**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-Q**

 

 

| (Mark One) |   |
|------------|--------|
| **ý** |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September  30, 2001 ****OR** |
|       |   |   |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                        TO                       ** |

 

**Commission file number  0-13721**

 

 

**HICKORY TECH CORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Minnesota**                    |   | **41-1524393**      |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 

**221 East Hickory Street**

**Mankato, Minnesota 56002-3248**

(Address of principalexecutive offices and zip code)

 

**(800) 326-5789**

(Registrant’s telephonenumber, including area code)

 

 

(Former name, formeraddress and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.     Yes   ý   No   o

 

 

The total number of shares of the registrant'scommon stock outstanding as of September 30, 2001:  13,929,497.

 

 

 

**HICKORY TECHCORPORATION**

September 30, 2001

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS.

 

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 
| ***(In Thousands Except Per  Share Amounts)***                                             |   | **For Quarter Ended** |          | **For Nine Months Ended** |          |
|--------------------------------------------------------------------------------------------|--------|-----------------------|---------------|---------------------------|---------------|
|                                                                                       |   | **9/30/2001**         |          | **9/30/2000**             |          | **9/30/2001** |   | **9/30/2000** |   |
| OPERATING REVENUES:                                                                        |   |                  |          |                      |          |   |   |   |   |
| Telephone                                                                                  |   | $                     | 13,560        |                      | $             | 13,224 |   | $ | 41,297 |   | $ | 39,031 |   |
| Communications Services                                                                    |   | 2,823                 |          | 2,022                     |          | 8,164 |   | 5,433 |   |
| Wireless Services                                                                          |   | 4,490                 |          | 4,976                     |          | 13,653 |   | 14,226 |   |
| Information Solutions                                                                      |   | 1,207                 |          | 1,021                     |          | 3,150 |   | 3,185 |   |
| Enterprise Solutions                                                                       |   | 5,479                 |          | 4,329                     |          | 15,480 |   | 13,739 |   |
| TOTAL OPERATING REVENUES                                                                   |   | 27,559                |          | 25,572                    |          | 81,744 |   | 75,614 |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| COSTS AND EXPENSES:                                                                        |   |                  |          |                      |          |   |   |   |   |
| Operating Expenses                                                                         |   | 16,983                |          | 16,114                    |          | 51,425 |   | 48,181 |   |
| Depreciation                                                                               |   | 3,271                 |          | 2,761                     |          | 9,216 |   | 8,061 |   |
| Amortization of Intangibles                                                                |   | 1,108                 |          | 813                       |          | 2,771 |   | 2,327 |   |
| TOTAL COSTS AND EXPENSES                                                                   |   | 21,362                |          | 19,688                    |          | 63,412 |   | 58,569 |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| OPERATING INCOME                                                                           |   | 6,197                 |          | 5,884                     |          | 18,332 |   | 17,045 |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| OTHER INCOME (EXPENSE):                                                                    |   |                  |          |                      |          |   |   |   |   |
| Equity in Net Income (Loss) of  Investee                                                   |   | (19                   | )             | 4                         |          | (32 | ) | 24 |   |
| Gain on Sale of Assets                                                                     |   | 1,069                 |          | -                         |          | 1,210 |   | 271 |   |
| Interest and Other Income                                                                  |   | 29                    |          | 137                       |          | 104 |   | 265 |   |
| Interest Expense                                                                           |   | (2,711                | )             | (2,590                    | )             | (8,318 | ) | (6,869 | ) |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| TOTAL OTHER INCOME (EXPENSE)                                                               |   | (1,632                | )             | (2,449                    | )             | (7,036 | ) | (6,309 | ) |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| INCOME BEFORE INCOME TAXES,  EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE |   | 4,565                 |          | 3,435                     |          | 11,296 |   | 10,736 |   |
| INCOME TAXES                                                                               |   | 1,825                 |          | 1,357                     |          | 4,589 |   | 4,300 |   |
| INCOME BEFORE EXTRAORDINARY ITEM AND  CUMULATIVE EFFECT OF ACCOUNTING CHANGE               |   | 2,740                 |          | 2,078                     |          | 6,707 |   | 6,436 |   |
| 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                                                                                 |   | $                     | 2,740         |                      | $             | 2,078 |   | $ | 6,707 |   | $ | 6,183 |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| Basic Earnings Per Share:                                                                  |   |                  |          |                      |          |   |   |   |   |
| Income Before Extraordinary Item and  Cumulative Effect of Accounting Change               |   | $                     | 0.20          |                      | $             | 0.15 |   | $ | 0.48 |   | $ | 0.47 |   |
| Extraordinary Item and Cumulative  Effect                                                  |   | -                     |          | -                         |          | - |   | (0.02 | ) |
| Net Income                                                                                 |   | $                     | 0.20          |                      | $             | 0.15 |   | $ | 0.48 |   | $ | 0.45 |   |
| Dividends Per Share                                                                        |   | $                     | 0.11          |                      | $             | 0.11 |   | $ | 0.33 |   | $ | 0.33 |   |
| Weighted  Average Common Shares Outstanding                                                |   | 13,908                |          | 13,844                    |          | 13,896 |   | 13,819 |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
|                                                                                       |   |                  |          |                      |          |   |   |   |   |
| Diluted Earnings Per Share:                                                                |   |                  |          |                      |          |   |   |   |   |
| Income Before Extraordinary Item and  Cumulative Effect of Accounting Change               |   | $                     | 0.20          |                      | $             | 0.15 |   | $ | 0.48 |   | $ | 0.47 |   |
| Extraordinary Item and Cumulative  Effect                                                  |   | -                     |          | -                         |          | - |   | (0.02 | ) |
| Net Income                                                                                 |   | $                     | 0.20          |                      | $             | 0.15 |   | $ | 0.48 |   | $ | 0.45 |   |
| Weighted  Average Common and Equivalent Shares Outstanding                                 |   | 14,014                |     | 13,956                    |     | 13,991 |     | 13,887 |     |

 

The accompanying notes are an integralpart of the consolidated financial statements.

 

 

**HICKORY TECHCORPORATION**

September 30, 2001

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 
| ***(In Thousands Except Share  and Per Share Amounts)***                                                                              |   | **9/30/2001** |                  | **12/31/2000** |                  |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-----------------------|----------------|-----------------------|
| ASSETS                                                                                                                                |   |
| CURRENT ASSETS:                                                                                                                       |   |          |                  |           |                  |
| Cash and Cash Equivalents                                                                                                             |   | **$**         | **905**               |           | $                     | 1,190 |   |
| Receivables, Net of Allowance for  Doubtful Accounts of $1,348 and $961                                                               |   | **16,767**    |                  | 16,137         |                  |
| Income Taxes Receivable                                                                                                               |   | **-**         |                  | 670            |                  |
| Inventories                                                                                                                           |   | **5,442**     |                  | 4,585          |                  |
| Deferred Income Taxes                                                                                                                 |   | **1,070**     |                  | 1,404          |                  |
| Other                                                                                                                                 |   | **1,462**     |                  | 1,423          |                  |
| TOTAL CURRENT ASSETS                                                                                                                  |   | **25,646**    |                  | 25,409         |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| INVESTMENTS                                                                                                                           |   | **10,623**    |                  | 10,361         |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                         |   | **224,679**   |                  | 203,362        |                  |
| Less ACCUMULATED DEPRECIATION                                                                                                         |   | **92,426**    |                  | 86,672         |                  |
| PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                    |   | **132,253**   |                  | 116,690        |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| OTHER ASSETS:                                                                                                                         |   |          |                  |           |                  |
| Intangible Assets, Net                                                                                                                |   | **107,839**   |                  | 100,603        |                  |
| Deferred Costs and Other                                                                                                              |   | **2,485**     |                  | 2,424          |                  |
| TOTAL OTHER ASSETS                                                                                                                    |   | **110,324**   |                  | 103,027        |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| TOTAL ASSETS                                                                                                                          |   | **$**         | **278,846**           |           | $                     | 255,487 |   |
|                                                                                                                                  |   |          |                  |           |                  |
| LIABILITIES & SHAREHOLDERS' EQUITY                                                                                                |   |
| CURRENT LIABILITIES:                                                                                                                  |   |          |                  |           |                  |
| Accounts Payable                                                                                                                      |   | **$**         | **7,164**             |           | $                     | 10,791 |   |
| Income Taxes Payable                                                                                                                  |   | **3,183**     |                  | -              |                  |
| Accrued Interest                                                                                                                      |   | **423**       |                  | 108            |                  |
| Advanced Billings and Deposits                                                                                                        |   | **3,749**     |                  | 4,411          |                  |
| Current Maturities of Long-Term Debt                                                                                                  |   | **1,220**     |                  | 1,217          |                  |
| TOTAL CURRENT LIABILITIES                                                                                                             |   | **15,739**    |                  | 16,527         |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| LONG-TERM DEBT, Net of Current  Maturities                                                                                            |   | **169,517**   |                  | 147,433        |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| DEFERRED INCOME TAXES                                                                                                                 |   | **8,569**     |                  | 9,417          |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| DEFERRED COMPENSATION AND OTHER                                                                                                       |   | **2,932**     |                  | 2,932          |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| DEFERRED REVENUE                                                                                                                      |   | **1,872**     |                  | 1,821          |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| TOTAL LIABILITIES                                                                                                                     |   | **198,629**   |                  | 178,130        |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| SHAREHOLDERS' EQUITY:                                                                                                                 |   |          |                  |           |                  |
| Common Stock, no par value, $.10  stated value Shares authorized: 100,000,000 Shares outstanding: 2001,  13,929,497; 2000, 13,878,568 |   | **1,393**     |        | 1,388          |        |
| Additional Paid-In Capital                                                                                                            |   | **6,205**     |                  | 5,473          |                  |
| Retained Earnings                                                                                                                     |   | **72,619**    |                  | 70,496         |                  |
| TOTAL SHAREHOLDERS' EQUITY                                                                                                            |   | **80,217**    |                  | 77,357         |                  |
|                                                                                                                                  |   |          |                  |           |                  |
| TOTAL LIABILITIES & SHAREHOLDERS'  EQUITY                                                                                         |   | **$**         | **278,846**           |           | $                     | 255,487 |   |
|                                                                                                                                       |        |               |                       |                |                       |  |  |  |

 

The accompanying notes are an integralpart of the consolidated financial statements.

 

 

**HICKORY TECHCORPORATION**

September 30, 2001

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
|                                                  |   | **For Nine Months Ended** |      |
|-------------------------------------------------------|--------|---------------------------|-----------|
| ***In Thousands***                                    |   | **9/30/2001**             |      | **9/30/2000** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                 |   |                      |      |   |   |
| Net Income                                            |   | **$**                     | **6,707** |   | $ | 6,183 |   |
| Adjustments to Reconcile Net Income to  Net           |   |                      |      |   |   |
| Cash Provided by Operating Activities:                |   |                      |      |   |   |
| Depreciation and Amortization                         |   | **11,987**                |      | 10,388 |   |
| Stock-Based Compensation                              |   | **320**                   |      | 697 |   |
| Equity in Net Loss (Income) of  Investee              |   | **32**                    |      | (24 | ) |
| Gain on Sale of Assets                                |   | **(1,210**                | )         | (271 | ) |
| Cumulative Effect of Accounting Change                |   | **-**                     |      | 34 |   |
| Deferred Income Taxes                                 |   | **(513**                  | )         | - |   |
| Provision for Losses on Accounts  Receivable          |   | **387**                   |      | 578 |   |
| Extraordinary Loss on Debt  Extinguishment            |   | **-**                     |      | 391 |   |
| Changes in Operating Assets and  Liabilities:         |   |                      |      |   |   |
| Receivables                                           |   | **(16**                   | )         | 601 |   |
| Inventories                                           |   | **(895**                  | )         | (1,987 | ) |
| Accounts Payable and Accrued Expenses                 |   | **190**                   |      | (5,236 | ) |
| Advance Billings and Deposits                         |   | **(656**                  | )         | 758 |   |
| Deferred Revenue and Compensation                     |   | **51**                    |      | 640 |   |
| Other                                                 |   | **(101**                  | )         | (776 | ) |
| Net Cash Provided By Operating  Activities            |   | **16,283**                |      | 11,976 |   |
|                                                  |   |                      |      |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                 |   |                      |      |   |   |
| Additions to Property, Plant and  Equipment           |   | **(26,646**               | )         | (18,228 | ) |
| Additions to Capitalized Software  Development Costs  |   | **(2,695**                | )         | (523 | ) |
| Increase in Investments                               |   | **(697**                  | )         | (10,120 | ) |
| Distribution from Investee                            |   | **-**                     |      | 700 |   |
| Proceeds from Sale of Assets                          |   | **6,949**                 |      | 298 |   |
| Acquisition of Licenses                               |   | **(11,399**               | )         | (104 | ) |
| Net Cash Used In Investing Activities                 |   | **(34,488**               | )         | (27,977 | ) |
|                                                  |   |                      |      |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                 |   |                      |      |   |   |
| Increase (Decrease) in Cash Overdraft                 |   | **-**                     |      | (16 | ) |
| Payment of Debt Issuance Costs                        |   | **-**                     |      | (1,229 | ) |
| Repayments of Debt                                    |   | **(162**                  | )         | (40,399 | ) |
| Borrowings on Line of Credit                          |   | **29,500**                |      | 63,100 |   |
| Repayments on Line of Credit                          |   | **(7,250**                | )         | (1,100 | ) |
| Proceeds from Issuance of Common Stock                |   | **416**                   |      | 370 |   |
| Dividends Paid                                        |   | **(4,584**                | )         | (4,381 | ) |
| Net Cash Provided By Financing  Activities            |   | **17,920**                |      | 16,345 |   |
|                                                  |   |                      |      |   |   |
| NET INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS |   | **(285**                  | )         | 344 |   |
|                                                  |   |                      |      |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING  OF PERIOD     |   | **1,190**                 |      | 2,708 |   |
|                                                  |   |                      |      |   |   |
| CASH AND CASH EQUIVALENTS AT END OF  PERIOD           |   | **$**                     | **905**   |   | $ | 3,052 |   |

 

The accompanying notes are an integralpart of the consolidated financial statements.

HICKORY TECH CORPORATION

SEPTEMBER 30, 2001

PART 1. FINANCIALINFORMATION

 

 

ITEM 1.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

NOTE 1.  BASIS OF PRESENTATION

 

        The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information necessary for a fairpresentation of results of operations, financial position, and cash flows inconformity with accounting principles generally accepted in the United Statesof America. In the opinion of management, the condensed consolidated financialstatements reflect all adjustments (consisting only of normal recurringadjustments) considered necessary for a fair presentation of Hickory TechCorporation’s (HickoryTech) results for the periods presented.  Operating results for interim periods arenot necessarily indicative of results that may be expected for the fiscal yearas a whole. The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues, expenses, and related disclosures atthe date of the financial statements and during the reporting period. Actualresults could differ from these estimates. These unaudited interim condensedconsolidated financial statements should be read in conjunction withHickoryTech’s Annual Report on Form 10-K for the year ended December 31, 2000.

 

        Theconsolidated financial statements of HickoryTech include Hickory TechCorporation and its subsidiaries in the following five business segments: (i)Telephone Sector, (ii) Communications Services Sector, (iii) Wireless ServicesSector, (iv) Information Solutions Sector and (v) Enterprise Solutions Sector.An investment in an unconsolidated partnership for the Information SolutionsSector is accounted for using the equity method. All intercompany transactionshave been eliminated from the consolidated financial statements.

 

        Operatingexpenses include all costs related to delivery of HickoryTech’s communicationsservices and products. These costs include all selling, general andadministrative costs and all costs of performing services and providing relatedproducts, except for costs associated with the depreciation and amortization ofproperty, plant and equipment and intangible assets.

 

        Allrevenues and expenses related to Internet services which were reported in theTelephone Sector in 2000 have been reclassified to the Communications ServicesSector to conform to the 2001 presentation. These reclassifications reduced Telephone Sector revenue and increasedCommunications Services Sector revenue by $398,000 for the three months endedSeptember 30, 2000 and $1,152,000 for the nine months ended September 30, 2000.These reclassifications also reduced Telephone Sector operating expenses andincreased Communications Services Sector operating expenses by $403,000 for thethree months ended September 30, 2000 and $1,060,000 for the nine months endedSeptember 30, 2000. In addition, cost of sales of $2,755,000 for the three monthsended September 30, 2000 and $9,217,000 for the nine months ended September 30,2000 related to Enterprise Solutions Sector sales that were reported separatelyin 2000 have been reclassified to include them in operating expenses to conformto the 2001 presentation.  Thesereclassifications had no effect on previously reported consolidated operatingincome, net income or cash flows.

 

 

NOTE 2. EARNINGS AND CASH DIVIDENDS PER COMMONSHARE

 

        Basicearnings per share is computed by dividing net income by the weighted averagenumber of shares of common stock outstanding during the quarter. Shares used inthe diluted earnings per share computation are based on the weighted averagenumber of shares of common stock outstanding during the quarter increased bypotentially dilutive common shares. Potentially dilutive common shares includestock options and stock issued under the employee stock purchase plan (ESPP).
|                                          |   | **For Three Months Ended** |   | **For Nine Months Ended** |   |
|-----------------------------------------------|--------|----------------------------|--------|---------------------------|--------|
|                                          |   | **9/30/01**                |   | **9/30/00**               |   | **9/30/01** |   | **9/30/00** |   |
|                                          |   |                       |   |                      |   |   |   |   |   |
| Weighted Average  Shares Outstanding          |   | 13,907,884                 |   | 13,843,724                |   | 13,895,659 |   | 13,818,601 |   |
| Stock Options  (dilutive only)                |   | 105,745                    |   | 112,176                   |   | 95,720 |   | 68,726 |   |
| Weighted Average  Stock Subscribed (ESPP)     |   | 269                        |   | 307                       |   | 90 |   | 102 |   |
| Weighted Average  Dilutive Shares Outstanding |   | 14,013,898                 |   | 13,956,207                |   | 13,991,469 |   | 13,887,429 |   |

 

        Optionsto purchase 39,750 shares for the three months and nine months ended September30, 2001 were not included in the computation of earnings per share assumingdilution because their effect on earnings per share would have beenantidilutive.

 

        Cashdividends are based on the number of common shares outstanding at therespective record dates. Listed below are the number of shares outstanding asof the record date for the first three quarters of 2001 and 2000.

 
| **Shares  Outstanding on Record Date** |   | **2001**   |   | **2000**   |   |
|----------------------------------------|--------|------------|--------|------------|--------|
| First Quarter (Feb. 15)                |   | 13,886,669 |   | 13,799,056 |   |
| Second Quarter (May 15)                |   | 13,892,254 |   | 13,817,168 |   |
| Third Quarter (August 15)              |   | 13,897,929 |   | 13,833,834 |   |
|                                        |        |            |        |            |        |  |

 

        Dividendsper share reflect dividends declared during the applicable quarter divided bythe weighted average common shares outstanding during the period.

 

        Duringthe first nine months of 2001 and 2000, shareholders have elected to reinvest$184,000 and $178,000, respectively, of dividends into HickoryTech common stockpursuant to the HickoryTech Dividend Reinvestment Plan.

 

 

NOTE 3. COMPREHENSIVE INCOME

 

        Forthe three months and nine months ended September 30, 2001 and 2000,comprehensive income was comprised solely of net income.

 

 

NOTE 4. INVENTORIES

 

        Inventoriesat September 30, 2001 and December 31, 2000 consist of raw materials andsupplies.

 

 

NOTE 5. DISPOSITION

 

        OnAugust 6, 2001, HickoryTech closed on the previously announced agreement tosell its local telephone exchange in Amana, Iowa to South Slope CooperativeTelephone Company, Inc. for $6,500,000 in cash.  The Amana operation, known as Amana Colonies Telephone Company(ACTC), served approximately 1,500 access lines in the seven communities of theAmana Colonies in east central Iowa. HickoryTech recorded a pre-tax gain on thesale of $1,068,000 ($597,000 net of tax). HickoryTech used the proceeds fromthe sale to repay a portion of its outstanding debt. The operations of ACTCwere included in the Telephone Sector. For the three months ended September 30, 2001 and 2000, ACTC generatedrevenues of $142,000 and $373,000 and generated an operating loss of ($23,000)and $0, respectively.  For the ninemonths ended September 30, 2001 and 2000, ACTC generated revenues of $829,000and $1,106,000 and generated an operating income (loss) of ($16,000) and$1,000, respectively.   The pro-formaimpact of this disposition on net income and earnings per share for the periodspresented herein is not considered material.

 

NOTE 6. RECENT ACCOUNTING DEVELOPMENTS

 

        InJuly 2001, the Financial Accounting Standards Board (FASB) issued Statement No.141, “Business Combinations,” and Statement No. 142, “Goodwill and OtherIntangible Assets,” (collectively, “the Statements”). The Statements eliminatethe pooling-of-interests method of accounting for business combinations and thesystematic amortization of goodwill and indefinite life intangibles.  HickoryTech intends to adopt the Statementsduring the first quarter of 2002 and expects that the adoption of theStatements will reduce 2002 amortization expense, but has not yet determinedthe amount of such reduction.

 

        InAugust 2001, the FASB approved Statement No. 143, “Accounting for AssetRetirement Obligations.” This statement addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs. Statement No. 143 iseffective for fiscal years beginning after June 15, 2002. This statement willaffect asset retirement obligations upon adoption.

 

        InOctober 2001, the FASB approved Statement No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for theimpairment of long-lived assets and for long-lived assets to be disposed of andsupercedes SFAS No. 121 and APB Opinion No. 30, “Reporting the Results ofOperations – Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions.”  Statement No. 144 iseffective for fiscal years beginning after December 15, 2001.  The effects on our financial position andresults of operations are unknown.

 

 

NOTE 7. QUARTERLY SECTOR FINANCIAL SUMMARY

 
| ***(In Thousands)***                           |   |          |         | **Comm.**    |   | **Wireless** |   | **Information** |        | **Enterprise** |   | **Corporate and** |   | **HickoryTech**  |        |
|------------------------------------------------|--------|---------------|--------------|--------------|--------|--------------|--------|-----------------|-------------|----------------|--------|-------------------|--------|------------------|-------------|
|                                           |   | **Telephone** |         | **Services** |   | **Services** |   | **Solutions**   |        | **Solutions**  |   | **Eliminations**  |   | **Consolidated** |        |
| **Three Months Ended  9/30/01**                |   |          |         |         |   |         |   |            |        |           |   |              |   |             |        |
| Operating Revenue from  Unaffiliated Customers |   | $             | 13,560       |         | $      | 2,823        |   | $               | 4,490       |           | $      | 1,207             |   | $                | 5,479       |   | $ | - |   | $ | 27,559 |   |
| Intercompany Revenues                          |   | 1,031         |         | 158          |   | -            |   | 1,206           |        | -              |   | (2,395            | )      | -                |        |
| Total                                          |   | 14,591        |         | 2,981        |   | 4,490        |   | 2,413           |        | 5,479          |   | (2,395            | )      | 27,559           |        |
|                                           |   |          |         |         |   |         |   |            |        |           |   |              |   |             |        |
| Depreciation and Amortization                  |   | 2,187         |         | 523          |   | 1,081        |   | 396             |        | 91             |   | 101               |   | 4,379            |        |
| Operating Income (Loss)                        |   | 7,064         |         | (1,376       | )      | 379          |   | (75             | )           | 250            |   | (45               | )      | 6,197            |        |
| Net Income (Loss)                              |   | 4,125         |         | (864         | )      | 158          |   | (83             | )           | 137            |   | (733              | )      | 2,740            |        |
| Total Assets                                   |   | 107,081       |         | 48,267       |   | 95,175       |   | 5,989           |        | 9,013          |   | 13,321            |   | 278,846          |        |
| Property, Plant and Equip.,Net                 |   | 66,444        |         | 45,545       |   | 16,047       |   | 3,460           |        | 727            |   | 30                |   | 132,253          |        |
| Capital Expenditures                           |   | 2,489         |         | 8,152        |   | 666          |   | 99              |        | 107            |   | -                 |   | 11,513           |        |
|                                           |   |          |         |         |   |         |   |            |        |           |   |              |   |             |        |
| **Three Months Ended  9/30/00**                |   |          |         |         |   |         |   |            |        |           |   |              |   |             |        |
| Operating Revenue from  Unaffiliated Customers |   | $             |  13,224 |         | $      |  2,022  |   | $               |  4,976 |           | $      |  1,021       |   | $                |  4,329 |   | $ |  - |   | $ |  25,572 |   |
| Intercompany Revenues                          |   | 884           |         | 258          |   | -            |   | 1,178           |        | -              |   | (2,320            | )      | -                |        |
| Total                                          |   | 14,108        |         | 2,280        |   | 4,976        |   | 2,199           |        | 4,329          |   | (2,320            | )      | 25,572           |        |
|                                           |   |          |         |         |   |         |   |            |        |           |   |              |   |             |        |
| Depreciation and Amortization                  |   | 2,009         |         | 190          |   | 1,091        |   | 100             |        | 87             |   | 97                |   | 3,574            |        |
| Operating Income (Loss)                        |   | 6,701         |         | (1,247       | )      | 640          |   | 106             |        | (582           | )      | 266               |   | 5,884            |        |
| Net Income (Loss)                              |   | 3,933         |         | (755         | )      | 359          |   | 66              |        | (361           | )      | (1,164            | )      | 2,078            |        |
| Total Assets                                   |   | 104,449       |         | 20,133       |   | 85,524       |   | 4,284           |        | 10,064         |   | 12,847            |   | 237,301          |        |
| Property, Plant and Equip.,Net                 |   | 61,463        |         | 18,779       |   | 14,918       |   | 2,004           |        | 694            |   | 469               |   | 98,327           |        |
| Capital Expenditures                           |   | 3,624         |         | 4,857        |   | 634          |   | 16              |        | 12             |   | 10                |   | 9,153            |        |

 
| *(In Thousands)*                               |   |          |   | **Comm.**    |   | **Wireless** |   | **Information** |   | **Enterprise** |   | **Corporate  and** |   | **HickoryTech**  |   |
|------------------------------------------------|--------|---------------|--------|--------------|--------|--------------|--------|-----------------|--------|----------------|--------|--------------------|--------|------------------|--------|
|                                           |   | **Telephone** |   | **Services** |   | **Services** |   | **Solutions**   |   | **Solutions**  |   | **Eliminations**   |   | **Consolidated** |   |
| **Nine Months Ended 9/30/01**                  |   |          |   |         |   |         |   |            |   |           |   |               |   |             |   |
| Operating Revenue from  Unaffiliated Customers |   | $             | 41,297 |         | $      | 8,164        |   | $               | 13,653 |           | $      | 3,150              |   | $                | 15,480 |   | $ | - |   | $ | 81,744 |   |
| Intercompany Revenues                          |   | 2,913         |   | 585          |   | -            |   | 3,751           |   | -              |   | (7,249             | )      |             |   |
| Total                                          |   | 44,210        |   | 8,749        |   | 13,653       |   | 6,901           |   | 15,480         |   | (7,249             | )      | 81,744           |   |
|                                           |   |          |   |         |   |         |   |            |   |           |   |               |   |             |   |
| Depreciation and Amortization                  |   | 6,475         |   | 1,179        |   | 3,166        |   | 596             |   | 264            |   | 307                |   | 11,987           |   |
| Operating Income (Loss)                        |   | 20,619        |   | (4,235       | )      | 1,219        |   | 785             |   | 842            |   | (898               | )      | 18,332           |   |
| Net Income (Loss)                              |   | 12,064        |   | (2,597       | )      | 613          |   | 397             |   | 466            |   | (4,236             | )      | 6,707            |   |
| Total Assets                                   |   | 107,081       |   | 48,267       |   | 95,175       |   | 5,989           |   | 9,013          |   | 13,321             |   | 278,846          |   |
| Property, Plant and Equip.,Net                 |   | 66,444        |   | 45,545       |   | 16,047       |   | 3,460           |   | 727            |   | 30                 |   | 132,253          |   |
| Capital Expenditures                           |   | 7,151         |   | 16,556       |   | 1,397        |   | 1,168           |   | 197            |   | 177                |   | 26,646           |   |
|                                           |   |          |   |         |   |         |   |            |   |           |   |               |   |             |   |
| **Nine Months Ended 9/30/00**                  |   |          |   |         |   |         |   |            |   |           |   |               |   |             |   |
| Operating Revenue from  Unaffiliated Customers |   | $             | 39,031 |         | $      | 5,433        |   | $               | 14,226 |           | $      | 3,185              |   | $                | 13,739 |   | $ | - |   | $ | 75,614 |   |
| Intercompany Revenues                          |   | 2,293         |   | 731          |   | -            |   | 3,408           |   | -              |   | (6,432             | )      |             |   |
| Total                                          |   | 41,324        |   | 6,164        |   | 14,226       |   | 6,593           |   | 13,739         |   | (6,432             | )      | 75,614           |   |
|                                           |   |          |   |         |   |         |   |            |   |           |   |               |   |             |   |
| Depreciation and Amortization                  |   | 6,011         |   | 495          |   | 3,154        |   | 253             |   | 255            |   | 220                |   | 10,388           |   |
| Operating Income (Loss)                        |   | 19,580        |   | (3,718       | )      | 2,253        |   | 400             |   | (469           | )      | (1,001             | )      | 17,045           |   |
| Net Income (Loss)                              |   | 11,513        |   | (2,250       | )      | 1,260        |   | 247             |   | (327           | )      | (4,260             | )      | 6,183            |   |
| Total Assets                                   |   | 104,449       |   | 20,133       |   | 85,524       |   | 4,284           |   | 10,064         |   | 12,847             |   | 237,301          |   |
| Property, Plant and Equip.,Net                 |   | 61,463        |   | 18,779       |   | 14,918       |   | 2,004           |   | 694            |   | 469                |   | 98,327           |   |
| Capital Expenditures                           |   | 8,843         |   | 6,239        |   | 2,946        |   | 109             |   | 67             |   | 24                 |   | 18,228           |   |

 

ITEM 2   MANAGEMENT'SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

 

FORWARD-LOOKING STATEMENTS

        ThisForm 10-Q contains forward-looking statements that are based on management’scurrent expectations, estimates and projections about the industry in whichHickoryTech operates and management’s beliefs and assumptions. Suchforward-looking statements are subject to important risks and uncertaintiesthat could cause HickoryTech’s future actual results to differ materially fromsuch statements. These statements are not guarantees of future performance andinvolve certain risks, uncertainties and probabilities, which are difficult topredict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in such forward-looking statements, whether as aresult of new information, future events or otherwise.  Factors that might cause such a differenceinclude, but are not limited to, those contained in this “Management’sDiscussion and Analysis” (Item 2) and Exhibit 99 (Cautionary Statement forPurposes of the “Safe Harbor” Provision of the Private Securities LitigationReform Act of 1995) to HickoryTech’s Annual Report on Form 10-K for the yearended December 31, 2000, which is incorporated herein by reference. You arecautioned not to place undue reliance on these forward looking statements,which speak only as of the date on which they were made.  HickoryTech undertakes no obligation toupdate any of its forward-looking statements for any reason.

 

BUSINESSES

        Thebusiness segments of HickoryTech are:

 

*TELEPHONESECTOR*

 

        HickoryTech’sTelephone Sector provides local exchange telephone service and owns andoperates certain fiber optic cable transport facilities outside of its localservice territory. There are four incumbent local exchange carriers (ILECs) inthis sector. Two ILECs provide telephone service in south central Minnesota,specifically Mankato (population 42,000) and eleven communities surroundingMankato. One Iowa ILEC provides telephone service for eleven communities innorthwest Iowa and another Iowa ILEC provides telephone service for the sevencommunities of the Amana Colonies in east central Iowa. The exchange in theAmana Colonies was sold on August 6, 2001. HickoryTech also owns and operatesfiber optic cable facilities in Minnesota, which are used to transportinterexchange communications as a service to telephone exchange companies.HickoryTech’s Minnesota ILECs and its Communications Services Sector are theprimary users of the fiber optic cable facilities.

*** ***

*COMMUNICATIONS SERVICES SECTOR*

 

        Thissector provides telephone services as a competitive local exchange carrier(CLEC) to customers in towns in Minnesota and Iowa not currently inHickoryTech’s Telephone Sector’s service area. HickoryTech’s CLEC currentlyoffers local dial tone, long distance and local call Internet access servicesas an alternative choice for local telecommunications service to the incumbentlocal exchange carrier in those towns. This alternative service is currentlyoffered by HickoryTech’s CLEC to customers in eight communities in Minnesotaand six communities in Iowa. Additional opportunities are being pursued incommunities in Minnesota and Iowa. This sector also provides long distanceservice and Internet access to HickoryTech’s southern Minnesota and northernIowa Telephone Sector subscribers.

 

*WIRELESS SERVICES SECTOR*

 

        HickoryTech’s WirelessServices Sector owns and operates cellular telephone businesses in southcentral Minnesota and in the Minneapolis/St. Paul area. In south centralMinnesota, the sector provides cellular service for Minnesota’s Rural ServiceArea (RSA) 10, under the business name of HickoryTech Wireless. This businessholds 100% of an FCC cellular license to operate in seven counties in southcentral Minnesota. The area overlaps and is larger than the telephone lineservice area of HickoryTech’s Minnesota ILEC and CLEC service areas and servesa population of approximately 230,000. This business also holds theMinneapolis/St. Paul Metro A-2 (Metro A-2) cellular license. The Metro A-2 propertysurrounds the metropolitan Twin Cities area and is located in five Minnesotacounties and in one Wisconsin county. Metro A-2 provides service to an area with a population of approximately170,000.  This business also holds thenewly acquired PCS licenses for the Minnesota BTAs of Mankato-Fairmont andRochester-Austin-Albert Lea.  The twoBTAs are located in 16 Minnesota counties and one Iowa county and provideservice to an area with a population of approximately 493,000, some of whichcoincide with the previously mentioned cellular RSA 10 population of 230,000.

*INFORMATIONSOLUTIONS SECTOR*

 

        HickoryTech’sInformation Solutions Sector provides data processing and related services,principally for HickoryTech, other ILECs, CLECs, interexchange network carriers,wireless companies, municipalities and utilities. HickoryTech’s InformationSolutions Sector’s principal activity is the provision of monthly batchprocessing of computerized data. Currently, this sector is working on a newintegrated billing and management system, to be called SuiteSolution.HickoryTech considers the wireless market, as well as the CLEC market,important components in the future of telecommunications. SuiteSolution shouldenable HickoryTech to become a full-service billing provider for all aspects ofthe telecommunications industry on a fully integrated basis.

 

*ENTERPRISE SOLUTIONS SECTOR*

 

        TheEnterprise Solutions Sector’s activities are focused on the sale, installationand service of business telephone systems and data communications equipment tocompanies based in metropolitan Minneapolis/St. Paul, Minnesota.  HickoryTech also applies this businesstelephone system expertise to its ILEC and CLEC operations in Minnesota andIowa.

 

RESULTS OF OPERATIONS:

 

CONSOLIDATED OPERATING RESULTS

        Thefollowing is a summarized discussion of consolidated results of operations.More detailed discussion of operating results by segment follows thisdiscussion.

 

OPERATING REVENUES - Consolidated operating revenues were $1,987,000 or7.8% higher for the three months ended September 30, 2001 than for the threemonths ended September 30, 2000. Consolidated operating revenues were$6,130,000 or 8.1% higher for the nine months ended September 30, 2001 than forthe nine months ended September 30, 2000. The revenue increase was primarilydue to a 16.2% increase in HickoryTech’s total customer base from September 30,2000 to September 30, 2001 and an increase in system sales in HickoryTech’sEnterprise Solutions Sector. The revenue increases from the higher customerbase and system sales were partially offset in the third quarter of 2001 by adecrease in roaming revenues of $937,000 from the levels experienced in thethird quarter of 2000 in HickoryTech’s Wireless Services Sector.

 

OPERATING EXPENSES - Operating expenses for the three months endedSeptember 30, 2001 increased $869,000 or 5.4% compared with the same period in2000. Operating expenses for the nine months ended September 30, 2001 increased$3,244,000 or 6.7% compared with the same period in 2000. The increase inoperating expenses was primarily due to higher customer acquisition costs,primarily advertising and promotions, in the Communications Services andWireless Sectors. A further cause for the increase in operating expenses wasthe higher employee count maintained by HickoryTech to service its expandingcustomer base. During the second quarter of 2001, HickoryTech implemented aseries of management actions aimed at reducing operating expenses.  These management actions were successful inlimiting the operating expense growth in the second and third quarters of 2001.

 

        Includedin operating expenses were cost of sales of HickoryTech’s Enterprise SolutionsSector of $3,865,000 and $2,947,000 for the three months ended September 30,2001 and 2000, respectively, and $10,503,000 and $9,409,000 for the nine monthsended September 30, 2001 and 2000, respectively. The increase in cost of salesfrom this sector for the three and nine months ended September 30, 2001 overcomparable periods in 2000 was primarily due to its increase in volume ofsystem sales.

DEPRECIATION AND AMORTIZATION - Depreciation expense for the three monthsended September 30, 2001 was $510,000 or 18.5% higher than for the same periodin 2000. Depreciation expense for the nine months ended September 30, 2001 was$1,155,000 or 14.3% higher than for the same period in 2000. The capitalexpenditures in the emerging CLEC and fiber optic networks primarily accountfor the increase in depreciation expense. Amortization expense for the threemonths ended September 30, 2001 was $295,000 or 36.3% higher than for the sameperiod in 2000. Amortization expense for the nine months ended September 30,2001 was $444,000 or 19.1% higher than for the same period in 2000. Theamortization of capitalized software development costs related to theInformation Solutions Sector’s billing software was the primary reason for theincrease in amortization expense.  Inaddition, HickoryTech began amortizing its PCS licenses, which were acquired atthe end of the second quarter 2001, during the third quarter of 2001.

 

OPERATING INCOME - Operating incomewas 5.3% higher for the three months ended September 30, 2001 than for thethree months ended September 30, 2000. Operating income was 7.6% higher for thenine months ended September 30, 2001 than for the nine months ended September30, 2000. The increase in operating income primarily reflects the impact of theincrease in operating revenues for this period and the implementation ofmanagement actions aimed at reducing operating expenses. Operating income wasnegatively impacted by the increase in customer acquisition costs, higherdepreciation expense related to building out the infrastructure of the CLECbusiness and higher amortization expense related to capitalized softwaredevelopment costs and recently-acquired PCS licenses.

 

INTEREST EXPENSE - Interest expense increased $121,000 or 4.7%for the three months ended September 30, 2001 compared to the same period in2000. Interest expense increased $1,449,000 or 21.1% for the nine months endedSeptember 30, 2001 compared to the same period in 2000. The increase ininterest expense was due to an increase in long-term debt of $37,535,000 as ofSeptember 30, 2001, compared to September 30, 2000, offset by a decrease in theweighted average interest rate on the revolving credit facility from 9.12% onSeptember 30, 2000 to 6.30% on September 30, 2001. The outstanding balance ofthe revolving credit facility was $170,250,000 on September 30, 2001.  HickoryTech expects interest expense toincrease in future periods given higher levels of borrowing expected to fundcapital expenditures in its emerging businesses.

 

NET INCOME - Consolidated net income for the three months ended September 30, 2001was 31.9% higher than the comparable period in 2000. Consolidated net incomefor the nine months ended September 30, 2001 was 8.5% higher than for thecomparable period in 2000. The three months ended September 30, 2001 includedafter-tax gains on the sale of assets of $598,000, primarily related to thesale of ACTC. The nine months ended September 30, 2001 included after-tax gainson the sale of assets of $681,000, primarily related to the sale of ACTC duringthe third quarter. The nine months ended September 30, 2000 included an after-taxgain on the sale of assets of $160,000. The nine months ended September 30,2000 also included a $233,000 after-tax extraordinary loss on debtextinguishment and a $20,000 after-tax charge for the cumulative effect of achange in accounting principle related to the adoption of Staff AccountingBulletin (SAB) No. 101.  Without theeffects of these one-time items, net income would have increased 3.1% for thethree months and decreased 4.0% for the nine months ended September 30, 2001compared to the same periods in 2000. The primary reason for the decrease innet income for HickoryTech for the nine months ended September 30, 2001 was theincrease in interest expense due to funds borrowed for capital expendituresrequired to expand the CLEC business.

 

 

OPERATING STATISTICS
|                         |   | **9/30/01** |   | **9/30/00**  |   |
|------------------------------|--------|-------------|--------|--------------|--------|
| Local Telephone Access Lines |   | 65,783      |   | 66,727       |   |
| Local CLEC Access Lines      |   | 10,894      |   |   7,051 |   |
| Wireless Customers           |   | 26,328      |   | 23,265       |   |
| Long Distance Customers      |   | 23,070      |   | 16,807       |   |
| Internet Customers           |   | 14,089      |   |   6,757 |   |

 

SECTOR RESULTS OFOPERATIONS

 

        TELEPHONE- Operating revenues for the three months ended September 30, 2001 increased$336,000 or 2.5% compared with the same period in 2000. Operating revenues forthe nine months ended September 30, 2001 increased $2,266,000 or 5.8% comparedwith the same period in 2000. Without the revenues of ACTC, which was sold onAugust 6, 2001, the increase in operating revenues would have been 4.5% for thethree months ended and 6.7% for the nine months ended September 30, 2001. Anincrease in total access revenues for the nine months ended September 30, 2001of $738,000 was the primary reason for the increase in operating revenues.Access revenues were bolstered by a continuing demand for special circuits anda 3.4% increase in minutes of use in the first nine months of 2001 over thefirst nine months of 2000. Access revenue in 2001 was also aided by $200,000 ofretroactive billings during the first quarter for special access circuitrevenue from interexchange carriers, which is a nonrecurring event. Access linegrowth, vertical service penetration and higher large system sales accountedfor the remaining revenue increase in the first nine months of 2001.

 

        Operatingincome increased $363,000 or 5.4% for the three months ended September 30, 2001compared with the same period in 2000. For the nine months ended September 30,2001, operating income was $1,039,000 or 5.3% higher than the same period in2000. The increase in operating income for the three months and nine monthsended September 30, 2001 was due primarily to the increase in operatingrevenues and the specific actions taken by management to reduce costs. Theseincreases in operating income were partially offset by a higher employee baseand other expenses incurred to support the growth and activity of HickoryTech’sCLEC.

 

        TheEBITDA(1) margin for this sector was 57.9% for the quarter endedSeptember 30, 2001 compared to 56.4% for the same quarter in 2000. For the ninemonths ended September 30, 2001, the EBITDA(1) margin was 56.4%compared to 56.5% for the same period in 2000. The EBITDA margin has remainedat a consistent level despite the higher employee base and other expensesincurred to support the growth and activity of HickoryTech’s CLEC primarilybecause of the  management actions takento reduce operating expenses.

 

----

*(1) – EBITDA represents operating income plus depreciationand amortization expense. EBITDA margin represents EBITDA divided by totaloperating revenues before eliminations. EBITDA, which is not a measure offinancial performance or liquidity under generally accepted accountingprinciples, is provided because such information is used by certain investorswhen analyzing the financial position and performance of HickoryTech. Becauseof the variety of methods used by companies and analysts to calculate EBITDA,and the fact that EBITDA calculations may not accurately measure a company’sability to meet debt service requirements, caution should be used in relying onany EBITDA presentation. HickoryTech sees value in disclosing its calculationof EBITDA for the financial community and in displaying the change in EBITDA.HickoryTech believes an increasing EBITDA depicts increased ability to attractfinancing and increased valuation of HickoryTech’s business.*

 

 

        COMMUNICATIONSSERVICES  - For the three monthsended September 30, 2001, operating revenues were $801,000 or 39.6% higher thanthe three months ended September 30, 2000. For the nine months ended September30, 2001, operating revenues were $2,731,000 or 50.3% higher than the ninemonths ended September 30, 2000. This increase was primarily attributable toincreased market share and customer penetration. The Communications ServicesSector had a count of 48,000 in combined access lines, long distance customersand Internet customers at September 30, 2001 (including approximately 5,000Internet customers acquired in October 2000) compared to 31,000 combinedcustomer units at September 30, 2000.

 

        Despitethe increase in revenues, the emerging Communications Services Sector reporteda loss for the quarter, as it has since its inception in 1998, due to fixedcost components of operating expenses, primarily administrative, anddepreciation expense related to capital expenditures made to build the CLECnetwork. For the three months ended September 30, 2001, the operating lossincreased $129,000 or 10.3% over the comparable period in 2000. For the ninemonths ended September 30, 2001, the operating loss increased $517,000 or 13.9%over the comparable period in 2000. This sector continues to be in its start-upphase, and is experiencing growth in its customer base. In order to servicethis growing customer base, this sector has increased its employee count andexperienced higher operating expenses, resulting in an increase in operatingexpenses of $830,000 or 23.5% for the three months ended September 30, 2001 andan increase of $3,102,000 or 31.4% for the nine months ended September 30, 2001over the comparable periods in 2000. This sector has also experienced anincrease in depreciation and amortization expense of $333,000 and $684,000 forthe three months and nine months ended September 30, 2001, respectively, ascompared to the same periods in 2000. The increase in depreciation expense wascaused by the capital expenditures related to overbuilding towns to providelocal telecommunications services.

 

        TheEBITDA(1) margin for this sector was (28.6%) for the quarter endedSeptember 30, 2001 compared to (46.3%) for the same quarter in 2000. For thenine months ended September 30, 2001, the EBITDA(1) margin was(34.9%) compared to (52.2%) for the same period in 2000. The improved marginwas primarily due to the increase in operating revenues over the fixed costcomponents of operating expenses.

 

----

*(1) – EBITDA represents operating income plus depreciationand amortization expense. EBITDA margin represents EBITDA divided by totaloperating revenues before eliminations. EBITDA, which is not a measure offinancial performance or liquidity under generally accepted accounting principles,is provided because such information is used by certain investors whenanalyzing the financial position and performance of HickoryTech. Because of thevariety of methods used by companies and analysts to calculate EBITDA, and thefact that EBITDA calculations may not accurately measure a company’s ability tomeet debt service 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.*

        WIRELESSSERVICES  - Operating revenues forthe three months ended September 30, 2001 decreased $486,000 or 9.8% comparedwith the same period in 2000. For the nine months ended September 30, 2001,operating revenues decreased $573,000 or 4.0% compared with the same period in2000.  Local service revenues increased16.6% for the three months and 19.6% for the nine months ended September 30,2001 compared to the same periods in 2000 as a result of retail customers atSeptember 30, 2001 growing 13.2% over the September 30, 2000 customer base. Theincreased revenue from the increase in the number of retail customers was morethan offset by a $973,000 decrease in roaming revenue for the three monthsended September 30, 2001 compared to the three months ended September 30, 2000.Roaming rates and minutes from other wireless carriers’ customers travellinginto HickoryTech’s service territory have continued to erode, particularly dueto technological changes among other wireless providers which diminish theroaming minutes on HickoryTech’s wireless service towers. In addition, AT&TWireless changed its Intelligent Roaming Database to favor its roaming partnersin HickoryTech’s service territory and has continued to build-out its PCSlicense in RSA10.  Both of these actionsby AT&T will continue to cause a decline in roaming minutes forHickoryTech, which will only be partially offset by increases in localrecurring service revenues from HickoryTech’s retail customers.

 

        Forthe three months ended September 30, 2001, operating income was $261,000 or40.8% lower than the comparable period in 2000. For the nine months endedSeptember 30, 2001, operating income was $1,034,000 or 45.9% lower than thecomparable period in 2000. The decrease in operating income was primarily dueto the decrease in wireless revenue, as discussed above.  This trend is expected to continue.

 

        TheEBITDA(1) margin for this sector was 32.3% for the quarter endedSeptember 30, 2001 compared to 34.3% for the same quarter in 2000. For the ninemonths ended September 30, 2001, the EBITDA(1) margin was 32.1%compared to 38.0% for the same period in 2000. The decrease in margin wasprimarily due to the decrease in roaming revenues.

 

----

*(1) – EBITDA represents operating income plus depreciationand amortization expense. EBITDA margin represents EBITDA divided by totaloperating revenues before eliminations. EBITDA, which is not a measure offinancial performance or liquidity under generally accepted accountingprinciples, is provided because such information is used by certain investorswhen analyzing the financial position and performance of HickoryTech. Becauseof the variety of methods used by companies and analysts to calculate EBITDA,and the fact that EBITDA calculations may not accurately measure a company’sability to meet debt service requirements, caution should be used in relying onany EBITDA presentation. HickoryTech sees value in disclosing its calculationof EBITDA for the financial community and in displaying the change in EBITDA.HickoryTech believes an increasing EBITDA depicts increased ability to attractfinancing and increased valuation of HickoryTech’s business.*

 

 

        INFORMATION SOLUTIONS -Operating revenues from unaffiliated customers for the three months endedSeptember 30, 2001 increased $186,000 or 18.2% compared with the same period in2000. For the nine months ended September 30, 2001, operating revenuesdecreased $35,000 or 1.1% compared with the same period in 2000. For the threemonths ended September 30, 2001, the Information Solutions Sector recognized$165,000 of revenue related to one-time processing of certain billinginformation for a new customer. As the Information Solutions Sectordevelops its new convergent billing system, SuiteSolution,the first users of the billing system will be internal customers. A predecessorto SuiteSolution called WRITE2K wasimplemented in the Wireless Services Sector in November 1999. There have beenno significant revenues recognized from SuiteSolution in HickoryTech’sconsolidated financial statements from unaffiliated customers.

 

        Operating income decreased$181,000 or 170.8% for the three months ended September 30, 2001 as compared tothe same period in 2000. For the nine months ended September 30, 2001,operating income increased $385,000 or 96.3% compared with the same period in2000. The decrease in operating income for the three months ended September 30,2001 was due to internal development costs no longer being capitalized forSuiteSolution during the quarter as the development has reached the point wherecapitalization ceases (technological feasibility). In addition, amortization ofSuiteSolution capitalized development costs began in the third quarter of2001.  Theincrease in operating income for the nine months ended September 30, 2001 wasattributable to operating expense controls as well as capitalization of certainpersonnel costs related to software development activities, partially offset byincreased amortization expense.

 

        TheEBITDA(1) margin for this sector was 13.3% for the quarter endedSeptember 30, 2001 compared to 9.4% for the same quarter in 2000. For the ninemonths ended September 30, 2001, the EBITDA(1) margin was 19.8%compared to 10.2% for the same period in 2000. The improved margin for the ninemonths ended September 30, 2001 was primarily due to operating expense controlsand the capitalization of software development costs.

 

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*(1) – EBITDA represents operating income plus depreciationand amortization expense. EBITDA margin represents EBITDA divided by totaloperating revenues before eliminations. EBITDA, which is not a measure offinancial performance or liquidity under generally accepted accountingprinciples, is provided because such information is used by certain investorswhen analyzing the financial position and performance of HickoryTech. Becauseof the variety of methods used by companies and analysts to calculate EBITDA,and the fact that EBITDA calculations may not accurately measure a company’sability to meet debt service requirements, caution should be used in relying onany EBITDA presentation. HickoryTech sees value in disclosing its calculationof EBITDA for the financial community and in displaying the change in EBITDA.HickoryTech believes an increasing EBITDA depicts increased ability to attractfinancing and increased valuation of HickoryTech’s business.*

 

 

        ENTERPRISESOLUTIONS – Operating revenues for the three months ended September 30,2001 increased $1,150,000 or 26.6% compared with the same period in 2000. Forthe nine months ended September 30, 2001, operating revenues increased$1,741,000 or 12.7% compared with the same period in 2000. The primary reasonfor the increase in operating revenues for the first nine months of 2001compared to the same period of 2000 was a 43.5% revenue increase in sales andinstallations of PBX and data equipment.

        Operatingincome increased $832,000 for the three months ended September 30, 2001 from aloss of $582,000 for the same period in 2000. For the nine months endedSeptember 30, 2001, operating income increased $1,311,000 from a loss of$469,000 for the same period in 2000. The increase in operating income wasattributable to the increase in operating revenues, along with an increase inthe proportion of higher margin installation contracts.

 

        Thegross margin for Enterprise Solutions was 29.5% for the quarter ended September30, 2001 compared to 31.9% for the quarter ended September 30, 2000. For thenine months ended September 30, 2001, the gross margin was 32.2% compared to31.5% for the same period in 2000.

 

        TheEBITDA(1) margin for this sector was 6.2% for the quarter endedSeptember 30, 2001 compared to (11.4%) for the same quarter in 2000. For thenine months ended September 30, 2001, the EBITDA(1) margin was 7.2%compared to (1.5%) for the same period in 2000. The improved margin wasprimarily due to the increased operating revenues and gross margin.

 

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*(1) – EBITDA represents operating income plus depreciationand amortization expense. EBITDA margin represents EBITDA divided by totaloperating revenues before eliminations. EBITDA, which is not a measure offinancial performance or liquidity under generally accepted accountingprinciples, is provided because such information is used by certain investorswhen analyzing the financial position and performance of HickoryTech. Becauseof the variety of methods used by companies and analysts to calculate EBITDA,and the fact that EBITDA calculations may not accurately measure a company’sability to meet debt service requirements, caution should be used in relying onany EBITDA presentation. HickoryTech sees value in disclosing its calculation ofEBITDA for the financial community and in displaying the change in EBITDA.HickoryTech believes an increasing EBITDA depicts increased ability to attractfinancing and increased valuation of HickoryTech’s business.*

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

        CAPITALSTRUCTURE – The total long-term capital structure (long-term debt plusshareholders’ equity) for HickoryTech was $249,734,000 at September 30, 2001,reflecting 32.1% equity and 67.9% debt. This compares to a capital structure of$224,790,000 at December 31, 2000, reflecting 34.4% equity and 65.6% debt.Management believes adequate internal and external resources are available tofinance ongoing operating requirements, including capital expenditures,business development, debt service and the payment of dividends for at leastthe next twelve months.

 

        CASHFLOWS – Cash provided by operations was $16,283,000 for the nine-monthperiod ended September 30, 2001 compared to $11,976,000 for the nine-monthperiod ended September 30, 2000.  Cashflows from operations for the nine months ended September 30, 2001 and 2000were primarily attributable to net income plus non-cash expenses fordepreciation and amortization. Cash flows from operations in 2000 werepartially offset by decreases in accounts payable related to timing ofpayments.

 

        Cashflows used in investing activities were $34,488,000 for the nine months endedSeptember 30, 2001 compared to $27,977,000 for the same period in 2000. Capitalexpenditures relating to ongoing businesses were $26,646,000 during the firstnine months of 2001 as compared to $18,228,000 for the same period in 2000.Capital expenditures were incurred primarily to construct additional networkfacilities to provide CLEC services. Also included in cash flows used ininvesting activities for the nine months ended September 30, 2001 wereadditions to capitalized software development costs for the InformationSolutions Sector’s SuiteSolution billing product of $2,695,000, compared to$523,000 for the same period in 2000. Cash flows used in investing activitiesfor the first nine months of 2001 also included $11,399,000 for the acquisitionof the two PCS licenses in Minnesota.

 

        Cashflows provided by financing activities was $17,920,000 for the nine-monthperiod ended September 30, 2001 compared to $16,345,000 for the nine-monthperiod ended September 30, 2000. Included in cash flows from financing activities are debt borrowings,debt repayments, and dividend payments. During the first nine months of 2001,HickoryTech borrowed $29,500,000 under its revolving credit facility to covercash requirements, primarily for capital expenditures and the PCS licensesacquisition. During the first nine months of 2000, HickoryTech borrowed$63,100,000 under the revolving credit facility, primarily to repay$40,000,000  of senior unsecured notesand for capital expenditures. During the nine months ended September 30, 2001,HickoryTech repaid $7,250,000 on its revolving credit facility, primarily fromthe proceeds on the sale of ACTC. Dividend payments for the first nine monthsof 2001 were $4,584,000 compared to $4,381,000 for the same period in 2000.

 

        WORKINGCAPITAL – Working capital was $9,907,000 as of September 30, 2001, comparedto working capital of $8,882,000 as of December 31, 2000. The increase isprimarily due to the decrease in accounts payable and advanced billings anddeposits, offset partially by the increase in income taxes payable.  The ratio of current assets to currentliabilities was 1.6:1.0 as of September 30, 2001 and 1.5:1.0 as of December 31,2000.

        LONG-TERM DEBT -HickoryTech’s long-term debt as of September 30, 2001 was $169,517,000,excluding current maturities of $1,220,000. In September 2000, HickoryTechobtained a $225,000,000 credit facility with a syndicate of banks.  The credit facility is comprised of a$125,000,000 revolving credit facility and a $100,000,000 term loanfacility.  The available line of crediton the $125,000,000 revolving credit facility decreases in increments beginningin March 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 average interest rateassociated with this credit facility varies with LIBOR and certain other ratesand was 6.30% at September 30, 2001. The $100,000,000 term loan component has a provision whereby HickoryTechperiodically receives patronage capital refunds depending on the amount ofinterest paid. As of September 30, 2001, HickoryTech had drawn $170,250,000 onthis credit facility and had $54,000,000 of available credit.

 

        OTHER - HickoryTech has not conducted a publicequity offering. It operates with original equity capital, retained earningsand recent additions to indebtedness in the form of bank term and revolvinglines of credit. HickoryTech believes its current level of debt to totalcapital is acceptable for ongoing operations.

 

        Cash provided by operations and access to new debt continue to beHickoryTech’s primary sources of funds. HickoryTech’s financial strengthcontinues to be supported by its current ratio (1.6 to 1), cash flows generatedby operations, and borrowings under the credit facility described above.

 

        HickoryTechprimarily uses variable interest rate financial instruments as of September 30,2001. HickoryTech continually monitors the interest rates on its bank loans. Ahigher level of interest expense is likely to occur because of expanded use ofthe credit facility for additional capital expenditures in the CommunicationsServices Sector.

 

 

RECENT ACCOUNTING DEVELOPMENTS

 

        InJuly 2001, the Financial Accounting Standards Board (FASB) issued Statement No.141, “Business Combinations,” and Statement No. 142, “Goodwill and OtherIntangible Assets,” (collectively, “the Statements”). The Statements eliminatethe pooling-of-interests method of accounting for business combinations and thesystematic amortization of goodwill and indefinite life intangibles.  HickoryTech intends to adopt the Statementsduring the first quarter of 2002 and expects that the adoption of theStatements will reduce 2002 amortization expense, but has not yet determinedthe amount of such reduction.

 

        InAugust 2001, the FASB approved Statement No. 143, “Accounting for AssetRetirement Obligations.” This statement addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs. Statement No. 143 is effectivefor fiscal years beginning after June 15, 2002. This statement will affectasset retirement obligations upon adoption.

 

        InOctober 2001, the FASB approved Statement No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for theimpairment of long-lived assets and for long-lived assets to be disposed of andsupercedes SFAS No. 121 and APB Opinion No. 30, “Reporting the Results ofOperations – Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions.”  Statement No. 144 iseffective for fiscal years beginning after December 15, 2001.  The effects on our financial position andresults of operations are unknown

 

ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

        HickoryTech does not haveoperations subject to risks of foreign currency fluctuations, nor doesHickoryTech use derivative financial instruments in its operations or investmentportfolio. HickoryTech’s earnings are affected by changes in interest rates asa portion of its long-term debt has variable interest rates based on LIBOR. Ifinterest rates for the portion of HickoryTech’s long-term debt based onvariable rates had averaged 10% more for the entire quarter and nine monthsended September 30, 2001, HickoryTech’s interest expense would have increased$290,000 for the three months ended September 30, 2001 and $905,000 for thenine months ended September 30, 2001. In case of a change of such magnitude,management would likely act to mitigate its exposure to the change byconverting a portion of its variable-rate debt to fixed-rate debt.

 

 

PART II. OTHER INFORMATION

 

Item 1.    LegalProceedings.

                None

 

Item 2.    Changesin Securities.

                None

 

Item 3.    DefaultUpon Senior Securities.

                None.

 

Item 4.    Submissionof Matters to a Vote of Security Holders.

                None.

 

Item 5.    OtherInformation.

                None.

 

Item 6.    Exhibitsand Reports of Form 8-K.

 

HickoryTech filed a Form8-K on August 21, 2001 announcing that it had closed on the sale of AmanaColonies Telephone Company to South Slope Cooperative Telephone Company, Inc.

 

 

SIGNATURES

 

        Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Dated: | November 13, 2001 |   | HICKORY TECH CORPORATION                       |
|--------|-------------------|--------|------------------------------------------------|
|   |              |   |                                           |
|   |              |   |                                           |
|   |              |   |                                           |
|   |              | By:    | /s/ Robert D. Alton, Jr.                       |
|   |              |   | Robert D. Alton, Jr., Chief  Executive Officer |
|   |              |   |                                           |
|   |              |   |                                           |
|   |              |   |                                           |
|   |              |   |                                           |
|   |              |   |                                           |
|   |              | By:    | /s/ David A. Christensen                       |
|   |              |   | David A. Christensen, Chief  Financial Officer |
|        |                   |        |                                                |  |  |