**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 March 31, 2002**

** **

**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 incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

| **221 East Hickory Street**                                                         |
|-------------------------------------------------------------------------------------|
| **Mankato,  Minnesota 56002-3248**                                                  |
| (Address of principal  executive offices and zip code)                              |
|                                                                                |
| **(800)  326-5789**                                                                 |
| (Registrant’s telephone  number, including area code)                          |
|                                                                                |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of 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  March 31,2002:  13,982,165.

 

 

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**HICKORY TECH CORPORATION**

March 31, 2002

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS.

 

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 
| ***(In Thousands Except Per  Share Amounts)***               |   | **For Three Months Ended** |   |
|--------------------------------------------------------------|--------|----------------------------|--------|
|                                                         |   | **3/31/2002**              |   | **3/31/2001** |   |
| OPERATING REVENUES:                                          |   |                       |   |   |   |
| Telecom                                                      |   | 20,717                     |   | 21,088 |   |
| Information Solutions                                        |   | 1,034                      |   | 978 |   |
| Enterprise Solutions                                         |   | 3,361                      |   | 5,165 |   |
| TOTAL OPERATING REVENUES                                     |   | 25,112                     |   | 27,231 |   |
|                                                         |   |                       |   |   |   |
| COSTS AND EXPENSES:                                          |   |                       |   |   |   |
| Operating Expenses, excluding  Depreciation and Amortization |   | 15,470                     |   | 17,326 |   |
| Depreciation                                                 |   | 3,813                      |   | 2,946 |   |
| Amortization of Intangibles                                  |   | 361                        |   | 789 |   |
| TOTAL COSTS AND EXPENSES                                     |   | 19,644                     |   | 21,061 |   |
|                                                         |   |                       |   |   |   |
| OPERATING INCOME                                             |   | 5,468                      |   | 6,170 |   |
| OTHER INCOME (EXPENSE):                                      |   |                       |   |   |   |
| Equity in Net Loss of Investees                              |   | (19                        | )      | (7 | ) |
| Interest and Other Income                                    |   | 43                         |   | 37 |   |
| Interest Expense                                             |   | (1,956                     | )      | (2,872 | ) |
| TOTAL OTHER INCOME (EXPENSE)                                 |   | (1,932                     | )      | (2,842 | ) |
|                                                         |   |                       |   |   |   |
| INCOME BEFORE INCOME TAXES                                   |   | 3,536                      |   | 3,328 |   |
| INCOME TAXES                                                 |   | 1,446                      |   | 1,365 |   |
| NET INCOME                                                   |   | $                          | 2,090  |   | $ | 1,963 |   |
|                                                         |   |                       |   |   |   |
| Basic Earnings Per Share                                     |   | $                          | 0.15   |   | $ | 0.14 |   |
| Dividends Per Share                                          |   | $                          | 0.11   |   | $ | 0.11 |   |
| Weighted Average Common Shares  Outstanding                  |   | 13,961                     |   | 13,885 |   |
|                                                         |   |                       |   |   |   |
| Diluted Earnings Per Share                                   |   | $                          | 0.15   |   | $ | 0.14 |   |
| Weighted Average Common and Equivalent  Shares Outstanding   |   | 14,063                     |   | 13,996 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

 

2

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**HICKORY TECH CORPORATION**

March 31, 2002

 

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 
| ***(In Thousands Except  Share and Per Share Amounts)***                                                                          |   | **3/31/2002** |        | **12/31/01** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-------------|--------------|--------|
| ASSETS                                                                                                                                 |
| CURRENT ASSETS:                                                                                                                        |   |          |        |         |   |
| Cash and Cash Equivalents                                                                                                              |   | **$**         | **1,018**   |         | $      | 2,008 |   |
| Receivables, Net of Allowance for  Doubtful Accounts of $1,460 and $1,231                                                              |   | **12,368**    |        | 14,616       |   |
| Income Taxes Receivable                                                                                                                |   | **344**       |        | 1,675        |   |
| Costs in Excess of Billings on  Contracts                                                                                              |   | **1,117**     |        | 1,520        |   |
| Inventories                                                                                                                            |   | **5,133**     |        | 4,989        |   |
| Deferred Income Taxes                                                                                                                  |   | **646**       |        | 646          |   |
| Other                                                                                                                                  |   | **1,972**     |        | 2,329        |   |
| TOTAL CURRENT ASSETS                                                                                                                   |   | **22,598**    |        | 27,783       |   |
|                                                                                                                                   |   |          |        |         |   |
| INVESTMENTS                                                                                                                            |   | **10,692**    |        | 10,701       |   |
|                                                                                                                                   |   |          |        |         |   |
| PROPERTY, PLANT AND EQUIPMENT                                                                                                          |   | **235,133**   |        | 231,675      |   |
| Less ACCUMULATED DEPRECIATION                                                                                                          |   | **99,649**    |        | 96,031       |   |
| PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                     |   | **135,484**   |        | 135,644      |   |
|                                                                                                                                   |   |          |        |         |   |
| OTHER ASSETS:                                                                                                                          |   |          |        |         |   |
| Goodwill                                                                                                                               |   | **25,086**    |        | 25,086       |   |
| Intangible Assets, Net                                                                                                                 |   | **76,887**    |        | 76,991       |   |
| Deferred Costs and Other                                                                                                               |   | **6,794**     |        | 7,087        |   |
| TOTAL OTHER ASSETS                                                                                                                     |   | **108,767**   |        | 109,164      |   |
|                                                                                                                                   |   |          |        |         |   |
| TOTAL ASSETS                                                                                                                           |   | **$**         | **277,541** |         | $      | 283,292 |   |
|                                                                                                                                   |   |          |        |         |   |
| LIABILITIES & SHAREHOLDERS' EQUITY                                                                                                 |
| CURRENT LIABILITIES:                                                                                                                   |   |          |        |         |   |
| Accounts Payable                                                                                                                       |   | **$**         | **3,776**   |         | $      | 5,301 |   |
| Accrued Expenses                                                                                                                       |   | **2,592**     |        | 3,372        |   |
| Accrued Interest                                                                                                                       |   | **287**       |        | 382          |   |
| Billings in Excess of Costs on  Contracts                                                                                              |   | **139**       |        | 169          |   |
| Advanced Billings and Deposits                                                                                                         |   | **3,592**     |        | 3,580        |   |
| Current Maturities of Long-Term  Obligations                                                                                           |   | **1,362**     |        | 1,242        |   |
| TOTAL CURRENT LIABILITIES                                                                                                              |   | **11,748**    |        | 14,046       |   |
|                                                                                                                                   |   |          |        |         |   |
| LONG-TERM OBLIGATIONS, Net of Current  Maturities                                                                                      |   | **165,521**   |        | 169,659      |   |
|                                                                                                                                   |   |          |        |         |   |
| DEFERRED INCOME TAXES                                                                                                                  |   | **13,876**    |        | 13,876       |   |
|                                                                                                                                   |   |          |        |         |   |
| DEFERRED REVENUE AND BENEFITS                                                                                                          |   | **4,922**     |        | 4,946        |   |
|                                                                                                                                   |   |          |        |         |   |
| TOTAL LIABILITIES                                                                                                                      |   | **196,067**   |        | 202,527      |   |
|                                                                                                                                   |   |          |        |         |   |
| COMMITMENTS AND CONTINGENCIES (Note 8)                                                                                                 |   | **—**    |        | **—**   |   |
|                                                                                                                                   |   |          |        |         |   |
| SHAREHOLDERS' EQUITY:                                                                                                                  |   |          |        |         |   |
| Common Stock, no par value, $.10 stated  value  Shares authorized: 100,000,000  Shares outstanding: 2002, 13,982,165; 2001, 13,935,308 |   | **1,398**     |        | 1,394        |   |
| Additional Paid-In Capital                                                                                                             |   | **6,406**     |        | 6,254        |   |
| Retained Earnings                                                                                                                      |   | **73,670**    |        | 73,117       |   |
| TOTAL SHAREHOLDERS' EQUITY                                                                                                             |   | **81,474**    |        | 80,765       |   |
| TOTAL LIABILITIES & SHAREHOLDERS'  EQUITY                                                                                          |   | **$**         | **277,541** |         | $      | 283,292 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

 

3

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**HICKORY TECH CORPORATION**

March31, 2002

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(UNAUDITED)

 
|                                                    |   | **For Three Months Ended** |      |
|---------------------------------------------------------|--------|----------------------------|-----------|
| ***In Thousands***                                      |   | **3/31/2002**              |      | **3/31/2001** |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                  |   |                       |      |   |   |
| Net Income                                              |   | **$**                      | **2,090** |   | $ | 1,963 |   |
| Adjustments to Reconcile  Net Income to Net             |   |                       |      |   |   |
| Cash Provided by Operating  Activities:                 |   |                       |      |   |   |
| Depreciation and  Amortization                          |   | **4,174**                  |      | 3,735 |   |
| Stock-Based Compensation                                |   | **172**                    |      | 272 |   |
| Employee Retirement  Benefits and Deferred Compensation |   | **96**                     |      | 71 |   |
| Accrued Patronage Refunds                               |   | **(285**                   | **)**     | (285 | ) |
| Equity in Net Loss of  Investees                        |   | **19**                     |      | 7 |   |
| Provision for Losses on  Accounts Receivable            |   | **452**                    |      | 238 |   |
| Changes in Operating  Assets and Liabilities:           |   |                       |      |   |   |
| Receivables                                             |   | **3,127**                  |      | 601 |   |
| Inventories                                             |   | **(145**                   | **)**     | (67 | ) |
| Billings and Costs on  Contracts                        |   | **374**                    |      | (250 | ) |
| Accounts Payable and  Accrued Expenses                  |   | **(2,625**                 | **)**     | (2,875 | ) |
| Advance Billings and  Deposits                          |   | **12**                     |      | 71 |   |
| Deferred Revenue and  Benefits                          |   | **(120**                   | **)**     | (184 | ) |
| Other                                                   |   | **567**                    |      | 101 |   |
| Net Cash Provided By  Operating Activities              |   | **7,908**                  |      | 3,398 |   |
|                                                    |   |                       |      |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                  |   |                       |      |   |   |
| Additions to Property,  Plant and Equipment             |   | **(3,488**                 | **)**     | (5,400 | ) |
| Additions to Capitalized  Software Development Costs    |   | **—**                 |      | (1,513 | ) |
| Redemption of Investments                               |   | **100**                    |      | — |   |
| Proceeds from Sale of  Assets                           |   | **172**                    |      | 1 |   |
| Net Cash Used In Investing  Activities                  |   | **(3,216**                 | **)**     | (6,912 | ) |
|                                                    |   |                       |      |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                  |   |                       |      |   |   |
| Repayments of Debt                                      |   | **—**                 |      | (54 | ) |
| Payments of Capital Lease  Obligations                  |   | **(105**                   | **)**     | — |   |
| Borrowings on Credit  Facility                          |   | **—**                 |      | 5,000 |   |
| Repayments on Credit  Facility                          |   | **(4,250**                 | **)**     | (250 | ) |
| Proceeds from Issuance of  Common Stock                 |   | **210**                    |      | 69 |   |
| Dividends Paid                                          |   | **(1,537**                 | **)**     | (1,527 | ) |
| Net Cash (Used In)  Provided By Financing Activities    |   | **(5,682**                 | **)**     | 3,238 |   |
|                                                    |   |                       |      |   |   |
| NET DECREASE IN CASH AND  CASH EQUIVALENTS              |   | **(990**                   | **)**     | (276 | ) |
|                                                    |   |                       |      |   |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD       |   | **2,008**                  |      | 1,190 |   |
|                                                    |   |                       |      |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD             |   | **$**                      | **1,018** |   | $ | 914 |   |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

 

4

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HICKORY TECH CORPORATION

MARCH 31, 2002

PART 1. FINANCIALINFORMATION

 

ITEM 1.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

NOTE 1.  BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information necessary for a fair presentation ofresults of operations, financial position, and cash flows in conformity withaccounting principles generally accepted in the United States of America. Inthe opinion of management, the condensed consolidated financial statementsreflect all adjustments (consisting only of normal recurring adjustments)considered necessary for a fair presentation of Hickory Tech Corporation’s(HickoryTech) results for the periods presented.  Operating results for interim periods are not necessarilyindicative of results that may be expected for the fiscal year as a whole. Thepreparation of 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, expenses, and related disclosures at the date of thefinancial statements and during the reporting period. Actual results coulddiffer from these estimates. These unaudited interim condensed consolidatedfinancial statements should be read in conjunction with HickoryTech’s AnnualReport on Form 10-K for the year ended December 31, 2001.

 

The consolidated financialstatements of HickoryTech include Hickory Tech Corporation and its subsidiariesin the following three business segments: (i) Telecom Sector, (ii) InformationSolutions Sector and (iii) Enterprise Solutions Sector. An investment in anunconsolidated partnership for the Information Solutions Sector is accountedfor using the equity method. All intercompany transactions have been eliminatedfrom the consolidated financial statements.

 

Beginning in the first quarter2002, HickoryTech reports its previously reported business segments ofTelephone, Communications Services and Wireless Services as a single segmentreferred to as the Telecom Sector. This new basis of segment reporting reflectsthe integration of HickoryTech’s management, sales, service and supportfunctions in these three areas, as well as reflecting the level at whichmanagement now reviews and makes resource allocation and other managementdecisions regarding the operations of the company. All segment informationreported in 2001 has been reclassified to conform to this new presentation.

 

In addition to the change inbusiness segments, certain reclassifications were made to the financialstatements as of and for the three months ended March 31, 2001 to conform tothe 2002 presentation. These reclassifications had no impact on previouslyreported operating income, net income or shareholders’ equity.

 

Operating expenses include all costs related to delivery ofHickoryTech’s communications services and products. These costs include allselling, general and administrative costs and all costs of performing servicesand providing related products, except for costs associated with the depreciationand amortization of property, plant and equipment and intangible assets.

 

NOTE 2. EARNINGS AND CASH DIVIDENDS PER COMMON SHARE

 

Basic earnings pershare is computed by dividing net income by the weighted average number ofshares of common stock outstanding during the quarter. Shares used in theearnings per share assuming dilution calculation are based on the weightedaverage number of shares of common stock outstanding during the quarterincreased by potentially dilutive common shares. Potentially dilutive commonshares include stock options and stock subscribed under the employee stockpurchase plan (ESPP).

 

 

5

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|                                          |   | **For Three  months Ended** |   |
|-----------------------------------------------|--------|-----------------------------|--------|
|                                          |   | **3/31/02**                 |   | **3/31/01** |   |
|                                          |   |                        |   |   |   |
| Weighted Average  Shares Outstanding          |   | 13,960,708                  |   | 13,885,453 |   |
| Stock Options  (dilutive only)                |   | 92,553                      |   | 101,765 |   |
| Weighted Average  Stock Subscribed (ESPP)     |   | 9,542                       |   | 9,261 |   |
| Weighted Average  Dilutive Shares Outstanding |   | 14,062,803                  |   | 13,996,479 |   |

 

Options to purchase 76,650 shares and 38,750 shares for the threemonths ended March 31, 2002 and 2001, respectively, were not included in thecomputation of earnings per share assuming dilution because their effect onearnings per share would have been antidilutive.

 

Cash dividends are based on the number of common shares outstanding atthe respective record dates. Listed below are the number of shares outstandingas of the record date for the first quarter of 2002 and 2001.

 

| **Shares Outstanding on Record Date** |   | **2002**   |   | **2001**   |   |
|---------------------------------------|--------|------------|--------|------------|--------|
| First Quarter (Feb. 15)               |   | 13,971,484 |   | 13,886,669 |   |

 

Dividends per share is based on the quarterly dividend per share asdeclared by the HickoryTech Board of Directors.

 

During the first three months of 2002 and 2001, shareholders haveelected to reinvest $60,000 and $62,000, respectively, of dividends intoHickoryTech common stock pursuant to the HickoryTech Dividend ReinvestmentPlan.

 

NOTE 3. COMPREHENSIVE INCOME

 

For the three months ended March 31, 2002 and 2001, comprehensiveincome was comprised solely of net income.

 

NOTE 4. INVENTORIES

 

Inventories, which consist of equipment for resale, materials andsupplies, are stated at the lower of average cost or market.

 

NOTE 5. INTANGIBLE ASSETS

 

HickoryTech adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” effectiveJanuary 1, 2002. SFAS No. 142 required that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead tested forimpairment at least annually. Accordingly, at January 1, 2002, HickoryTechceased amortizing its goodwill (net carrying value as of March 31, 2002 of$25,086,000) and FCC licenses (net carrying value as of March 31, 2002 of$75,635,000). HickoryTech also tested these intangible assets for impairment atJanuary 1, 2002 pursuant to the method prescribed by SFAS No. 142 anddetermined that these assets’ carrying values are not impaired.

 

The following table adjusts previously reported net income to excludeamortization expense recognized from goodwill and FCC licenses as if SFAS No.142 had taken effect in 2001:

 

 

6

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| ***(Dollars in Thousands, except Per Share Amounts and shown  Net of Income Tax)*** |   | **For Three Months Ended** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                |   | **3/31/02**                |   | **3/31/01** |   |
|                                                                                |   |                       |   |   |   |
| Reported Net Income                                                                 |   | $                          | 2,090  |   | $ | 1,963 |   |
| Goodwill Amortization                                                               |   |                       |   | 113 |   |
| FCC License Amortization                                                            |   |                       |   | 259 |   |
| Adjusted Net Income                                                                 |   | $                          | 2,090  |   | $ | 2,335 |   |
|                                                                                |   |                       |   |   |   |
| Basic and Diluted Earnings Per Share:                                               |   |                       |   |   |   |
| Reported Net Income                                                                 |   | $                          | 0.15   |   | $ | 0.14 |   |
| Goodwill Amortization                                                               |   |                       |   | 0.01 |   |
| FCC License Amortization                                                            |   |                       |   | 0.02 |   |
| Adjusted Net Income                                                                 |   | $                          | 0.15   |   | $ | 0.17 |   |

 

Upon adoption at January 1, 2002, SFAS No. 142 also requiredHickoryTech to reassess the useful lives over which its other intangible assetsare amortized. These useful lives were not changed as a result of thisreassessment and, accordingly, these assets continue to be amortized overperiods ranging from two to eight years.

 

The components of HickoryTech’s intangible assets are shown in thefollowing table:

 

|                          |   | **As of March 31, 2002**   |       |
|-------------------------------|--------|----------------------------|------------|
|                          |   | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** |   |
|                          |   |                       |       |   |   |
| Amortized Intangible Assets   |   |                       |       |   |   |
| Customers                     |   | $                          | 1,701      |   | $ | 850 |   |
| Other Intangibles             |   | 538                        |       | 137 |   |
| Total                         |   | $                          | 2,239      |   | $ | 987 |   |
|                          |   |                       |       |   |   |
| Unamortized Intangible Assets |   |                       |       |   |   |
| FCC Licenses                  |   | $                          | 75,635     |   |   |   |

 

Amortization expense related to the amortized intangible assets for thethree months ended March 31, 2002 amounted to $104,000. Total estimatedamortization expense for 2002 and the five years subsequent to 2002 is asfollows: 2002 - $407,000; 2003 - $248,000; 2004 - $190,000; 2005 - $190,000;2006 - $146,000 and 2007 - $102,000.

 

NOTE 6.  RECENT ACCOUNTING DEVELOPMENTS

 

HickoryTech adopted the provisions of SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets,” as of January 1, 2002. SFAS No.144 requires that long-lived assets that are to be disposed of by sale bemeasured at the lower of book value or fair value less cost to sell and alsosets forth requirements for recognizing and measuring impairment losses oncertain long-lived assets to be held or used. The adoption of SFAS No. 144 hadno impact on HickoryTech’s financial position or its results of operations.

 

In June 2001, the Financial Accounting Standards Board (FASB) issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement 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.

 

 

7

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NOTE7.  QUARTERLY SECTOR FINANCIAL SUMMARY

 
| ***(In Thousands)***                           |   | **Telecom** |   | **Information  Solutions** |   | **Enterprise  Solutions** |   | **Corporate and  Eliminations** |   | **HickoryTech  Consolidated** |   |
|------------------------------------------------|--------|-------------|--------|----------------------------|--------|---------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                           |   |        |   |                       |   |                      |   |                            |   |                          |   |
| **Three Months Ended  3/31/02**                |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Operating Revenue from Unaffiliated  Customers |   | $           | 20,717 |                       | $      | 1,034                     |   | $                               | 3,361  |                          | $      | — |   | $ | 25,112 |   |
| Intersegment Revenues                          |   | 68          |   | 915                        |   | —                    |   | (983                            | )      | —                        |   |
| Total                                          |   | 20,785      |   | 1,949                      |   | 3,361                     |   | (983                            | )      | 25,112                        |   |
|                                           |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Depreciation and Amortization                  |   | 3,538       |   | 510                        |   | 70                        |   | 56                              |   | 4,174                         |   |
| Operating Income/(Loss)                        |   | 6,510       |   | (525                       | )      | (151                      | )      | (366                            | )      | 5,468                         |   |
| Interest Expense                               |   | 5           |   | 14                         |   | 1,937                     |   | 1,956                           |   |                          |   |
| Income Taxes                                   |   | 2,643       |   | (244                       | )      | (69                       | )      | (884                            | )      | 1,446                         |   |
| Net Income/(Loss)                              |   | 3,813       |   | (352                       | )      | (99                       | )      | (1,272                          | )      | 2,090                         |   |
| Identifiable Assets                            |   | 247,466     |   | 8,441                      |   | 7,989                     |   | 13,645                          |   | 277,541                       |   |
| Property, Plant and Equip., Net                |   | 129,859     |   | 4,836                      |   | 643                       |   | 146                             |   | 135,484                       |   |
| Capital Expenditures                           |   | 2,787       |   | 522                        |   | 40                        |   | 139                             |   | 3,488                         |   |
|                                           |   |        |   |                       |   |                      |   |                            |   |                          |   |
| **Three Months Ended  3/31/01**                |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Operating Revenue from Unaffiliated  Customers |   | $           | 21,088 |                       | $      | 978                       |   | $                               | 5,165  |                          | $      | — |   | $ | 27,231 |   |
| Intersegment Revenues                          |   | 69          |   | 1,303                      |   | —                    |   | (1,372                          | )      | —                        |   |
| Total                                          |   | 21,157      |   | 2,281                      |   | 5,165                     |   | (1,372                          | )      | 27,231                        |   |
|                                           |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Depreciation and Amortization                  |   | 3,488       |   | 100                        |   | 85                        |   | 62                              |   | 3,735                         |   |
| Operating Income/(Loss)                        |   | 5,861       |   | 562                        |   | 367                       |   | (620                            | )      | 6,170                         |   |
| Interest Expense                               |   | 7           |   | —                     |   | —                    |   | 2,865                           |   | 2,872                         |   |
| Income Taxes                                   |   | 2,344       |   | 224                        |   | 143                       |   | (1,346                          | )      | 1,365                         |   |
| Net Income/(Loss)                              |   | 3,373       |   | 322                        |   | 205                       |   | (1,937                          | )      | 1,963                         |   |
| Identifiable Assets                            |   | 229,061     |   | 5,215                      |   | 8,656                     |   | 14,414                          |   | 257,346                       |   |
| Property, Plant and Equip., Net                |   | 115,906     |   | 1,936                      |   | 668                       |   | 633                             |   | 119,143                       |   |
| Capital Expenditures                           |   | 5,331       |   | 31                         |   | 5                         |   | 33                              |   | 5,400                         |   |

 

NOTE 8. CONTINGENCIES

 

HickoryTech is involved incertain contractual disputes in the ordinary course of business. HickoryTechdoes not believe the ultimate resolution of any of these existing matters willhave a material adverse effect on its financial position, results of operationsor cash flows.

 

 

8

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

 

**FORWARD-LOOKING STATEMENTS**

This Form 10-Q contains forward-looking statements that are based onmanagement’s current expectations, estimates and projections about the industryin which HickoryTech 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, 2001, 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. Except as otherwiserequired by law, HickoryTech undertakes no obligation to update any of itsforward-looking statements for any reason.

 

**BUSINESSES**

The business segments of HickoryTech are:

 

*TELECOMSECTOR*

 

HickoryTech’s Telecom Sector (formerly the individual Telephone Sector,Communications Services Sector and Wireless Services Sector) provides localexchange wireline and wireless telephone service, long distance, dial-upinternet access and owns and operates fiber optic cable facilities. This sectorincludes three incumbent local exchange carriers (ILECs). Two ILECs providetelephone service in south central Minnesota, specifically Mankato (a smallurban city) and eleven rural communities surrounding Mankato. The third ILECprovides telephone service for eleven rural communities in northwest Iowa. Thissector also includes HickoryTech’s competitive local exchange carrier (CLEC),which provides local telephone service, long distance and dial-up internetaccess on a competitive basis to customers in eight rural communities inMinnesota and six rural communities in Iowa not in HickoryTech’s ILEC serviceareas. The Telecom Sector also owns and operates a wireless telephone businessin south central Minnesota. The wireless telephone business consists of the“A-side” FCC cellular license to operate in Minnesota’s Rural Service Area(RSA) 10, the Minneapolis/St. Paul Metro A-2 cellular license and two digitalpersonal communications services (PCS) licenses covering the Minnesota BasicTrading Areas (BTAs) of Mankato-Fairmont and Rochester-Austin-Albert Lea.HickoryTech also owns and operates fiber optic cable facilities in Minnesota,which are used to transport interexchange communications as a service totelephone industry customers. HickoryTech’s Minnesota ILECs and its CLEC arethe primary users of the fiber optic cable facilities.

* *

*INFORMATIONSOLUTIONS SECTOR*

 

HickoryTech’s Information Solutions Sector provides data processing andrelated services, principally for HickoryTech, other ILECs, CLECs,interexchange network carriers, wireless companies, municipalities andutilities. HickoryTech’s Information Solutions Sector’s principal activity isthe provision of monthly batch processing of computerized data. This 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 andwireless carriers the individual benefits of a billing platform, or to integratedservice providers, such as HickoryTech, a total system. The InformationSolutions Sector also has many popular legacy systems, such as its carrieraccess billing products.

 

 

9

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*ENTERPRISE SOLUTIONS SECTOR*

 

The Enterprise Solutions Sector’s activities are focused on the sale,installation and service of business telephone systems and data communicationsequipment to companies based in metropolitan Minneapolis/St. Paul, Minnesota.  This sector also supports the businesstelephone system service for HickoryTech ILEC and CLEC operations in Minnesotaand Iowa.

 

**RESULTS OF OPERATIONS**

 

CONSOLIDATED OPERATING RESULTS

The following is a summarized discussion of consolidated results ofoperations. More detailed discussion of operating results by segment followsthis discussion.

 

OPERATING REVENUES- Consolidated operating revenues were $2,119,000 or 7.8% lower for the threemonths ended March 31, 2002 than for the three months ended March 31, 2001. Therevenue decrease was primarily attributable to a lower volume of business inthe Enterprise Solutions Sector and a continuing decline in roaming revenue inthe Telecom Sector. These decreases were partially offset by a 5.2% increase inHickoryTech’s total customer base in its Telecom Sector, in addition to theimpact of local rate increases by HickoryTech’s ILECs, also in the TelecomSector.

 

OPERATING EXPENSES (excluding Depreciation and Amortization) - Operating expenses for the three months endedMarch 31, 2002 decreased $1,856,000 or 10.7% compared with the same period in2001. Included in operating expenses were cost of sales of HickoryTech’sEnterprise Solutions Sector of $2,184,000 and $3,401,000 for the three monthsended March 31, 2002 and 2001, respectively. The decrease in operating expenses was primarily due to lower cost ofsales at the Enterprise Solutions Sector as a result of lower sales volumes in2002 compared to 2001. In addition, operating expenses are lower in the TelecomSector due to continued management actions aimed at reducing costs.

 

DEPRECIATION AND AMORTIZATION - Depreciation expense for the three months ended March 31, 2002 was$867,000 or 29.4% higher than for the same period in 2001. The buildout ofHickoryTech’s CLEC and fiber optic networks primarily account for the increasein depreciation expense. Amortization expense for the three months ended March31, 2002 was $428,000 or 54.2% lower than for the same period in 2001. If SFASNo. 142 had taken effect in 2001, amortization expense for the first quarter2002 would have increased $202,000 over the first quarter 2001 due toamortization of capitalized software development costs related to theInformation Solutions Sector’s SuiteSolution billing software.

 

OPERATING INCOME- Operating income was 11.4% lower for the three months ended March 31, 2002than for the three months ended March 31, 2001. The decrease in operatingincome primarily reflects the impact of the decrease in operating revenues forthis period and the increase in depreciation expense related to building outthe infrastructure of the CLEC business in the Telecom Sector. These impactswere partially offset by the effect of management actions aimed at reducingoperating expenses and lower amortization expense due to the adoption of SFASNo. 142.

 

INTEREST EXPENSE- Interest expense decreased $916,000 or 31.9% for the three months ended March31, 2002, compared to the same period in 2001. The decrease in interest expensewas due to a decrease in the weighted average interest rate on HickoryTech’srevolving credit facility from 8.02% on March 31, 2001 to 5.16% on March 31,2002, partially offset by an increase in long-term obligations of $13,393,000as of March 31, 2002, compared to March 31, 2001. The outstanding balance of therevolving credit facility was $165,750,000 on March 31, 2002.

 

NET INCOME- Consolidated net income for the threemonths ended March 31, 2002 was $127,000 or 6.5% higher than the comparableperiod in 2001. If SFAS No. 142 had taken effect in 2001, net income for thefirst quarter 2002 would have decreased $245,000 or 10.5% compared to the firstquarter 2001.  The primary reasons forthis decrease in net income for HickoryTech were the decrease in operatingrevenues and the increase in depreciation expense due to the building out ofthe CLEC infrastructure.

 

 

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SECTOR RESULTS OF OPERATIONS

 

TELECOM – Thefollowing table provides a breakdown of the Telecom Sector operating resultsfor the first quarter 2002 and 2001.

 

**TELECOM**

| ***(Dollars in Thousands)***                                                 |   | **For Three  Months Ended** |       |
|------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                         |   | **3/31/02**                 | ** ** | **3/31/01** | ** ** |
| Revenues Before Intersegment Eliminations                                    |   |                        |       |   |   |
| ILEC                                                                         |   |                        |       |   |   |
| Local Access                                                                 |   | $                           | 3,802      |   | $ | 3,487 |   |
| Network Access                                                               |   | 8,067                       |       | 8,249 |   |
| Intersegment                                                                 |   | 68                          |       | 69 |   |
| Other                                                                        |   | 2,327                       |       | 2,322 |   |
| Total ILEC                                                                   |   | 14,264                      |       | 14,127 |   |
|                                                                         |   |                        |       |   |   |
| CLEC                                                                         |   |                        |       |   |   |
| Local Service                                                                |   | 699                         |       | 493 |   |
| Other                                                                        |   | 660                         |       | 419 |   |
| Total CLEC                                                                   |   | 1,359                       |       | 912 |   |
|                                                                         |   |                        |       |   |   |
| Long Distance                                                                |   | 913                         |       | 944 |   |
|                                                                         |   |                        |       |   |   |
| Internet                                                                     |   | 847                         |       | 769 |   |
|                                                                         |   |                        |       |   |   |
| Wireless                                                                     |   |                        |       |   |   |
| Service                                                                      |   | 2,334                       |       | 2,479 |   |
| Home Roaming                                                                 |   | 194                         |       | 159 |   |
| Roaming                                                                      |   | 874                         |       | 1,767 |   |
| Total Wireless                                                               |   | 3,402                       |       | 4,405 |   |
|                                                                         |   |                        |       |   |   |
| **Total Telecom Revenues Before Intersegment Eliminations**                  |   |                        | ** ** |   | ** ** |
| Unaffiliated Customers                                                       |   | $                           | 20,717     |   | $ | 21,088 |   |
| Intersegment                                                                 |   | 68                          |       | 69 |   |
|                                                                         |   | 20,785                      |       | 21,157 |   |
| Operating Expenses, excluding Depr. and Amort.                               |   | 10,737                      |       | 11,808 |   |
| Depreciation and Amortization                                                |   | 3,538                       |       | 3,488 |   |
| Operating Income                                                             |   | $                           | 6,510      |   | $ | 5,861 |   |
| Net Income                                                                   |   | $                           | 3,813      |   | $ | 3,373 |   |
| Earnings Before Interest, Taxes,  Depreciation and Amortization (EBITDA) (1) |   | $                           | 10,048     |   | $ | 9,349 |   |
|                                                                         |   |                        |       |   |   |   |   |
| Capital Expenditures                                                         |   | $                           | 2,787      |   | $ | 5,331 |   |
|                                                                         |   |                        |       |   |   |
| ILEC Access Lines                                                            |   | 66,212                      |       | 67,305 |   |
|                                                                         |   |                        |       |   |   |
| CLEC Access Lines                                                            |   |                        |       |   |   |
| Overbuild                                                                    |   | 6,241                       |       | 2,293 |   |
| UNE                                                                          |   | 1,188                       |       | 1,786 |   |
| TSR                                                                          |   | 4,304                       |       | 5,348 |   |
| Total                                                                        |   | 11,733                      |       | 9,427 |   |
|                                                                         |   |                        |       |   |   |
| Long Distance Customers                                                      |   | 25,436                      |       | 19,901 |   |
|                                                                         |   |                        |       |   |   |
| Internet Customers                                                           |   | 13,517                      |       | 12,869 |   |
|                                                                         |   |                        |       |   |   |
| Wireless Customers                                                           |   | 26,091                      |       | 26,470 |   |
|                                                                         |   |                        |       |   |   |
| Total Telecom Customers                                                      |   | 142,989                     |       | 135,972 |   |
|                                                                              |        |                             |            |  |  |  |  |  |  |

 

 

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Operating revenues before intersegment eliminations for the threemonths ended March 31, 2002 decreased $372,000 or 1.8% compared with the sameperiod in 2001. Amana Colonies Telephone Company (ACTC), which was sold onAugust 6, 2001, contributed $341,000 of revenues to this sector during thefirst three months of 2001. Local service rates were increased in HickoryTech’sIowa ILEC in May 2001 and in the Minnesota ILECs in December 2001, whichcontributed $281,000 of revenue in the first three months of 2002. Without thelocal service rate increases and excluding the revenues from ACTC, Telecomrevenues would have decreased $312,000 or 1.5% for the first three months of2002 compared to the same period in 2001. The primary reason for the decreasein operating revenues was a decline of $893,000 in roaming revenue. Roamingminutes from other wireless carriers’ customers travelling into HickoryTech’scellular 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 RSA 10. The resultant decline in roaming revenue associated with this volumedecrease was partially offset by an increase of $206,000 in local servicerevenue from HickoryTech’s growing CLEC customer base.

 

Operating expenses excluding depreciation and amortizationdecreased  $1,071,000 or 9.1% for thethree months ended March 31, 2002 compared to the same period in 2001. Onereason for the decrease in operating expenses was the improved efficienciesachieved in the design and operation of HickoryTech’s network as it pertains toits CLEC and internet operations. In addition, management actions aimed atreducing operating costs, which began in the first quarter of 2001, and thecombination of certain business office functions aided in reducing operatingexpenses for this sector. HickoryTech has also performed specific costreduction initiatives such as using its PCS network to reduce roaming expensefor its wireless product, closely auditing the interconnection fees paid toother carriers for its CLEC product and reducing the plant installation andengineering workforce of its Network Design and Operations Division. Theemployment levels in this sector are 10% lower than in 2001, mostly due tore-arrangements and attrition.

 

Depreciation and amortization for the three months ended March 31, 2002increased $50,000 or 1.4% compared with the same period in 2001. Depreciationexpense for the three months ended March 31, 2002 increased $651,000 or 23.1%compared with the same period in 2001. The buildout of HickoryTech’s CLEC andfiber optic networks primarily account for the increase in depreciationexpense. For the three months ended March 31, 2002 compared to the same periodin 2001, depreciation expense increased $233,000 or 11.9% for the networksassociated with its ILEC product and $463,000 or 161.3% for the networks associatedwith its CLEC product. Amortization expense for the three months ended March31, 2002 decreased $601,000 or 90.1% compared with the same period in 2001. IfSFAS No. 142 had taken effect in 2001, amortization expense for the firstquarter 2002 would have increased $19,000 over the first quarter 2001

 

Operating income increased $649,000 or 11.1% for the three months endedMarch 31, 2002 compared with the same period in 2001. Net income increased$440,000 or 13.0% for the three months ended March 31, 2002 compared with thesame period in 2001. If SFAS No. 142 had taken effect in 2001, operating incomeand net income for the first quarter 2002 would have increased $29,000 or 0.5%and $89,000 or 2.4%, respectively, compared with the same period in 2001.

 

EBITDA(1) increased $699,000 or 7.5% for the three months ended March 31, 2002 compared tothe same period in 2001. The EBITDA(1) margin for this sector was 48.3% for thethree months ended March 31, 2002 compared to 44.2% for the same period in2001. The increase in EBITDA and EBITDA margin was primarily because of themanagement actions taken to reduce operating expenses.

 

 

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INFORMATION SOLUTIONS – The following table provides a breakdown of the InformationSolutions Sector operating results for the first quarter 2002 and 2001.

 

**INFORMATIONSOLUTIONS**

| ***(Dollars in Thousands)***                   |   | **For Three  Months Ended** |   |
|------------------------------------------------|--------|-----------------------------|--------|
|                                           |   | **3/31/02**                 |   | **3/31/01** |   |
| Revenues Before Intersegment Eliminations      |   |                        |   |   |   |
| Unaffiliated Customers                         |   | $                           | 1,034  |   | $ | 978 |   |
| Intersegment                                   |   | 915                         |   | 1,303 |   |
|                                           |   | 1,949                       |   | 2,281 |   |
| Operating Expenses, excluding Depr. and Amort. |   | 1,964                       |   | 1,619 |   |
| Depreciation and Amortization                  |   | 510                         |   | 100 |   |
| Operating Income/(Loss)                        |   | $                           | (525   | ) | $ | 562 |   |
| Net Income/(Loss)                              |   | $                           | (352   | ) | $ | 322 |   |
| Earnings Before Interest, Taxes,               |   |                        |   |   |   |
| Depreciation and Amortization (EBITDA) (1)     |   | $                           | (15    | ) | $ | 662 |   |
|                                           |   |                        |   |   |   |   |   |
| Capital Expenditures                           |   | $                           | 522    |   | $ | 31 |   |

 

Operating revenues from unaffiliated customers for the three monthsended March 31, 2002 increased $56,000 or 5.7% compared with the same period in2001. The increase in operating revenues was the result of new customerrelationships for monthly batch processing utilizing this sector’s legacysoftware systems, as well as the implementation of the predecessor to SuiteSolution called WRITE2K by a new customer.

 

Operating expensesexcluding depreciation and amortization increased $345,000 or 21.3% for thethree months ended March 31, 2002 compared with the same period in 2001. Thissector capitalized internal development costs associated with SuiteSolutionduring the first quarter of 2001. The capitalization of these costs endedduring the third quarter of 2001 as the development of SuiteSolution hadreached the point where the product was available for release to customers. Asa result of development costs no longer being capitalized, operating expensesfor this sector were higher in the first quarter of 2002 as developmentpersonnel were deployed on routine operating and implementation duties.

 

Depreciation andamortization for the three months ended March 31, 2002 increased $410,000 or410.0% compared with the same period in 2001. Depreciation expense for thethree months ended March 31, 2002 was $199,000 higher than the three monthsended March 31, 2001. The increase was due to depreciation expense recorded oncapitalized leases for new computer equipment and other capital expendituresrelated to the development and implementation of SuiteSolution. Amortizationexpense for the three months ended March 31, 2002 was $211,000 higher than thethree months ended March 31, 2001. The increase was due to the amortization ofcapitalized SuiteSolution development costs, which began in the third quarterof 2001.

 

Operating incomedecreased $1,087,000 or 193.5% for the three months ended March 31, 2002 ascompared to the same period in 2001. Net income decreased $674,000 or 209.3%for the three months ended March 31, 2002 compared to the same period in 2001. The decrease in operating income and net incomewas attributable to the increase in operating expenses, including depreciationand amortization.

 

EBITDA(1) decreased $677,000 or 102.3% for the quarter ended March 31,2002 compared to the same period in 2001. The EBITDA(1) margin for this sectorwas (0.8%) for the quarter ended March 31, 2002 compared to 29.0% for the samequarter in 2001.  The decrease in EBITDAand the EBITDA margin was primarily due to increased operating expenses, andthe fact that this sector has finished development of its next key softwareplatform, and external revenue for the new product is being delayed whileHickoryTech applies the software for its internal use.

 

 

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ENTERPRISE SOLUTIONS– The following table provides a breakdown of the Enterprise Solutions Sectoroperating results for the first quarter 2002 and 2001.

 

**ENTERPRISESOLUTIONS**

| ***(Dollars in Thousands)***                   |   | **For Three  Months Ended** |   |
|------------------------------------------------|--------|-----------------------------|--------|
|                                           |   | **3/31/02**                 |   | **3/31/01** |   |
| Revenues Before Intersegment Eliminations      |   |                        |   |   |   |
| Installation                                   |   | $                           | 1,395  |   | $ | 2,531 |   |
| Service                                        |   | 1,966                       |   | 2,634 |   |
|                                           |   | 3,361                       |   | 5,165 |   |
| Operating Expenses, excluding Depr. and Amort. |   | 3,442                       |   | 4,713 |   |
| Depreciation and Amortization                  |   | 70                          |   | 85 |   |
| Operating Income/(Loss)                        |   | $                           | (151   | ) | $ | 367 |   |
| Net Income/(Loss)                              |   | $                           | (99    | ) | $ | 205 |   |
| Earnings Before Interest, Taxes,               |   |                        |   |   |   |
| Depreciation and Amortization (EBITDA) (1)     |   | $                           | (81    | ) | $ | 452 |   |
|                                           |   |                        |   |   |   |
| Capital Expenditures                           |   | $                           | 40     |   | $ | 5 |   |

 

Operating revenues for the three months ended March 31, 2002 decreased$1,804,000 or 34.9% compared with the same period in 2001. Sales volumes in thefirst quarter 2002 are down in this sector compared to the first quarter 2001.Installation revenue for the three months ended March 31, 2002 was 44.9% lowercompared to the same period in 2001, primarily a result of a 70.3% decrease insales and installations of PBX and small business systems. Service revenue forthe three months ended March 31, 2002 was 25.4% lower compared to the sameperiod in 2001. This sector has encountered across the board reductions indemand in all of its major products and services. The reduction occurred inearly 2002, and is believed to be associated with the economy’s effect oncustomers of this sector, and due to the crossroads of technology (i.e. voicevs. data protocol) in the communications products which this sector provides.These factors appear to be affecting the industry and not merely this sector inany unique way. It is unknown when the factors will revert and allow customerdemand to return to normal levels.

 

Operating expenses excluding depreciation and amortization decreased$1,271,000 or 27.0% for the three months ended March 31, 2002 compared to thesame period in 2001.  The primary reasonfor the decrease in operating expenses was a $1,217,000 or 35.8% decline incost of sales, which correlates to the decrease in sales volumes. Otheroperating expenses have also been reduced through proactive management steps,such as workforce reduction.

 

Depreciation and amortization for the three months ended March 31, 2002decreased $15,000 or 17.6% compared with the same period in 2001. Depreciationexpense for the three months ended March 31, 2002 increased $8,000 comparedwith the same period in 2001. Due to the implementation of SFAS No. 142, therewas no amortization expense for the first three months of 2002. If SFAS No. 142had taken effect in 2001, then no amortization expense would have been recordedin 2001.

 

Operating income decreased $518,000 to a loss of $151,000 for the threemonths ended March 31, 2002 compared to income of $367,000 for the three monthsended March 31, 2001. Net income decreased $304,000 or 148.3% for the threemonths ended March 31, 2002 compared to the same period in 2001. If SFAS No.142had taken effect in 2001, operating income and net income would have decreased$541,000 and $318,000, respectively, for the three months ended March 31, 2002compared with the same period in 2001. The decrease in operating income and netincome was attributable to the decrease in sales volumes.

** **

EBITDA (1) decreased $533,000 or 117.9% for the three months endedMarch 31, 2002 compared to the same period in 2001. The EBITDA (1) margin forthis sector was (2.4%) for the quarter ended March 31, 2002 compared to 8.8%for the same quarter in 2001.  Thedecline in EBITDA and the EBITDA margin was primarily due to the decrease inoperating revenues, combined with a slower reduction in operating expenses.

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

CAPITAL STRUCTURE– The total long-term capital structure (long-term obligations plusshareholders’ equity) for HickoryTech was $246,995,000 at March 31, 2002,reflecting 33.0% equity and 67.0% debt. This compares to a capital structure of$250,424,000 at December 31, 2001, reflecting 32.3% equity and 67.7% 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.

 

CASH FLOWS – Cashprovided by operations was $7,908,000 for the three-month period ended March31, 2002 compared to $3,398,000 for the three-month period ended March 31,2001.  Cash flows from operations forthe three months ended March 31, 2002 and 2001 were primarily attributable to netincome plus non-cash expenses for depreciation and amortization and a decreasein receivables, partially offset by decreases in accounts payable related totiming of payments.  The increase incash flows from operations in the first quarter of 2002 relative to the sameperiod in 2001 was primarily due to a $3,127,000 reduction in receivablesduring the first quarter of 2002.

 

Cash flows used in investing activities were $3,216,000 for the threemonths ended March 31, 2002 compared to $6,912,000 for the same period in 2001.Capital expenditures relating to ongoing businesses were $3,488,000 during thefirst three months of 2002 as compared to $5,400,000 for the same period in2001. Capital expenditures were incurred primarily to construct additional networkfacilities to provide CLEC services and continued buildout of the PCS networkin the Telecom Sector. Also included in cash flows used in investing activitiesfor the three months ended March 31, 2001 were additions to capitalizedsoftware development costs for the Information Solutions Sector’s SuiteSolutionbilling product of $1,513,000. 

 

Cash flows used in financing activities was $5,682,000 for thethree-month period ended March 31, 2002 compared to cash flows provided byfinancing activities of $3,238,000 for the three-month period ended March 31,2001.  Included in cash flows fromfinancing activities are debt borrowings, debt repayments, and dividendpayments. During the first three months of 2002, HickoryTech made payments onits revolving credit facility of $4,250,000. During the first three months of2001, HickoryTech borrowed $5,000,000 under its revolving credit facility tocover cash requirements, primarily for capital expenditures. Dividend paymentsfor the first three months of 2002 were $1,537,000 compared to $1,527,000 forthe same period in 2001. 

 

WORKING CAPITAL –Working capital was $10,850,000 as of March 31, 2002, compared to workingcapital of $13,737,000 as of December 31, 2001. The decrease is primarily dueto the decreases in cash, accounts receivable and income taxes receivable.  The ratio of current assets to currentliabilities was 1.9:1.0 as of March 31, 2002 and 2.0:1.0 as of December 31,2001.

 

LONG-TERM OBLIGATIONS - HickoryTech’s long-term obligations as of March 31, 2002 was$165,521,000, excluding current maturities of $1,362,000. As of March 31, 2002,HickoryTech had a $223,750,000 credit facility with a syndicate of banks.  The credit facility is comprised of a$125,000,000 revolving credit component and a $98,750,000 term loancomponent.  The available line of crediton the $125,000,000 revolving credit component decreases in incrementsbeginning in March 2004 with a final maturity date in September 2008.  The term loan component requires equalquarterly principal payments of $250,000 during the period March 2001 toDecember 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 5.16% at March 31, 2002.  As ofMarch 31, 2002, HickoryTech had drawn $165,750,000 on this credit facility andhad $58,000,000 of available credit. In April 2002, HickoryTech reduced itsrevolving credit facility by $40,000,000 to $183,750,000. Management believesthe remaining available credit is sufficient to cover future cash requirementsand expects reductions in interest expense for the remainder of 2002 as aresult of the lower credit facility.

 

HickoryTech’s Information Solutions Sector leases certain computer equipmentunder capital lease arrangements. During the first quarter 2002, this sectorrecorded additions to property, plant and equipment of $337,000 related tothese capital lease arrangements. 

 

 

15

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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):

 
| ***(Dollars in Thousands)***       |   | **Payments  Due by Year** |    |
|------------------------------------|--------|---------------------------|---------|
|                               |   | **Total**                 |    | **Remainder  of 2002** |   | **2003 to  2005** |   | **2006 to  2007** |   | **2008 and  after** |   |
| Contractual Obligations            |   |                      |    |   |   |   |   |   |   |   |   |
| Long-term Debt                     |   | $                         | 165,750 |   | $ | 750 |   | $ | 3,000 |   | $ | 40,875 |   | $ | 121,125 |   |
| Capital Lease  Obligations         |   | 1,133                     |    | 264 |   | 869 |   | — |   | — |   |
| Operating Leases                   |   | 3,529                     |    | 801 |   | 1,749 |   | 298 |   | 681 |   |
| Total Contractual Cash Obligations |   | $                         | 170,412 |   | $ | 1,815 |   | $ | 5,618 |   | $ | 41,173 |   | $ | 121,806 |   |

 

 

The total commitment to HickoryTech on its revolving credit facilityexpires as follows:

 
| ***(Dollars in Thousands)*** |   | **Amount of  Commitment Expiration per Year** |    |
|------------------------------|--------|-----------------------------------------------|---------|
|                         |   | **Total**                                     |    | **Remainder  of 2002** |   | **2003 to  2005** |   | **2006 to  2007** |   | **2008 and  after** |   |
| Revolving Credit Component   |   | $                                             | 125,000 |   | $ | — |   | $ | 37,500 |   | $ | 59,375 |   | $ | 28,125 |   |
|                              |        |                                               |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

OTHER -HickoryTech operates with original equity capital, retained earnings and recentadditions to indebtedness in the form of bank term and revolving lines ofcredit. HickoryTech believes its current level of debt to total capital isacceptable for ongoing operations. 

 

HickoryTech primarily uses variable interest rate financial instrumentsas of March 31, 2002. HickoryTech continually monitors the interest rates onits bank loans. A lower level of interest expense is likely to occur because ofmore limited use of the revolving credit facility for capital expenditures andpotentially lower weighted average interest rates.

 

RECENT ACCOUNTING DEVELOPMENTS

 

HickoryTech adopted the provisions of SFAS No. 142, “Goodwill and OtherIntangible Assets,” effective January 1, 2002. SFAS No. 142 required thatgoodwill and intangible assets with indefinite useful lives no longer beamortized, but instead tested for impairment at least annually. Accordingly, atJanuary 1, 2002, HickoryTech ceased amortizing its goodwill (net carrying valueas of March 31, 2002 of $25,086,000) and FCC licenses (net carrying value as ofMarch 31, 2002 of $75,635,000). HickoryTech also tested these intangible assetsfor impairment at January 1, 2002 pursuant to the method prescribed by SFAS No.142 and determined that these assets’ carrying values are not impaired.

 

The following table adjusts previously reported net income to excludeamortization expense recognized from goodwill and FCC licenses as if SFAS No.142 had taken effect in 2001:

 

| ***(Dollars in Thousands, except Per Share Amounts and shown  Net of Income Tax)*** |   | **For Three Months Ended** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                |   | **3/31/02**                |   | **3/31/01** |   |
|                                                                                |   |                       |   |   |   |
| Reported Net Income                                                                 |   | $                          | 2,090  |   | $ | 1,963 |   |
| Goodwill Amortization                                                               |   |                       |   | 113 |   |
| FCC License Amortization                                                            |   |                       |   | 259 |   |
| Adjusted Net Income                                                                 |   | $                          | 2,090  |   | $ | 2,335 |   |
|                                                                                |   |                       |   |   |   |
| Basic and Diluted Earnings Per Share:                                               |   |                       |   |   |   |
| Reported Net Income                                                                 |   | $                          | 0.15   |   | $ | 0.14 |   |
| Goodwill Amortization                                                               |   |                       |   | 0.01 |   |
| FCC License Amortization                                                            |   |                       |   | 0.02 |   |
| Adjusted Net Income                                                                 |   | $                          | 0.15   |   | $ | 0.17 |   |

 

 

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Upon adoption at January 1, 2002, SFAS No. 142 also requiredHickoryTech to reassess the useful lives over which its other intangible assetsare amortized. These useful lives were not changed as a result of thisreassessment and, accordingly, these assets continue to be amortized overperiods ranging from two to eight years.

 

HickoryTech also adopted the provisions of SFAS No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets.” 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 and also sets forth requirementsfor recognizing and measuring impairment losses on certain long-lived assets tobe held or used. The adoption of SFAS No. 144 had no impact on HickoryTech’sfinancial position or its results of operations.

 

In June 2001, the Financial Accounting Standards Board (FASB) issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement 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.

 

 

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(1)– EBITDA represents operating income plus depreciation and amortizationexpense. EBITDA margin represents EBITDA divided by total operating revenuesbefore eliminations. EBITDA, which is not a measure of financial performance orliquidity under generally accepted accounting principles, is provided becausesuch information is used by certain investors when analyzing the financialposition and performance of HickoryTech. Because of the variety of methods usedby companies 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 EBITDA presentation.HickoryTech sees value in disclosing its calculation of EBITDA for thefinancial community and in displaying the change in EBITDA. HickoryTechbelieves an increasing EBITDA depicts increased ability to attract financingand increased valuation of HickoryTech’s business.

 

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ITEM 3. QUANTATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

HickoryTech doesnot have operations subject to risks of foreign currency fluctuations, or doesHickoryTech use derivative financial instruments in its operations orinvestment portfolio. HickoryTech’s earnings are affected by changes ininterest rates as a portion of its long-term debt has variable interest ratesbased on LIBOR. If interest rates for the portion of HickoryTech’s long-termdebt based on variable rates had averaged 10% more for the entire quarter endedMarch 31, 2002, HickoryTech’s interest expense would have increased $218,000for the three months ended March 31, 2002. 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.                   |   | Legal  Proceedings. |
|                       |   | None |
|                       |   |   |
| Item  2.                   |   | Changes  in Securities. |
|                       |   | None |
|                       |   |   |
| Item  3.                   |   | Default  Upon Senior Securities. |
|                       |   | None |
|                       |   |   |
| Item  4.                   |   | Submission  of Matters to a Vote of Security Holders. |
|                       |   | None |
|                       |   |   |
| Item  5.                   |   | Other  Information. |
|                       |   | None. |
|                       |   |   |
| Item  6.                   |   | Exhibits  and Reports of Form 8-K. |
|                       |   |   |
|                       |   | (a) | Exhibits |
|                       |   |   | None. |
|                       |   |   |
|                       |   | (b) | No reports on Form 8-K were filed during the quarter  ended March 31, 2002. |

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Dated: | May  14, 2002 |                                           | 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 |
|        |               |                                                |                           |  |  |  |

 

 

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