001
consolidated operating revenues after eliminations. Revenues are earned
primarily by providing wireless and prepaid cellular telephone service to
subscribers in seven counties in south central Minnesota and by providing
roaming service to customers and to other service providers. The Wireless
Services Sector was formed after cellular service area license acquisitions in
May 1998 and June 1999 and PCS license acquisitions in June 2001. Customers
served in this sector have grown from 20,309 at the end of 1999 to 26,230 at
the end of 2001.
In the three years ended 2001, the Wireless Services Sector invested
$11,926,000 in capital expenditures to improve its service area coverage,
expand its cellular businesses and build-out its newly acquired PCS license
territory. HickoryTech is nearing the end of its cellular capital expenditure
plan, and in 2002 will complete its PCS capital expenditure plan.
WIRELESS SERVICES
(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 such
information is used by certain investors when analyzing the financial position
and performance of HickoryTech. 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. HickoryTech sees value in disclosing its calculation of EBITDA
for the financial community and in displaying the change in EBITDA. HickoryTech
believes an increasing EBITDA depicts increased ability to attract financing
and increased valuation of HickoryTech’s business.
From the table above, Wireless revenues decreased 6.6% in 2001 over
2000 and increased 11.8% in 2000 over 1999. The decrease is primarily a result
of the decrease in roaming revenue. Service revenue increased by 19.4% for 2001
over 2000 and 29.8% for 2000 over 1999. The increase in service revenue is due
primarily to the growth in the customer base served by this sector of 2.1% in
2001 and 26.5% in 2000. The increase in service revenue in 2001 was more than
offset by a decrease in roaming revenue of $3,111,000 during 2001. Roaming
rates and minutes from other wireless carriers’ customers travelling into
HickoryTech’s service territory have continued to erode, particularly due to
technological changes among other wireless providers which re-route the roaming
minutes from HickoryTech’s wireless service towers to other providers. In
addition, other PCS wireless carriers have continued to build-out PCS licenses
in RSA10. HickoryTech believes that both of these factors will continue to
cause a decline in roaming minutes and related revenues for HickoryTech.
Cash operating expenses decreased 2.4% in 2001 over 2000 after
increasing 19.8% in 2000 over 1999. During 2001, this sector implemented a
series of management actions aimed at reducing operating expenses in an attempt
to offset a portion of the decline in roaming revenue. These management actions
were successful in reducing operating expenses and maintaining margins in 2001.
The increase in cash operating expenses in 2000 was due primarily to the
increase in customers served.
INFORMATION
SOLUTIONS
Information Solutions Sector revenues represented approximately 4% of
2001 consolidated operating revenues after eliminations. Revenues are earned by
providing information management solutions for HickoryTech subsidiaries, other
local telephone companies, long distance resellers, CLECs, wireless companies,
municipalities and utilities.
The Information Solutions Sector’s principal activity is the provision
of monthly batch processing of computerized data. The sector has developed a
new integrated billing and management system called SuiteSolution. HickoryTech
plans to deploy SuiteSolution in 2002 to all HickoryTech sectors, and to
provide external installations through sale or turnkey transactions beginning
in 2002.
INFORMATION SOLUTIONS
(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 such
information is used by certain investors when analyzing the financial position
and performance of HickoryTech. 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. HickoryTech sees value in disclosing its calculation of EBITDA
for the financial community and in displaying the change in EBITDA. HickoryTech
believes an increasing EBITDA depicts increased ability to attract financing
and increased valuation of HickoryTech’s business.
From the table above, Information Solutions Sector revenues before
eliminations increased 1.7% in 2001 over 2000 and 19.2% in 2000 over 1999. The
sector’s focus in 2001, 2000 and 1999 was split between the development and
introduction of the new SuiteSolution billing and customer care software
package and continued service to the existing customer base. The current
customer base revenue primarily is driven by service bureau processing to long
distance resellers, CLECs and local telephone companies.
Cash operating expenses in the Information Solutions Sector decreased
3.8% in 2001 and increased 1.6% in 2000. The decrease in 2001 was due primarily
to management actions aimed at reducing operating expenses. This sector
capitalized internal development costs associated with SuiteSolution during
2001, 2000 and 1999. The capitalization of these costs ended during the third
quarter 2001 as the development of SuiteSolution had reached the point where
the product was available for release to customers. As a result of development
costs no longer being capitalized, cash operating expenses for this sector are
expected to be higher in future years as development personnel are deployed on
other tasks. Non-cash operating expenses for this sector increased in 2001 due
to the amortization of SuiteSolution development costs, which began in the
third quarter of 2001.
ENTERPRISE
SOLUTIONS
Enterprise Solutions Sector revenues represented approximately 19% of
2001 consolidated operating revenues after eliminations. Revenues are earned
primarily by the sale, installation and service of business telephone systems
and data communications equipment primarily in metropolitan Minneapolis/St.
Paul, Minnesota. 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. HickoryTech believes that
this sector’s expertise is the quality installation and maintenance of wide
area and local telecommunications networks for end user customers.
ENTERPRISE SOLUTIONS
(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 such information
is used by certain investors when analyzing the financial position and
performance of HickoryTech. 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. HickoryTech sees
value in disclosing its calculation of EBITDA for the financial community and
in displaying the change in EBITDA. HickoryTech believes an increasing EBITDA
depicts increased ability to attract financing and increased valuation of
HickoryTech’s business.
From the table above, revenues for 2001 increased 10.1% from 2000 while
revenues for 2000 decreased 18.0% from 1999. The Enterprise Solutions Sector
experienced lower volumes of business from customers during the second half of
1999 due to concerns regarding Y2K issues.
In 2000, the lower volumes of business continued. Management believes
this lower business volume reflected customer delays due to industry-wide
concerns regarding technological changes, including the role of switch versus
server-based communications, and general economic concerns. During 2001,
Enterprise Solutions gained several large customer sales and, in spite of a
difficult economy, experienced consistently high new installation activity.
Cash operating expenses increased 1.0% in 2001 over 2000 and decreased
12.5% in 2000 over 1999. Cash operating expenses in 2001 were held to
consistent levels as those experienced in 2000 despite a 10.1% increase in
operating revenues. This was the result of management actions aimed at
controlling operating expenses and improving profitability. The decrease in
cash operating expenses experienced in 2000 was less than the 18.0% decrease in
operating revenues as certain fixed costs could not be eliminated.
TOTAL
COSTS AND EXPENSES
Total consolidated costs and expenses after eliminations increased 5.8%
in 2001 over 2000 and 5.8% in 2000 over 1999. Depreciation and amortization
increased $2,526,000 in 2001 over 2000 and $2,421,000 in 2000 over 1999 due
primarily to the higher pace of capital investment in the Communications
Services Sector, wireless acquisitions in 2001, 1999 and 1998 and the
amortization of capitalized SuiteSolution software development costs. Costs and
expenses other than depreciation and amortization were $67,811,000 in 2001,
compared with $65,692,000 in 2000 and $63,723,000 in 1999. The causes of the
net increases are explained in the sector discussions above, although the
primary cause of the overall increase was the growth of the Communications
Services Sector. The Communications Services Sector’s growth costs include the
hiring of staff and marketing expenses prior to revenue streams and paying
interconnection fees to incumbent carriers for transferring customers to the
CLEC telephone network.
INTEREST
EXPENSE
Interest expense increased by $884,000 in 2001 over 2000 and $3,290,000
in 2000 over 1999. The increase in interest expense in 2001 was due to the
increase in total debt outstanding from $149 million at December 31, 2000 to
$171 million at December 31, 2001, offset by a decrease in the weighted average
interest rate from 8.17% in 2000 to 6.66% in 2001. The debt level increased in
2001 to fund internal growth and to fund the PCS acquisition. The increase in
interest expense in 2000 was due to the increase in total outstanding debt from
$111 million at December 31, 1999 to $149 million at December 31, 2000, and due
to an increase in the weighted average interest rate from 6.65% in 1999 to
8.17% in 2000. The debt level increased in 2000 to fund internal growth.
GAIN ON
SALE OF ASSETS
The 2001 gain on sale of assets includes $1,015,000 from the sale of
ACTC and $100,000 from the sale of miscellaneous assets. HickoryTech received
proceeds of $6.5 million on the sale of ACTC. The 2000 gain on sale of assets
of $271,000 is related to a final contingent payment received from the 1998
sale of DTI. The 1999 gain on sale of assets of $9.2 million is the result of
HickoryTech selling its minority interest in Midwest Wireless Communications,
LLC. HickoryTech received proceeds of $12.8 million on the transaction.
INCOME
TAXES
The effective tax rate in 2001 was 40.6%, versus 39.9% in 2000 and
41.9% in 1999. These effective tax rates differ from the U.S. statutory rate
primarily due to state income taxes.
EXTRAORDINARY
LOSS ON DEBT EXTINGUISHMENT
In June 2000, HickoryTech increased its revolving credit facility and
used the proceeds to repay $40,000,000 of senior unsecured notes. As a result
of the extinguishment of the senior unsecured notes, HickoryTech recorded an
extraordinary loss of $233,000, net of income tax benefit of $158,000. This action was taken to align the capital
financing of HickoryTech more suitably with its current business plan.
CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, “Revenue Recognition in Financial Statements,” which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. Implementation of SAB No. 101 required HickoryTech to defer
revenues resulting from up-front fees and to also defer the associated direct
costs. These deferred revenues and costs are now recognized ratably over the
customer relationship period. As permitted by SAB No. 101, HickoryTech
accounted for the change in accounting policy prospectively as a cumulative
effect of accounting change retroactively to January 1, 2000. The cumulative
effect of accounting change in 2000 was a loss of $20,000, net of a tax benefit
of $14,000.
CRITICAL
ACCOUNTING POLICIES
This Management’s Discussion and Analysis of Financial Condition and
Results of Operations are based upon HickoryTech’s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America and, where applicable,
conform to the accounting principles as prescribed by federal and state
telephone utility regulatory authorities. HickoryTech presently gives
accounting recognition to the actions of regulators where appropriate, as
prescribed by Statement of Financial Accounting Standards (SFAS) No. 71,
“Accounting for the Effects of Certain Types of Regulation.”
Revenue
Recognition -
Revenues are generally recognized when services are rendered or products are
delivered to customers. Revenues in the Telephone, Communications Services and
Wireless Services Sectors are earned from monthly billings to customers for
telephone (wireline or wireless) service. Revenues in the Telephone Sector are
also derived from charges for network access to HickoryTech’s local exchange
telephone 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. The companies that take
part in these pooling arrangements may adjust their costs and investments for a
period of two years, which causes the dollars distributed by the pool to be
adjusted retroactively. Management believes that recorded amounts represent
reasonable estimates of the final distribution from these pools.
Revenue in the Enterprise Solutions Sector earned on major installation
and change contracts is recognized on the percentage of completion method,
which relies on measuring actual contract completion versus estimates of total
expected contract revenue and costs. The percentage of completion method is
used since reasonably dependable estimates of the revenue and costs applicable
to various stages of a contract can be made. Recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which the facts that
give rise to the revision become known.
Estimates - 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.
HickoryTech’s allowance for doubtful accounts is an estimate based on
specifically identified accounts as well as general reserves. HickoryTech
evaluates specific accounts where it has information that the customer may have
an inability to meet its financial obligations. In these cases, management uses
its judgment, based on the best available facts and circumstances, and records
a specific reserve for that customer against amounts due to reduce the
receivable to the amount that is expected to be collected. These specific
reserves are reevaluated and adjusted as additional information is received
that impacts the amount reserved. HickoryTech also establishes a general reserve
for all customers based on a range of percentages applied to aging categories.
These percentages are based on historical collection and write-off experience.
If circumstances change, HickoryTech’s estimates of the recoverability of
amounts due the company could be reduced or increased by a material amount.
Such a change in estimated recoverability would be accounted for in the period
in which the facts that give rise to the change become known.
Similarly, HickoryTech makes estimates related to the valuation of
inventory. HickoryTech adjusts its inventory carrying value for estimated
obsolescence or unmarketable inventory to the estimated market value based upon
assumptions about future demand and market conditions. As market conditions
change, if inventory valuations are lower additional inventory write-downs may
be required at the time that the facts that give rise to the lower value become
known.
During 2001, 2000 and 1999, HickoryTech amortized its intangible assets
over their estimated useful lives. The intangible assets and their estimated
useful lives are as follows: goodwill - 40 years; FCC license - 37-40 years;
customer lists - 5-8 years; and other - 5-8 years. See Recent Accounting
Developments for discussion of SFAS 142 and its impact on amortization of
intangible assets.
INFLATION
It is the opinion of management that the effects of inflation on
operating revenues and expenses over the past three years have been immaterial.
Management anticipates that this trend will continue in the near future.
FINANCIAL
CONDITION, RESOURCES AND COMMITMENTS
REVIEW
OF CASH FLOWS
HickoryTech’s net working capital of $13,737,000 at December 31, 2001,
is an increase of $4,855,000 from December 31, 2000. The increase is primarily
due to an increase in receivables and cash, and a decrease in accounts payable.
The ratio of current assets to current liabilities is 2.0 to 1.0 at December
31, 2001.
Cash flows from operations continue to be a steady source of funds for
HickoryTech, primarily coming from the Telephone Sector. Cash provided from
operations was $25,135,000 in 2001, $22,908,000 in 2000 and $23,175,000 in
1999. Cash flows from operations in 2001 were primarily attributable to net
income plus depreciation, amortization and an increase in deferred tax liabilities,
partially offset by increases in income taxes receivable, increases in costs in
excess of billings on contracts in the Enterprise Solutions Sector and
decreases in accounts payable relating to timing of payments and decreases in
billings in excess of costs on contract in the Enterprise Solutions Sector.
Cash flows from operations in 2000 were primarily attributable to net income
plus depreciation and amortization, partially offset by increases in inventory
in the Telephone Sector and decreases in accounts payable relating to timing of
payments. Cash flows from operations in 1999 were primarily attributable to net
income plus depreciation and amortization, along with a decrease in accounts
receivables, an increase in accounts payable and also offset by the gain on
sale of assets.
Cash flows used in investing activities were $39,979,000 in 2001,
$51,238,000 in 2000 and $54,471,000 in 1999. Capital expenditures relating to
ongoing businesses were $32,868,000 in 2001, $39,662,000 in 2000 and $28,531,000
in 1999. Capital expenditures were incurred to construct additional network
facilities to provide CLEC services and buildout fiber optic and wireless
networks. Cash used in investing activities also included $2,717,000 in 2001,
$1,450,000 in 2000 and $251,000 in 1999 for capitalized software development
costs associated with SuiteSolution in the Information Solutions Sector. Cash
used in investing activities included $11,386,000 in 2001 for the acquisition
of PCS licenses (including direct acquisition costs) and $38,767,000 in 1999
for the Metro A-2 cellular license acquisition. Proceeds from sale of assets
also provided $6,992,000 in 2001 and $12,971,000 in 1999 related primarily to
the sales of ACTC in 2001 and the investment in Midwest Wireless Communications,
LLC in 1999. In 2000, cash used in investing activities included a $10,000,000
investment in Rural Telephone Finance Cooperative (RTFC) which was required as
part of HickoryTech’s new revolving credit facility entered into in September
2000 with a syndicate which included RTFC and other banks.
Cash flows from financing activities were $15,662,000 in 2001,
$26,812,000 in 2000 and $32,871,000 in 1999 primarily resulting from net
borrowings under HickoryTech’s credit facilities. Dividend payments resulted in
uses of cash of $6,117,000, $6,085,000 and $6,048,000 in 2001, 2000 and 1999,
respectively.
DIVIDENDS
HickoryTech paid dividends of $6,117,000, or $0.44 per share, in 2001.
The dividend per share rate was the same as in 2000 and 1999. HickoryTech
expects paying at the existing level of dividends in 2002, which is not
expected to negatively impact the liquidity of HickoryTech.
LIQUIDITY
AND CAPITAL RESOURCES
In 2001, HickoryTech’s acquisition of PCS licenses was funded with
debt, using its revolving credit facility. During 2000, HickoryTech’s bank
credit facility was expanded to $225 million in order to fund capital
expenditures. In 1999, HickoryTech’s
acquisition of the Minneapolis/St. Paul Metro A-2 cellular business was funded
with debt, using its revolving credit facility.
HickoryTech uses variable interest rate financial instruments as of
December 31, 2001. The revolving credit facility had a weighted average
interest rate of 6.66% for the year 2001, and 5.3% at December 31, 2001.
HickoryTech continually monitors the interest rates on its bank loans. A lower
level of interest expense is likely to occur in 2002 because of more limited
use of the revolving credit facility for capital expenditures and potentially
lower weighted average interest rates for the year 2002 than HickoryTech
experienced in 2001. Based on HickoryTech’s banking relationships, HickoryTech
continues to have access to multiple forms of financing based upon its 2001
current ratio (2 to 1), its EBITDA, its debt to EBITDA ratio and its proven
access to debt markets.
The following table sets forth HickoryTech’s contractual obligations,
along with the cash payments due each period (long-term debt and capital lease
payments do not include associated interest):
HickoryTech has a $224,000,000 credit facility with a syndicate of
banks. This credit facility is comprised of a $125,000,000 revolving credit
component and a $99,000,000 term loan component. As of December 31, 2001,
HickoryTech had drawn $170,000,000 on this credit facility, with available
borrowing capacity of $54,000,000 under the revolving credit component. The
total commitment to HickoryTech expires as follows:
On June 26, 2001, HickoryTech acquired two PCS licenses in southern
Minnesota. Refer to Note 2 of Notes to Consolidated Financial Statements for
further discussion of this acquisition.
On August 6, 2001, HickoryTech completed the sale of its local
telephone exchange in Amana, Iowa. Refer to Note 2 of Notes to Consolidated
Financial Statements for further discussion of this disposition.
HickoryTech operates with original equity capital, retained earnings
and recent additions to indebtedness in the form of bank term debt and
revolving lines of credit.
RECENT
ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, “Business
Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies the criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. HickoryTech made no acquisitions after June
30, 2001 and, therefore, SFAS No. 141 had no impact on 2001 results.
SFAS No. 142 is effective January 1, 2002 and addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. Those intangible assets with finite useful lives will continue to be
amortized over their respective useful lives. As of December 31, 2001,
HickoryTech had unamortized goodwill of $25,086,000 and recorded amortization
expense related to goodwill during 2001 of $766,000. HickoryTech is still
waiting for further guidance from the FASB and/or the Securities Exchange
Commission on whether its FCC licenses qualify as indefinite lived intangible
assets. This guidance is expected before the end of the first quarter of 2002.
As of December 31, 2001, HickoryTech had unamortized FCC licenses of
$75,635,000 and recorded amortization expense related to these licenses during
2001 of $1,906,000. Upon adoption of SFAS No. 142, HickoryTech will cease
amortization of its goodwill and may cease amortization of FCC licenses if they
are determined to have indefinite lives under SFAS No. 142. HickoryTech is in
the process of evaluating whether any of its goodwill or intangible asset
values are impaired pursuant to the provisions of SFAS No. 142 and 144 (as
described below). Although HickoryTech’s analysis is not complete, management
currently does not expect any write-downs of the carrying value of its
intangible assets or goodwill and therefore does not expect adoption of SFAS
No. 142 will have a material impact on its financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset
Retirement Obligations,” which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. SFAS No. 143 is effective January 1, 2003. HickoryTech is currently evaluating
the provisions of SFAS No. 143 and does not expect that adoption will have a
material impact on its financial position or its results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets,” which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, “Reporting the Results of Operations - Reporting the Transactions for the
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.” SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell. SFAS No. 144 also sets forth
requirements for recognizing and measuring impairment losses on certain
long-lived assets to be held or used.
SFAS No. 144 is effective January 1, 2002. HickoryTech is currently
evaluating the provisions of SFAS No. 144 and does not expect that adoption
will have a material impact on its financial position or its results of
operations.
REGULATED
INDUSTRY
STATE- HickoryTech increased local rates in its
Iowa ILEC subsidiary effective May 2001 and in its Minnesota ILEC subsidiaries
effective December 2001, adding approximately $128,000 of revenues in 2001. The
Minnesota ILEC subsidiaries also increased local rates in February 2000, adding
approximately $744,000 of revenues in 2000. The Minnesota Department of Public
Service has the authority to investigate rates and profits of telephone
companies in Minnesota. Under Minnesota law, telephone companies with less than
50,000 customers are regulated on price and service level rather than on
profit. HickoryTech’s two Minnesota ILEC subsidiaries fall under this
alternative form of regulation. HickoryTech’s subsidiaries’ local service rates
are lower than the rates of most Minnesota telephone companies. This relieves
HickoryTech of substantial regulatory oversight. In the state of Iowa,
HickoryTech’s operations fall below the 15,000 access line minimum level for
rate regulation by the Iowa Utilities Board. No regulatory matters in Iowa
affect HickoryTech’s current operation.
State regulators are considering access charge reform. There are no
specific dockets at this time, and HickoryTech cannot estimate the amount, if
any, of future potential state access revenue changes.
INTERSTATE-
The Telephone
Sector’s three local exchange telephone companies have had their interstate
access rates established based on a nationwide pool of companies known as the
National Exchange Carriers Association (NECA). These access charges reflect 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 that the Telephone
Sector can charge for interstate access. There has been a decline in the level
of interstate access charges in the last several years, and HickoryTech
foresees a continuation of this trend. The FCC ordered in late 2001 to amend
the interstate access charge rate design. The FCC modifications of ILEC
transport rate structure, reallocation of costs in the transport
interconnection charge and amendments to universal service funds are effective
January 1, 2002. The net effect of these changes did not materially change the
interstate revenues for HickoryTech beginning in 2002.
FCC regulators may consider additional access charge reform. There are
no specific dockets at this time, and HickoryTech cannot estimate the amount,
if any, of future potential interstate revenue changes.
In September 1999, by order of the FCC, HickoryTech moved its Iowa
telephone exchange from “average schedule” status for interstate traffic to a
pure “cost basis” form of revenue recognition and tariffs. This means that for
the Iowa telephone exchange, interstate access revenues are determined based on
the specific company’s cost of service rather than nationwide averages of other
companies. The switch from “average schedule” to “cost basis” for Iowa’s
interstate revenue has reduced company revenues by less than $200,000 on an annualized
basis.
HickoryTech’s Communications Services Sector operates in Minnesota and
Iowa with less regulatory oversight than HickoryTech’s Telephone Sector. A CLEC
petitions regulators for authority to operate in certain geographic areas,
submits tariffs to describe services and the rates at which it will provide
service, and submits interconnection agreements it has reached with other
carriers for regulatory review. However, there is no regulatory oversight of
the prices charged or the rate of return earned by the CLEC. This is also the
case with HickoryTech’s Wireless Services Sector.
CONTINGENCIES
In January 2002, National Independent Billing Partnership (NIBP), an
unconsolidated partnership of NIBI (see Note 1 of the Notes to Consolidated
Financial Statements for discussion of NIBP), received written claims from one
of its customers relating to contractual obligations. The claims are not a
formal legal action. NIBP disagrees with the claims made by this customer. In
the opinion of management, the ultimate resolution of these claims will not
have a material adverse impact on HickoryTech’s financial position, results of
operations or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
HickoryTech does not have operations subject to
risks of foreign currency fluctuations, nor does HickoryTech use derivative
financial instruments in its operations or investment portfolio. HickoryTech’s
earnings are affected by changes in interest rates as a portion of its
long-term debt has variable interest rates based on LIBOR. If interest rates
for the portion of HickoryTech’s long-term debt based on variable rates had
averaged 10% more for the entire year ended December 31, 2001, HickoryTech’s
interest expense would have increased $1,155,000 in 2001. In case of a change
of this magnitude, management would likely act to mitigate its exposure to the
change by converting a portion of its variable-rate debt to fixed-rate debt.
Item 8.
Item 8. Financial
Statements and Supplementary Data.
REPORT OF MANAGEMENT
Management of Hickory Tech Corporation (HickoryTech) 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 accounting principles generally accepted in the United States
of America applied on a consistent basis. They are considered by management to
present fairly HickoryTech’s financial position, results of operations and cash
flows. In preparing the financial statements, management is required to
objectively 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, HickoryTech 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 regularly 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 Audit Committee reviews and approves
financial disclosures prior to releasing to the public.
HickoryTech’s financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. Management has made
available to the independent accountants all HickoryTech financial records and
related data. Their audits, 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
Vice President and
Chief
Executive Officer
Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Hickory Tech Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of shareholders’ equity and of cash
flows present fairly, in all material respects, the financial position of Hickory
Tech Corporation and subsidiaries (HickoryTech) at December 31, 2001 and
December 31, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of HickoryTech’s management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 1, 2002
HICKORY TECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years
Ended December 31
The accompanying notes
are an integral part of the consolidated financial statements.
HICKORY TECH CORPORATION
CONSOLIDATED
BALANCE SHEETS
As of
December 31
The accompanying notes
are an integral part of the consolidated financial statements.
HICKORY TECH CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31
The accompanying notes
are an integral part of the consolidated financial statements.
HICKORY TECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years
Ended December 31
The accompanying notes
are an integral part of the consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
The accounting policies of Hickory Tech
Corporation (HickoryTech) are in conformity with accounting principles
generally accepted in the United States of America and, where applicable,
conform to the accounting principles as prescribed by federal and state
telephone utility regulatory authorities. HickoryTech presently gives
accounting recognition to the actions of regulators where appropriate, as
prescribed by Financial Accounting Standards Board Statement (SFAS) No. 71,
“Accounting for the Effects of Certain Types of Regulation.”
Basis of Consolidation - The consolidated financial
statements of HickoryTech include Hickory Tech Corporation and its
subsidiaries. HickoryTech operates in the following five business
segments: (i) Telephone Sector, (ii)
Communications Services Sector, (iii) Wireless Services Sector, (iv)
Information Solutions Sector and (v) Enterprise Solutions Sector. An investment
in an unconsolidated partnership for the Information Solutions Sector is
accounted for using the equity method.
All intercompany transactions have been eliminated from the consolidated
financial statements.
Revenue Recognition - Revenues are generally
recognized when services are earned, rendered or products are delivered to
customers. Customers are billed as of monthly cycle dates. Telephone Sector
revenues are derived from charges for network access to HickoryTech’s local
exchange telephone 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
Enterprise Solutions Sector earned on major installation and change contracts
is recognized on the percentage of completion method. Up-front fees, including
installation and activation fees, are deferred and recognized on a
straight-line basis over the corresponding customer relationship period.
Estimates - The preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America 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 these estimates and assumptions.
Reclassifications - Certain expenses reported as
cost of sales in 2000 and 1999 have
been reclassified to operating expenses to conform to the 2001 presentation.
These reclassifications reduced cost of sales and increased other operating
expenses for 2000 and 1999 by $12,510,000 and $15,987,000, respectively. In
addition, certain revenues and expenses related to HickoryTech’s internet
service have been reclassified from the Telephone Sector to the Communications
Services Sector. Internet revenues reclassified amounted to $1,874,000 in 2000
and $1,072,000 in 1999. Internet expenses reclassified amounted to $1,885,000
in 2000 and $1,075,000 in 1999. These reclassifications had no effect on
previously reported consolidated operating income, net income or cash flows.
Property, Plant and Equipment - Property, plant and equipment
are recorded at original cost of acquisition or construction. When regulated incumbent local exchange carrier
(ILEC) telephone assets are sold or retired, the assets and related accumulated
depreciation are removed from the accounts and any gains or losses on
disposition are amortized with the remaining net investment in telephone plant.
The components of property, plant and equipment
are summarized as follows:
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 ILEC
telephone plant for the three years ended December 31, 2001, were 5.9%, 6.0%,
and 6.0%. All other property, plant and
equipment is depreciated over estimated useful lives of three to fifteen years,
and buildings are depreciated over their estimated useful lives of thirty-nine
years. Other property and equipment includes $1,041,000 of equipment acquired
under a capital lease. Amortization expense in 2001 and accumulated
amortization at December 31, 2001 related to this capital lease was $130,000.
Cash Equivalents - Cash equivalents include
short-term investments with original maturities of three months or less. The
carrying value of cash and cash equivalents approximates its fair value due to
the short maturity of the instruments.
Investments - Investments include $10.3
million of non-interest bearing Rural Telephone Finance Cooperative (RTFC)
Subordinated Capital Certificates (SCCs) accounted for under the cost method of
accounting. This method requires
HickoryTech to periodically evaluate whether a non-temporary decrease in value
of the investment has occurred, and if so, to write this investment down to its
net realizable value.
Investments also include an unconsolidated
partnership accounted for using the equity method of accounting. NIBI is a 40%
general partner in National Independent Billing Partnership (NIBP), which
performs billing and collection clearinghouse functions for interexchange
carriers. NIBP had total assets of $1,623,000 and $1,911,000 as of December 31,
2001 and 2000, respectively. NIBP had total liabilities of $1,472,000 and $1,693,000
as of December 31, 2001 and 2000, respectively. For the years ended December
31, 2001, 2000 and 1999, NIBP had revenues of $620,000, $1,006,000 and
$1,673,000, respectively, and net income/(loss) of ($67,000), $57,000 and
$210,000, respectively.
Inventories - Inventories, which consist of
equipment for resale, materials and supplies, are stated at the lower of
average cost or market.
Income Taxes - HickoryTech accounts for
income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Accordingly, deferred tax assets and liabilities
arise from the difference between the tax basis of an asset or liability and
its reported amount in the financial statements. Deferred tax amounts are
determined by using the tax rates expected to be in effect when the taxes will
actually be paid or refunds received, as provided under currently enacted tax
law. Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense or benefit is
the tax payable or refundable, respectively, for the period plus or minus the
change in deferred tax assets and liabilities during the period.
Intangible Assets - The components of HickoryTech’s intangible assets, along with the
periods in which each component is being amortized, are shown in the following
table. FCC licenses consist of the cost
of acquiring the cellular licenses of RSA 10 and Metro A-2, and the PCS
licenses in southern Minnesota. Goodwill consists of costs in excess of net
assets acquired. Customers include the value assigned to customer lists
acquired. Amortization expense is computed using the straight-line method based
on the estimated useful life of the asset. HickoryTech reviews its intangibles
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. HickoryTech estimates the future cash flows expected to
result from the asset, and if the sum of the expected net undiscounted future
cash flows is less than the carrying amount of the intangible, HickoryTech
recognizes an impairment loss by reducing the amortized cost of the intangible
to its estimated fair value. HickoryTech has not recognized impairment losses
on any intangibles in 2001, 2000 or 1999.
Capitalized Software Costs - Software costs associated with software that is developed or purchased
for internal use only are accounted for in accordance with the American
Institute of Certified Public Accountants Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.” HickoryTech capitalizes costs (including right to use fees)
associated with externally acquired software for internal use. Costs associated
with internally developed software are segregated into three project stages:
preliminary project stage, application development stage and
post-implementation stage. Costs associated with both the preliminary project
stage and post-implementation stage are expensed as incurred. Costs associated
with the application development stage are capitalized. Software maintenance
and training costs are expensed as incurred. Amortization of software costs
commences when the software is ready for its intended use, and is amortized
over a period of three years. During 2001, 2000 and 1999, HickoryTech
capitalized $1,285,000, $492,000 and $0, respectively, of costs associated with
software purchased or developed for internal use only. These software costs are
included in property, plant and equipment, and amounted to $1,503,000 and
$492,000 at December 31, 2001 and 2000, respectively. These amounts are net of
accumulated amortization of $184,000 and $0 at December 31, 2001 and 2000,
respectively. Amortization expense relating to these capitalized costs began in
2001 and amounted to $196,000.
Software costs
associated with software that is developed or purchased for external sale or
license are accounted for in accordance with SFAS No. 86, “Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed.”
HickoryTech
capitalizes costs
related to such software once technological feasibility has been established
and continues capitalization until the product becomes available for general
release to customers. HickoryTech capitalized software costs of $2,717,000,
$1,450,000 and $251,000 in 2001, 2000
and 1999, respectively, related to software that will be sold or licensed
externally. These software costs are included in other non-current assets, and
amounted to $3,197,000 and $1,076,000 at December 31, 2001 and 2000,
respectively. These amounts are net of accumulated amortization of $729,000 and
$133,000 at December 31, 2001 and 2000, respectively. Capitalized software
costs are amortized on a product-by-product basis over the estimated economic
life of the product. Amortization expense relating to these costs began in 2000
and amounted to $596,000 in 2001 and $133,000 in 2000.
Comprehensive Income - SFAS No. 130 requires that a full set of general purpose financial
statements include the reporting of “comprehensive income.” Comprehensive
income is comprised of foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. During the years ended December 31, 2001, 2000 and 1999,
comprehensive income was comprised solely of net income.
Advertising Expense - Advertising is expensed as incurred. Advertising expense charged to
operations was $952,000, $1,050,000 and $669,000 in 2001, 2000 and 1999,
respectively.
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 potentially
dilutive common shares. Potentially dilutive common shares include stock
options and stock subscribed under the employee stock purchase plan (ESPP).
Options to purchase 76,750 shares in 2001, 15,750
shares in 2000 and 63,500 shares in 1999 were not included in the computation
of earnings per share assuming dilution because their effect on earnings per
share would have been antidilutive.
Dividends per share is based on the quarterly
dividend per share as declared by the HickoryTech Board of Directors.
NOTE 2 - ACQUISITIONS AND DISPOSITIONS
On June 26, 2001, HickoryTech acquired two
digital personal communications services (PCS) licenses from McLeodUSA
Incorporated for $11,100,000 in cash. The PCS licenses acquired by HickoryTech
include the Minnesota Basic Trading Areas (BTAs) of Mankato-Fairmont and
Rochester-Austin-Albert Lea, an area covering a population of approximately
493,000 people. The acquisition was a purchase of the licenses only. There were
no customers, existing revenue stream or physical property and equipment
included with this acquisition as the BTAs were undeveloped. HickoryTech paid
for the acquisition with advances under its revolving credit facility.
HickoryTech allocated the entire purchase price to the fair value of the PCS
license, which is being amortized over 37 years.
On August 6, 2001, HickoryTech closed on the
previously announced agreement to sell its local telephone exchange in Amana,
Iowa to South Slope Cooperative Telephone Company, Inc. for $6,500,000 in cash.
The Amana operation, known as Amana Colonies Telephone Company (ACTC), served
approximately 1,500 access lines in the seven communities of the Amana Colonies
in east central Iowa. HickoryTech recorded a pre-tax gain on the sale of $1,015,000
($566,000 net of tax). HickoryTech used the proceeds from the sale to repay a
portion of its outstanding debt. The operations of ACTC were included in the
Telephone Sector. For the years ended December 31, 2001, 2000 and 1999, ACTC
generated revenues of $832,000, $1,467,000 and $1,461,000 and generated an
operating income (loss) of ($13,000), $70,000 and $356,000, respectively. The
pro-forma impact of this disposition on net income and earnings per share for
the periods presented herein is not considered material.
On October 9, 2000, HickoryTech completed the
acquisition of the dial-up internet customer accounts, along with certain
assets and liabilities, of Internet Connections, a Mankato internet service
provider, in exchange for $870,000 in cash. Internet Connections had
approximately 5,000 internet customers in southern Minnesota and the Twin
Cities area. The acquisition was accounted for under the purchase method of
accounting. HickoryTech paid for the acquisition with available funds. HickoryTech
allocated $840,000 of the purchase price to customers (intangible asset),
$100,000 to other intangible assets and $70,000 to tangible net liabilities.
The operations of the Internet Connections dial-up internet business are
included in the Communications Services Sector. Customers will be amortized over a period of eight years.
On May 12, 1999, HickoryTech sold its 6.4% equity
interest in Midwest Wireless Communications, LLC (MWC), a rural cellular
telecommunications provider in southern Minnesota, to MWC. HickoryTech recorded
a pre-tax gain on the sale of $9,207,000 ($5,213,000 net of tax). The
investment was accounted for under the equity method and was included with
Investments prior to its sale in May 1999. The equity interest was reflected in
the operations of the Telephone Sector.
On June 1, 1999, HickoryTech acquired the Metro
A-2 cellular property. The property surrounds the metropolitan Twin Cities area
and is located in five Minnesota counties and in one Wisconsin county. The
population of the serving area is 170,000. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired based upon their fair values. The total
purchase price was approximately $41,500,000. HickoryTech allocated $36,600,000
of the purchase price to the FCC license acquired and $4,900,000 to the
cellular network and cellular tower sites. HickoryTech financed $30,000,000 of
the acquisition from its revolving credit facility and paid the remainder of
the purchase price with available funds. The operations of the Metro A-2
acquisition are included in the Wireless Services Sector.
NOTE 3 - INVESTMENTS AND FINANCIAL INSTRUMENTS
Substantially all investments include investments
accounted for using the cost method of accounting. The fair value of
HickoryTech’s long-term obligations, after deducting current maturities, is
estimated to be $170,923,000at
December 31, 2001 and $145,635,000 at December 31, 2000, compared to carrying
values of $169,659,000 and $147,433,000 respectively. The fair value estimates
are based on the overall weighted interest rates and maturity compared to rates
and terms currently available in the long-term financing markets.
NOTE 4 - BUSINESS SEGMENTS
HickoryTech’s operations are conducted in five
business segments as: (i) Telephone Sector, (ii) Communications Services
Sector, (iii) Wireless Services Sector, (iv) Information Solutions Sector and
(v) Enterprise Solutions Sector. The
Telephone Sector provides telephone services to Mankato and adjacent areas of
south central Minnesota and to eleven communities in northwest Iowa. The
Telephone Sector also operates fiber optic cable transport facilities in
Minnesota. The Telephone Sector also included the operations of Amana Colonies
Telephone Company, a local telephone exchange serving the Amana Colonies in
east central Iowa, which was sold in August 2001. The Communications Services
Sector offers an alternative choice for local telecommunications service, known
as CLEC (Competitive Local Exchange Carrier) service in the telecommunications
industry, to customers in Minnesota and Iowa not currently in HickoryTech’s
Telephone Sector’s service area. In addition, the Communications Services
Sector resells long distance service to Minnesota and Iowa subscribers. The
Wireless Services Sector provides cellular telephone service to seven counties
in south central Minnesota and a service area around the Minneapolis/St. Paul,
Minnesota metropolitan area. The Wireless Services Sector also provides PCS
service to the Minnesota BTAs of Mankato-Fairmont and Rochester-Austin-Albert
Lea. The Information Solutions Sector provides data processing and related
services to HickoryTech’s other sectors and to other external telephone
companies, municipalities and utilities. The Enterprise Solutions Sector
designs, sells, installs and services business telephone systems and data
communications equipment primarily in metropolitan Minneapolis/St. Paul,
Minnesota.
Business segment information for the years 2001,
2000 and 1999 is as follows. Certain
amounts from the Telephone Sector and the Communications Services Sector have
been reclassified in 2000 and 1999 to reflect internet operations as part of
the Communications Services Sector.
BUSINESS
SEGMENT DATA
Years Ended December 31
NOTE 5 - STOCK COMPENSATION
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 their compensation. The price at
which the shares can be purchased is 85% of the lower fair market value for
such shares on two specified dates in each plan year. As of December 31, 2001,
there were 900,000 common shares reserved for this plan and 665,801 shares
still available for issuance. At December 31, 2001, employees had
subscribed to purchase approximately 22,000 shares in the current plan year
ending August 31, 2002.
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 the date of
purchase. As of December 31, 2001,
there were 300,000 common shares reserved for this plan and 269,399 shares
still available for future grants.
HickoryTech also offers a directors’ stock option
plan to attract and retain outside directors. The plan provides for each
outside director to receive fully vested options to purchase 5,000 shares of
common stock of HickoryTech at an exercise price equal to the fair market value
on the date of grant if HickoryTech meets pre-established financial objectives.
The options may be exercised no later than ten years after the date of grant.
As of December 31, 2001, there were 300,000 common shares reserved for this
plan and 171,000 shares available for future grants.
HickoryTech’s stock award 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. In addition, for one
component of the plan, HickoryTech utilizes a trust account for the funding of
a long-term performance award. In
2001, 2000 and 1999, HickoryTech paid cash of $157,000, $170,000 and $607,000
for its common stock shares and issued these shares, 8,904, 12,038 and 47,751
in 2001, 2000 and 1999, respectively, to a trust for the benefit of certain key
employees. The stock options issued under the stock option
component of the stock award plan may be exercised no later than ten years
after the date of grant, with one-third of the options vesting each year. As of
December 31, 2001, there were 1,750,000 common shares reserved for this plan
and 1,187,050 shares available for future grants.
HickoryTech has elected to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its employee and directors’ stock compensation plans. If HickoryTech 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 to determine the fair value of the
options with the following listed assumptions:
A summary of the stock option activity of the
plans is as follows:
The following table provides certain information
with respect to stock options outstanding at December 31, 2001:
The following table provides certain information
with respect to stock options exercisable at December 31, 2001:
All stock options granted in 2001, 2000 and 1999
had an exercise price equal to the fair market value of HickoryTech’s common
stock on the date of grant.
Other stock award activity is as follows:
Stock compensation expense for 2001, 2000 and
1999 was $217,000, $660,000 and $890,000, respectively, for all stock
compensation plans.
NOTE 6- DEBT AND OTHER OBLIGATIONS
Long-term obligations consist of the following:
HickoryTech has a $224,000,000 credit facility
with a syndicate of banks. The credit facility is comprised of a $125,000,000
revolving credit component and a $99,000,000 term loan component. The available line of credit on the
$125,000,000 revolving credit component decreases in increments beginning in
March 2004 with a final maturity date in September 2008. The term loan requires equal quarterly
principal payments of $250,000 during the period March 2001 to December 2008,
and $23,000,000 of principal payments per quarter in 2009. The weighted average
interest rate associated with this credit facility varies with LIBOR and
certain other rates and was 5.30% and 8.69% at December 31, 2001 and 2000,
respectively. The term loan component has a provision whereby HickoryTech
periodically receives patronage capital refunds depending on the amount of
interest paid. This patronage refund is recorded as an offset to interest
expense and amounted to $807,000 in 2001 and $399,000 in 2000. As of December
31, 2001, HickoryTech had drawn $170,000,000 on this credit facility, comprised
of $99,000,000 in term loan and $71,000,000 in revolving credit, and had
$54,000,000 of available borrowing capacity of the revolving credit component. The
credit facility is collateralized by certain property, plant and equipment and
contains covenants relating to cash flow and capitalization.
In June 2000, HickoryTech amended and increased
its $90,000,000 unsecured revolving credit facility with a syndicate of banks
to $125,000,000. Proceeds from the increased credit facility were used to repay
$40,000,000 of senior unsecured notes dated April 1997. As a result of the
extinguishment of the senior unsecured notes, HickoryTech recorded an
extraordinary loss of $233,000, net of an income tax benefit of $158,000.
In December 2001, HickoryTech repaid the
outstanding balance remaining on its debt with Rural Utilities Service and the
Rural Telephone Bank. These loans were originally used for the financing of telephone
property, plant and equipment of Mid-Communications, Inc. and were scheduled to
mature in the years 2003 and 2007, respectively.
Annual requirements for principal payments for
the years subsequent to 2001 are as follows: 2002 - $1,000,000; 2003 -
$1,000,000; 2004 - $1,000,000; 2005 - $1,000,000; 2006 - $11,063,000 and
thereafter - $154,937,000.
HickoryTech’s Information Solutions Sector leases
certain computer equipment under a capital lease arrangement. HickoryTech has
recorded the present value of the future minimum lease payments as a
capitalized asset and related lease obligation. Assets under this capital lease
are included in property, plant and equipment and amounted to $911,000
($1,041,000 asset, net of accumulated depreciation of $130,000) as of December
31, 2001. Annual requirements for future lease payments under this capital
lease are as follows:
HickoryTech owns
most of its major facilities, but does lease certain office space, land and
equipment under principally noncancelable operating leases. Rental expense was $2,033,000 in 2001,
$2,295,000 in 2000 and $1,619,000 in 1999. At December 31, 2001, future minimum
lease obligations for the next five years are as follows: 2002 - $1,068,000;
2003 - $839,000; 2004 - $632,000; 2005 - $278,000; 2006 - $164,000 and
thereafter - $816,000.
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. HickoryTech contributes up to 6.0% of
the employee’s eligible compensation, based on the employee’s voluntary
contribution. HickoryTech 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, HickoryTech contributes up to 2.0% of the eligible
employee group compensation into retirement savings plan accounts if the
HickoryTech sectors achieve specific earnings targets. HickoryTech
contributions and costs for the retirement savings plan were $1,128,000 in
2001, $1,018,000 in 2000 and $1,007,000 in 1999.
In addition to providing retirement savings benefits, HickoryTech
provides postretirement health care and life insurance benefits for certain
employees. HickoryTech is not currently funding these postretirement benefits,
but has accrued these liabilities.
The health care cost trend rate used in
determining the accumulated postretirement benefit obligations was 9%,
decreasing to 8% in the year 2003, decreasing to 6% in the year 2007 and then
decreasing to 5% for the years thereafter.
An increase of one percentage point in the assumed health care cost
trend would increase the accumulated postretirement benefit obligation at
December 31, 2001 by $716,000 and the net periodic post-retirement benefit cost
for the year then ended by $64,000. A decrease of one percentage point in the
assumed health care cost trend would decrease the accumulated postretirement
benefit obligation at December 31, 2001 by $552,000 and the net periodic
postretirement benefit cost for the year then ended by $50,000.
A weighted average discount rate of 7.50% was
used to develop net periodic postretirement benefit cost and the actuarial
present value of accumulated benefit obligations.
NOTE 8 - INCOME TAXES
The income tax provision (benefit) for the years
ended December 31, 2001, 2000 and 1999 include the following components:
Deferred tax liabilities and assets are comprised
of the following:
The reconciliation of the U.S. income tax rate to
the effective income tax rate is as follows:
The valuation allowance has been recorded due to the uncertainty of
realization of the benefits associated with net operating losses incurred by a
subsidiary of HickoryTech in the state of Iowa. This effectively reduces the net deferred tax asset related to
these net operating loss carryforwards to $0.
Future events and changes in circumstances could cause this valuation
allowance to change.
NOTE 9 -
CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the SEC issued Staff Accounting
Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” which,
as amended by SAB No. 101A and SAB No. 101B, provides additional guidance in
applying generally accepted accounting principles for revenue recognition.
Implementation of SAB No. 101 required HickoryTech to defer revenues resulting
from up-front fees, including installation and activation fees, and to also
defer the associated direct costs. These deferred revenues and costs are now
recognized ratably over the corresponding customer relationship period. These
customer relationship periods range from one to seven years. Prior to
implementation of SAB No. 101 in the fourth quarter of 2000, HickoryTech
recognized revenues resulting from up-front fees and the corresponding direct
costs in the period that installation
and activation services were provided. As permitted by SAB No. 101, HickoryTech
accounted for the change in accounting principle prospectively as a cumulative
effect of accounting change retroactively to January 1, 2000. The cumulative
effect of accounting change was a loss of $20,000, net of a tax benefit of
$14,000.
NOTE 10
- RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, “Business
Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase
method of
accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies the criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. HickoryTech made no acquisitions after June
30, 2001 and, therefore, SFAS No. 141 had no impact on 2001 results.
SFAS No. 142 is effective January 1, 2002 and addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. Those intangible assets with finite useful lives will continue to be
amortized over their respective useful lives. As of December 31, 2001,
HickoryTech had unamortized goodwill of $25,086,000 and recorded amortization
expense related to goodwill during 2001 of $766,000. HickoryTech is still
waiting for further guidance from the FASB and/or the Securities and Exchange
Commission on whether its FCC licenses qualify as indefinite lived intangible
assets. This guidance is expected before the end of the first quarter of 2002.
As of December 31, 2001, HickoryTech had unamortized FCC licenses of
$75,635,000 and recorded amortization expense related to these licenses during
2001 of $1,906,000. Upon adoption of SFAS No. 142, HickoryTech will cease
amortization of its goodwill and may cease amortization of FCC licenses if they
are determined to have indefinite lives under SFAS No. 142. HickoryTech is in
the process of evaluating whether any of its goodwill or intangible asset
values are impaired pursuant to the provisions of SFAS No. 142 and 144 (as
described below). Although HickoryTech’s analysis is not complete, management
currently does not expect any write-downs of the carrying value of its
intangible assets or goodwill and therefore does not expect adoption of SFAS
No. 142 will have a material impact on its financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset
Retirement Obligations,” which
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development or normal use of the asset. SFAS No. 143 is effective
January 1, 2003. HickoryTech is currently evaluating the provisions of SFAS No.
143 and does not expect that adoption will have a material impact on its
financial position or its results of operations.
In October 2001, the FASB issued SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets,” which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, “Reporting the Results of Operations - Reporting the Transactions for the
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.” SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell. SFAS No. 144 also sets forth
requirements for recognizing and measuring impairment losses on certain assets
to be held or used. SFAS No. 144 is
effective January 1, 2002. HickoryTech is currently evaluating the provisions
of SFAS No. 144 and does not expect that adoption will have a material impact
on its financial position or its results of operations.
NOTE 11 - CONTINGENCIES
HickoryTech is involved in certain contractual
disputes in the ordinary course of business. HickoryTech does not believe the
ultimate resolution of any of these existing matters will have a material
adverse effect on its financial position, results of operations, or cash flows.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)
Item 9.
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosures.
None.
PART III
Item 10.
Item 10. Directors and
Executive Officers of HickoryTech.
Information as to Directors and Executive Officers of HickoryTech
included on pages 3 and 5 of the Proxy Statement and “Section 16(a) Beneficial
Ownership Reporting Compliance” on page 14 of the Proxy Statement are
incorporated by reference.
Item 11.
Item 11. Executive
Compensation.
Information as to executive compensation included on pages 6 to 11 of
the Proxy Statement is incorporated by reference.
Item 12.
Item 12. Security
Ownership of Certain Beneficial Owners and Management.
The information as to beneficial ownership of more than five percent of
HickoryTech’s common stock included on page 5 of the Proxy Statement is
incorporated by reference. The information
as to security ownership of management included on page 4 of the Proxy
Statement is incorporated by reference.
Item 13.
Item 13. Certain
Relationships and Related Transactions.
HickoryTech does not know of any matter required to be reported under
this item.
PART IV
Item 14.
Item 14. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Consolidated
Financial Statements
The
following is contained in the Annual Report:
Page(s) in 2001 Annual
Report on Form 10-K
Management’s Discussion and Analysis
10-22
Report of Management and Report of Independent Accountants
Consolidated Statements of Income*
Years Ended December 31, 2001, 2000, and 1999
Consolidated Balance Sheets*
December 31, 2001 and 2000
Consolidated Statements of Cash Flows*
Years Ended December 31, 2001, 2000, and 1999
Consolidated Statements of Shareholders’ Equity*
Years Ended December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements*
28-37
Selected Financial and Operating Data
*Addressed by Report of Independent Accountants
2.
Consolidated Financial Statement Schedules
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
All schedules not included are omitted either 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
Description
3(a)
Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3 to the registrant’s Form 10-Q dated May 6, 1999)
3(b)
Restated By-Laws (Incorporated by reference to
Exhibit 3(b) to the registrant’s Form 10-K dated March 29, 2000)
3(c)
Certificate of Designations of Series A Junior
Participating Preferred Stock of Hickory Tech Corporation (Incorporated by
reference to Exhibit 3(c) to the registrant’s Form 10-K dated March 29, 2000)
4(a)
Shareholder Rights Agreement (Incorporated by
reference to Exhibit 1 to the registrant’s Form 8-A dated March 9, 1999)
4(b)
Second Amended and Restated Credit Agreement dated
as of September 21, 2000, by and among Hickory Tech Corporation, as Borrower,
the Lenders referred to herein and First Union National Bank, as
Administrative Agent (Incorporated by reference to Exhibit 4 to the
registrant’s Form 10-Q dated November 10, 2000)
10(a)
Supplemental Retirement Agreement dated January 1,
1993, between registrant and Robert D. Alton, Jr. (Incorporated by reference
to Exhibit 10(a) to the registrant’s Form S-8 dated May 11, 1993)
Exhibit
Description
10(b) 
Supplemental Retirement Agreement dated January 31,
1984, between registrant’s subsidiary, Mankato Citizens Telephone Company,
and David A. Christensen (Incorporated by reference to Exhibit 10(b) to the
registrant’s Form S-8 dated May 11, 1993)
10(c) 
Hickory Tech Corporation Executive Incentive Plan
(Incorporated by reference to Exhibit 10(c) to the registrant’s Form S-8
dated May 11, 1993)
10(d) 
Change in Control Agreement dated June 25, 1998,
between registrant and Robert D. Alton (Incorporated by reference to Exhibit
10(d) to the registrant’s Form 10-K dated March 29, 2000)
10(e) 
Change in Control Agreement dated June 25, 1998,
between registrant and Jon L. Anderson, David A. Christensen, John W. Finke,
Mary T. Jacobs, F. Ernest Lombard and Bruce H. Malmgren (Incorporated by
reference to Exhibit 10(e) to the registrant’s Form 10-K dated March 29,
2000)
10(g) 
Hickory Tech Corporation Directors’ Stock Option
Plan Amended and Restated March 29, 2000 (Incorporated by reference to
Exhibit 10 to the registrant’s Form 10-Q dated May 5, 2000)
10(h) 
Employment Agreement dated January 1, 1993, between
registrant and Robert D. Alton, Jr. (Incorporated by reference to Exhibit
10(h) to the registrant’s Form S-8 dated May 11, 1993)
10(i) 
Hickory Tech Corporation Retainer Stock Plan for
Directors Restated and Amended effective September 1, 1996 (Incorporated by
reference to Exhibit 10(m) to the registrant’s Form 10-Q dated August 12,
1996)
10(j) 
Hickory Tech Corporation Retirement Savings Plan and
Trust, as amended (Incorporated by reference to Exhibit 10(j) to the
registrant’s Form S-8 dated May 11, 1993)
10(k) 
Hickory Tech Corporation Amended and Restated
Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10(j) to
the registrant’s Form 10-Q dated August 12, 1996)
10(l) 
Hickory Tech Corporation 1993 Stock Award Plan
(Amended and Restated effective January 29, 1997) (Incorporated by reference
to Exhibit 10(l) to the registrant’s Form 10-K dated March 26, 1997)
10(m)
Agreement for Sale of Amana Colonies Telephone
Company Assets, dated July 21, 2000 (Incorporated by reference to Exhibit 99
to the registrant’s Form 10-Q dated August 11, 2000)
10(n)
Agreement for Purchase and Sale of Assets dated as
of September 29, 2000 between Internet Connections, Inc., as Seller and
Hickory Tech Corporation, as Buyer (Incorporated by reference to Exhibit
10(n) to the registrant's Form 10-K dated March 29, 2001)
21 *
Subsidiaries of Hickory Tech Corporation
23 *
Consent of Independent Accountants
99 *
Cautionary Statement for Purposes of the “Safe
Harbor” Provision of the Private Securities Litigation Reform Act of 1995
* Filed herewith.
 Management
compensation plan or arrangement required to be filed as an exhibit.
b) 1. Reports
on Form 8-K
No reports on Form 8-K were filed during the last
quarter of the period ended December 31, 2001.
Report
of Independent Accountants on Financial Statement Schedules
To the Shareholders and Board of Directors of
Hickory Tech Corporation
Our audits of the consolidated financial statements referred to in our
report dated February 1, 2002 also included an audit of the financial statement
schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 1, 2002
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS:
INVENTORY VALUATION RESERVE:
SIGNATURES
Pursuant to the requirements of section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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.
(a
majority of directors)