** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2001**

 

**Commission File Number: 0-13721**

 

**HICKORY TECH CORPORATION**

 

| **Minnesota**                                                   |   | **41-1524393**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **221 East Hickory Street**                                     |
| **P.O. Box 3248**                                               |
| **Mankato, Minnesota  56002**                              |
| (Address of principal  executive offices and zip code)          |

 

**Registrant’stelephone number, including area code: 800-326-5789**

 

**Securitiesregistered pursuant to Section 12(b) of the Act:  None**

 

**Securitiesregistered pursuant to Section 12(g) of the Act:**

 

**Common Stock, No Par Value**

**Preferred Stock Purchase Rights**

**Title of Class**

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. 

Yes  ý   No  o

 

Indicate by a check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

As of February 28, 2002, the aggregate market value of the common stockheld by non-affiliates of the registrant was $215,856,156 based on the last sale price of $16.27 on TheNasdaq National Market.

 

The total number of shares of the registrant’s common stock outstandingas of February 28, 2002: 13,961,327.

 

Documents Incorporated by Reference: Portions of the registrant’s definitive Proxy Statement for the AnnualMeeting of Shareholders to be held on April 8, 2002 (“Proxy Statement”) areincorporated by reference in Part III of this Form 10-K.

 

 

**PART I**

**Item 1.****Business.**

 

**GENERAL**

 

Hickory Tech Corporation (HickoryTech) isa diversified communications company headquartered in Mankato, Minnesota.HickoryTech has over a 100-year history in the local telephone exchangebusiness. From those roots, it has expanded into five business segments andeight operating companies. HickoryTech’s core business is the operation ofthree incumbent local exchange carriers (ILECs). This business consists ofconnecting customers to the telephone network, providing switched service anddedicated private lines, connecting customers to long distance serviceproviders and providing many other services commonly associated with ILECs. Inaddition in 1998, HickoryTech undertook business startup initiatives in longdistance, internet access and competitive local exchange carrier (CLEC)businesses. This business takes advantage of HickoryTech’s telecommunicationsexpertise and expands service into areas served by other ILECs. HickoryTechalso provides wireless telecommunications services to customers in and in thearea surrounding its ILEC service territory in Minnesota and also in an areasurrounding Minneapolis/St. Paul. As additional lines of business, HickoryTechprovides data processing services to the telecommunications industry andinstalls and maintains telephone systems.

 

The eight subsidiaries of HickoryTech and thebusiness segments in which they operate are:

 

**TELEPHONE SECTOR**

•     MankatoCitizens Telephone Company (MCTC)

•     Mid-Communications,Inc. (Mid-Comm)

•     HeartlandTelecommunications Company of Iowa (Heartland)

•     Cable Network,Inc. (CNI)

 

**COMMUNICATIONS SERVICES SECTOR**

•     CrystalCommunications, Inc. (Crystal)

 

**WIRELESS SERVICES SECTOR**

•     MinnesotaSouthern Wireless Company (MSWC)

 

**INFORMATION SOLUTIONS SECTOR**

•     NationalIndependent Billing, Inc. (NIBI)

 

**ENTERPRISE SOLUTIONS SECTOR**

•     CollinsCommunications Systems Co. (Collins)

 

HickoryTech and its subsidiaries are engaged in businesses that provideservices to their customers for a fee. These services are repetitive andrecurring, and, as a result, backlog orders and seasonality are not significantfactors. Working capital requirements primarily involve the funding of theconstruction and maintenance of telephone landline and wireless fixed assets,the payroll costs of highly skilled labor and the inventory to service itstelephone equipment customers.

 

The materials and supplies which are necessary for the operation of thebusinesses of HickoryTech and its subsidiaries are available from a variety ofsources, and no future supply problems are anticipated. All of HickoryTech’sILEC and CLEC central office switches and wireless switches, as well as amajority 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 had502 full-time equivalent employees.

 

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**ACQUISITIONS**

 

On June 26, 2001, HickoryTech acquired two digital personalcommunications services (PCS) licenses from McLeodUSA Incorporated for$11,100,000 in cash.  The PCS licensesacquired by HickoryTech include the Minnesota Basic Trading Areas (BTAs) ofMankato-Fairmont and Rochester-Austin-Albert Lea, an area covering a populationof approximately 493,000 people.  Theacquisition was a purchase of the licenses only.  There were no customers, existing revenue stream or physicalproperty and equipment included with this acquisition as the BTAs wereundeveloped.  The operations of thesePCS licenses are included in the Wireless Services Sector. FCC PCS licenses areforfeitable if minimum service coverage requirements are not met. TheMankato-Fairmont BTA license minimum buildout requirement was met in 2001. TheRochester-Austin-Albert Lea BTA license minimum buildout requirement deadlineis June 27, 2002. Management anticipates completing the minimum buildout beforethe deadline.

 

On October 9, 2000, HickoryTech acquired the dial-up internet customeraccounts of Internet Connections, a Mankato-based internet service provider.Internet Connections had approximately 5,000 internet customers in southernMinnesota. The operations of this internet services business are integratedwith HickoryTech’s existing dial-up internet business in its CommunicationsServices Sector.

 

**DISPOSITIONS**

 

On August 6, 2001, HickoryTech closed on thepreviously 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), servedapproximately 1,500 access lines in the seven communities of the Amana Coloniesin east central Iowa.  HickoryTechrecorded a pre-tax gain on the sale of $1,015,000 ($566,000 net of tax).  HickoryTech used the proceeds from the saleto repay a portion of its outstanding debt. The operations of ACTC wereincluded in the Telephone Sector.  Forthe 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’sindustry segments is included on pages 12 to 16 and 32 of this Form 10-K.

 

**INDUSTRY SEGMENTS**

 

HickoryTech’s operations are conducted in thefollowing five segments:

 

TELEPHONE SECTOR

 

MCTC, Mid-Comm and Heartland are ILECs and CNI isa fiber optic network company. Together they provide telephone-related servicesand collectively form HickoryTech’s Telephone Sector. The Telephone Sector alsoincluded the operations of ACTC, which was sold on August 6, 2001. None of theremaining companies in the Telephone Sector experienced major changes in scopeor direction of their operations during the past year. MCTC owns and operatesan independent telephone system serving the cities of Mankato and North Mankatoand adjacent rural areas in Blue Earth and Nicollet Counties in south centralMinnesota, approximately 75 miles south of Minneapolis/St. Paul. Mid-Commprovides telephone services to eleven rural communities adjacent to Mankato insouth central Minnesota. Heartland provides service to eleven rural communitiesin northwest Iowa. CNI owns and operates fiber optic cable facilities insouthern and central Minnesota, which are used to transport interexchangecommunications as a service to telephone exchange companies, primarily to MCTCand Mid-Comm.

 

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MCTC derives its principal revenues and incomefrom local services charged to subscribers in its service area, from accessservices charged to interexchange carriers and from the operation of a tolltandem switching center in Mankato, Minnesota. Revenues and income for Mid-Commare also derived from local service charges in its area of operation and fromproviding access to long distance services for its subscribers through the tollcenter in Mankato. Local and interexchange telephone access for the twocompanies are provided on an integrated basis. The local and interexchangetelephone access for both telephone companies utilize the same facilities andequipment and are managed and maintained by a common work force. Heartlandderives its principal revenues and income from local services charged tosubscribers in its service area in Iowa and from providing interexchange accessfor its subscribers. Interexchange telephone access is provided by all three ofHickoryTech’s telephone subsidiaries by connecting the communications networksof interexchange and cellular carriers with the equipment and facilities of endusers by use of its switched networks or private lines.

 

MCTC and Mid-Comm are Minnesota public utilitiesoperating pursuant to indeterminate permits issued by the Minnesota PublicUtilities Commission. Heartland is also a public utility, which operatespursuant to a certificate of public convenience and necessity issued by theIowa Utilities Board. These state agencies regulate the services provided byMCTC, Mid-Comm and Heartland. None of CNI’s operations are subject toregulation by any state regulatory authority. Due to the size of MCTC, Mid-Command Heartland, neither the Minnesota Public Utilities Commission nor the IowaUtilities Board regulates the rate of return or profits of each telephone company’soperations. Instead, the Minnesota Public Utilities Commission regulates theprices and services levels provided by MCTC and Mid-Comm because each company’soperations fall below the 50,000 access line minimum level for rate regulationin the state of Minnesota. In the state of Iowa, Heartland’s operations fallbelow the 15,000 access line minimum level for rate regulation by the IowaUtilities Board. MCTC, Mid-Comm and Heartland are each required to file localservice rates as tariffs with the applicable state public utilities commission.MCTC’s and Mid-Comm’s local service rates are below those of most MinnesotaILECs, which relieves these companies of substantial regulatory oversight.Regardless of whether a particular rate is subject to regulatory review, theability of HickoryTech and its subsidiaries to change rates will be determinedby various factors, including economic and competitive circumstances. Due tothe rural nature of HickoryTech’s service territory and the relatively smallsize of HickoryTech’s service territory in each state, management does notexpect individual state or federal regulation to materially impactHickoryTech’s operations in the near future.

 

As local exchange telephone companies, MCTC,Mid-Comm and Heartland provide end office switching and ancillary services tolong distance interexchange carriers. These relationships allow HickoryTech’stelephone subscribers to place long distance telephone calls. By paying accesscharges on the long distance calls of all of the individual customers who usetheir service, the long distance interexchange carriers are significantcustomers of HickoryTech, but individually none of them represent more than tenpercent of HickoryTech’s consolidated revenues.

 

Alternatives to HickoryTech service includecustomers leasing private line switched voice and data services in or adjacentto the territories served by HickoryTech, which permits the bypassing of localtelephone facilities. In addition, microwave transmission services, wirelesscommunications, fiber optic and coaxial cable deployment and other servicespermit bypass of the local exchange network. These alternatives to localexchange service represent a potential threat to HickoryTech’s long-termability to provide local exchange service at economical rates.

 

In order to meet this competition, HickoryTechhas deployed new technology for its local exchange network to increaseoperating efficiencies and to provide new services to its customers. These newtechnologies include the latest release of digital switching technology on allof HickoryTech’s switches, installation of over 500 miles of fiber optic cableand 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 inthe line), which allows HickoryTech to provide a very reliable level of serviceto its customers. The utility of the local network is also enhanced by theability to offer high speed internet (digital subscriber line, or DSL) in over70% of all HickoryTech territories, and over 95% of its largest exchange,Mankato.

 

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Competition in HickoryTech’s ILEC service areahas developed in one of Heartland’s exchanges. In the city of Hawarden, Iowa,the municipal city government overbuilt the city’s telephone serviceinfrastructure and is providing an alternative to HickoryTech’s telephoneservice. The Hawarden CLEC has acquired approximately 1,000 access lines orapproximately 59% of that city’s business from HickoryTech. The impact of thiscompetition is reflected in HickoryTech’s 2001, 2000 and 1999 financial resultsand HickoryTech management does not believe there will be significant furtherimpact from competition in Hawarden. HickoryTech constantly responds tocompetitive changes with active programs to market products and to engineer itsinfrastructure for higher customer satisfaction.

 

Competition also exists for some of the servicesprovided to interexchange carriers, such as customer billing services,dedicated private lines, and network switching. This competition comesprimarily from the interexchange carriers themselves. The provision of theseservices is of a contractual nature and is primarily controlled by theinterexchange carriers.  Other services,such as directory advertising, operator services and cellular communications,are open to competition. Competition is based primarily on service andexperience.

 

COMMUNICATIONS SERVICES SECTOR

 

The passage of the Telecommunications Act createdthe opportunity for HickoryTech to offer communications service in territoriesserved by other telephone companies, and Crystal began operations in January1998 as a new start-up business. Crystal offers local service, long distanceand dial-up internet access services on a competitive basis to customers intowns in southern Minnesota and Iowa not in HickoryTech’s Telephone Sector’sservice area. This service offers alternatives to the incumbent telephonecarrier in various communities and is offered under the trade name HickoryTechwireline service. These services are currently being offered to customers ineight rural communities in Minnesota, as well as six rural communities in Iowa.Crystal’s primary strategy is to provide service by overbuilding the ILEC withnew telecommunications switching networks and telephone lines. TheCommunications Services Sector also provides the long distance service anddial-up internet access services to HickoryTech’s Telephone Sector’ssubscribers.

 

Crystal is not subject to regulation by thepublic utilities commissions in the states it serves regarding rates andservices. The CLEC activities of Crystal do require it to file for authority tooperate with the appropriate public utilities commission in each state itenters. Crystal competes directly against existing ILECs in the areas in whichCrystal operates. Crystal will continue to offer services to other markets andwill require additional investment of assets to be competitive in thosemarkets.

 

Crystal is not dependent upon any single customeror small group of customers. No one customer accounts for ten percent or moreof HickoryTech’s consolidated revenues in the Communications Services Sector.

 

WIRELESS SERVICES SECTOR

 

HickoryTech, through its subsidiary MSWC, ownsand operates cellular telephone businesses in south central Minnesota and inthe Minneapolis/St. Paul area. In south central Minnesota, MSWC providescellular service for Minnesota’s Rural Service Area (RSA) 10, under the tradename of HickoryTech Wireless. This business owns 100% of the  “A-side” FCC cellular license to operate inseven counties in south central Minnesota. The area overlaps and is larger thanthe telephone line service area of HickoryTech’s Minnesota ILEC and CLECservice areas and serves a population of approximately 230,000. This sectoralso 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 themetropolitan Minneapolis/St. Paul area and is located in five Minnesotacounties and in one Wisconsin county. Metro A-2 provides service to an areawith a population of approximately 170,000. In addition, this sector also ownsthe newly acquired PCS licenses for the Minnesota BTAs of Mankato-Fairmont andRochester-Austin-Albert Lea. The two BTAs are located in 16 Minnesota countiesand one Iowa county and provide service to an area with a population ofapproximately 493,000, some of which coincide with the previously mentionedcellular RSA 10 population of 230,000.

 

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MSWC derives its principal revenues and incomefrom providing cellular telephone service to the retail customers in sevencounties in south central Minnesota and roaming traffic. MSWC also derivesroaming revenue from the six counties surrounding the metropolitanMinneapolis/St. Paul Metro A-2 area and roaming revenues from the 17 countieswhich comprise the PCS service territory.

 

MSWC directly competes against local cellular andPCS companies in southern Minnesota and in the Minneapolis/St. Paul area. MSWCshares the market with other wireless providers and will require additionalinvestment of assets to build the infrastructure to provide high qualityservice to this service area and to meet FCC mandates.

 

INFORMATION SOLUTIONS SECTOR

 

Through NIBI, HickoryTech’s Information SolutionsSector provides data processing and related services, principally forHickoryTech, other local exchange telephone companies, CLECs, interexchangenetwork carriers, wireless companies, municipalities and utilities. TheInformation Solutions Sector’s principal activity is the provision of monthlybatch processing of computerized data for HickoryTech as well as non-affiliatedcompanies. Services for telephone company customers include the processing oflong distance telephone calls from data sources and telephone switches, thepreparation of the subscriber telephone bills, customer record keeping, carrieraccess bills and general accounting and payroll services. NIBI, under the tradename HickoryTech Information Solutions, also provides certain billingclearinghouse functions for interexchange carriers.

 

There are a number of companies engaged insupplying data processing services comparable to those furnished by NIBI.Competition is based primarily on price and service. There are some companiesof much larger size that dominate certain aspects of the billing and dataservices business. There are many new market niches for telecommunicationsbilling and data services, including ILECs, CLECs and wireless carriers.HickoryTech believes that NIBI is in a position to provide data processingservices for these companies.

 

HickoryTech’s Information Solutions Sector hasdeveloped a new integrated billing and management system called SuiteSolution.For internal use, SuiteSolution enables HickoryTech to become a full-servicebilling provider for all aspects of the telecommunications industry on a fullyintegrated basis. For external use, SuiteSolution can provide wireline orwireless carriers the individual benefits of a billing platform, or tointegrated service providers, such as HickoryTech, a total system.

 

ENTERPRISE SOLUTIONS SECTOR

 

HickoryTech’s Enterprise Solutions’ activitiesare focused on the sale, installation and service of business telephone systemsand data communications equipment to companies based in metropolitanMinneapolis/St. Paul, Minnesota. This sector also supports the businesstelephone system service for HickoryTech ILEC and CLEC operations in southernMinnesota and in Iowa. The customers in the Enterprise Solutions Sector’smarket are the individual business end users of telecommunications service withongoing service needs. Products consist of telecommunication platforms such asNortel and Octel on the voice side of the Enterprise Solutions’ business, andCisco and Bay Networks (Nortel) equipment on the data side of its business.Enterprise Solutions specializes in the quality custom installation andmaintenance of wide area networking, local networking and transport solutionsin telecommunications for end user customers.

 

Revenues are primarily earned by the sales,installation and service of business telephone systems. Enterprise Solutions continuesits commitment to service and support of its core product, Nortel, whileidentifying new opportunities such as call centers, computer telephoneintegration voice mail and interactive voice response systems.

 

HickoryTech’s Enterprise Solutions Sector is notdependent upon any single customer or small group of customers. No one customeraccounts for ten percent or more of HickoryTech’s consolidated revenues in theEnterprise Solutions Sector.

 

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There are several companies competing in thecommunications products market in which Enterprise Solutions operates.Competition is based primarily on price and service. No one company is dominantin this field. Enterprise Solutions offers customer premises telephoneequipment through well-trained and experienced market representatives withlong-term customer relationships. HickoryTech believes that its EnterpriseSolutions Sector enjoys a very strong reputation for quality service.Enterprise Solutions has built a strong base of customers with recurringtelecommunications 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 materialeffects on their earnings, capital expenditures or competitive position becauseof laws pertaining to the protection of the environment.

 

**OTHERCOMPETITION**

 

Since the mid-1980’s, HickoryTech’s businessstrategy has been to position itself as a “one-stop” telecommunicationsservices provider. Long-term business relationships with its customers havestrengthened HickoryTech’s business position. HickoryTech believes that itscustomers value the fact that it is the “local company” whose goal is to meetthe customers’ total communications needs. HickoryTech has several competitiveadvantages: its prices and costs are low; its service reputation is high; itsinvestment in technology is strong and it has a direct billing relationshipwith almost all of the customers in its service territories.

 

The long-range effect of competition on theprovision of telecommunications services and equipment will depend ontechnological advances, regulatory actions at both the state and federallevels, court decisions, and possible additional future state and federallegislation. The trend resulting from past legislation has been to expandcompetition in the telecommunications industry. It is imperative to HickoryTechthat competition in this industry remain open on an equal basis to allproviders. HickoryTech has chosen to participate in the competitive trend andenhance its growth by establishing its Communications Services Sector.

 

**FORWARD-LOOKING STATEMENTS**

 

This Form 10-K Annual Report, Management’sDiscussion and Analysis and other sections of this Annual Report containforward-looking statements that are based on current expectations, estimatesand projections about the industry in which HickoryTech operates andmanagement’s beliefs and assumptions. HickoryTech is developing severalinternal growth businesses, including its Communications Services Sector, itsWireless Services Sector and its SuiteSolution product in the InformationSolutions Sector, and in this Form 10-K is making certain forward-lookingstatements about these growth businesses. Such forward-looking statements aresubject to uncertainties that could cause HickoryTech’s future actual resultsto differ materially from such statements. These statements are not guaranteesof future performance and involve certain risks, uncertainties and probabilities,which are difficult to predict. Therefore, actual outcomes and results maydiffer materially from what is expressed or forecasted in such forward-lookingstatements, whether as a result of new information, future events or otherwise.  Factors that might cause such a differenceinclude, but are not limited to, those contained in this Item 1, “Management’sDiscussion and Analysis” in Item 7 and Exhibit 99, which is incorporated hereinby reference.  You are cautioned not toplace undue reliance on these forward looking statements, which speak only asof the date on which they were made. Except as otherwise required by law,HickoryTech undertakes no obligation to update any of its forward-lookingstatements for any reason.

 

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**Item 2.****       Properties.**

 

HickoryTech’s business is primarily focused onthe provision of services and its properties are used for administrativesupport and to store and safeguard equipment. At December 31, 2001, HickoryTech’s gross property, plant and equipmentof $231,675,000 consisted primarily of telephone switches, cable and networkequipment. HickoryTech owns or leases the telephone property, plant andequipment which it utilizes to operate its telephone systems. The threetelephone subsidiaries of HickoryTech in Minnesota and Iowa own centraltelephone offices with related real estate in all of the communities theyserve. HickoryTech’s Telephone and Communications Services Sectors own thetelephone network, including telephone outside plant, fiber-optic cable andcentral office equipment, over which they provide services to their customers.HickoryTech’s Wireless Services Sector owns the switches and cellular/PCS radioequipment which provides its unique wireless network. It is the opinion ofHickoryTech’s management that the properties of HickoryTech are suitable andadequate to provide modern and effective telecommunications services within itsservice areas, including both local and long distance service. The capacity forfurnishing these services both currently and in the future are under ongoingreview by HickoryTech’s engineering staff. Facilities are placed in full useafter installation and appropriate testing under the guidance associated withmulti-year capital expenditure plans.

 

HickoryTech’s principal properties are thefollowing:

 

(1)               MCTC’s generaloffices and principal central office exchange building are located in downtownMankato, Minnesota.  This facility isowned by MCTC and is a three-level brick and stone building containingapproximately 60,000 square feet of floor space.  Portions of this building are leased to HickoryTech for itsgeneral offices and to NIBI for its data processing equipment.

 

(2)               MCTC’s mainwarehouse is located in Mankato, Minnesota. The warehouse, built in 1996, is owned by MCTC and is a two-storyconcrete building containing approximately 48,000 square feet.  The warehouse is used to store vehicles andsupplies and is also used as office space for engineering and outside telephonepersonnel.

 

(3)               Heartland’s maincentral office equipment is located in a one-story brick structure owned byHeartland in Rock Rapids, Iowa containing approximately 1,500 square feet.Heartland also leases general office space in Rock Valley, Iowa.

 

(4)               Crystal leasesoffice space in Mankato, Minnesota and West Des Moines, Iowa.

 

(5)               MSWC leasesoffice space in Mankato, Minnesota for cellular switch equipment andadministration. MSWC also leases and owns various cellular and PCS tower sitesthrough southern Minnesota and the Minneapolis/St. Paul metropolitan area.

 

(6)               NIBI owns athree-story building in Mankato, Minnesota containing approximately 17,000square feet.

 

(7)               Collins leasesbuilding and warehouse space in Roseville, Minnesota.

 

**Item 3.****       LegalProceedings.**

 

There is no material pending legal or governmental proceedings directlyinvolving HickoryTech or its subsidiaries, other than ordinary routinelitigation or ordinary routine utility matters, incidental to the business ofHickoryTech and its subsidiaries.

 

**Item 4.****       Submission ofMatters to a Vote of Security Holders.**

 

No matters were submitted to a vote of securityholders during the fourth quarter of the fiscal year covered by this 2001Annual Report on Form 10-K.

 

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**PART II**

 

**Item 5.****       Market forRegistrant’s Common Equity and Related Stockholder Matters**.

 

The common stock of HickoryTech is traded on TheNasdaq National Market under the symbol “HTCO”.

 

The following table sets forth for the periodindicated, the high and low closing sales price of the common stock.

 
|   |     |   |         | **High** |   | **Low** |   | **End of Qtr.** |    |
|--------|----------|--------|--------------|----------|--------|---------|--------|-----------------|---------|
|   | **2001** |   | 4th  Quarter |     | $      | 19.0000 |   | $               | 14.8000 |   | $ | 16.9500 |   |
|   |     |   | 3rd Quarter  |     | $      | 18.4000 |   | $               | 14.5100 |   | $ | 16.3000 |   |
|   |     |   | 2nd Quarter  |     | $      | 16.0000 |   | $               | 13.5000 |   | $ | 16.0000 |   |
|   |     |   | 1st Quarter  |     | $      | 20.8125 |   | $               | 12.1875 |   | $ | 14.8750 |   |
|   |     |   |         |     |   |    |   |            |    |   |
|   | **2000** |   | 4th Quarter  |     | $      | 23.0000 |   | $               | 18.3750 |   | $ | 20.5000 |   |
|   |     |   | 3rd Quarter  |     | $      | 22.2500 |   | $               | 13.7500 |   | $ | 22.2500 |   |
|   |     |   | 2nd Quarter  |     | $      | 15.5000 |   | $               | 11.9375 |   | $ | 12.1875 |   |
|   |     |   | 1st Quarter  |     | $      | 15.0000 |   | $               | 12.9375 |   | $ | 14.0000 |   |
|        |          |        |              |          |        |         |        |                 |         |  |  |  |  |  |

 

As of February 28, 2002, there were approximately 3,339 holders ofrecord 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 cashdividend of $0.11 per share will be paid on March 5, 2002 to stockholders ofrecord at the close of business on February 15, 2002.

 

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**Item 6.****       SelectedFinancial Data.**

 
|                               |   |                                                  |        |       |
|------------------------------------|--------|-------------------------------------------------------|-------------|------------|
|                               |   | **2001**                                              |        | **2000**   |   | **1999** |   | **1998** |   | **1997** |   |
|                               |   | **(Dollars in  Thousands, Except Per Share Amounts)** |        |
| **FOR THE YEAR:**                  |   |                                                  |        |       |   |   |   |   |   |   |   |
| Operating Revenues (A)             |   |                                                  |        |       |   |   |   |   |   |   |   |
| Telephone                          |   | **$**                                                 | **55,167**  |       | $ | 52,662 |   | $ | 49,178 |   | $ | 47,934 |   | $ | 42,982 |   |
| Communications Services            |   | **11,197**                                            |        | 7,944      |   | 4,170 |   | 2,094 |   | – |   |
| Wireless Services                  |   | **17,655**                                            |        | 18,899     |   | 16,897 |   | 7,993 |   | – |   |
| Information Solutions              |   | **4,085**                                             |        | 4,287      |   | 4,368 |   | 7,962 |   | 9,474 |   |
| Enterprise Solutions               |   | **20,374**                                            |        | 18,511     |   | 22,576 |   | 28,721 |   | 24,153 |   |
| Total Operating Revenues           |   | **$**                                                 | **108,478** |       | $ | 102,303 |   | $ | 97,189 |   | $ | 94,704 |   | $ | 76,609 |   |
|                               |   |                                                  |        |       |   |   |   |   |   |   |   |
| Net Income                         |   | **$**                                                 | **8,738**   |       | $ | 7,705 |   | $ | 14,666 |   | $ | 13,526 |   | $ | 15,479 |   |
| Net Income Before Gains/Losses (B) |   | **$**                                                 | **8,119**   |       | $ | 7,797 |   | $ | 9,453 |   | $ | 12,715 |   | $ | 11,774 |   |
|                               |   |                                                  |        |       |   |   |   |   |   |   |   |
| **PER SHARE:**                     |   |                                                  |        |       |   |   |   |   |   |   |   |
| Fully Diluted Earnings Per Share   |   | **$**                                                 | **0.62**    |       | $ | 0.55 |   | $ | 1.06 |   | $ | 0.99 |   | $ | 1.12 |   |
| Fully Diluted Earnings Per Share   |   |                                                  |        |       |   |   |   |   |   |   |   |
| Before Gains/Losses (B) (C)        |   | **$**                                                 | **0.58**    |       | $ | 0.56 |   | $ | 0.68 |   | $ | 0.93 |   | $ | 0.85 |   |
| Dividends Per Share (C)            |   | **$**                                                 | **0.44**    |       | $ | 0.44 |   | $ | 0.44 |   | $ | 0.44 |   | $ | 0.40 |   |
|                               |   |                                                  |        |       |   |   |   |   |   |   |   |
| **AT YEAR END:**                   |   |                                                  |        |       |   |   |   |   |   |   |   |
| Total Assets                       |   | **$**                                                 | **283,292** |       | $ | 255,487 |   | $ | 214,804 |   | $ | 161,429 |   | $ | 112,384 |   |
| Shareholders’ Equity          |   | **$**                                                 | **80,765**  |       | $ | 77,357 |   | $ | 74,476 |   | $ | 63,629 |   | $ | 55,562 |   |
| Total Debt, Long-Term and Current  |   | **$**                                                 | **170,901** |       | $ | 148,650 |   | $ | 111,361 |   | $ | 76,042 |   | $ | 41,964 |   |
| Debt Ratio  (D)               |   | **67.9**                                              | %           | 65.8       | % | 59.9 | % | 54.4 | % | 43.0 | % |
|                               |   |                                                  |        |       |   |   |   |   |   |   |   |
| **CUSTOMER DATA (year end):**      |   |                                                  |        |       |   |   |   |   |   |   |   |
| ILEC Access Lines (E)              |   | **66,393**                                            |        | 67,120     |   | 64,969 |   | 61,346 |   | 59,223 |   |
| CLEC Access Lines (F)              |   | **11,573**                                            |        | 8,283      |   | 3,704 |   | 344 |   | – |   |
| Wireless Customers (G)             |   | **26,230**                                            |        | 25,698     |   | 20,309 |   | 15,955 |   | – |   |
| Internet Customers (H)             |   | **12,816**                                            |        | 12,129     |   | 5,835 |   | 3,195 |   | – |   |
| Long Distance Subscribers (I)      |   | **24,241**                                            |        | 18,366     |   | 12,146 |   | 6,012 |   | – |   |
|                               |   |                                                  |        |       |   |   |   |   |   |   |   |
| **OTHER DATA:**                    |   |                                                  |        |       |   |   |   |   |   |   |   |
| Employees (year end)               |   | **502**                                               |        | 552        |   | 502 |   | 479 |   | 452 |   |
| Capital Expenditures               |   | **$**                                                 | **32,868**  |       | $ | 39,662 |   | $ | 28,531 |   | $ | 12,190 |   | $ | 12,135 |   |
| Shares Outstanding (C) (year end)  |   | **13,935,308**                                        |        | 13,878,568 |   | 13,787,416 |   | 13,662,216 |   | 13,602,357 |   |
| Share Price (J) (year end)         |   | **$**                                                 | **16.9500** |       | $ | 20.5000 |   | $ | 15.0000 |   | $ | 12.6250 |   | $ | 11.6875 |   |
| Shareholders (K)                   |   | **3,339**                                             |        | 3,300      |   | N/A |   | N/A |   | N/A |   |

 

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(A)                                        Acquisitions of HeartlandTelecommunications Company of Iowa and Datacomm Products in 1997, MinnesotaSouthern Wireless Company in 1998 and Metro A-2 (Minneapolis/St. Paul area)cellular telephone business in 1999 and dispositions of HickoryTech’ssubsidiaries, Digital Techniques, Inc. (DTI) in 1998 and Amana ColoniesTelephone Company (ACTC) in 2001, have affected HickoryTech’s revenue trends.

 

(B)                                          Excludes one-time after-tax gains in 2001of $619,000 or $0.04 per share from sale of ACTC and unrelated assets andinvestments; in 2000 of $161,000 or $0.01 per share adjustment to the 1998 saleof DTI; in 1999 of $5.2 million or $0.38 per share from the sale of a cellularpartnership interest; in 1998 of $811,000 or $0.06 per share from the sale ofDTI and unrelated securities; in 1997 of $3.7 million or $0.27 per share fromthe sale of DirecTV assets. 2000 also excludes $253,000 or $0.02 per share fromthe extraordinary loss and cumulative effect charge.

 

(C)              All per sharecalculations and shares outstanding have been restated for the 1998 3-for-1stock split.

 

(D)              Debt Ratio =Total Debt /  (Total Debt + EndingShareholders’ Equity).

 

(E)                                           ILEC Lines refer to the local exchangetelephone access lines in the Telephone Sector. ILEC Lines include ISDN (HighSpeed Data) lines of 2,196 in 2001, 2,198 in 2000 and 1,683 in 1999.

 

(F)              CLEC Lines referto the competitive local exchange telephone access lines in the CommunicationsServices Sector.

 

(G)              WirelessCustomers refer to the cellular service subscribers in the Wireless ServicesSector.

 

(H)                                         Internet Customers are dial-up internetaccounts within the Communications Services Sector, serving ILEC, CLEC or standalone dial-up accounts anywhere HickoryTech serves. 2000 includes 4,834customers acquired from Internet Connections. This does not include DSLcustomers.

 

(I)               Long Distanceservice accounts are provided in the Communications Services Sector to ILEC andCLEC customers.

 

(J)                                             Price is the last day closing price for2001 through 1999 and the last five-day closing price average for the years1998 and 1997.

 

(K)                                         Number of Shareholders is approximatetotal of Company registrations and street name accounts. Data prior to 2000 isnot available.

 

10

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**Item 7.****       Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**BUSINESSES**

HickoryTech operates in five business sectors. Its largest and oldestbusiness (since 1898) has been the operation of incumbent local exchangecarriers (ILECs) or traditional wired telephone service. This business isHickoryTech’s Telephone Sector. In 1998, HickoryTech began its CommunicationsServices Sector, which is a competitive local exchange carrier (CLEC),competing for the telephone dial tone, data and long distance calling businessin other ILECs’ territories. Also in 1998, HickoryTech began its Wireless ServicesSector by acquiring its first wholly-owned cellular service license, added tothat sector in 1999 with the acquisition of an additional cellular servicelicense and again in 2001 with the acquisition of two PCS licenses. Since 1964,HickoryTech’s Information Solutions Sector has provided computer dataprocessing and software, predominantly to other telecommunications companiesand for its own operations. HickoryTech acquired its Enterprise SolutionsSector in 1990. Since then, HickoryTech has operated as a leadingtelecommunications and data equipment distributor from a base inMinneapolis/St. Paul, Minnesota.

 

**THECOMPANY**

The eight subsidiaries of HickoryTech, all of which publicly operateand conduct business as HickoryTech, and the business sectors in which theyoperate 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.

 

**CORPORATEDEVELOPMENTS**

**2001****                             **In June, HickoryTech acquired two PCSlicenses in southern Minnesota covering an area with a population ofapproximately 493,000.

 

In August, HickoryTech sold Amana Colonies TelephoneCompany (ACTC), a local telephone exchange serving approximately 1,500 accesslines in east central Iowa.

 

During 2001, HickoryTech grew internally by 800 ILECaccess lines (prior to sale of ACTC), 3,300 CLEC access lines, 500 wirelesscustomers, 700 internet customers and 5,900 long distance customers, a total of8.6% growth internally in customer counts.

 

**2000**                              In October, HickoryTech acquired approximately 5,000dial-up internet customer accounts in southern Minnesota from InternetConnections.

 

During 2000, HickoryTech grew internally by 2,200 ILECaccess lines, 4,500 CLEC access lines, 5,400 wireless customers, 1,300 internetcustomers and 6,200 long distance customers, a total of 18.5% growth internallyin customer counts.

 

**1999**                              In May, HickoryTech sold its 6.4% equity interest inMidwest Wireless Communications, LLC, a rural cellular provider in southernMinnesota.

 

In June, HickoryTech acquired 170,000 population equivalents(pops) cellular license surrounding metropolitan Minneapolis/St. Paul.

 

11

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**CONSOLIDATEDRESULTS OF OPERATIONS**

 

**2001Compared to 2000**

•                       2001 consolidated operating revenues were $108.5million, 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 in2001, consolidated operating revenues in 2001 increased 6.7% over 2000.

 

•                       2001 consolidated net income of $8.7 millionrepresents a $1.0 million or 13.4% increase from 2000. The 2001 net incomeincludes a $566,000 after-tax gain from the sale of ACTC. The 2001 net incomealso includes a $53,000 after-tax gain from the sale of various property andinvestments. The 2000 net income includes a $161,000 after-tax gain related tofinal payment received from the 1998 sale of Digital Techniques, Inc. The 2000net income also includes a $233,000 after-tax extraordinary loss related to theearly extinguishment of debt and a $20,000 after-tax loss from the cumulativeeffect of a change in accounting principle. Without the effect of these gainsand other one-time items in either year, consolidated net income would haveincreased 4.1% from 2000.

 

**2000Compared to 1999**

•                       2000 consolidated operating revenues were $102.3million, a $5.1 million or 5.2% increase over 1999. HickoryTech’s acquisitionof Metro A-2 contributed $3,569,000 to consolidated operating revenues for thefull year 2000 and $2,730,000 for the partial year 1999. Without the effect ofthe acquisition of Metro A-2, consolidated operating revenues in 2000 wouldhave increased 4.5% over 1999.

 

•                       2000 consolidated net income of $7.7 millionrepresents a $7.0 million or 47.5% decrease from 1999. The 2000 net incomeincludes a $161,000 after-tax gain related to final payment received from the1998 sale of Digital Techniques, Inc. The 2000 net income also includes a$233,000 after-tax extraordinary loss related to the early extinguishment ofdebt and a $20,000 after-tax loss from the cumulative effect of a change inaccounting principle. The 1999 net income includes a $5.2 million after-taxgain from the sale of HickoryTech’s equity interest in Midwest WirelessCommunications. Without the effect of these gains and other one-time items ineither year, consolidated net income would have decreased 17.5% from 1999.

 

**OVERALL SUMMARY OF OPERATIONS**

 
| **Year Ended  December 31,**              |   | **2001**                   |       | **2000** |   | **1999** |   |
|-------------------------------------------|--------|----------------------------|------------|----------|--------|----------|--------|
|                                      |   | **(Dollars in thousands)** |       |
| Operating Income/(Loss)                   |   |                       |       |     |   |     |   |
| Telephone                                 |   | **$**                      | **27,277** |     | $      | 25,896   |   | $ | 23,871 |   |
| Communications  Services                  |   | **(5,754**                 | )          | (5,219   | )      | (4,153   | )      |
| Wireless  Services                        |   | **1,303**                  |       | 2,226    |   | 3,347    |   |
| Information  Solutions                    |   | **408**                    |       | 706      |   | (486     | )      |
| Enterprise  Solutions                     |   | **1,340**                  |       | (308     | )      | 1,137    |   |
| Corporate                                 |   | **(701**                   | )          | (958     | )      | (2,097   | )      |
|                                      |   | **23,873**                 |       | 22,343   |   | 21,619   |   |
| Other Income                              |   | **408**                    |       | 434      |   | 953      |   |
| Gain on Sale of  Assets                   |   | **1,115**                  |       | 271      |   | 9,207    |   |
| Interest Expense                          |   | **(10,687**                | )          | (9,803   | )      | (6,513   | )      |
| Income Taxes                              |   | **(5,971**                 | )          | (5,287   | )      | (10,600  | )      |
| Extraordinary  Item and Cumulative Effect |   | –                     |       | (253     | )      | –   |   |
| Net Income                                |   | **$**                      | **8,738**  |     | $      | 7,705    |   | $ | 14,666 |   |
| Net Income  Before Gains/Losses *         |   | **$**                      | **8,119**  |     | $      | 7,797    |   | $ | 9,453 |   |

 

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* 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-taxcumulative loss on accounting change of $20,000 in 2000.

 

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**TELEPHONE**

Telephone Sector revenues represented 51% of 2001 consolidatedoperating revenues after intersegment eliminations. They were earned primarilyby providing customers access to the Telephone Sector’s 66,393 ILEC access linelocal network and by providing interexchange access for long-distance networkcarriers. The Telephone Sector also earns revenue through use of its fiberoptic 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 theacquisition of Heartland in 1997 and excluding the revenues from ACTC, whichwas sold in 2001, the five-year compound annual growth rate would have been6.3%.

 

**TELEPHONE**
|                                              |   | **2001**                   |       | **2000**   |   | **1999** |   |
|---------------------------------------------------|--------|----------------------------|------------|------------|--------|----------|--------|
|                                              |   | **(Dollars in Thousands)** |       |
| Revenues Before Eliminations                      |   |                       |       |       |   |     |   |
| Local Service                                     |   | **$**                      | **14,433** |       | $      | 13,091   |   | $ | 12,260 |   |
| Network Access                                    |   | **33,162**                 |       | 32,765     |   | 29,760   |   |
| Intersegment                                      |   | **4,114**                  |       | 3,151      |   | 3,936    |   |
| Other                                             |   | **7,572**                  |       | 6,806      |   | 7,158    |   |
|                                              |   | **59,281**                 |       | 55,813     |   | 53,114   |   |
| Cash Operating  Expenses                          |   | **23,238**                 |       | 21,816     |   | 21,724   |   |
| Non-Cash  Operating Expenses                      |   | **8,766**                  |       | 8,101      |   | 7,519    |   |
|                                              |   | **32,004**                 |       | 29,917     |   | 29,243   |   |
| Operating Income                                  |   | **$**                      | **27,277** | ** ** | $      | 25,896   |   | $ | 23,871 |   |
| Net Income                                        |   | **$**                      | **15,893** | ** ** | $      | 15,190   |   | $ | 14,433 |   |
| Earnings Before  Interest,                        |   |                       | ** ** |       |   |     |   |
| Taxes,  Depreciation and Amortization (EBITDA)(1) |   | **$**                      | **36,043** | ** ** | $      | 33,997   |   | $ | 31,389 |   |
| Capital Expenditures                              |   | **$**                      | **8,812**  | ** ** | $      | 15,028   |   | $ | 12,710 |   |

 

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(1)- EBITDA represents operating income plus depreciation and amortizationexpense. EBITDA, which is not a measure of financial performance or liquidityunder generally accepted accounting principles, is provided because suchinformation is used by certain investors when analyzing the financial positionand performance of HickoryTech. Because of the variety of methods used bycompanies and analysts to calculate EBITDA, and the fact that EBITDAcalculations may not accurately measure a company’s ability to meet debtservice requirements, caution should be used in relying on any EBITDApresentation. HickoryTech sees value in disclosing its calculation of EBITDAfor the financial community and in displaying the change in EBITDA. HickoryTechbelieves an increasing EBITDA depicts increased ability to attract financingand increased valuation of HickoryTech’s business.

 

From the table above, Telephone revenues before eliminations increased6.2% in 2001 and 5.1% in 2000. Local service rates were increased in Heartlandin May 2001 and in MCTC and Mid-Comm in December 2001 and February 2000, whichcontributed $128,000 and $744,000 to Telephone revenues in 2001 and 2000,respectively.  Without the local servicerate increases and excluding the revenues of ACTC, Telephone revenues beforeeliminations would have increased 7.3% in 2001 and 3.7% in 2000.

 

Local service revenue increased in the Telephone Sector by 10.3% for2001 over 2000 and 6.8% for 2000 over 1999. Without the impact of the localservice rate increases and excluding the revenues of ACTC, local servicerevenue would have increased 9.9% in 2001 and 0.7% in 2000. Increased demandfor local private lines and higher penetration of vertical services such ascaller identification, call waiting and three-way calling was the primarysource of the growth in local service revenue in 2001. Access line growth of1.2% in 2001 (prior to sale of ACTC) and 3.3% in 2000, along with the localservice rate increases, was also a contributor to higher local service revenue.

 

Network access revenue increased 1.2% in 2001 and 10.1% in 2000. Accessminutes in 2001 increased 0.6% over 2000 and in 2000 increased by 1.9% over1999. Excluding the revenues of ACTC, network access revenue would haveincreased 3.1% in 2001, and access minutes would have increased 2.0% in 2001over 2000. Access revenues in 2000 were enhanced by high demand for dedicatedlines, high speed circuits and other non-usage based network connections. In2001, the negative effects of network access pricing, a common industry trend,began to erode the increases in network access revenue from the volume ofswitched minutes of use.

 

Intersegment revenues increased 30.6% in 2001 over 2000 and decreased19.9% in 2000 over 1999. The intersegment revenues are primarily related toengineering assistance provided to construct the CLEC telephone network and theuse of the Telephone Sector’s telephone switch by the Communications ServicesSector. These revenues are eliminated from operating revenues on theConsolidated Statements of Income.

 

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Other revenues, which include directory advertising, billing andcollections revenue and large system sales, increased 11.3% in 2001 over 2000and decreased 4.9% in 2000 over 1999. Other revenues increased in 2001 due tohigher demand for high speed data circuits and increased large system sales.

 

Cash operating expenses increased 6.5% in 2001 and 0.4% in 2000. Theincrease in 2001 was caused primarily by higher corporate costs being allocatedto the Telephone Sector primarily related to the sale of ACTC, efforts made toaddress access reform and industry issues. The increases in 2000 were due tonormal inflation. The Telephone Sector is striving for cost efficiencies andtechnological 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 opticroutes outside of this sector’s service territory. Capital expenditures in 2000also included $1,513,000 in host switch additions. The remainder of the 2000and 1999 capital expenditures of $9,479,000 and $7,187,000, respectively, arecomparable to those in 2001 and consists primarily of additional serviceconnections and network upgrades.

 

**COMMUNICATIONSSERVICES**

Communications Services Sector revenues represented approximately 10%of 2001 consolidated operating revenues after eliminations. Revenues are earnedprimarily by providing competitive local telephone service (CLEC), by providinglong distance service and dial-up internet access to both CLEC and ILECcustomers.

 

HickoryTech is developing new business with this sector. As a result ofthis investment, this sector’s local service, long distance and internetactivities operated at negative EBITDA of $3,875,000 in 2001, $4,373,000 in2000 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 sectorhave grown to 11,573 at the end of 2001 from 3,704 at the end of 1999. Longdistance customers served in this sector have grown to 24,241 at the end of2001 from 12,146 at the end of 1999. Internet customers served in this sectorhave 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 otherILEC services. While the customer acquisition costs may be high for this growthplan, management believes the long-term benefits will be comparable to itsTelephone Sector operations because in essence, HickoryTech will be running itsILEC and CLEC businesses in similar manner.

 

**COMMUNICATIONS SERVICES**
|                                              |   | **2001**                   |       | **2000**   |   | **1999** |   |
|---------------------------------------------------|--------|----------------------------|------------|------------|--------|----------|--------|
|                                              |   | **(Dollars in Thousands)** |       |
| Revenues Before Eliminations                      |   |                       |       |       |   |     |   |
| Long Distance                                     |   | **$**                      | **4,538**  |       | $      | 4,371    |   | $ | 2,520 |   |
| Local Service                                     |   | **2,774**                  |       | 1,690      |   | 712      |   |
| Internet                                          |   | **3,066**                  |       | 1,958      |   | 1,098    |   |
| Other                                             |   | **1,561**                  |       | 885        |   | 387      |   |
|                                              |   | **11,939**                 |       | 8,904      |   | 4,717    |   |
| Cash Operating  Expenses                          |   | **15,814**                 |       | 13,277     |   | 8,543    |   |
| Non-Cash  Operating Expenses                      |   | **1,879**                  |       | 846        |   | 327      |   |
|                                              |   | **17,693**                 |       | 14,123     |   | 8,870    |   |
| Operating Loss                                    |   | **$**                      | **(5,754** | **)**      | $      | (5,219   | )      | $ | (4,153 | ) |
| Net Loss                                          |   | **$**                      | **(3,492** | **)**      | $      | (3,131   | )      | $ | (2,525 | ) |
| Earnings Before  Interest,                        |   |                       | ** ** |       |   |     |   |
| Taxes,  Depreciation and Amortization (EBITDA)(1) |   | **$**                      | **(3,875** | **)**      | $      | (4,373   | )      | $ | (3,826 | ) |
| Capital  Expenditures                             |   | **$**                      | **19,626** | ** ** | $      | 19,197   |   | $ | 11,137 |   |

 

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(1)- EBITDA represents operating income plus depreciation and amortizationexpense. EBITDA, which is not a measure of financial performance or liquidityunder generally accepted accounting principles, is provided because suchinformation is used by certain investors when analyzing the financial positionand performance of HickoryTech. Because of the variety of methods used bycompanies and analysts to calculate EBITDA, and the fact that EBITDAcalculations may not accurately measure a company’s ability to meet debtservice requirements, caution should be used in relying on any EBITDApresentation. HickoryTech sees value in disclosing its calculation of EBITDAfor the financial community and in displaying the change in EBITDA. HickoryTechbelieves an increasing EBITDA depicts increased ability to attract financingand increased valuation of HickoryTech’s business.

 

14

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The significant increases in operating revenues and expenses in 2001and 2000 were the result of the Communications Services Sector’s growth in CLECaccess lines and long distance and internet customers. One industry trendimpacting this sector is the decrease in average long distance revenue percustomer. This sector experienced a 32.0% increase in its long distancecustomer 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 thedecreasing long distance revenue per customer.

 

The Communications Services Sector’s growth  costs include the hiring of staff and marketing expenses prior torevenue streams and paying interconnection fees to incumbent carriers fortransferring customers to the CLEC telephone network.

 

**WIRELESSSERVICES**

Wireless Services Sector revenues represented approximately 16% of 2001consolidated operating revenues after eliminations. Revenues are earnedprimarily by providing wireless and prepaid cellular telephone service tosubscribers in seven counties in south central Minnesota and by providingroaming service to customers and to other service providers. The WirelessServices Sector was formed after cellular service area license acquisitions inMay 1998 and June 1999 and PCS license acquisitions in June 2001. Customersserved in this sector have grown from 20,309 at the end of 1999 to 26,230 atthe 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 licenseterritory. HickoryTech is nearing the end of its cellular capital expenditureplan, and in 2002 will complete its PCS capital expenditure plan.

 

**WIRELESS SERVICES**
|                                              |   | **2001**                   |       | **2000**   |   | **1999** |   |
|---------------------------------------------------|--------|----------------------------|------------|------------|--------|----------|--------|
|                                              |   | **(Dollars in Thousands)** |       |
| Revenues Before Eliminations                      |   |                       |       |       |   |     |   |
| Service                                           |   | **$**                      | **10,531** |       | $      | 8,818    |   | $ | 6,795 |   |
| Home Roaming                                      |   | **740**                    |       | 586        |   | 1,272    |   |
| Roaming                                           |   | **6,384**                  |       | 9,495      |   | 8,830    |   |
|                                              |   | **17,655**                 |       | 18,899     |   | 16,897   |   |
| Cash Operating  Expenses                          |   | **12,098**                 |       | 12,396     |   | 10,346   |   |
| Non-Cash  Operating Expenses                      |   | **4,254**                  |       | 4,277      |   | 3,204    |   |
|                                              |   | **16,352**                 |       | 16,673     |   | 13,550   |   |
| Operating Income                                  |   | **$**                      | **1,303**  | ** ** | $      | 2,226    |   | $ | 3,347 |   |
| Net Income                                        |   | **$**                      | **668**    | ** ** | $      | 1,227    |   | $ | 1,931 |   |
| Earnings Before  Interest,                        |   |                       | ** ** |       |   |     |   |
| Taxes, Depreciation  and Amortization (EBITDA)(1) |   | **$**                      | **5,557**  | ** ** | $      | 6,503    |   | $ | 6,551 |   |
| Capital  Expenditures                             |   | **$**                      | **2,694**  | ** ** | $      | 4,981    |   | $ | 4,251 |   |

 

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(1)- EBITDA represents operating income plus depreciation and amortizationexpense. EBITDA, which is not a measure of financial performance or liquidityunder generally accepted accounting principles, is provided because suchinformation is used by certain investors when analyzing the financial positionand performance of HickoryTech. Because of the variety of methods used bycompanies and analysts to calculate EBITDA, and the fact that EBITDAcalculations may not accurately measure a company’s ability to meet debtservice requirements, caution should be used in relying on any EBITDApresentation. HickoryTech sees value in disclosing its calculation of EBITDAfor the financial community and in displaying the change in EBITDA. HickoryTechbelieves an increasing EBITDA depicts increased ability to attract financingand increased valuation of HickoryTech’s business.

 

From the table above, Wireless revenues decreased 6.6% in 2001 over2000 and increased 11.8% in 2000 over 1999. The decrease is primarily a resultof the decrease in roaming revenue. Service revenue increased by 19.4% for 2001over 2000 and 29.8% for 2000 over 1999. The increase in service revenue is dueprimarily to the growth in the customer base served by this sector of 2.1% in2001 and 26.5% in 2000. The increase in service revenue in 2001 was more thanoffset by a decrease in roaming revenue of $3,111,000 during 2001. Roamingrates and minutes from other wireless carriers’ customers travelling intoHickoryTech’s service territory have continued to erode, particularly due totechnological changes among other wireless providers which re-route the roamingminutes from HickoryTech’s wireless service towers to other providers. Inaddition, other PCS wireless carriers have continued to build-out PCS licensesin RSA10. HickoryTech believes that both of these factors will continue tocause a decline in roaming minutes and related revenues for HickoryTech.

 

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Cash operating expenses decreased 2.4% in 2001 over 2000 afterincreasing 19.8% in 2000 over 1999. During 2001, this sector implemented aseries of management actions aimed at reducing operating expenses in an attemptto offset a portion of the decline in roaming revenue. These management actionswere successful in reducing operating expenses and maintaining margins in 2001.The increase in cash operating expenses in 2000 was due primarily to theincrease in customers served.

 

**INFORMATIONSOLUTIONS**

Information Solutions Sector revenues represented approximately 4% of2001 consolidated operating revenues after eliminations. Revenues are earned byproviding information management solutions for HickoryTech subsidiaries, otherlocal telephone companies, long distance resellers, CLECs, wireless companies,municipalities and utilities.

 

The Information Solutions Sector’s principal activity is the provisionof monthly batch processing of computerized data. The sector has developed anew integrated billing and management system called SuiteSolution. HickoryTechplans to deploy SuiteSolution in 2002 to all HickoryTech sectors, and toprovide external installations through sale or turnkey transactions beginningin 2002.

 

**INFORMATION SOLUTIONS**
|                                                                        |   | **2001**                   |      | **2000**   |   | **1999** |   |
|-----------------------------------------------------------------------------|--------|----------------------------|-----------|------------|--------|----------|--------|
|                                                                        |   | **(Dollars in Thousands)** |      |
| Revenues Before Eliminations                                                |   |                       |      |       |   |     |   |
| Unaffiliated Customers                                                      |   | **$**                      | **4,085** |       | $      | 4,287    |   | $ | 4,368 |   |
| Intersegment                                                                |   | **5,022**                  |      | 4,668      |   | 3,146    |   |
|                                                                        |   | **9,107**                  |      | 8,955      |   | 7,514    |   |
| Cash Operating  Expenses                                                    |   | **7,570**                  |      | 7,869      |   | 7,746    |   |
| Non-Cash  Operating Expense                                                 |   | **1,129**                  |      | 380        |   | 254      |   |
|                                                                        |   | **8,699**                  |      | 8,249      |   | 8,000    |   |
| Operating  Income/(Loss)                                                    |   | **$**                      | **408**   | ** ** | $      | 706      |   | $ | (486 | ) |
| Net  Income/(Loss)                                                          |   | **$**                      | **128**   | ** ** | $      | 427      |   | $ | (221 | ) |
| Earnings Before  Interest, Taxes, Depreciation and Amortization (EBITDA)(1) |   | **$**                      | **1,537** | ** ** | $      | 1,086    |   | $ | (232 | ) |
| Capital  Expenditures                                                       |   | **$**                      | **1,347** | ** ** | $      | 123      |   | $ | 148 |   |

 

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(1)- EBITDA represents operating income plus depreciation and amortizationexpense. EBITDA, which is not a measure of financial performance or liquidityunder generally accepted accounting principles, is provided because suchinformation is used by certain investors when analyzing the financial positionand performance of HickoryTech. Because of the variety of methods used bycompanies and analysts to calculate EBITDA, and the fact that EBITDAcalculations may not accurately measure a company’s ability to meet debtservice requirements, caution should be used in relying on any EBITDApresentation. HickoryTech sees value in disclosing its calculation of EBITDAfor the financial community and in displaying the change in EBITDA. HickoryTechbelieves an increasing EBITDA depicts increased ability to attract financingand increased valuation of HickoryTech’s business.

 

From the table above, Information Solutions Sector revenues beforeeliminations increased 1.7% in 2001 over 2000 and 19.2% in 2000 over 1999. Thesector’s focus in 2001, 2000 and 1999 was split between the development andintroduction of the new SuiteSolution billing and customer care softwarepackage and continued service to the existing customer base. The currentcustomer base revenue primarily is driven by service bureau processing to longdistance resellers, CLECs and local telephone companies.

 

Cash operating expenses in the Information Solutions Sector decreased3.8% in 2001 and increased 1.6% in 2000. The decrease in 2001 was due primarilyto management actions aimed at reducing operating expenses. This sectorcapitalized internal development costs associated with SuiteSolution during2001, 2000 and 1999. The capitalization of these costs ended during the thirdquarter 2001 as the development of SuiteSolution had reached the point wherethe product was available for release to customers. As a result of developmentcosts no longer being capitalized, cash operating expenses for this sector areexpected to be higher in future years as development personnel are deployed onother tasks. Non-cash operating expenses for this sector increased in 2001 dueto the amortization of SuiteSolution development costs, which began in thethird quarter of 2001.

 

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** **

** **

**ENTERPRISESOLUTIONS**

Enterprise Solutions Sector revenues represented approximately 19% of2001 consolidated operating revenues after eliminations. Revenues are earnedprimarily by the sale, installation and service of business telephone systemsand data communications equipment primarily in metropolitan Minneapolis/St.Paul, Minnesota. Customers in this sector’s market are the individualcommercial/business end users of telecommunications service with ongoingservice needs. This sector’s products consist of telecommunication platformssuch 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 thatthis sector’s expertise is the quality installation and maintenance of widearea and local telecommunications networks for end user customers.

 

**ENTERPRISE SOLUTIONS**
|                                              |   | **2001**                   |       | **2000**   |   | **1999** |   |
|---------------------------------------------------|--------|----------------------------|------------|------------|--------|----------|--------|
|                                              |   | **(Dollars in Thousands)** |       |
| Revenues Before Eliminations                      |   |                       |       |       |   |     |   |
| Installation                                      |   | **$**                      | **11,227** |       | $      | 8,688    |   | $ | 12,470 |   |
| Service                                           |   | **9,147**                  |       | 9,823      |   | 10,106   |   |
|                                              |   | **20,374**                 |       | 18,511     |   | 22,576   |   |
| Cash Operating  Expenses                          |   | **18,675**                 |       | 18,482     |   | 21,120   |   |
| Non-Cash  Operating Expenses                      |   | **359**                    |       | 337        |   | 319      |   |
|                                              |   | **19,034**                 |       | 18,819     |   | 21,439   |   |
| Operating Income                                  |   | **$**                      | **1,340**  | ** ** | $      | (308     | )      | $ | 1,137 |   |
| Net Income                                        |   | **$**                      | **748**    | ** ** | $      | (250     | )      | $ | 565 |   |
| Earnings Before  Interest,                        |   |                       | ** ** |       |   |     |   |
| Taxes,  Depreciation and Amortization (EBITDA)(1) |   | **$**                      | **1,699**  | ** ** | $      | 29       |   | $ | 1,456 |   |
| Capital  Expenditures                             |   | **$**                      | **213**    | ** ** | $      | 157      |   | $ | 269 |   |

 

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(1)- EBITDA represents operating income plus depreciation and amortizationexpense. EBITDA, which is not a measure of financial performance or liquidityunder generally accepted accounting principles, is provided because such informationis used by certain investors when analyzing the financial position andperformance of HickoryTech. Because of the variety of methods used by companiesand analysts to calculate EBITDA, and the fact that EBITDA calculations may notaccurately measure a company’s ability to meet debt service requirements,caution should be used in relying on any EBITDA presentation. HickoryTech seesvalue in disclosing its calculation of EBITDA for the financial community andin displaying the change in EBITDA. HickoryTech believes an increasing EBITDAdepicts increased ability to attract financing and increased valuation ofHickoryTech’s business.

 

From the table above, revenues for 2001 increased 10.1% from 2000 whilerevenues for 2000 decreased 18.0% from 1999. The Enterprise Solutions Sectorexperienced lower volumes of business from customers during the second half of1999 due to concerns regarding Y2K issues. In 2000, the lower volumes of business continued. Management believesthis lower business volume reflected customer delays due to industry-wideconcerns regarding technological changes, including the role of switch versusserver-based communications, and general economic concerns. During 2001,Enterprise Solutions gained several large customer sales and, in spite of adifficult economy, experienced consistently high new installation activity.

 

Cash operating expenses increased 1.0% in 2001 over 2000 and decreased12.5% in 2000 over 1999. Cash operating expenses in 2001 were held toconsistent levels as those experienced in 2000 despite a 10.1% increase inoperating revenues. This was the result of management actions aimed atcontrolling operating expenses and improving profitability. The decrease incash operating expenses experienced in 2000 was less than the 18.0% decrease inoperating revenues as certain fixed costs could not be eliminated.

 

**TOTALCOSTS 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 amortizationincreased $2,526,000 in 2001 over 2000 and $2,421,000 in 2000 over 1999 dueprimarily to the higher pace of capital investment in the CommunicationsServices Sector, wireless acquisitions in 2001, 1999 and 1998 and theamortization of capitalized SuiteSolution software development costs. Costs andexpenses 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 thenet increases are explained in the sector discussions above, although theprimary cause of the overall increase was the growth of the CommunicationsServices Sector. The Communications Services Sector’s growth costs include thehiring of staff and marketing expenses prior to revenue streams and payinginterconnection fees to incumbent carriers for transferring customers to theCLEC telephone network.

 

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**INTERESTEXPENSE**

Interest expense increased by $884,000 in 2001 over 2000 and $3,290,000in 2000 over 1999. The increase in interest expense in 2001 was due to theincrease 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 averageinterest rate from 8.17% in 2000 to 6.66% in 2001. The debt level increased in2001 to fund internal growth and to fund the PCS acquisition. The increase ininterest 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 dueto an increase in the weighted average interest rate from 6.65% in 1999 to8.17% in 2000. The debt level increased in 2000 to fund internal growth.

 

**GAIN ONSALE OF ASSETS**

The 2001 gain on sale of assets includes $1,015,000 from the sale ofACTC and $100,000 from the sale of miscellaneous assets. HickoryTech receivedproceeds of $6.5 million on the sale of ACTC. The 2000 gain on sale of assetsof $271,000 is related to a final contingent payment received from the 1998sale of DTI. The 1999 gain on sale of assets of $9.2 million is the result ofHickoryTech selling its minority interest in Midwest Wireless Communications,LLC. HickoryTech received proceeds of $12.8 million on the transaction.

 

**INCOMETAXES**

The effective tax rate in 2001 was 40.6%, versus 39.9% in 2000 and41.9% in 1999. These effective tax rates differ from the U.S. statutory rateprimarily due to state income taxes.

 

**EXTRAORDINARYLOSS ON DEBT EXTINGUISHMENT**

In June 2000, HickoryTech increased its revolving credit facility andused the proceeds to repay $40,000,000 of senior unsecured notes. As a resultof the extinguishment of the senior unsecured notes, HickoryTech recorded anextraordinary loss of $233,000, net of income tax benefit of $158,000.  This action was taken to align the capitalfinancing of HickoryTech more suitably with its current business plan.

 

**CUMULATIVEEFFECT OF ACCOUNTING CHANGE**

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.101, “Revenue Recognition in Financial Statements,” which provides additionalguidance in applying generally accepted accounting principles for revenuerecognition. Implementation of SAB No. 101 required HickoryTech to deferrevenues resulting from up-front fees and to also defer the associated directcosts. These deferred revenues and costs are now recognized ratably over thecustomer relationship period. As permitted by SAB No. 101, HickoryTechaccounted for the change in accounting policy prospectively as a cumulativeeffect of accounting change retroactively to January 1, 2000. The cumulativeeffect of accounting change in 2000 was a loss of $20,000, net of a tax benefitof $14,000.

 

**CRITICALACCOUNTING POLICIES**

This Management’s Discussion and Analysis of Financial Condition andResults of Operations are based upon HickoryTech’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America and, where applicable,conform to the accounting principles as prescribed by federal and statetelephone utility regulatory authorities. HickoryTech presently givesaccounting recognition to the actions of regulators where appropriate, asprescribed by Statement of Financial Accounting Standards (SFAS) No. 71,“Accounting for the Effects of Certain Types of Regulation.”

 

**RevenueRecognition** —Revenues are generally recognized when services are rendered or products aredelivered to customers. Revenues in the Telephone, Communications Services andWireless Services Sectors are earned from monthly billings to customers fortelephone (wireline or wireless) service. Revenues in the Telephone Sector arealso derived from charges for network access to HickoryTech’s local exchangetelephone network, from subscriber line charges and from contractualarrangements for services such as billing and collection and directoryadvertising. Certain of these revenues are realized under pooling arrangementswith other telephone companies and are divided among the companies based onrespective costs and investments to provide the services. The companies that takepart in these pooling arrangements may adjust their costs and investments for aperiod of two years, which causes the dollars distributed by the pool to beadjusted retroactively. Management believes that recorded amounts representreasonable estimates of the final distribution from these pools.

 

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Revenue in the Enterprise Solutions Sector earned on major installationand change contracts is recognized on the percentage of completion method,which relies on measuring actual contract completion versus estimates of totalexpected contract revenue and costs. The percentage of completion method isused since reasonably dependable estimates of the revenue and costs applicableto various stages of a contract can be made. Recognized revenues and profit aresubject to revisions as the contract progresses to completion. Revisions inprofit estimates are charged to income in the period in which the facts thatgive rise to the revision become known.

 

**Estimates** — The preparation of the consolidatedfinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses 

and disclosure of contingent assets and liabilities. The estimates andassumptions used in the accompanying consolidated financial statements arebased upon management’s evaluation of the relevant facts and circumstances asof the date of the financial statements. Actual results may differ from theestimates and assumptions used in preparing the accompanying consolidatedfinancial statements.

 

HickoryTech’s allowance for doubtful accounts is an estimate based onspecifically identified accounts as well as general reserves. HickoryTechevaluates specific accounts where it has information that the customer may havean inability to meet its financial obligations. In these cases, management usesits judgment, based on the best available facts and circumstances, and recordsa specific reserve for that customer against amounts due to reduce thereceivable to the amount that is expected to be collected. These specificreserves are reevaluated and adjusted as additional information is receivedthat impacts the amount reserved. HickoryTech also establishes a general reservefor 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 ofamounts due the company could be reduced or increased by a material amount.Such a change in estimated recoverability would be accounted for in the periodin which the facts that give rise to the change become known.

 

Similarly, HickoryTech makes estimates related to the valuation ofinventory. HickoryTech adjusts its inventory carrying value for estimatedobsolescence or unmarketable inventory to the estimated market value based uponassumptions about future demand and market conditions. As market conditionschange, if inventory valuations are lower additional inventory write-downs maybe required at the time that the facts that give rise to the lower value becomeknown.

 

During 2001, 2000 and 1999, HickoryTech amortized its intangible assetsover their estimated useful lives. The intangible assets and their estimateduseful lives are as follows: goodwill — 40 years; FCC license — 37-40 years;customer lists — 5-8 years; and other — 5-8 years. See Recent AccountingDevelopments for discussion of SFAS 142 and its impact on amortization ofintangible assets.

 

**INFLATION**

It is the opinion of management that the effects of inflation onoperating revenues and expenses over the past three years have been immaterial.Management anticipates that this trend will continue in the near future.

 

**FINANCIALCONDITION, RESOURCES AND COMMITMENTS**

 

**REVIEWOF 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 primarilydue 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 December31, 2001.

 

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Cash flows from operations continue to be a steady source of funds forHickoryTech, primarily coming from the Telephone Sector. Cash provided fromoperations was $25,135,000 in 2001, $22,908,000 in 2000 and $23,175,000 in1999. Cash flows from operations in 2001 were primarily attributable to netincome plus depreciation, amortization and an increase in deferred tax liabilities,partially offset by increases in income taxes receivable, increases in costs inexcess of billings on contracts in the Enterprise Solutions Sector anddecreases in accounts payable relating to timing of payments and decreases inbillings in excess of costs on contract in the Enterprise Solutions Sector.Cash flows from operations in 2000 were primarily attributable to net incomeplus depreciation and amortization, partially offset by increases in inventoryin the Telephone Sector and decreases in accounts payable relating to timing ofpayments. Cash flows from operations in 1999 were primarily attributable to netincome plus depreciation and amortization, along with a decrease in accountsreceivables, an increase in accounts payable and also offset by the gain onsale 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 toongoing businesses were $32,868,000 in 2001, $39,662,000 in 2000 and $28,531,000in 1999. Capital expenditures were incurred to construct additional networkfacilities to provide CLEC services and buildout fiber optic and wirelessnetworks. 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 developmentcosts associated with SuiteSolution in the Information Solutions Sector. Cashused in investing activities included $11,386,000 in 2001 for the acquisitionof PCS licenses (including direct acquisition costs) and $38,767,000 in 1999for the Metro A-2 cellular license acquisition. Proceeds from sale of assetsalso provided $6,992,000 in 2001 and $12,971,000 in 1999 related primarily tothe sales of ACTC in 2001 and the investment in Midwest Wireless Communications,LLC in 1999. In 2000, cash used in investing activities included a $10,000,000investment in Rural Telephone Finance Cooperative (RTFC) which was required aspart of HickoryTech’s new revolving credit facility entered into in September2000 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 netborrowings under HickoryTech’s credit facilities. Dividend payments resulted inuses 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. HickoryTechexpects paying at the existing level of dividends in 2002, which is notexpected to negatively impact the liquidity of HickoryTech.

 

**LIQUIDITYAND CAPITAL RESOURCES**

In 2001, HickoryTech’s acquisition of PCS licenses was funded withdebt, using its revolving credit facility. During 2000, HickoryTech’s bankcredit facility was expanded to $225 million in order to fund capitalexpenditures.  In 1999, HickoryTech’sacquisition of the Minneapolis/St. Paul Metro A-2 cellular business was fundedwith debt, using its revolving credit facility.

 

HickoryTech uses variable interest rate financial instruments as ofDecember 31, 2001. The revolving credit facility had a weighted averageinterest 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 lowerlevel of interest expense is likely to occur in 2002 because of more limiteduse of the revolving credit facility for capital expenditures and potentiallylower weighted average interest rates for the year 2002 than HickoryTechexperienced in 2001. Based on HickoryTech’s banking relationships, HickoryTechcontinues to have access to multiple forms of financing based upon its 2001current ratio (2 to 1), its EBITDA, its debt to EBITDA ratio and its provenaccess to debt markets.

 

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The following table sets forth HickoryTech’s contractual obligations,along with the cash payments due each period (long-term debt and capital leasepayments do not include associated interest):

 
|                                |   | **Payments Due by Period** |    |
|-------------------------------------|--------|----------------------------|---------|
|                                |   |                       |    | **Less than** |   | **1 — 3** |   | **4 — 5** |   | **After 5** |   |
|                                |   | **Total**                  |    | **1 year** |   | **years** |   | **years** |   | **years** |   |
|                                |   |                       |    | **(Dollars in Thousands)** |   |   |   |
| Contractual Obligations             |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term debt                      |   | $                          | 170,000 |   | $ | 1,000 |   | $ | 3,000 |   | $ | 44,875 |   | $ | 121,125 |   |
| Capital Lease Obligations           |   | 901                        |    | 242 |   | 659 |   | — |   | — |   |
| Operating Leases                    |   | 3,796                      |    | 1,068 |   | 1,749 |   | 298 |   | 681 |   |
| Total  Contractual Cash Obligations |   | $                          | 174,697 |   | $ | 2,310 |   | $ | 5,408 |   | $ | 45,173 |   | $ | 121,806 |   |

 

HickoryTech has a $224,000,000 credit facility with a syndicate ofbanks. This credit facility is comprised of a $125,000,000 revolving creditcomponent and a $99,000,000 term loan component. As of December 31, 2001,HickoryTech had drawn $170,000,000 on this credit facility, with availableborrowing capacity of $54,000,000 under the revolving credit component. Thetotal commitment to HickoryTech expires as follows:

 
|                       |   | **Amount of Commitment Expiration per Period** |    |
|----------------------------|--------|------------------------------------------------|---------|
|                       |   |                                           |    | **Less than** |   | **1 — 3** |   | **4 — 5** |   | **After 5** |   |
|                       |   | **Total**                                      |    | **1 year** |   | **years** |   | **years** |   | **years** |   |
|                       |   |                                           |    | **(Dollars in Thousands)** |   |   |   |
| Revolving Credit Component |   | $                                              | 125,000 |   | $ | — |   | $ | 37,500 |   | $ | 59,375 |   | $ | 28,125 |   |
|                            |        |                                                |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On June 26, 2001, HickoryTech acquired two PCS licenses in southernMinnesota. Refer to Note 2 of Notes to Consolidated Financial Statements forfurther discussion of this acquisition.

 

On August 6, 2001, HickoryTech completed the sale of its localtelephone exchange in Amana, Iowa. Refer to Note 2 of Notes to ConsolidatedFinancial Statements for further discussion of this disposition.

 

HickoryTech operates with original equity capital, retained earningsand recent additions to indebtedness in the form of bank term debt andrevolving lines of credit.

 

**RECENTACCOUNTING DEVELOPMENTS**

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations,” and No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires that the purchasemethod of accounting be used for all business combinations initiated after June30, 2001. SFAS No. 141 also specifies the criteria that intangible assetsacquired in a purchase method business combination must meet to be recognizedand reported apart from goodwill. HickoryTech made no acquisitions after June30, 2001 and, therefore, SFAS No. 141 had no impact on 2001 results.

 

SFAS No. 142 is effective January 1, 2002 and addresses financialaccounting and reporting for acquired goodwill and other intangible assets.SFAS No. 142 will require that goodwill and intangible assets with indefiniteuseful lives no longer be amortized, but instead tested for impairment at leastannually. Those intangible assets with finite useful lives will continue to beamortized over their respective useful lives. As of December 31, 2001,HickoryTech had unamortized goodwill of $25,086,000 and recorded amortizationexpense related to goodwill during 2001 of $766,000. HickoryTech is stillwaiting for further guidance from the FASB and/or the Securities ExchangeCommission on whether its FCC licenses qualify as indefinite lived intangibleassets. 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 during2001 of $1,906,000. Upon adoption of SFAS No. 142, HickoryTech will ceaseamortization of its goodwill and may cease amortization of FCC licenses if theyare determined to have indefinite lives under SFAS No. 142. HickoryTech is inthe process of evaluating whether any of its goodwill or intangible assetvalues are impaired pursuant to the provisions of SFAS No. 142 and 144 (asdescribed below). Although HickoryTech’s analysis is not complete, managementcurrently does not expect any write-downs of the carrying value of itsintangible assets or goodwill and therefore does not expect adoption of SFASNo. 142 will have a material impact on its financial position or results ofoperations.

 

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In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations,” which addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets thatresult from the acquisition, construction, development or normal use of theasset. SFAS No. 143 is effective January 1, 2003. HickoryTech is currently evaluatingthe provisions of SFAS No. 143 and does not expect that adoption will have amaterial impact on its financial position or its results of operations.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets,” which addresses financialaccounting and reporting for the impairment or disposal of long-lived assets.SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of,” and theaccounting and reporting provisions of Accounting Principles Board Opinion No.30, “Reporting the Results of Operations — Reporting the Transactions for theDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions.” SFAS No. 144 requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair value less cost to sell. SFAS No. 144 also sets forthrequirements for recognizing and measuring impairment losses on certainlong-lived assets to be held or used. SFAS No. 144 is effective January 1, 2002. HickoryTech is currentlyevaluating the provisions of SFAS No. 144 and does not expect that adoptionwill have a material impact on its financial position or its results ofoperations.

 

**REGULATEDINDUSTRY**

**STATE-** HickoryTech increased local rates in itsIowa ILEC subsidiary effective May 2001 and in its Minnesota ILEC subsidiarieseffective December 2001, adding approximately $128,000 of revenues in 2001. TheMinnesota ILEC subsidiaries also increased local rates in February 2000, addingapproximately $744,000 of revenues in 2000. The Minnesota Department of PublicService has the authority to investigate rates and profits of telephonecompanies in Minnesota. Under Minnesota law, telephone companies with less than50,000 customers are regulated on price and service level rather than onprofit. HickoryTech’s two Minnesota ILEC subsidiaries fall under thisalternative form of regulation. HickoryTech’s subsidiaries’ local service ratesare lower than the rates of most Minnesota telephone companies. This relievesHickoryTech of substantial regulatory oversight. In the state of Iowa,HickoryTech’s operations fall below the 15,000 access line minimum level forrate regulation by the Iowa Utilities Board. No regulatory matters in Iowaaffect HickoryTech’s current operation.

 

State regulators are considering access charge reform. There are nospecific dockets at this time, and HickoryTech cannot estimate the amount, ifany, of future potential state access revenue changes.

 

**INTERSTATE-**The TelephoneSector’s three local exchange telephone companies have had their interstateaccess rates established based on a nationwide pool of companies known as theNational Exchange Carriers Association (NECA). These access charges reflect theFCC rules and changes in regulation as they apply to the other companies whichare in the NECA pools, and ultimately establish the prices that the TelephoneSector can charge for interstate access. There has been a decline in the levelof interstate access charges in the last several years, and HickoryTechforesees a continuation of this trend. The FCC ordered in late 2001 to amendthe interstate access charge rate design. The FCC modifications of ILECtransport rate structure, reallocation of costs in the transportinterconnection charge and amendments to universal service funds are effectiveJanuary 1, 2002. The net effect of these changes did not materially change theinterstate revenues for HickoryTech beginning in 2002.

 

FCC regulators may consider additional access charge reform. There areno 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 Iowatelephone exchange from “average schedule” status for interstate traffic to apure “cost basis” form of revenue recognition and tariffs. This means that forthe Iowa telephone exchange, interstate access revenues are determined based onthe specific company’s cost of service rather than nationwide averages of othercompanies. The switch from “average schedule” to “cost basis” for Iowa’sinterstate revenue has reduced company revenues by less than $200,000 on an annualizedbasis.

 

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HickoryTech’s Communications Services Sector operates in Minnesota andIowa with less regulatory oversight than HickoryTech’s Telephone Sector. A CLECpetitions regulators for authority to operate in certain geographic areas,submits tariffs to describe services and the rates at which it will provideservice, and submits interconnection agreements it has reached with othercarriers for regulatory review. However, there is no regulatory oversight ofthe prices charged or the rate of return earned by the CLEC. This is also thecase with HickoryTech’s Wireless Services Sector.

 

**CONTINGENCIES**

In January 2002, National Independent Billing Partnership (NIBP), anunconsolidated partnership of NIBI (see Note 1 of the Notes to ConsolidatedFinancial Statements for discussion of NIBP), received written claims from oneof its customers relating to contractual obligations. The claims are not aformal legal action. NIBP disagrees with the claims made by this customer. Inthe opinion of management, the ultimate resolution of these claims will nothave a material adverse impact on HickoryTech’s financial position, results ofoperations or cash flows.

 

**Item 7A.****    Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

HickoryTech does not have operations subject torisks of foreign currency fluctuations, nor does HickoryTech use derivativefinancial instruments in its operations or investment portfolio. HickoryTech’searnings are affected by changes in interest rates as a portion of itslong-term debt has variable interest rates based on LIBOR. If interest ratesfor the portion of HickoryTech’s long-term debt based on variable rates hadaveraged 10% more for the entire year ended December 31, 2001, HickoryTech’sinterest expense would have increased $1,155,000 in 2001. In case of a changeof this magnitude, management would likely act to mitigate its exposure to thechange by converting a portion of its variable-rate debt to fixed-rate debt.

 

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**Item 8.****       FinancialStatements and Supplementary Data.**

 

**REPORT OF MANAGEMENT**

 

Management of Hickory Tech Corporation (HickoryTech) is responsible forthe consolidated financial statements and the other financial informationcontained in this Annual Report. The financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America applied on a consistent basis. They are considered by management topresent fairly HickoryTech’s financial position, results of operations and cashflows. In preparing the financial statements, management is required toobjectively include amounts based on estimates and judgments that it believesare reasonable under the circumstances.

 

To provide reasonable assurance that assets are safeguarded againstloss and that accounting records are reliable for preparing financialstatements, HickoryTech management maintains a system of internal controls. TheAudit Committee of the Board of Directors, which is composed of directors whoare not officers or employees, meets regularly with the independent accountantsand management to review the scope of internal controls, the manner in whichthey perform their responsibilities, audit activities and financial reporting.The Audit Committee provides a direct method of access from the Board ofDirectors to the independent accountants and assures the objectivity of thisreport’s financial information. The Audit Committee reviews and approvesfinancial disclosures prior to releasing to the public.

 

HickoryTech’s financial statements have been audited byPricewaterhouseCoopers LLP, independent accountants. Management has madeavailable to the independent accountants all HickoryTech financial records andrelated data. Their audits, which included consideration of the internalcontrols, 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 therelated consolidated statements of income, of shareholders’ equity and of cashflows present fairly, in all material respects, the financial position of HickoryTech Corporation and subsidiaries (HickoryTech) at December 31, 2001 andDecember 31, 2000, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2001, in conformitywith 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 basedon our audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

PricewaterhouseCoopers LLP

 

Minneapolis, Minnesota

February 1, 2002

 

24

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**HICKORY TECH CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

** **

**YearsEnded December 31**

** **
|                                                                                      |   | **2001**                                              |       | **2000**   |   | **1999**   |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|------------|------------|--------|------------|--------|
|                                                                                      |   | **(Dollars in  Thousands, Except Per Share Amounts)** |       |
| OPERATING REVENUES:                                                                       |   |                                                  |       |       |   |       |   |
| Telephone                                                                                 |   | **$**                                                 | **55,167** |       | $      | 52,662     |   | $ | 49,178 |   |
| Communications Services                                                                   |   | **11,197**                                            |       | 7,944      |   | 4,170      |   |
| Wireless Services                                                                         |   | **17,655**                                            |       | 18,899     |   | 16,897     |   |
| Information Solutions                                                                     |   | **4,085**                                             |       | 4,287      |   | 4,368      |   |
| Enterprise Solutions                                                                      |   | **20,374**                                            |       | 18,511     |   | 22,576     |   |
| TOTAL OPERATING REVENUES                                                                  |   | **108,478**                                           |       | 102,303    |   | 97,189     |   |
|                                                                                      |   |                                                  |       |       |   |       |   |
| COSTS AND EXPENSES:                                                                       |   |                                                  |       |       |   |       |   |
| Operating Expenses                                                                        |   | **67,811**                                            |       | 65,692     |   | 63,723     |   |
| Depreciation                                                                              |   | **12,915**                                            |       | 11,088     |   | 9,319      |   |
| Amortization of Intangibles                                                               |   | **3,879**                                             |       | 3,180      |   | 2,528      |   |
| TOTAL COSTS AND EXPENSES                                                                  |   | **84,605**                                            |       | 79,960     |   | 75,570     |   |
| OPERATING INCOME                                                                          |   | **23,873**                                            |       | 22,343     |   | 21,619     |   |
|                                                                                      |   |                                                  |       |       |   |       |   |
| OTHER INCOME (EXPENSE):                                                                   |   |                                                  |       |       |   |       |   |
| Gain on Sale of Assets                                                                    |   | **1,115**                                             |       | 271        |   | 9,207      |   |
| Equity in Net Income/(Loss) of Investees                                                  |   | **(27**                                               | **)**      | 23         |   | 530        |   |
| Interest and Other Income                                                                 |   | **435**                                               | ** ** | 411        |   | 423        |   |
| Interest Expense                                                                          |   | **(10,687**                                           | **)**      | (9,803     | )      | (6,513     | )      |
| TOTAL OTHER INCOME (EXPENSE)                                                              |   | **(9,164**                                            | **)**      | (9,098     | )      | 3,647      |   |
|                                                                                      |   |                                                  |       |       |   |       |   |
| INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM,AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE |   | **14,709**                                            |       | 13,245     |   | 25,266     |   |
| INCOME TAXES                                                                              |   | **5,971**                                             |       | 5,287      |   | 10,600     |   |
| INCOME BEFORE EXTRAORDINARY ITEM ANDCUMULATIVE  EFFECT OF ACCOUNTING CHANGE               |   | **8,738**                                             |       | 7,958      |   | 14,666     |   |
| EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT,NET OF TAX BENEFIT OF $158                      |   | **—**                                            |       | (233       | )      | —     |   |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE,NET OF TAX BENEFIT OF $14                          |   | **—**                                            |       | (20        | )      | —     |   |
|                                                                                      |   |                                                  |       |       |   |       |   |
| NET INCOME                                                                                |   | **$**                                                 | **8,738**  |       | $      | 7,705      |   | $ | 14,666 |   |
|                                                                                      |   |                                                  |       |       |   |       |   |
| Basic Earnings Per Share:                                                                 |   |                                                  |       |       |   |       |   |
| Income Before Extraordinary Item and Cumulative Effect ofAccounting Change                |   | **$**                                                 | **0.63**   |       | $      | 0.58       |   | $ | 1.07 |   |
| Extraordinary Item and Cumulative Effect of Accounting Change                             |   | **–**                                            |       | (0.02      | )      | –     |   |
| Net Income                                                                                |   | **$**                                                 | **0.63**   |       | $      | 0.56       |   | $ | 1.07 |   |
| Dividends Per Share                                                                       |   | **$**                                                 | **0.44**   |       | $      | 0.44       |   | $ | 0.44 |   |
| Weighted Average Common Shares Outstanding                                                |   | **13,904,690**                                        |       | 13,832,502 |   | 13,746,053 |   |
|                                                                                      |   |                                                  |       |       |   |       |   |
| Diluted Earnings Per Share:                                                               |   |                                                  |       |       |   |       |   |
| Income Before Extraordinary Item and Cumulative Effect ofAccounting Change                |   | **$**                                                 | **0.62**   |       | $      | 0.57       |   | $ | 1.06 |   |
| Extraordinary Item and Cumulative Effect of Accounting Change                             |   | **—**                                            |       | (0.02      | )      | —     |   |
| Net Income                                                                                |   | **$**                                                 | **0.62**   |       | $      | 0.55       |   | $ | 1.06 |   |
| Weighted Average Common and Equivalent Shares Outstanding                                 |   | **14,001,478**                                        |       | 13,923,015 |   | 13,772,495 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

25

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**HICKORY TECH CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**As ofDecember 31**

** **
| ASSETS                                                                                                                                         |   |                        |        |       |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------|------------|
|                                                                                                                                           |   | **2001**                    |        | **2000**   |       |
|                                                                                                                                           |   | **(Dollars in  Thousands)** |        |
| CURRENT ASSETS:                                                                                                                                |   |                        |        |       |       |
| Cash and Cash Equivalents                                                                                                                      |   | **$**                       | **2,008**   |       | $          | 1,190 |   |
| Accounts Receivable, Net of Allowance for Doubtful Accounts of $1,231 in 2001  and $961 in 2000                                           |   | **14,616**                  |        | 15,156     |       |
| Income Taxes Receivable                                                                                                                        |   | **1,675**                   |        | 670        |       |
| Costs in Excess of Billings on Contracts                                                                                                       |   | **1,520**                   |        | 981        |       |
| Inventories                                                                                                                                    |   | **4,989**                   |        | 4,585      |       |
| Deferred Income Taxes                                                                                                                          |   | **646**                     |        | 1,404      |       |
| Other                                                                                                                                          |   | **2,329**                   |        | 1,423      |       |
| TOTAL CURRENT ASSETS                                                                                                                           |   | **27,783**                  |        | 25,409     |       |
|                                                                                                                                           |   |                        |        |       |       |
| INVESTMENTS                                                                                                                                    |   | **10,701**                  |        | 10,361     |       |
|                                                                                                                                           |   |                        |        |       |       |
| PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                             |   | **135,644**                 |        | 116,690    |       |
|                                                                                                                                           |   |                        |        |       |       |
| OTHER ASSETS:                                                                                                                                  |   |                        |        |       |       |
| Intangible Assets, Net                                                                                                                         |   | **102,077**                 |        | 97,402     |       |
| Other                                                                                                                                          |   | **7,087**                   |        | 5,625      |       |
| TOTAL OTHER ASSETS                                                                                                                             |   | **109,164**                 |        | 103,027    |       |
|                                                                                                                                           |   |                        |        |       |       |
| TOTAL ASSETS                                                                                                                                   |   | **$**                       | **283,292** |       | $          | 255,487 |   |
|                                                                                                                                           |   |                        |        |       |       |
|                                                                                                                                           |   |                        |        |       |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                      |   |                        |        |       |       |
|                                                                                                                                           |   |                        |        |       |       |
| CURRENT LIABILITIES:                                                                                                                           |   |                        |        |       |       |
| Accounts Payable                                                                                                                               |   | **$**                       | **3,338**   |       | $          | 6,459 |   |
| Accrued Expenses                                                                                                                               |   | **5,335**                   |        | 4,332      |       |
| Accrued Interest                                                                                                                               |   | **382**                     |        | 108        |       |
| Billings in Excess of Costs on Contracts                                                                                                       |   | **169**                     |        | 950        |       |
| Advanced Billings and Deposits                                                                                                                 |   | **3,580**                   |        | 3,461      |       |
| Current Maturities of Long-Term Obligations                                                                                                    |   | **1,242**                   |        | 1,217      |       |
| TOTAL CURRENT LIABILITIES                                                                                                                      |   | **14,046**                  |        | 16,527     |       |
|                                                                                                                                           |   |                        |        |       |       |
| LONG-TERM OBLIGATIONS, Net of Current Maturities                                                                                               |   | **169,659**                 |        | 147,433    |       |
|                                                                                                                                           |   |                        |        |       |       |
| DEFERRED INCOME TAXES                                                                                                                          |   | **13,876**                  |        | 9,417      |       |
|                                                                                                                                           |   |                        |        |       |       |
| DEFERRED REVENUE AND BENEFITS                                                                                                                  |   | **4,946**                   |        | 4,753      |       |
|                                                                                                                                           |   |                        |        |       |       |
| TOTAL LIABILITIES                                                                                                                              |   | **202,527**                 |        | 178,130    |       |
|                                                                                                                                           |   |                        |        |       |       |
| COMMITMENTS AND CONTINGENCIES (Notes 6 and 11)                                                                                                 |   | **—**                  | ** **  | **—** | ** ** |
|                                                                                                                                           |   |                        |        |       |       |
| SHAREHOLDERS’ EQUITY:                                                                                                                     |   |                        |        |       |       |
| Common Stock, no par value, $.10 stated value    Shares authorized: 100,000,000   Shares outstanding: 2001, 13,935,308; 2000,  13,878,568 |   | **1,394**                   |        | 1,388      |       |
| Additional Paid-In Capital                                                                                                                     |   | **6,254**                   |        | 5,473      |       |
| Retained Earnings                                                                                                                              |   | **73,117**                  |        | 70,496     |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                |   | **80,765**                  |        | 77,357     |       |
|                                                                                                                                           |   |                        |        |       |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                |   | **$**                       | **283,292** |       | $          | 255,487 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

26

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**HICKORY TECH CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YearsEnded December 31**

** **
|                                                                                          |   | **2001**                    |       | **2000** |   | **1999** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------|--------|----------|--------|
|                                                                                          |   | **(Dollars in  Thousands)** |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                          |   |                        |       |     |   |     |   |
| Net Income                                                                                    |   | **$**                       | **8,738**  |     | $      | 7,705    |   | $ | 14,666 |   |
|                                                                                          |   |                        |       |     |   |     |   |
| Adjustments to Reconcile Net Income to Net Cash Provided by  Operating Activities:            |   |                        |       |     |   |     |   |
| Depreciation and Amortization                                                                 |   | **16,794**                  | ** ** | 14,268   |   | 11,847   |   |
| Gain on Sale of Assets                                                                        |   | **(1,115**                  | **)**      | (271     | )      | (9,207   | )      |
| Extraordinary Loss on   Debt Extinguishment                                              |   | —                      | ** ** | 391      |   | —   |   |
| Cumulative Effect of Accounting Change                                                        |   | **—**                  | ** ** | 34       |   | —   |   |
| Provision for Losses on Accounts Receivable                                                   |   | **782**                     | ** ** | 1,005    |   | 9        |   |
| Deferred Income Taxes                                                                         |   | **5,217**                   | ** ** | 2,577    |   | 2,744    |   |
| Stock-Based Compensation                                                                      |   | **217**                     | ** ** | 660      |   | 890      |   |
| Employee Retirement Benefits and Deferred Compensation                                        |   | **170**                     | ** ** | 202      |   | (520     | )      |
| Accrued Patronage Refunds                                                                     |   | **(1,114**                  | **)**      | —   |   | —   |   |
| Equity in Net (Income)/Loss of Investees                                                      |   | **27**                      | ** ** | (23      | )      | (530     | )      |
| **Cash Provided From Operations  Before Changes In Assets and  Liabilities**                  |   | **29,716**                  | ** ** | 26,548   |   | 19,899   |   |
| Changes in Operating Assets and Liabilities Net of Effects of  Acquisitions and Dispositions: |   |                        | ** ** |     |   |     |   |
| Receivables                                                                                   |   | **(823**                    | **)**      | 878      |   | 1,233    |   |
| Inventories                                                                                   |   | **(442**                    | **)**      | (2,102   | )      | 27       |   |
| Billings and Costs on Contracts                                                               |   | **(1,321**                  | **)**      | 379      |   | (395     | )      |
| Accounts Payable and Accrued Expenses                                                         |   | **(1,525**                  | **)**      | (2,319   | )      | 2,401    |   |
| Advanced Billings and Deposits                                                                |   | **125**                     | ** ** | 181      |   | 57       |   |
| Deferred Revenue and Benefits                                                                 |   | **23**                      | ** ** | (584     | )      | 72       |   |
| Other                                                                                         |   | **(618**                    | **)**      | (73      | )      | (119     | )      |
| Net Cash Provided by Operating Activities                                                     |   | **25,135**                  | ** ** | 22,908   |   | 23,175   |   |
|                                                                                          |   |                        | ** ** |     |   |     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |   |                        | ** ** |     |   |     |   |
| Additions to Property, Plant and Equipment                                                    |   | **(32,868**                 | **)**      | (39,662  | )      | (28,531  | )      |
| Additions to Capitalized Software Development Costs                                           |   | **(2,717**                  | **)**      | (1,450   | )      | (251     | )      |
| Increase in Investments                                                                       |   | **—**                  | ** ** | (10,363  | )      | (86      | )      |
| Redemption of Investments                                                                     |   | **—**                  | ** ** | 700      |   | 193      |   |
| Acquisitions, Net of Cash Acquired                                                            |   | **(11,386**                 | **)**      | (885     | )      | (38,767  | )      |
| Proceeds from Sale of Assets                                                                  |   | **6,992**                   | ** ** | 422      |   | 12,971   |   |
| Net Cash Used in Investing Activities                                                         |   | **(39,979**                 | **)**      | (51,238  | )      | (54,471  | )      |
|                                                                                          |   |                        |       |     |   |     |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                         |   |                        |       |     |   |     |   |
| Change in Cash Overdraft                                                                      |   | **—**                  |       | (3,552   | )      | 3,552    |   |
| Payment of Debt Issuance Costs                                                                |   | **—**                  | ** ** | (1,300   | )      | (463     | )      |
| Repayments of  Debt                                                                      |   | **(649**                    | **)**      | (40,452  | )      | (681     | )      |
| Payments of Capital Lease Obligations                                                         |   | **(141**                    | **)**      | –   |   | –   |   |
| Borrowings on Line of Credit                                                                  |   | **30,500**                  | ** ** | 78,600   |   | 52,000   |   |
| Repayments on Line of Credit                                                                  |   | **(8,500**                  | **)**      | (1,100   | )      | (16,000  | )      |
| Proceeds from Issuance of Common Stock                                                        |   | **569**                     | ** ** | 701      |   | 511      |   |
| Dividends Paid                                                                                |   | **(6,117**                  | **)**      | (6,085   | )      | (6,048   | )      |
| Net Cash Provided by Financing Activities                                                     |   | **15,662**                  | ** ** | 26,812   |   | 32,871   |   |
|                                                                                          |   |                        | ** ** |     |   |     |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          |   | **818**                     | ** ** | (1,518   | )      | 1,575    |   |
|                                                                                          |   |                        | ** ** |     |   |     |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                |   | **1,190**                   | ** ** | 2,708    |   | 1,133    |   |
|                                                                                          |   |                        | ** ** |     |   |     |   |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                                      |   | **$**                       | **2,008**  |     | $      | 1,190    |   | $ | 2,708 |   |
|                                                                                          |   |                        |       |     |   |     |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                             |   |                        |       |     |   |     |   |
| Cash Paid for Interest                                                                        |   | **$**                       | **11,337** |     | $      | 10,643   |   | $ | 6,535 |   |
| Cash Paid for Income Taxes                                                                    |   | **$**                       | **1,750**  |     | $      | 2,205    |   | $ | 8,548 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

27

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**HICKORY TECH CORPORATION**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**YearsEnded December 31**

** **
|                                |   |                        |   |        |   | **Additional** |   |                   |   | **Total**  |   |
|-------------------------------------|--------|-----------------------------|--------|-------------|--------|----------------|--------|------------------------|--------|------------|--------|
|                                |   | **Common Stock**            |   | **Paid-In** |   | **Retained**   |   | **Shareholders’** |   |
|                                |   | **Shares**                  |   | **Amount**  |   | **Capital**    |   | **Earnings**           |   | **Equity** |   |
|                                |   | **(Dollars in  Thousands)** |   |
| BALANCE AT DECEMBER 31, 1998        |   | 13,662,216                  |   | $           | 1,366  |           | $      | 2,005                  |   | $          | 60,258 |   | $ | 63,629 |   |
|                                |   |                        |   |        |   |           |   |                   |   |       |   |
| Stock Award Plan                    |   | 71,654                      |   | 8           |   | 1,607          |   |                   |   | 1,615      |   |
| Employee Stock Purchase Plan        |   | 31,753                      |   | 3           |   | 368            |   |                   |   | 371        |   |
| Directors’ Stock Retainer Plan |   | 2,914                       |   |        |   | 37             |   |                   |   | 37         |   |
| Stock Options Exercised             |   | 12,313                      |   | 1           |   | 121            |   |                   |   | 122        |   |
| Dividend Reinvestment Plan          |   | 6,566                       |   | 1           |   | 83             |   |                   |   | 84         |   |
| Net Income                          |   |                        |   |        |   |           |   | 14,666                 |   | 14,666     |   |
| Dividends Paid                      |   |                        |   |        |   |           |   | (6,048                 | )      | (6,048     | )      |
| BALANCE AT DECEMBER 31, 1999        |   | 13,787,416                  |   | 1,379       |   | 4,221          |   | 68,876                 |   | 74,476     |   |
|                                |   |                        |   |        |   |           |   |                   |   |       |   |
| Stock Award Plan                    |   | 29,788                      |   | 3           |   | 496            |   |                   |   | 499        |   |
| Employee Stock Purchase Plan        |   | 28,464                      |   | 3           |   | 287            |   |                   |   | 290        |   |
| Directors’ Stock Retainer Plan |   | 2,967                       |   |        |   | 50             |   |                   |   | 50         |   |
| Stock Options Exercised             |   | 15,384                      |   | 2           |   | 181            |   |                   |   | 183        |   |
| Dividend Reinvestment Plan          |   | 14,549                      |   | 1           |   | 238            |   |                   |   | 239        |   |
| Net Income                          |   |                        |   |        |   |           |   | 7,705                  |   | 7,705      |   |
| Dividends Paid                      |   |                        |   |        |   |           |   | (6,085                 | )      | (6,085     | )      |
| BALANCE AT DECEMBER 31, 2000        |   | 13,878,568                  |   | 1,388       |   | 5,473          |   | 70,496                 |   | 77,357     |   |
|                                |   |                        |   |        |   |           |   |                   |   |       |   |
| Stock Award Plan                    |   | 18,374                      |   | 2           |   | 211            |   |                   |   | 213        |   |
| Employee Stock Purchase Plan        |   | 20,781                      |   | 2           |   | 291            |   |                   |   | 293        |   |
| Directors’ Stock Retainer Plan |   | 2,089                       |   |        |   | 33             |   |                   |   | 33         |   |
| Dividend Reinvestment Plan          |   | 15,496                      |   | 2           |   | 246            |   |                   |   | 248        |   |
| Net Income                          |   |                        |   |        |   |           |   | 8,738                  |   | 8,738      |   |
| Dividends Paid                      |   |                        |   |        |   |           |   | (6,117                 | )      | (6,117     | )      |
| BALANCE AT DECEMBER 31, 2001        |   | 13,935,308                  |   | $           | 1,394  |           | $      | 6,254                  |   | $          | 73,117 |   | $ | 80,765 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

28

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - ACCOUNTING POLICIES**

The accounting policies of Hickory TechCorporation (HickoryTech) are in conformity with accounting principlesgenerally accepted in the United States of America and, where applicable,conform to the accounting principles as prescribed by federal and statetelephone utility regulatory authorities. HickoryTech presently givesaccounting recognition to the actions of regulators where appropriate, asprescribed by Financial Accounting Standards Board Statement (SFAS) No. 71,“Accounting for the Effects of Certain Types of Regulation.”

 

**Basis of Consolidation** - The consolidated financialstatements of HickoryTech include Hickory Tech Corporation and itssubsidiaries. HickoryTech operates in the following five businesssegments:  (i) Telephone Sector, (ii)Communications Services Sector, (iii) Wireless Services Sector, (iv)Information Solutions Sector and (v) Enterprise Solutions Sector. An investmentin an unconsolidated partnership for the Information Solutions Sector isaccounted for using the equity method. All intercompany transactions have been eliminated from the consolidatedfinancial statements.

 

**Revenue Recognition** — Revenues are generallyrecognized when services are earned, rendered or products are delivered tocustomers. Customers are billed as of monthly cycle dates. Telephone Sectorrevenues are derived from charges for network access to HickoryTech’s localexchange telephone network, from subscriber line charges and from contractualarrangements for services such as billing and collection and directoryadvertising.  Certain of these revenuesare realized under pooling arrangements with other telephone companies and aredivided among the companies based on respective costs and investments toprovide the services. Management believes that recorded amounts representreasonable estimates of the final distribution from these pools. Revenue in theEnterprise Solutions Sector earned on major installation and change contractsis recognized on the percentage of completion method. Up-front fees, includinginstallation and activation fees, are deferred and recognized on astraight-line basis over the corresponding customer relationship period.

 

**Estimates**- The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and disclosure of contingent assets andliabilities. The estimates and assumptions used in the accompanyingconsolidated financial statements are based upon management’s evaluation of therelevant facts and circumstances as of the date of the financial statements.Actual results may differ from these estimates and assumptions.

 

**Reclassifications** — Certain expenses reported ascost of sales in  2000 and 1999 havebeen reclassified to operating expenses to conform to the 2001 presentation.These reclassifications reduced cost of sales and increased other operatingexpenses for 2000 and 1999 by $12,510,000 and $15,987,000, respectively. Inaddition, certain revenues and expenses related to HickoryTech’s internetservice have been reclassified from the Telephone Sector to the CommunicationsServices Sector. Internet revenues reclassified amounted to $1,874,000 in 2000and $1,072,000 in 1999. Internet expenses reclassified amounted to $1,885,000in 2000 and $1,075,000 in 1999. These reclassifications had no effect onpreviously reported consolidated operating income, net income or cash flows.

 

**Property, Plant and Equipment** - Property, plant and equipmentare 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 accumulateddepreciation are removed from the accounts and any gains or losses ondisposition are amortized with the remaining net investment in telephone plant.

 

The components of property, plant and equipmentare summarized as follows:

 
|                                                  |   | **2001**                   |        | **2000** |   |
|-------------------------------------------------------|--------|----------------------------|-------------|----------|--------|
|                                                  |   | **(Dollars in Thousands)** |        |
| ILEC Telephone Plant (Telephone Sector)               |   | **$**                      | **147,315** |     | $      | 142,918 |   |
| CLEC Telephone Plant (Communications Services Sector) |   | **51,175**                 |        | 31,735   |   |
| Wireless Plant (Wireless Services Sector)             |   | **23,606**                 |        | 20,945   |   |
| Other Property and Equipment                          |   | **9,579**                  |        | 7,764    |   |
| Total                                                 |   | **231,675**                |        | 203,362  |   |
| Less Accumulated Depreciation                         |   | **96,031**                 |        | 86,672   |   |
| Property, Plant and Equipment,  Net                   |   | **$**                      | **135,644** |     | $      | 116,690 |   |

 

Depreciation for financial statement purposes isdetermined using the straight-line method based on the lives of the variousclasses of depreciable assets. The composite depreciation rates on ILECtelephone plant for the three years ended December 31, 2001, were 5.9%, 6.0%,and 6.0%.  All other property, plant andequipment is depreciated over estimated useful lives of three to fifteen years,and buildings are depreciated over their estimated useful lives of thirty-nineyears. Other property and equipment includes $1,041,000 of equipment acquiredunder a capital lease. Amortization expense in 2001 and accumulatedamortization at December 31, 2001 related to this capital lease was $130,000.

 

**Cash Equivalents** - Cash equivalents includeshort-term investments with original maturities of three months or less. Thecarrying value of cash and cash equivalents approximates its fair value due tothe short maturity of the instruments.

 

**Investments** — Investments include $10.3million of non-interest bearing Rural Telephone Finance Cooperative (RTFC)Subordinated Capital Certificates (SCCs) accounted for under the cost method ofaccounting.  This method requiresHickoryTech to periodically evaluate whether a non-temporary decrease in valueof the investment has occurred, and if so, to write this investment down to itsnet realizable value.

 

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Investments also include an unconsolidatedpartnership accounted for using the equity method of accounting. NIBI is a 40%general partner in National Independent Billing Partnership (NIBP), whichperforms billing and collection clearinghouse functions for interexchangecarriers. 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 $1,693,000as of December 31, 2001 and 2000, respectively. For the years ended December31, 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 ofequipment for resale, materials and supplies, are stated at the lower ofaverage cost or market.

 

**Income Taxes** — HickoryTech accounts forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”which requires an asset and liability approach to financial accounting andreporting for income taxes. Accordingly, deferred tax assets and liabilitiesarise from the difference between the tax basis of an asset or liability andits reported amount in the financial statements. Deferred tax amounts aredetermined by using the tax rates expected to be in effect when the taxes willactually be paid or refunds received, as provided under currently enacted taxlaw. Valuation allowances are established when necessary to reduce deferred taxassets to the amount expected to be realized. Income tax expense or benefit isthe tax payable or refundable, respectively, for the period plus or minus thechange in deferred tax assets and liabilities during the period.

 

**Intangible Assets** — The components of HickoryTech’s intangible assets, along with theperiods in which each component is being amortized, are shown in the followingtable.  FCC licenses consist of the costof acquiring the cellular licenses of RSA 10 and Metro A-2, and the PCSlicenses in southern Minnesota. Goodwill consists of costs in excess of netassets acquired. Customers include the value assigned to customer listsacquired. Amortization expense is computed using the straight-line method basedon the estimated useful life of the asset. HickoryTech reviews its intangibleswhenever events or changes in circumstances indicate that the carrying amountmay not be recoverable. HickoryTech estimates the future cash flows expected toresult from the asset, and if the sum of the expected net undiscounted futurecash flows is less than the carrying amount of the intangible, HickoryTechrecognizes an impairment loss by reducing the amortized cost of the intangibleto its estimated fair value. HickoryTech has not recognized impairment losseson any intangibles in 2001, 2000 or 1999.

 
|                          |   | **2001**                    |        | **2000** |   | **Lives**     |   |
|-------------------------------|--------|-----------------------------|-------------|----------|--------|---------------|--------|
|                          |   | **(Dollars  in Thousands)** |        |
| Goodwill                      |   | **$**                       | **28,815**  |     | $      | 33,245        |   | 40 years |   |
| FCC Licenses                  |   | **81,224**                  |        | 70,093   |   | 37 - 40 years |   |
| Customers                     |   | **1,701**                   |        | 1,734    |   | 5 - 8 years   |   |
| Other Intangibles             |   | **538**                     |        | 300      |   | 5 - 8 years   |   |
| Total                         |   | **112,278**                 |        | 105,372  |   |          |   |
| Less Accumulated Amortization |   | **10,201**                  |        | 7,970    |   |          |   |
| Intangible Assets, Net        |   | **$**                       | **102,077** |     | $      | 97,402        |   |   |   |

 

**Capitalized Software Costs —**Software costs associated with software that is developed or purchasedfor internal use only are accounted for in accordance with the AmericanInstitute of Certified Public Accountants Statement of Position 98-1,“Accounting for the Costs of Computer Software Developed or Obtained forInternal Use.” HickoryTech capitalizes costs (including right to use fees)associated with externally acquired software for internal use. Costs associatedwith internally developed software are segregated into three project stages:preliminary project stage, application development stage andpost-implementation stage. Costs associated with both the preliminary projectstage and post-implementation stage are expensed as incurred. Costs associatedwith the application development stage are capitalized. Software maintenanceand training costs are expensed as incurred. Amortization of software costscommences when the software is ready for its intended use, and is amortizedover a period of three years. During 2001, 2000 and 1999, HickoryTechcapitalized $1,285,000, $492,000 and $0, respectively, of costs associated withsoftware purchased or developed for internal use only. These software costs areincluded 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 ofaccumulated amortization of $184,000 and $0 at December 31, 2001 and 2000,respectively. Amortization expense relating to these capitalized costs began in2001 and amounted to $196,000.

 

Software costsassociated with software that is developed or purchased for external sale orlicense are accounted for in accordance with SFAS No. 86, “Accounting for theCosts of Computer Software to Be Sold, Leased or Otherwise Marketed.”HickoryTech 

capitalizes costsrelated to such software once technological feasibility has been establishedand continues capitalization until the product becomes available for generalrelease to customers. HickoryTech capitalized software costs of $2,717,000,$1,450,000 and $251,000 in  2001, 2000and 1999, respectively, related to software that will be sold or licensedexternally. These software costs are included in other non-current assets, andamounted 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 softwarecosts are amortized on a product-by-product basis over the estimated economiclife of the product. Amortization expense relating to these costs began in 2000and amounted to $596,000 in 2001 and $133,000 in 2000.

 

**Comprehensive Income**— SFAS No. 130 requires that a full set of general purpose financialstatements include the reporting of “comprehensive income.” Comprehensiveincome is comprised of foreign currency items, minimum pension liabilityadjustments and unrealized gains and losses on certain investments in debt andequity 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 tooperations was $952,000, $1,050,000 and $669,000 in 2001, 2000 and 1999,respectively.

 

30

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**Earnings Per Share** - Basic earnings per share iscomputed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the year. Shares used in the earnings per shareassuming dilution calculation are based on the weighted average number ofshares of common stock outstanding during the year increased by potentiallydilutive common shares. Potentially dilutive common shares include stockoptions and stock subscribed under the employee stock purchase plan (ESPP).

 
|                               |       | **2001**       |       | **2000**   |       | **1999**   |       |
|------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Weighted AverageShares Outstanding | ** ** | **13,904,690** | ** ** | 13,832,502 | ** ** | 13,746,053 | ** ** |
| Stock Options                      |       | **95,645**     |       | 89,305     |       | 24,770     |       |
| Stock Subscribed (ESPP)            |       | **1,143**      |       | 1,208      |       | 1,672      |       |
| Total DilutiveShares Outstanding   |       | **14,001,478** |       | 13,923,015 |       | 13,772,495 |       |

 

Options to purchase 76,750 shares in 2001, 15,750shares in 2000 and 63,500 shares in 1999 were not included in the computationof earnings per share assuming dilution because their effect on earnings pershare would have been antidilutive.

 

Dividends per share is based on the quarterlydividend per share as declared by the HickoryTech Board of Directors.

 

**NOTE 2 - ACQUISITIONS AND DISPOSITIONS**

On June 26, 2001, HickoryTech acquired twodigital personal communications services (PCS) licenses from McLeodUSAIncorporated for $11,100,000 in cash. The PCS licenses acquired by HickoryTechinclude the Minnesota Basic Trading Areas (BTAs) of Mankato-Fairmont andRochester-Austin-Albert Lea, an area covering a population of approximately493,000 people. The acquisition was a purchase of the licenses only. There wereno customers, existing revenue stream or physical property and equipmentincluded with this acquisition as the BTAs were undeveloped. HickoryTech paidfor the acquisition with advances under its revolving credit facility.HickoryTech allocated the entire purchase price to the fair value of the PCSlicense, which is being amortized over 37 years.

 

On August 6, 2001, HickoryTech closed on thepreviously 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), servedapproximately 1,500 access lines in the seven communities of the Amana Coloniesin 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 aportion of its outstanding debt. The operations of ACTC were included in theTelephone Sector. For the years ended December 31, 2001, 2000 and 1999, ACTCgenerated revenues of $832,000, $1,467,000 and $1,461,000 and generated anoperating income (loss) of ($13,000), $70,000 and $356,000, respectively. Thepro-forma impact of this disposition on net income and earnings per share forthe periods presented herein is not considered material.

 

On October 9, 2000, HickoryTech completed theacquisition of the dial-up internet customer accounts, along with certainassets and liabilities, of Internet Connections, a Mankato internet serviceprovider, in exchange for $870,000 in cash. Internet Connections hadapproximately 5,000 internet customers in southern Minnesota and the TwinCities area. The acquisition was accounted for under the purchase method ofaccounting. HickoryTech paid for the acquisition with available funds. HickoryTechallocated $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 areincluded in the Communications Services Sector.  Customers will be amortized over a period of eight years.

 

On May 12, 1999, HickoryTech sold its 6.4% equityinterest in Midwest Wireless Communications, LLC (MWC), a rural cellulartelecommunications provider in southern Minnesota, to MWC. HickoryTech recordeda pre-tax gain on the sale of $9,207,000 ($5,213,000 net of tax). Theinvestment was accounted for under the equity method and was included withInvestments prior to its sale in May 1999. The equity interest was reflected inthe operations of the Telephone Sector.

 

On June 1, 1999, HickoryTech acquired the MetroA-2 cellular property. The property surrounds the metropolitan Twin Cities areaand is located in five Minnesota counties and in one Wisconsin county. Thepopulation of the serving area is 170,000. The acquisition was accounted forunder the purchase method of accounting. Accordingly, the purchase price hasbeen allocated to the assets acquired based upon their fair values. The totalpurchase price was approximately $41,500,000. HickoryTech allocated $36,600,000of the purchase price to the FCC license acquired and $4,900,000 to thecellular network and cellular tower sites. HickoryTech financed $30,000,000 ofthe acquisition from its revolving credit facility and paid the remainder ofthe purchase price with available funds. The operations of the Metro A-2acquisition are included in the Wireless Services Sector.

 

**NOTE 3 — INVESTMENTS AND FINANCIAL INSTRUMENTS**

Substantially all investments include investmentsaccounted for using the cost method of accounting. The fair value ofHickoryTech’s long-term obligations, after deducting current maturities, isestimated to be $170,923,000atDecember 31, 2001 and $145,635,000 at December 31, 2000, compared to carryingvalues of $169,659,000 and $147,433,000 respectively. The fair value estimatesare based on the overall weighted interest rates and maturity compared to ratesand terms currently available in the long-term financing markets.

 

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**NOTE 4 - BUSINESS SEGMENTS**

HickoryTech’s operations are conducted in fivebusiness segments as: (i) Telephone Sector, (ii) Communications ServicesSector, (iii) Wireless Services Sector, (iv) Information Solutions Sector and(v) Enterprise Solutions Sector.  TheTelephone Sector provides telephone services to Mankato and adjacent areas ofsouth central Minnesota and to eleven communities in northwest Iowa. TheTelephone Sector also operates fiber optic cable transport facilities inMinnesota. The Telephone Sector also included the operations of Amana ColoniesTelephone Company, a local telephone exchange serving the Amana Colonies ineast central Iowa, which was sold in August 2001. The Communications ServicesSector offers an alternative choice for local telecommunications service, knownas CLEC (Competitive Local Exchange Carrier) service in the telecommunicationsindustry, to customers in Minnesota and Iowa not currently in HickoryTech’sTelephone Sector’s service area. In addition, the Communications ServicesSector resells long distance service to Minnesota and Iowa subscribers. TheWireless Services Sector provides cellular telephone service to seven countiesin south central Minnesota and a service area around the Minneapolis/St. Paul,Minnesota metropolitan area. The Wireless Services Sector also provides PCSservice to the Minnesota BTAs of Mankato-Fairmont and Rochester-Austin-AlbertLea. The Information Solutions Sector provides data processing and relatedservices to HickoryTech’s other sectors and to other external telephonecompanies, municipalities and utilities. The Enterprise Solutions Sectordesigns, sells, installs and services business telephone systems and datacommunications equipment primarily in metropolitan Minneapolis/St. Paul,Minnesota.

 

Business segment information for the years 2001,2000 and 1999 is as follows.  Certainamounts from the Telephone Sector and the Communications Services Sector havebeen reclassified in 2000 and 1999 to reflect internet operations as part ofthe Communications Services Sector.

 

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**BUSINESSSEGMENT DATA**

Years Ended December 31

 
|                                      |   |                        |   |         |   |         |   |            |   |           |   | **Corporate**    |   |             |   |
|-------------------------------------------|--------|-----------------------------|--------|--------------|--------|--------------|--------|-----------------|--------|----------------|--------|------------------|--------|------------------|--------|
|                                      |   |                        |   | **Comm.**    |   | **Wireless** |   | **Information** |   | **Enterprise** |   | **and**          |   |             |   |
|                                      |   | **Telephone**               |   | **Services** |   | **Services** |   | **Solutions**   |   | **Solutions**  |   | **Eliminations** |   | **Consolidated** |   |
|                                      |   | **(Dollars in  Thousands)** |   |
| **2001**                                  |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| Revenue from Unaffiliated Customers       |   | $                           | 55,167 |         | $      | 11,197       |   | $               | 17,655 |           | $      | 4,085            |   | $                | 20,374 |   | $ | — |   | $ | 108,478 |   |
| Intersegment Revenues                     |   | 4,114                       |   | 742          |   | —       |   | 5,022           |   | —         |   | (9,878           | )      | —           |   |
| Total                                     |   | 59,281                      |   | 11,939       |   | 17,655       |   | 9,107           |   | 20,374         |   | (9,878           | )      | 108,478          |   |
|                                      |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| Depreciation and Amortization             |   | 8,766                       |   | 1,879        |   | 4,254        |   | 1,129           |   | 359            |   | 407              |   | 16,794           |   |
| Operating Income/(Loss)                   |   | 27,277                      |   | (5,754       | )      | 1,303        |   | 408             |   | 1,340          |   | (701             | )      | 23,873           |   |
| Equity in Net Income/(Loss) ofInvestees   |   | —                      |   | —       |   | —       |   | (27             | )      | —         |   | —           |   | (27              | )      |
| Interest Expense                          |   | 28                          |   | 2            |   | 1            |   | 32              |   | —         |   | 10,624           |   | 10,687           |   |
| Income Taxes                              |   | 11,134                      |   | (2,427       | )      | 472          |   | 89              |   | 520            |   | (3,817           | )      | 5,971            |   |
| Net Income/(Loss)                         |   | 15,893                      |   | (3,492       | )      | 668          |   | 128             |   | 748            |   | (5,207           | )      | 8,738            |   |
| Identifiable Assets                       |   | 100,859                     |   | 50,125       |   | 95,069       |   | 8,825           |   | 10,861         |   | 17,553           |   | 283,292          |   |
| Investment in Equity Method Investees     |   | —                      |   | —       |   | —       |   | 60              |   | —         |   | —           |   | 60               |   |
| Capital Expenditures                      |   | 8,812                       |   | 19,626       |   | 2,694        |   | 1,347           |   | 213            |   | 176              |   | 32,868           |   |
|                                      |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| **2000**                                  |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| Revenue from Unaffiliated Customers       |   | $                           | 52,662 |         | $      | 7,944        |   | $               | 18,899 |           | $      | 4,287            |   | $                | 18,511 |   | $ | — |   | $ | 102,303 |   |
| Intersegment Revenues                     |   | 3,151                       |   | 960          |   | —       |   | 4,668           |   | —         |   | (8,779           | )      | —           |   |
| Total                                     |   | 55,813                      |   | 8,904        |   | 18,899       |   | 8,955           |   | 18,511         |   | (8,779           | )      | 102,303          |   |
|                                      |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| Depreciation and Amortization             |   | 8,101                       |   | 846          |   | 4,277        |   | 380             |   | 337            |   | 327              |   | 14,268           |   |
| Operating Income/(Loss)                   |   | 25,896                      |   | (5,219       | )      | 2,226        |   | 706             |   | (308           | )      | (958             | )      | 22,343           |   |
| Equity in Net Income of Investees         |   | —                      |   | —       |   | —       |   | 23              |   | —         |   | —           |   | 23               |   |
| Interest Expense                          |   | 32                          |   | —       |   | 2            |   | —          |   | 1              |   | 9,768            |   | 9,803            |   |
| Income Taxes                              |   | 10,563                      |   | (2,177       | )      | 907          |   | 295             |   | (174           | )      | (4,127           | )      | 5,287            |   |
| Extraordinary Loss on Debt Extinguishment |   | —                      |   | —       |   | —       |   | —          |   | —         |   | (233             | )      | (233             | )      |
| Cumulative Effect of Accounting Change    |   | (20                         | )      | —       |   | —       |   | —          |   | —         |   | —           |   | (20              | )      |
| Net Income/(Loss)                         |   | 15,190                      |   | (3,131       | )      | 1,227        |   | 427             |   | (250)          |   | (5,758           | )      | 7,705            |   |
| Identifiable Assets                       |   | 106,157                     |   | 31,935       |   | 86,108       |   | 4,585           |   | 9,989          |   | 16,713           |   | 255,487          |   |
| Investment in Equity Method Investees     |   | —                      |   | —       |   | —       |   | 87              |   | —         |   | —           |   | 87               |   |
| Capital Expenditures                      |   | 15,028                      |   | 19,197       |   | 4,981        |   | 123             |   | 157            |   | 176              |   | 39,662           |   |
|                                      |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| **1999**                                  |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| Revenue from Unaffiliated Customers       |   | $                           | 49,178 |         | $      | 4,170        |   | $               | 16,897 |           | $      | 4,368            |   | $                | 22,576 |   | $ | — |   | $ | 97,189 |   |
| Intersegment Revenues                     |   | 3,936                       |   | 547          |   | —       |   | 3,146           |   | —         |   | (7,629           | )      | —           |   |
| Total                                     |   | 53,114                      |   | 4,717        |   | 16,897       |   | 7,514           |   | 22,576         |   | (7,629           | )      | 97,189           |   |
|                                      |   |                        |   |         |   |         |   |            |   |           |   |             |   |             |   |
| Depreciation and Amortization             |   | 7,519                       |   | 327          |   | 3,204        |   | 254             |   | 319            |   | 224              |   | 11,847           |   |
| Operating Income/(Loss)                   |   | 23,871                      |   | (4,153       | )      | 3,347        |   | (486            | )      |           |   | (2,097           | )      | 21,619           |   |
| Equity in Net Income of Investees         |   | 445                         |   | —       |   | —       |   | 85              |   | —         |   | —           |   | 530              |   |
| Interest Expense                          |   | 41                          |   | —       |   | 1            |   | —          |   | —         |   | 6,471            |   | 6,513            |   |
| Income Taxes                              |   | 10,007                      |   | (1,767       | )      | 1,350        |   | (157            | )      | 392            |   | 775              |   | 10,600           |   |
| Net Income/(Loss)                         |   | 14,433                      |   | (2,525       | )      | 1,931        |   | (221            | )      | 565            |   | 483              |   | 14,666           |   |
| Identifiable Assets                       |   | 95,364                      |   | 12,717       |   | 85,136       |   | 4,041           |   | 10,939         |   | 6,607            |   | 214,804          |   |
| Investment in Equity Method Investees     |   | —                      |   | —       |   | —       |   | 764             |   | —         |   | —           |   | 764              |   |
| Capital Expenditures                      |   | 12,710                      |   | 11,137       |   | 4,251        |   | 148             |   | 269            |   | 16               |   | 28,531           |   |

 

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**NOTE 5 – STOCK COMPENSATION**

Under the terms of an employee stock purchaseplan, participating employees may acquire shares of common stock throughpayroll deductions of not more than 10% of their compensation. The price atwhich the shares can be purchased is 85% of the lower fair market value forsuch 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 sharesstill available for issuance. At December 31, 2001, employees hadsubscribed to purchase approximately 22,000 shares in the current plan yearending August 31, 2002.

 

Under the terms of a corporate retainer stockplan for directors, participating directors may acquire shares of common stockin exchange for their quarterly retainers. The price at which the shares can bepurchased is 100% of the fair market value for such shares on the date ofpurchase.  As of December 31, 2001,there were 300,000 common shares reserved for this plan and 269,399 sharesstill available for future grants.

 

HickoryTech also offers a directors’ stock optionplan to attract and retain outside directors. The plan provides for eachoutside director to receive fully vested options to purchase 5,000 shares ofcommon stock of HickoryTech at an exercise price equal to the fair market valueon 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 thisplan and 171,000 shares available for future grants.

 

HickoryTech’s stock award plan provides for thegranting of incentive stock options, non-qualified stock options and stockawards. The plan provides for stock awards based on the attainment of certainfinancial targets and for individual achievements. In addition, for onecomponent of the plan, HickoryTech utilizes a trust account for the funding ofa long-term performance award. In2001, 2000 and 1999, HickoryTech paid cash of $157,000, $170,000 and $607,000for its common stock shares and issued these shares, 8,904, 12,038 and 47,751in 2001, 2000 and 1999, respectively, to a trust for the benefit of certain keyemployees. The stock options issued under the stock optioncomponent of the stock award plan may be exercised no later than ten yearsafter the date of grant, with one-third of the options vesting each year. As ofDecember 31, 2001, there were 1,750,000 common shares reserved for this planand 1,187,050 shares available for future grants.

 

HickoryTech has elected to apply AccountingPrinciples Board Opinion No. 25 and related interpretations in accounting forits employee and directors’ stock compensation plans. If HickoryTech hadelected to recognize compensation cost based on the fair value of the optionsas prescribed by SFAS No. 123, the following results would have occurred usingthe Black-Scholes option-pricing model to determine the fair value of theoptions with the following listed assumptions:

 

|                     |   | **2001**                                              |       | **2000**   |   | **1999** |   |
|--------------------------|--------|-------------------------------------------------------|------------|------------|--------|----------|--------|
|                     |   | **(Dollars in Thousands, Except  Per Share Amounts)** |       |
| Pro Forma Net  Income    |   | **$**                                                 | **8,416**  |       | $      | 7,280    |   | $ | 14,514 |   |
| Pro Forma Basic EPS      |   | **$**                                                 | **0.61**   | ** ** | $      | 0.53     |   | $ | 1.06 |   |
| Pro Forma Diluted EPS    |   | **$**                                                 | **0.60**   | ** ** | $      | 0.52     |   | $ | 1.06 |   |
| Volatility               |   | **32.8**                                              | **%**      | 30.6       | %      | 24.8     | %      |
| Dividend Yield           |   | **2.5**                                               | **%**      | 3.1        | %      | 3.9      | %      |
| Risk-Free Interest Rates |   | **5.0**                                               | **%**      | 6.4        | %      | 5.5      | %      |
| Expected Life in Years   |   | **7**                                                 | ** ** | 7          |   | 7        |   |

 

A summary of the stock option activity of theplans is as follows:

 
|                     |   |        |     |               |   |     |       | **Weighted Average** |      |
|--------------------------|--------|-------------|----------|--------------------|--------|----------|------------|----------------------|-----------|
|                     |   | **Shares**  |     | **Exercise Price** |   |
|                     |   | **2001**    |     | **2000**           |   | **1999** |       | **2001**             |      | **2000** |   | **1999** |   |
| Outstanding at           |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| Beginning of Year        |   | **343,781** |     | 226,781            |   | 153,984  |       | **$**                | **12.46** |   | $ | 11.07 |   | $ | 10.72 |   |
| Granted                  |   | **138,400** |     | 137,750            |   | 100,000  |       | **15.62**            |      | 14.66 |   | 11.36 |   |
| Exercised                |   | **—**  |     | (15,384            | )      | (12,313  | )          | **—**           |      | 11.81 |   | 9.88 |   |
| Forfeited                |   | **—**  |     | (5,366             | )      | (14,890  | )          | **—**           |      | 11.87 |   | 10.40 |   |
| Outstanding at           |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| End of Year              |   | **482,181** |     | 343,781            |   | 226,781  | ** ** | **$**                | **13.37** |   | $ | 12.46 |   | $ | 11.07 |   |
|                     |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| Exercisable at           |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| End of Year              |   | **312,040** |     | 214,736            |   | 119,083  | ** ** | **$**                | **12.86** |   | $ | 11.81 |   | $ | 10.99 |   |
|                     |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| Weighted Average Fair    |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| Value of Options Granted |   |        |     |               |   |     |       |                 |      |   |   |   |   |
| During the Year          |   | **$**       | **5.00** |               | $      | 4.66     |       | $                    | 2.59      |   |   |   |   |   |   |   |
|                          |        |             |          |                    |        |          |            |                      |           |  |  |  |  |  |  |  |  |  |  |

 

The following table provides certain informationwith respect to stock options outstanding at December 31, 2001:

 
|                  |   |            |   | **Weighted** |   | **Weighted**         |       |
|-----------------------|--------|-----------------|--------|--------------|--------|----------------------|------------|
|                  |   | **Stock**       |   | **Average**  |   | **Average**          |       |
| **Range of**          |   | **Options**     |   | **Exercise** |   | **Remaining**        |       |
| **Exercise Prices**   |   | **Outstanding** |   | **Price**    |   | **Contractual Life** | ** ** |
| $  9.00 - $12.00 |   | 154,131         |   | $            | 10.24  |                 | 5.3  years |   |
| $12.00 - $16.00       |   | 251,400         |   | 13.82        |   | 8.3  years           |       |
| $16.00 - $21.00       |   | 76,650          |   | 18.19        |   | 9.3  years           |       |
|                  |   | 482,181         |   | $            | 13.37  |                 | 7.5  years |   |

 

34

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The following table provides certain informationwith respect to stock options exercisable at December 31, 2001:

 
|                  |   |              |       | **Weighted**       |       |
|-----------------------|--------|-------------------|------------|--------------------|------------|
| **Range of**          |   | **Stock Options** |       | **Average**        |       |
| **Exercise Prices**   |   | **Exercisable**   | ** ** | **Exercise Price** | ** ** |
| $  9.00 - $12.00 |   | 132,382           |       | $                  | 10.18      |   |
| $12.00 - $16.00       |   | 134,404           |       | 13.66              |       |
| $16.00 - $21.00       |   | 45,254            |       | 18.30              |       |
|                  |   | 312,040           |       | $                  | 12.86      |   |

 

All stock options granted in 2001, 2000 and 1999had an exercise price equal to the fair market value of HickoryTech’s commonstock on the date of grant.

 

Other stock award activity is as follows:

 
|                                                                |   | **2001**  |      | **2000** |   | **1999** |   |
|---------------------------------------------------------------------|--------|-----------|-----------|----------|--------|----------|--------|
| Stock Awards Granted                                                |   | **9,470** |      | 17,750   |   | 23,903   |   |
| Weighted Average Fair Value of Stock Awards Granted During the Year |   | **$**     | **17.43** |     | $      | 14.76    |   | $ | 12.55 |   |
|                                                                     |        |           |           |          |        |          |        |  |  |  |

 

Stock compensation expense for 2001, 2000 and1999 was $217,000, $660,000 and $890,000, respectively, for all stockcompensation plans.

 

**NOTE 6– DEBT AND OTHER OBLIGATIONS**

Long-term obligations consist of the following:

 
|                                                                     |       | **2001**                   |        | **2000**   |   |
|--------------------------------------------------------------------------|------------|----------------------------|-------------|------------|--------|
|                                                                     |       | **(Dollars in Thousands)** |        |
| Credit Facility, Average 5.3%, maturing in varying amounts through  2009 |       | **$**                      | **170,000** | ** ** | $      | 148,000 |   |
| Notes Payable to Rural Utilities Service                                 |       | **—**                 | ** **  | 585        |   |
| Notes Payable to Rural Telephone Bank                                    |       | **—**                 | ** **  | 65         |   |
| Capitalized Lease Obligations, 6.5%, maturing June 2005                  |       | **901**                    |        | —     |   |
|                                                                     |       |                       |        |       |   |
| Total                                                                    |       | **170,901**                |        | 148,650    |   |
| Less Current Maturities                                                  |       | **1,242**                  |        | 1,217      |   |
| Long–Term Obligations                                               | ** ** | **$**                      | **169,659** |       | $      | 147,433 |   |

 

HickoryTech has a $224,000,000 credit facilitywith a syndicate of banks. The credit facility is comprised of a $125,000,000revolving 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 inMarch 2004 with a final maturity date in September 2008.  The term loan requires equal quarterlyprincipal 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 averageinterest rate associated with this credit facility varies with LIBOR andcertain other rates and was 5.30% and 8.69% at December 31, 2001 and 2000,respectively. The term loan component has a provision whereby HickoryTechperiodically receives patronage capital refunds depending on the amount ofinterest paid. This patronage refund is recorded as an offset to interestexpense and amounted to $807,000 in 2001 and $399,000 in 2000. As of December31, 2001, HickoryTech had drawn $170,000,000 on this credit facility, comprisedof $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. Thecredit facility is collateralized by certain property, plant and equipment andcontains covenants relating to cash flow and capitalization.

 

In June 2000, HickoryTech amended and increasedits $90,000,000 unsecured revolving credit facility with a syndicate of banksto $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 theextinguishment of the senior unsecured notes, HickoryTech recorded anextraordinary loss of $233,000, net of an income tax benefit of $158,000.

 

In December 2001, HickoryTech repaid theoutstanding balance remaining on its debt with Rural Utilities Service and theRural Telephone Bank. These loans were originally used for the financing of telephoneproperty, plant and equipment of Mid-Communications, Inc. and were scheduled tomature in the years 2003 and 2007, respectively.

 

Annual requirements for principal payments forthe 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 andthereafter - $154,937,000.

 

35

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HickoryTech’s Information Solutions Sector leasescertain computer equipment under a capital lease arrangement. HickoryTech hasrecorded the present value of the future minimum lease payments as acapitalized asset and related lease obligation. Assets under this capital leaseare included in property, plant and equipment and amounted to $911,000($1,041,000 asset, net of accumulated depreciation of $130,000) as of December31, 2001. Annual requirements for future lease payments under this capitallease are as follows:

 

| **Year**                                |   | **Annual Lease Payments** |    |
|-----------------------------------------|--------|---------------------------|---------|
| 2002                                    |   | $                         | 294,816 |   |
| 2003                                    |   | 294,816                   |    |
| 2004                                    |   | 294,816                   |    |
| 2005                                    |   | 122,840                   |    |
| Total minimum lease payments            |   | 1,007,288                 |    |
| Amount representing interest            |   | 106,188                   |    |
| Present value of minimum lease payments |   | $                         | 901,100 |   |

 

HickoryTech ownsmost of its major facilities, but does lease certain office space, land andequipment 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 minimumlease 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 andthereafter - $816,000.

 

**NOTE 7 - EMPLOYEE RETIREMENT BENEFITS**

Employees who meet certain service requirementsare covered under a defined contribution retirement savings plan, whichincludes IRS Section 401(k) provisions. HickoryTech contributes up to 6.0% ofthe employee’s eligible compensation, based on the employee’s voluntarycontribution. HickoryTech also offers an employee profit sharing provision withthe plan for all employees who are eligible to participate in the employeeretirement savings plan and are not covered by other types of incentive payplans. Under this provision, HickoryTech contributes up to 2.0% of the eligibleemployee group compensation into retirement savings plan accounts if theHickoryTech sectors achieve specific earnings targets. HickoryTechcontributions and costs for the retirement savings plan were $1,128,000  in2001, $1,018,000 in 2000 and $1,007,000 in 1999.

 

In addition to providing retirement savings benefits, HickoryTechprovides postretirement health care and life insurance benefits for certainemployees. HickoryTech is not currently funding these postretirement benefits,but has accrued these liabilities.

 
|                                           |   | **2001**                   |      | **2000** |   |
|------------------------------------------------|--------|----------------------------|-----------|----------|--------|
|                                           |   | **(Dollars in Thousands)** |      |
| Change in Benefit Obligation                   |   |                       |      |     |   |
| Benefit  Obligation at Beginning of Year       |   | **$**                      | **1,712** |     | $      | 1,448 |   |
| Net Periodic  Benefit Cost                     |   | **364**                    |      | 369      |   |
| Benefits Paid                                  |   | **(106**                   | )         | (105     | )      |
| Benefit  Obligation at End of Year             |   | **$**                      | **1,970** |     | $      | 1,712 |   |
|                                           |   |                       |      |     |   |
| Accumulated  Postretirement Benefit Obligation |   | **$**                      | **4,479** |     | $      | 2,693 |   |
| Unrecognized Transition  Obligation            |   | **(660**                   | )         | (720     | )      |
| Unrecognized  Prior Service Cost               |   | **119**                    |      | 130      |   |
| Unrecognized  Cumulative Net Loss              |   | **(1,968**                 | )         | (391     | )      |
| Accrued Benefit  Cost                          |   | **$**                      | **1,970** |     | $      | 1,712 |   |

 
|                                                   |   | **2001** |    | **2000** |   | **1999** |   |
|--------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Components of Net Periodic Benefit Cost                |   |     |    |     |   |     |   |
| Service Cost                                           |   | **$**    | **112** |     | $      | 117      |   | $ | 92 |   |
| Interest Cost                                          |   | **198**  |    | 186      |   | 173      |   |
| Amortization of  Unrecognized:

Transition  Obligation |   | **60**   |    | 60       |   | 60       |   |
| Prior Service  Cost                                    |   | **(12**  | )       | (12      | )      | (12      | )      |
| Cumulative Net  Loss                                   |   | **6**    |    | 18       |   | 21       |   |
| Net Periodic  Benefit Cost                             |   | **$**    | **364** |     | $      | 369      |   | $ | 334 |   |

 

The health care cost trend rate used indetermining the accumulated postretirement benefit obligations was 9%,decreasing to 8% in the year 2003, decreasing to 6% in the year 2007 and thendecreasing to 5% for the years thereafter. An increase of one percentage point in the assumed health care costtrend would increase the accumulated postretirement benefit obligation atDecember 31, 2001 by $716,000 and the net periodic post-retirement benefit costfor the year then ended by $64,000. A decrease of one percentage point in theassumed health care cost trend would decrease the accumulated postretirementbenefit obligation at December 31, 2001 by $552,000 and the net periodicpostretirement benefit cost for the year then ended by $50,000.

 

A weighted average discount rate of 7.50% wasused to develop net periodic postretirement benefit cost and the actuarialpresent value of accumulated benefit obligations.

 

36

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**NOTE 8 - INCOME TAXES**

The income tax provision (benefit) for the yearsended December 31, 2001, 2000 and 1999 include the following components:

 
|                   |       | **2001**                   |      | **2000** |   | **1999** |   |
|------------------------|------------|----------------------------|-----------|----------|--------|----------|--------|
|                   |       | **(Dollars in Thousands)** |      |
| Current  Income Taxes: |       |                       |      |     |   |     |   |
| Federal                |       | **$**                      | **571**   |     | $      | 1,936    |   | $ | 5,995 |   |
| State                  |       | **183**                    |      | 601      |   | 1,861    |   |
| Deferred Income Taxes: |       |                       |      |     |   |     |   |
| Federal                |       | **3,954**                  |      | 1,967    |   | 2,094    |   |
| State                  |       | **1,263**                  |      | 611      |   | 650      |   |
| Total Income Taxes     | ** ** | **$**                      | **5,971** |     | $      | 5,115    |   | $ | 10,600 |   |

 

 

Deferred tax liabilities and assets are comprisedof the following:

 
|                                               |   | **2001**                   |       | **2000** |   |
|----------------------------------------------------|--------|----------------------------|------------|----------|--------|
|                                               |   | **(Dollars in Thousands)** |       |
| Tax Liabilities:                                   |   |                       |       |     |   |
| Depreciation and  Fixed Assets                     |   | **$**                      | **8,206**  |     | $      | 6,256 |   |
| Intangible  Assets                                 |   | **7,685**                  |       | 5,206    |   |
| Other                                              |   | **80**                     |       | —   |   |
| Gross Deferred  Tax Liability                      |   | **15,971**                 |       | 11,462   |   |
|                                               |   |                       |       |     |   |
| Tax Assets:                                        |   |                       |       |     |   |
| Deferred  Compensation and Postretirement Benefits |   | **1,970**                  |       | 1,905    |   |
| Receivables and  Inventories                       |   | **631**                    |       | 767      |   |
| Accrued  Liabilities                               |   | **136**                    |       | 309      |   |
| Investments                                        |   | —                     |       | 137      |   |
| Other                                              |   | **4**                      |       | 4        |   |
| Net Operating  Loss                                |   | **315**                    |       | 327      |   |
| Gross Deferred  Tax Asset                          |   | **3,056**                  |       | 3,449    |   |
| Valuation  Allowance                               |   | **(315**                   | )          | —   |   |
| Net Deferred Tax  Liability                        |   | **13,230**                 |       | 8,013    |   |
| Current Deferred  Tax Asset                        |   | **646**                    |       | 1,404    |   |
| Net Non-Current  Deferred Tax Liability            |   | **$**                      | **13,876** |     | $      | 9,417 |   |

 

The reconciliation of the U.S. income tax rate tothe effective income tax rate is as follows:

** **
|                                           |       | **2001** |       | **2000** |   | **1999** |   |
|------------------------------------------------|------------|----------|------------|----------|--------|----------|--------|
| Statutory Tax Rate                             |       | **35.0** | **%**      | 35.0     | %      | 35.0     | %      |
| Effect of:                                     |       |     |       |     |   |     |   |
| State Income  Taxes Net of Federal Tax Benefit |       | **6.7**  |       | 6.4      |   | 6.3      |   |
| Valuation  Allowance                           |       | **2.1**  | ** ** | —   |   | —   |   |
| Other, Net                                     |       | **(3.2** | )          | (1.5     | )      | 0.6      |   |
| Effective Tax Rate                             | ** ** | **40.6** | %          | 39.9     | %      | 41.9     | %      |

 

The valuation allowance has been recorded due to the uncertainty ofrealization of the benefits associated with net operating losses incurred by asubsidiary of HickoryTech in the state of Iowa.  This effectively reduces the net deferred tax asset related tothese net operating loss carryforwards to $0. Future events and changes in circumstances could cause this valuationallowance to change.

 

**NOTE 9 –CHANGE IN ACCOUNTING PRINCIPLE**

In December 1999, the SEC issued Staff AccountingBulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” which,as amended by SAB No. 101A and SAB No. 101B, provides additional guidance inapplying generally accepted accounting principles for revenue recognition.Implementation of SAB No. 101 required HickoryTech to defer revenues resultingfrom up-front fees, including installation and activation fees, and to alsodefer the associated direct costs. These deferred revenues and costs are nowrecognized ratably over the corresponding customer relationship period. Thesecustomer relationship periods range from one to seven years. Prior toimplementation of SAB No. 101 in the fourth quarter of 2000, HickoryTechrecognized revenues resulting from up-front fees and the corresponding directcosts in the period  that installationand activation services were provided. As permitted by SAB No. 101, HickoryTechaccounted for the change in accounting principle prospectively as a cumulativeeffect of accounting change retroactively to January 1, 2000. The cumulativeeffect 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) issuedStatement of Financial Accounting Standards (SFAS) No. 141, “BusinessCombinations,” and No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires that the purchasemethod of 

 

37

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accounting be used for all business combinations initiated after June30, 2001. SFAS No. 141 also specifies the criteria that intangible assetsacquired in a purchase method business combination must meet to be recognizedand reported apart from goodwill. HickoryTech made no acquisitions after June30, 2001 and, therefore, SFAS No. 141 had no impact on 2001 results.

 

SFAS No. 142 is effective January 1, 2002 and addresses financialaccounting and reporting for acquired goodwill and other intangible assets.SFAS No. 142 will require that goodwill and intangible assets with indefiniteuseful lives no longer be amortized, but instead tested for impairment at leastannually. Those intangible assets with finite useful lives will continue to beamortized over their respective useful lives. As of December 31, 2001,HickoryTech had unamortized goodwill of $25,086,000 and recorded amortizationexpense related to goodwill during 2001 of $766,000. HickoryTech is stillwaiting for further guidance from the FASB and/or the Securities and ExchangeCommission on whether its FCC licenses qualify as indefinite lived intangibleassets. 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 during2001 of $1,906,000. Upon adoption of SFAS No. 142, HickoryTech will ceaseamortization of its goodwill and may cease amortization of FCC licenses if theyare determined to have indefinite lives under SFAS No. 142. HickoryTech is inthe process of evaluating whether any of its goodwill or intangible assetvalues are impaired pursuant to the provisions of SFAS No. 142 and 144 (asdescribed below). Although HickoryTech’s analysis is not complete, managementcurrently does not expect any write-downs of the carrying value of itsintangible assets or goodwill and therefore does not expect adoption of SFASNo. 142 will have a material impact on its financial position or results ofoperations.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations,”  whichaddresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets that result from the acquisition,construction, development or normal use of the asset. SFAS No. 143 is effectiveJanuary 1, 2003. HickoryTech is currently evaluating the provisions of SFAS No.143 and does not expect that adoption will have a material impact on itsfinancial position or its results of operations.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets,” which addresses financialaccounting and reporting for the impairment or disposal of long-lived assets.SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of,” and theaccounting and reporting provisions of Accounting Principles Board Opinion No.30, “Reporting the Results of Operations – Reporting the Transactions for theDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions.” SFAS No. 144 requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair value less cost to sell. SFAS No. 144 also sets forthrequirements for recognizing and measuring impairment losses on certain assetsto be held or used.  SFAS No. 144 iseffective January 1, 2002. HickoryTech is currently evaluating the provisionsof SFAS No. 144 and does not expect that adoption will have a material impacton its financial position or its results of operations.

 

**NOTE 11 – CONTINGENCIES**

HickoryTech is involved in certain contractualdisputes in the ordinary course of business. HickoryTech does not believe theultimate resolution of any of these existing matters will have a materialadverse effect on its financial position, results of operations, or cash flows.

 

**NOTE 12 - QUARTERLY FINANCIAL INFORMATION (Unaudited)**

 
|                             |   | **2001**                                              |    |
|----------------------------------|--------|-------------------------------------------------------|---------|
|                             |   | **Total**                                             |    | **4th** |   | **3rd** |   | **2nd** |   | **1st** |   |
|                             |   | **(Dollars in  thousands, except per share amounts)** |    |
| Operating Revenues               |   | $                                                     | 108,478 |   | $ | 26,734 |   | $ | 27,559 |   | $ | 26,954 |   | $ | 27,231 |   |
| Operating Income                 |   | 23,873                                                |    | 5,541 |   | 6,197 |   | 6,007 |   | 6,128 |   |
| Net Income                       |   | 8,738                                                 |    | 2,031 |   | 2,740 |   | 2,004 |   | 1,963 |   |
| Fully Diluted Earnings Per Share |   | $                                                     | .62     |   | $ | .14 |   | $ | .20 |   | $ | .14 |   | $ | .14 |   |
| Dividends Per Share              |   | $                                                     | .44     |   | $ | .11 |   | $ | .11 |   | $ | .11 |   | $ | .11 |   |

 
|                                                                              |   | **2000**  |    |
|-----------------------------------------------------------------------------------|--------|-----------|---------|
|                                                                              |   | **Total** |    | **4th** |   | **3rd** |   | **2nd** |   | **1st** |   |
| Operating Revenues                                                                |   | $         | 102,303 |   | $ | 26,689 |   | $ | 25,572 |   | $ | 26,196 |   | $ | 23,846 |   |
| Operating Income                                                                  |   | 22,343    |    | 5,298 |   | 5,884 |   | 5,732 |   | 5,429 |   |
| Income Before Extraordinary Item and  Cumulative Effect                           |   | 7,958     |    | 1,522 |   | 2,078 |   | 2,283 |   | 2,075 |   |
| Net Income                                                                        |   | 7,705     |    | 1,522 |   | 2,078 |   | 2,050 |   | 2,055 |   |
| Fully Diluted Earnings Per Share Before Extraordinary Item and  Cumulative Effect |   | $         | 0.57    |   | $ | 0.10 |   | $ | 0.15 |   | $ | 0.17 |   | $ | 0.15 |   |
| Fully Diluted Earnings Per Share on Extraordinary Item and Cumulative  Effect     |   | $         | (0.02   | ) | — |   | — |   | $ | (0.02 | ) | — |   |
| Fully Diluted Earnings Per Share                                                  |   | $         | 0.55    |   | $ | 0.10 |   | $ | 0.15 |   | $ | 0.15 |   | $ | 0.15 |   |
| Dividends Per Share                                                               |   | $         | 0.44    |   | $ | 0.11 |   | $ | 0.11 |   | $ | 0.11 |   | $ | 0.11 |   |

 

38

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**Item 9.****       Changes in andDisagreements with Accountants on Accounting and Financial Disclosures.**

 

None.

 

**PART III**

 

**Item 10.****     Directors andExecutive Officers of HickoryTech.**

 

Information as to Directors and Executive Officers of HickoryTechincluded on pages 3 and 5 of the Proxy Statement and “Section 16(a) BeneficialOwnership Reporting Compliance” on page 14 of the Proxy Statement areincorporated by reference.

 

**Item 11.****     ExecutiveCompensation.**

 

Information as to executive compensation included on pages 6 to 11 ofthe Proxy Statement is incorporated by reference.

 

**Item 12.****     SecurityOwnership of Certain Beneficial Owners and Management.**

 

The information as to beneficial ownership of more than five percent ofHickoryTech’s common stock included on page 5 of the Proxy Statement isincorporated by reference. The informationas to security ownership of management included on page 4 of the ProxyStatement is incorporated by reference.

 

**Item 13.****     CertainRelationships and Related Transactions.**

 

HickoryTech does not know of any matter required to be reported underthis item.

 

39

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**PART IV**

 

**Item 14.****     Exhibits,Financial Statement Schedules, and Reports on Form 8-K.**

 

(a) 1.           ConsolidatedFinancial Statements

 

                   Thefollowing 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                                                                                                  |   | 23                         |   |
| Consolidated Statements of Income*                                                                                                                          |   |                       |   |
| Years Ended December 31, 2001, 2000, and 1999                                                                                                               |   | 24                         |   |
| Consolidated Balance Sheets*                                                                                                                                |   |                       |   |
| December 31, 2001 and 2000                                                                                                                                  |   | 25                         |   |
| Consolidated Statements of Cash Flows*                                                                                                                      |   |                       |   |
| Years Ended December 31, 2001, 2000, and 1999                                                                                                               |   | 26                         |   |
| Consolidated Statements of Shareholders’ Equity*                                                                                                       |   |                       |   |
| Years Ended December 31, 2001, 2000, and 1999                                                                                                               |   | 27                         |   |
| Notes to Consolidated Financial Statements*                                                                                                                 |   | 28-37                      |   |
| Selected Financial and Operating Data                                                                                                                       |   | 9                          |   |
|                                                                                                                                                             |   |                       |   |
| *Addressed by Report of Independent Accountants                                                                                                             |   |                       |   |
|                                                                                                                                                        |   |                       |   |
|     2.                 Consolidated Financial Statement Schedules |   |                       |   |
| Report of Independent Accountants                                                                                                                           |   | 41                         |   |
| Schedule II – Valuation and Qualifying Accounts                                                                                                        |   | 42                         |   |

 

All schedules not included are omitted either because of the absence ofconditions under which they are required or because the required information isgiven 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)                                                                                                                       |

 

40

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| 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                                                                                                                                                            |

 

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*           Filed herewith.

†           Managementcompensation plan or arrangement required to be filed as an exhibit.

 

b) 1.            Reportson Form 8-K 

 

No reports on Form 8-K were filed during the lastquarter of the period ended December 31, 2001.

 

41

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**Reportof 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 ourreport dated February 1, 2002 also included an audit of the financial statementschedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, thesefinancial statement schedules present fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.

 

PricewaterhouseCoopers LLP

Minneapolis, Minnesota

February 1, 2002

 

42

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**SCHEDULEII – VALUATION AND QUALIFYING ACCOUNTS**

 

ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS:

 
|                          |   | **Years  Ended December 31,** |   |
|-------------------------------|--------|-------------------------------|--------|
|                          |   | **2001**                      |   | **2000** |   | **1999** |   |
|                          |   | **(In  Thousands)**           |   |
| Balance, at beginning of year |   | $                             | 961    |   | $ | 413 |   | $ | 618 |   |
|                          |   |                          |   |   |   |   |   |   |   |   |
| Additions charged to income   |   | 782                           |   | 1,005 |   | 9 |   |
| Write-offs, net of recoveries |   | (512                          | )      | (457 | ) | (214 | ) |
|                          |   |                          |   |   |   |   |   |
| Balance, at end of year       |   | $                             | 1,231  |   | $ | 961 |   | $ | 413 |   |

 

INVENTORY VALUATION RESERVE:

 
|                          |   | **Years  Ended December 31,** |   |
|-------------------------------|--------|-------------------------------|--------|
|                          |   | **2001**                      |   | **2000** |   | **1999** |   |
|                          |   | **(In  Thousands)**           |   |
| Balance, at beginning of year |   | $                             | 836    |   | $ | 1,016 |   | $ | 55 |   |
|                          |   |                          |   |   |   |   |   |   |   |   |
| Additions charged to income   |   | 95                            |   | — |   | 961 |   |
| Reductions                    |   | (73                           | )      | (180 | ) | — |   |
|                          |   |                          |   |   |   |   |   |
| Balance, at end of year       |   | $                             | 858    |   | $ | 836 |   | $ | 1,016 |   |

 

 

43

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Dated: | March  1, 2002                           |                                     | HICKORY TECH CORPORATION |
|--------|------------------------------------------|------------------------------------------|--------------------------|
|   |                                     |                                     |
|   |       By:  | /s/ David A. Christensen                 |
|   |                                     | David A. Christensen,  Secretary,        |
|   |                                     | Vice President, Chief  Financial Officer |
|   |                                     | and Treasurer                            |
|        |                                          |                                          |                          |  |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 
|   |   | /s/  Robert D. Alton, Jr.                                  |   | March 1, 2002 |
|--------|--------|-----------------------------------------------------------------|--------|---------------|
|   |   | Robert D. Alton, Jr.                                            |   |
|   |   | Chairman, President, Chief  Executive Officer and Director      |   |
|   |   | (principal executive officer)                                   |   |
|   |   |                                                            |   |
|   |   | /s/ David A. Christensen                                        |   | March 1, 2002 |
|   |   | David A. Christensen,  Secretary,                               |   |
|   |   | Vice President, Chief  Financial Officer and Treasurer          |   |
|   |   | (principal financial officer  and principal accounting officer) |   |
|   |   |                                                            |   |
|   |   | /s/  Lyle T. Bosacker                                      |   | March 1, 2002 |
|   |   | Lyle T. Bosacker, Director                                      |   |
|   |   |                                                            |   |
|   |   | /s/ Robert K. Else                                              |   | March 1, 2002 |
|   |   | Robert K. Else, Director                                        |   |
|   |   |                                                            |   |
|   |   | /s/  Lyle G. Jacobson                                      |   | March 1, 2002 |
|   |   | Lyle G. Jacobson, Director                                      |   |
|   |   |                                                            |   |
|   |   | /s/  R. Wynn Kearney, Jr.                                  |   | March 1, 2002 |
|   |   | R. Wynn Kearney, Jr., Director                                  |   |

 

(amajority of directors)

 

44

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