0000766561-11-000017.txt : 20110503 0000766561-11-000017.hdr.sgml : 20110503 20110503164336 ACCESSION NUMBER: 0000766561-11-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20110331 FILED AS OF DATE: 20110503 DATE AS OF CHANGE: 20110503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HICKORY TECH CORP CENTRAL INDEX KEY: 0000766561 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 411524393 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13721 FILM NUMBER: 11805952 BUSINESS ADDRESS: STREET 1: 221 E HICKORY ST STREET 2: P O BOX 3248 CITY: MANKATO STATE: MN ZIP: 56002-3248 BUSINESS PHONE: 8003265789 MAIL ADDRESS: STREET 1: P.O. BOX 3248 STREET 2: 221 EAST HICKORY STREET CITY: MANKATO STATE: MN ZIP: 56002-3248 FORMER COMPANY: FORMER CONFORMED NAME: MANKATO CITIZENS CORP DATE OF NAME CHANGE: 19850508 10-Q 1 form10q.htm FORM 10Q form10q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from     to      .


 
Commission file number   0-13721

 
HICKORY TECH CORPORATION
 
(Exact name of registrant as specified in its charter)

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

 
221 East Hickory Street
 
Mankato, Minnesota  56002-3248
 
(Address of principal executive offices and zip code)

 
(800) 326-5789
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   þNo   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ¨    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨      Accelerated filer  þ      Non-accelerated filer  ¨      Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨   No  þ

The total number of shares of the Registrant’s common stock outstanding as of April 29, 2011: 13,358,971.

 
 

 


 
 



 
2

 



Item 1.  Financial Statements
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
   
Three Months Ended March 31
 
(Dollars in thousands, except share and per share amounts)
 
2011
   
2010
 
Operating revenue:
           
Equipment
  $ 8,195     $ 9,884  
Services
    30,427       28,836  
Total operating revenue
    38,622       38,720  
                 
Costs and expenses:
               
Cost of sales, excluding depreciation and amortization
    6,999       8,475  
Cost of services, excluding depreciation and amortization
    14,735       14,178  
Selling, general and administrative expenses
    6,543       6,196  
Depreciation
    5,591       5,322  
Amortization of intangibles
    88       89  
Total costs and expenses
    33,956       34,260  
                 
Operating income
    4,666       4,460  
                 
Other income and expense:
               
Interest and other income
    10       37  
Interest expense
    (1,068 )     (1,591 )
Total other (expense)
    (1,058 )     (1,554 )
                 
Income before income taxes
    3,608       2,906  
Income tax provision
    1,466       1,479  
                 
Net income
  $ 2,142     $ 1,427  
                 
                 
Basic earnings per share
  $ 0.16     $ 0.11  
                 
Weighted average common shares outstanding
    13,329,603       13,154,781  
                 
                 
Diluted earnings per share
  $ 0.16     $ 0.11  
                 
Weighted average common and equivalent shares outstanding
    13,341,871       13,159,326  
                 
Dividends per share
  $ 0.135     $ 0.13  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 


 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Dollars in thousands except share and per share amounts)
 
March 31, 2011
   
December 31, 2010
 
ASSETS
 
Current assets:
           
       Cash and cash equivalents
  $ 9,859     $ 73  
       Receivables, net of allowance for doubtful accounts of $535 and $570
    19,647       24,642  
       Inventories
    4,959       5,205  
       Income taxes receivable
    -       3,814  
       Deferred income taxes, net
    2,008       2,008  
       Prepaid expenses
    2,719       2,026  
       Other
    600       1,030  
             Total current assets
    39,792       38,798  
                 
Investments
    4,224       4,512  
                 
Property, plant and equipment
    381,900       379,433  
       Accumulated depreciation
    (228,639 )     (224,356 )
              Property, plant and equipment, net
    153,261       155,077  
                 
Other assets:
               
       Goodwill
    27,303       27,303  
       Intangible assets, net
    2,580       2,668  
       Deferred costs and other
    1,717       1,830  
             Total other assets
    31,600       31,801  
                 
Total assets
  $ 228,877     $ 230,188  
                 
LIABILITIES & SHAREHOLDERS' EQUITY
 
Current liabilities:
               
       Extended term payable
  $ 6,958     $ 8,254  
       Accounts payable
    2,182       2,840  
       Accrued expenses and other
    6,962       7,929  
       Accrued income taxes
    611       -  
       Financial derivative instruments
    740       1,079  
       Deferred revenue
    5,468       5,073  
       Current maturities of long-term obligations
    62,368       4,892  
             Total current liabilities
    85,289       30,067  
                 
Long-term liabilities:
               
       Debt obligations, net of current maturities
    56,418       114,067  
       Accrued income taxes
    562       562  
       Deferred income taxes
    27,046       26,868  
       Deferred revenue
    1,283       1,397  
       Accrued employee benefits and deferred compensation
    16,041       15,923  
             Total long-term liabilities
    101,350       158,817  
                 
             Total liabilities
    186,639       188,884  
                 
Commitments and contingencies
               
                 
Shareholders' equity:
               
       Common stock, no par value, $.10 stated value
               
             Shares authorized: 100,000,000
               
             Shares issued and outstanding: 13,366,179 in 2011 and 13,298,626 in 2010
    1,337       1,330  
       Additional paid-in capital
    14,641       14,328  
       Retained earnings
    30,186       29,841  
       Accumulated other comprehensive (loss)
    (3,926 )     (4,195 )
             Total shareholders' equity
    42,238       41,304  
                 
Total liabilities and shareholders' equity
  $ 228,877     $ 230,188  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 




 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
Three Months Ended March 31
 
(Dollars in thousands)
 
2011
   
2010
 
OPERATING ACTIVITIES:
           
     Net income
  $ 2,142     $ 1,427  
     Adjustments to reconcile net income to net cash provided by operating activities:
               
            Depreciation and amortization
    5,679       5,411  
            Accrued patronage refunds
    (97 )     (124 )
            Stock based compensation
    254       352  
            Other
    122       263  
     Changes in operating assets and liabilities, net of effect from acquired net assets
               
            Receivables
    5,036       (648 )
            Prepaids
    (693 )     (687 )
            Inventories
    246       (1,830 )
            Accounts payable and accrued expenses
    (1,427 )     (1,283 )
            Deferred revenue, billings and deposits
    280       (1,218 )
            Income taxes
    4,427       447  
            Other
    928       181  
     Net cash provided by operating activities
    16,897       2,291  
                 
INVESTING ACTIVITIES:
               
     Additions to property, plant and equipment
    (3,742 )     (3,429 )
     Acquisition, adjustment to purchase price
    -       120  
     Proceeds from sale of assets
    69       33  
     Net cash (used in) investing activities
    (3,673 )     (3,276 )
                 
FINANCING ACTIVITIES:
               
     Borrowings on extended term payable arrangement
    11,382       14,909  
     Payments on extended term payable arrangement
    (12,678 )     (10,274 )
     Borrowings on credit facility
    16,000       800  
     Payments on credit facility and capital lease obligations
    (16,173 )     (5,161 )
     Proceeds from issuance of common stock
    66       59  
     Change in cash overdraft
    (238 )     -  
     Dividends paid
    (1,797 )     (1,706 )
     Net cash (used in) financing activities
    (3,438 )     (1,373 )
                 
Net increase (decrease) in cash and cash equivalents
    9,786       (2,358 )
Cash and cash equivalents at beginning of the period   
    73       2,420  
Cash and cash equivalents at the end of the period
  $ 9,859     $ 62  
                 
Supplemental disclosure of cash flow information:
               
     Cash paid for interest
  $ 1,078     $ 1,804  
     Net cash paid (received) for income taxes
  $ (2,961 )   $ 1,032  
Non-cash investing and financing activities:
               
     Property, plant and equipment acquired with capital leases
  $ -     $ 35  
     Change in other comprehensive income (loss) from financial derivatives and post-retirement benefits
  $ 269     $ 228  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 


HICKORY TECH CORPORATION
March 31, 2011

Item 1.   Condensed Notes to Consolidated Financial Statements (Unaudited)

Note 1.   Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements of HickoryTech Corporation and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position, and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.

Our consolidated financial statements include HickoryTech Corporation and its subsidiaries in the following two business segments: the Business Sector and the Telecom Sector. All inter-company transactions have been eliminated from the consolidated financial statements.

Cost of Sales (excluding depreciation and amortization)
Cost of sales for the Business Sector includes costs associated with the installation of products for customers. These costs are primarily for equipment and materials. Labor associated with installation work is not included in this category, but is included in cost of services (excluding depreciation and amortization) described below.

Cost of Services (excluding depreciation and amortization)
Cost of services includes all costs related to delivery of communication services and products for all sectors. These operating costs include all costs of performing services and providing related products including engineering, customer service, billing and collections, network monitoring and transport costs.

Selling, General and Administrative Expenses
Selling, general and administrative expenses include direct and indirect selling expenses, advertising and all other general and administrative costs associated with the operations of the business.

Depreciation Expense
Depreciation expense is determined using the straight-line method based on the lives of various classes of depreciable assets. Business and Telecom Sector depreciation is entirely associated with services revenue.


Recent Accounting Developments

In January 2010, the FASB issued new guidance related to disclosures about the transfer in and out of levels 1 and 2 and the activity in level 3 fair value measurements. It also clarifies disclosures about the level of disaggregation, inputs and valuation techniques. Our adoption of this guidance, which was effective in Q1 2010 except for the new requirements relating to a Level 3 activity, did not have a material impact on our disclosures. Our adoption of the Level 3 requirements on January 1, 2011 did not have a material impact on our disclosures.

In the first quarter of 2011 we adopted new guidance for separating consideration in multiple-deliverable arrangements. This guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the consideration should be allocated among the separate units of accounting. We have multiple-deliverable arrangements with several units of accounting within our Business and Telecom Sectors which are described below. The adoption of this guidance did not have a material impact on our financial statements.

Business Sector (This is a discussion of multi-deliverable arrangements only. It does not attempt to describe all types of service agreements available within our Business Sector.)

Multiple-deliverable arrangements primarily include the sale of Cisco communications equipment and associated support contracts, along with professional services providing design, configuration, and installation consulting. Cisco equipment, maintenance contracts and professional services all meet the criteria to qualify as separate units of accounting.

We utilize Cisco list prices as third party evidence for standalone value for our equipment and support contracts. We analyze professional services billings quarterly to determine vendor-specific objective evidence of selling price. We calculate the median of all services performed on a standalone basis and consider fair value of professional services performed as part of a multiple element arrangement to be any rate that is within 15% of the median.

In instances where we sell Cisco voice and data communications equipment with no installation obligations (equipment only sales), all warranty obligations reside with Cisco. Therefore, revenue is recognized when the equipment is delivered to the customer site.

In instances where we sell Cisco voice and data communications equipment with installation obligations, terms of the agreements typically provide for installation services without customer-specific acceptance provisions and we recognize revenue for the equipment when title passes to the customer and services revenue when work is performed based on the relative fair value of the element being sold on a stand-alone basis.

For contracts with customer specific acceptance provisions, we recognize  revenue upon formal customer acceptance for the elements for which the acceptance provisions apply assuming that all other revenue recognition criteria have been met.

Support contracts state that Cisco will provide all support services and therefore revenue is recognized immediately. Support services also include “24x7” support of a customer’s voice and data systems. Most of these contracts are billed on a time and materials basis and revenue is recognized either as services are provided or over the term of the contract. Support services also include professional support services, which are typically sold on a time and materials basis but may be sold as a pre-paid block of time.
 
Telecom Sector (This is a discussion of multi-deliverable arrangements only. It does not attempt to describe all types of service agreements available within our Telecom Sector.)

Our Telecom Sector markets competitive service bundles which may contain several deliverables. Our base bundles consist of voice services including a business or residential phone line, features and long distance. Customers may choose to add additional services including internet, digital subscriber line (DSL) and digital/IP TV services to the base bundle packages. Separate units of accounting within the bundled packages include voice services, internet, DSL and digital or IP TV services. Revenue for services included in our bundles are recognized over the same service period which is the time period in which service is provided to the customer, creating no overall impact on the Telecom Sector operating revenue. Service bundle discounts are recognized concurrently with the associated revenue and are allocated to the various services in the bundled offering based on the relative selling price of the services included in each bundled combination. 

We reviewed all other significant newly issued accounting pronouncements and determined they are either not applicable to our business or that no material effect is expected on our financial position and results of operations.

Note 2.  Earnings and Cash Dividends per Common Share

Basic earnings per share (EPS) are computed by dividing net income by the weighted average number of shares of common stock outstanding during the applicable period. Shares used in the EPS dilution calculation are based on the weighted average number of shares of common stock outstanding during the period increased by potentially dilutive common shares. Potentially dilutive common shares include stock options and stock subscribed under the HickoryTech Corporation Amended and Restated Employee Stock Purchase Plan (ESPP). Dilution is determined using the treasury stock method.

   
Three Months Ended March 31
 
(Dollars in thousands, except share and earnings per share amounts)
 
2011
   
2010
 
Net Income
  $ 2,142     $ 1,427  
                 
Weighted average shares outstanding
    13,329,603       13,154,781  
Stock options (dilutive only)
    10,667       4,545  
Stock subscribed (ESPP)
    1,601       -  
Total dilutive shares outstanding
    13,341,871       13,159,326  
                 
Earnings per share:
               
    Basic
  $ 0.16     $ 0.11  
    Diluted
  $ 0.16     $ 0.11  
                 
Dividends per share
  $ 0.135     $ 0.13  

Options to purchase 238,250 and 341,950 shares for the three months ended March 31, 2011 and 2010, respectively, were not included in the computation of diluted EPS, because their effect on diluted EPS would have been anti-dilutive.

Cash dividends are based on the number of common shares outstanding at their respective record dates. The number of shares outstanding as of the record date for the first quarter of 2011 and 2010, respectively, are as follows:
 
Shares outstanding on record date
 
2011
   
2010
 
First quarter (February 15)
    13,311,817       13,120,514  

Dividends per share are based on the quarterly dividend per share as declared by the HickoryTech Board of Directors. HickoryTech paid dividends of $0.135 and $0.13 per share in the first quarter of 2011 and 2010, respectively. During the first three months of 2011 and 2010, shareholders have elected to reinvest $66,000 and $59,000, respectively, of dividends into HickoryTech common stock pursuant to the HickoryTech Corporation Dividend Reinvestment Plan.


Note 3.  Accumulated Other Comprehensive Income (Loss)

In addition to net income, our comprehensive income includes changes in the market value of the cumulative unrealized gain or loss, net of tax, on financial derivative instruments qualifying and designated as cash flow hedges and unrecognized Net Periodic Benefit Cost related to our Post-Retirement Benefit Plans. Additional information on our interest-rate swap agreements, which are classified as financial derivative instruments, can be found under Note 10. “Financial Derivative Instruments.” Comprehensive income for the three months ended March 31, 2011 and 2010 was $2,411,000 and $1,655,000 respectively, in relation to reported net income of $2,142,000 and $1,427,000 for those periods. The following summary sets forth the components of accumulated other comprehensive income (loss), net of tax.
 
   
Unrecognized
   
Unrecognized
   
Unrecognized
   
Unrealized
   
Accumulated Other
 
   
Net Actuarial
   
Prior Service
   
Transition
   
Gain/(Loss)
   
Comprehensive
 
(Dollars in thousands)
 
Loss (1)
   
Credit (1)
   
Asset (1)
   
on Derivatives
   
Income/(Loss)
 
December 31, 2010
  $ (3,651 )   $ 180     $ (73 )   $ (651 )     (4,195 )
2011 Q1 Activity
                            204       204  
Q1 Net Periodic Benefit Cost
    64       (8 )     9               65  
March 31, 2011
  $ (3,587 )   $ 172     $ (64 )   $ (447 )   $ (3,926 )
                                         
(1) Amounts pertain to our post-retirement benefit plans.
                                 

Note 4.   Fair Value of Financial Instruments

The fair value of our long-term obligations, after deducting current maturities, is estimated to be $64,462,000 at March 31, 2011 and $116,483,000 at December 31, 2010, compared to carrying values of $56,418,000 and $114,067,000, respectively. A portion of our credit facility with a bank syndicate is due to mature on December 31, 2011 causing the large decrease in the fair and carrying value of our long-term obligations at March 31, 2011 as compared to December 31, 2010. The fair value estimates are based on the overall weighted average interest rates and maturity compared to rates and terms currently available in the long-term financing markets. Our financial instruments also include cash equivalents, trade accounts receivable and accounts payable for which current carrying amounts approximate fair market value.

Note 5.  Inventories

Inventory includes parts, materials and supplies stored in our warehouses to support basic levels of service and maintenance as well as scheduled capital projects and equipment awaiting configuration for customers. Inventory also includes parts and equipment shipped directly from vendors to customer locations while in transit and parts and equipment returned from customers which is being returned to vendors for credit, as well as maintenance contracts associated with customer sales which have not yet transferred to the customer. The inventory value in the Business Sector, comprised of finished goods in transit to customers as of March 31, 2011 and December 31, 2010 was $3,107,000 and $3,460,000, respectively. The inventory level in the Business Sector is subject to the variations in the equipment revenue and the timing of individual customer orders. The inventory value in the Telecom Sector, comprised of raw materials, as of March 31, 2011 and December 31, 2010 was $1,852,000 and $1,745,000, respectively.

We value inventory using the lower of cost (perpetual weighted average-cost or specific identification) or market method. We make estimates related to the valuation of inventory. We adjust our inventory carrying value for estimated obsolescence or unmarketable inventory to the estimated market value based upon assumptions about future demand and market conditions. As market and other conditions change, we may establish additional inventory reserves.

Note 6.  Goodwill and Other Intangible Assets

We have goodwill in two of our reporting units. In our Business Sector, we have $4,255,000 of goodwill carrying value as of March 31, 2011, resulting from our acquisition of Enventis Telecom in 2005 and our acquisition of CP Telecom in 2009. In our Telecom Sector, we have $23,048,000 of goodwill carrying value as of March 31, 2011, resulting from our acquisition of Heartland Telecommunications in 1997.


We test acquired goodwill for impairment annually using a fair value approach. We also test goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. We completed our annual impairment test for acquired goodwill as of December 31, 2010, which resulted in no impairment charges to goodwill. In the first three months of 2011, there was no event or change in circumstance that would have more likely than not reduced the fair value below its carrying value.

Intangible assets with finite lives are amortized over their respective estimated useful lives to their estimated residual value.  Identifiable intangible assets that are subject to amortization are evaluated for impairment. The components of other intangible assets are as follows:
 
 
     
As of March 31, 2011
   
As of December 31, 2010
 
       
Gross Carrying
   
Accumulated
   
Gross Carrying
   
Accumulated
 
(Dollars in thousands)  
Useful Lives
 
Amount
   
Amortization
   
Amount
   
Amortization
 
Definite-Lived Intangible Assets
                           
Customer relationships
 
1 - 8 years
  $ 5,299     $ 4,585     $ 5,299     $ 4,532  
  Other intangibles
 
1 - 5 years
    2,830       964       2,830       929  
Total
      $ 8,129     $ 5,549     $ 8,129     $ 5,461  

We periodically reassess the carrying value, useful lives and classifications of identifiable assets. Amortization expense related to the definite-lived intangible assets was $88,000 and $89,000 for the three months ended March 31, 2011 and 2010, respectively. Total estimated amortization expense for the remaining nine months of 2011 and the five years subsequent to 2011 is as follows: 2011 (April 1 – December 31) – $266,000; 2012 - $354,000; 2013 - $354,000; 2014 - $265,000; 2015 - $140,000; 2016 - $140,000.

Note 7.  Quarterly Sector Financial Summary

Our operations are conducted in two segments as: (i) Business Sector and (ii) Telecom Sector. Segment information for the three months ended March 31, 2011 and 2010 is as follows:
 
(Dollars in thousands)
             
Corporate and
       
Three Months Ended March 31, 2011
 
Business
   
Telecom
   
Eliminations
   
Consolidated
 
Revenue from unaffiliated customers
  $ 21,285     $ 17,337     $ -     $ 38,622  
Intersegment revenue
    161       412       (573 )     -  
   Total operating revenue
    21,446       17,749       (573 )     38,622  
                                 
Depreciation and amortization
    1,654       4,003       22       5,679  
Operating income (loss)
    1,983       2,901       (218 )     4,666  
Interest expense
    -       18       1,050       1,068  
Income tax provision (benefit)
    806       1,168       (508 )     1,466  
Net Income (loss)
    1,178       1,716       (752 )     2,142  
Total assets
    84,127       129,109       15,641       228,877  
Property, plant and equipment, net
    56,107       97,008       146       153,261  
Additions to property, plant and equipment
    1,812       1,930       -       3,742  


(Dollars in thousands)
             
Corporate and
       
Three Months Ended March 31, 2010
 
Business
   
Telecom
   
Eliminations
   
Consolidated
 
Revenue from unaffiliated customers
  $ 21,354     $ 17,366     $ -     $ 38,720  
Intersegment revenue
    133       429       (562 )     -  
   Total operating revenue
    21,487       17,795       (562 )     38,720  
                                 
Depreciation and amortization
    1,364       4,016       31       5,411  
Operating income (loss)
    1,907       2,825       (272 )     4,460  
Interest expense
    -       25       1,566       1,591  
Income tax provision (benefit)
    810       1,398       (729 )     1,479  
Net Income (loss)
    1,122       1,406       (1,101 )     1,427  
Total assets
    76,249       138,233       6,653       221,135  
Property, plant and equipment, net
    47,598       103,776       252       151,626  
Additions to property, plant and equipment
    2,064       1,365       -       3,429  

Note 8.  Commitments and Contingencies

We are involved in certain contractual disputes in the ordinary course of business. We do not believe the ultimate resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows. We did not experience any changes to material contractual obligations in the first three months of 2011. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for the discussion relating to commitments and contingencies.

Note 9.  Stock Compensation

Refer to our Annual Report on Form 10-K for the year ended December 31, 2010 for a complete description of all stock-based compensation plans.

Our stock award plan provides for granting non-qualified stock options, stock awards and restricted stock awards to employees. We recognize stock compensation charges related to stock award plans when management concludes it is probable the participant will earn the award. Share-based compensation expense includes amounts recognized related to the Company Employee Stock Purchase Plan. This plan allows participating employees to acquire shares of common stock at 85% of fair market value on one specified date. Stock-based compensation expense was $254,000 and $352,000 respectively in the three months ended March 31, 2011 and 2010.

As of March 31, 2011, no stock options have been granted under the Company’s Stock Award Plan since September 2006 and all options are fully vested and the associated compensation costs related to these options have been recognized.

A summary of stock option activity is as follows:
         
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding at January 1, 2011
    343,250     $ 12.45  
    Granted
    -       -  
    Exercised
    -       -  
    Forfeited
    -       -  
    Expired
    (35,000 )     7.21  
Outstanding at March 31, 2011
    308,250     $ 11.82  
Exercisable at March 31, 2011
    308,250     $ 11.82  



The following table provides certain information with respect to stock options outstanding and exercisable at March 31, 2011:
 
Range of
   
Stock Options
   
Stock Options
   
Weighted Average
   
Weighted Average Remaining
 
Exercise Prices
   
Outstanding
   
Exercisable
   
Exercise Price
   
Contractual Life
 
  $6.00 - $8.00       15,000       15,000     $ 6.95       5.42  
  $8.00 - $12.00       156,950       156,950       10.22       2.68  
  $12.00 - $16.00       126,000       126,000       13.97       0.73  
  $16.00 - $21.00       10,300       10,300       16.98       0.67  
          308,250       308,250     $ 11.82       1.95  
                                     
Aggregate intrinsic value:
                    $ 56,300          

Note 10.  Financial Derivative Instruments

We utilize interest-rate swap agreements that qualify as cash-flow hedges to manage our exposure to interest rate fluctuations on a portion of our variable-interest rate debt. Our interest-rate swaps increase or decrease the amount of cash paid for interest depending on the increase or decrease of interest required on the variable rate debt. We account for derivative instruments on the balance sheet at fair value.
 
Fair value is the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Three levels of inputs may be used to measure fair value:

·  
Level 1 – quoted prices in active markets for identical assets and liabilities.
·  
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.
·  
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

The fair value of our interest rate swap agreements were determined based on Level 2 inputs. We currently have an interest-rate swap agreement effectively locking in the LIBOR rate portion of the interest rate on $80,000,000 of variable-interest rate debt until September 2011. The LIBOR rate portion of the swap is a fixed rate of 2.15%. This swap rate is in addition to the applicable margin under our credit agreement, which is currently 1.5%.

As our interest-rate swap agreement is set to expire September 2011, the fair value of our derivatives at March 31, 2011 and December 31, 2010 are recorded as financial derivative instruments under the short-term liabilities section of our balance sheet. The fair value of our derivatives at March 31, 2011 and December 31, 2010 is a net liability of $740,000 and $1,079,000, respectively. The cumulative gain or (loss) on the market value of financial derivative instruments is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity, net of tax. If we were to terminate our interest rate swap positions, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income (loss), which is classified in shareholder’s equity, into earnings in the Consolidated Statements of Operations. The table below illustrates the effect of derivative instruments on consolidated operations for the periods ending March 31, 2011 and 2010, respectively.
 
(Dollars in thousands)   
Gain Reported in Accumulated
 
 
 
Amount of Gain/Proceeds
Derivative Instruments in
 
Other Comprehensive Loss
 
Location of Gain/Proceeds Reclassified
 
Recognized in Income on Derivative
Cash Flow Hedging Relationships
 
2011
 
2010
 
from Accumulated Other Comprehensive Income into Income
 
2011
 
2010
                     
Interest Rate Contracts
 
 $204
 
 $168
 
Interest Expense
 
 $-
 
 $-



Note 11.  Employee Post-Retirement Benefits

HickoryTech provides post-retirement health care and life insurance benefits for eligible employees. We are currently not funding these post-retirement benefits, but have accrued these liabilities. We are required to recognize the funded status of our post-retirement benefit plans on our consolidated balance sheet and recognize as a component of accumulated other comprehensive income (loss), net of tax, the gains and losses and prior service costs or credit that arise during the period but are not recognized as components of net periodic benefit cost. New employees are not eligible for post-retirement health care and life insurance benefits.

      Three Months Ended March 31  
(Dollars in thousands)
    2011     2010  
Components of net periodic benefit cost
             
Service cost
  $
127
 
 113
 
Interest cost
   
 200
   
 181
 
Amortization of transition obligation
   
 15
   
 15
 
Amortization of prior service cost
   
 (14)
   
 (14)
 
Recognized net actuarial loss
   
 107
   
 98
 
Net periodic benefit cost
  $
435
 
 393
 
               
               
Employer's contributions for current premiums:
         
March 31, 2011
 
Contributions made for the three months ended March 31, 2011
       
 88
 
Expected contributions for remainder of 2011
         
 259
 
Total estimated employer contributions for fiscal year 2011
       
 347
 

Note 12.  Income Taxes

The effective income tax rate from operations for the first quarter of 2011 and 2010 was 40.7% and 50.9% which exceeds the federal statutory rate primarily due to state income taxes. In the first quarter of 2010, we recognized $279,000 of noncash income tax expense due to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. The $279,000 charge increased the effective tax rate for the first quarter of 2010 by 9.6%.

As of March 31, 2011, we had unrecognized tax benefits totaling $510,000 excluding interest. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $490,000. It is reasonably possible that the total amount of unrecognized tax benefits may decrease by approximately $405,000, including interest, during the next 12 months as a result of expirations of the statute of limitations. Subsequent to March 31, 2011, we have recognized approximately $277,000 of previously unrecognized tax benefits and $41,000 of associated interest as a result of the expiration of statute of limitations.

We recognize interest and penalties related to income tax matters as income tax expense. As of March 31, 2011, we have accrued $51,000 (net of tax) for interest related to unrecognized tax benefits.

We file consolidated income tax returns in the United States federal jurisdiction and combined or separate income tax returns in various state jurisdictions. In general, we are no longer subject to United States federal income tax examinations for the years prior to 2007 except to the extent of losses utilized in subsequent years.

Note 13.  Acquisition

On August 1, 2009, we purchased all of the capital stock of CP Telecom for an adjusted purchase price of $6,625,000 to grow our small to medium-sized business customer base. In the first quarter of 2010, an adjustment associated with a change in working capital of CP Telecom at closing, reduced the purchase price and associated goodwill by $120,000, resulting in an adjusted purchase price of $6,505,000.


The initial purchase price allocation resulted in goodwill of $2,184,000 which was reduced by $120,000 to $2,064,000 as a result of the change in working capital. Goodwill in our CP Telecom acquisition is a result of the value of acquired employees along with the expected synergies from the combination of CP Telecom and our operations. Goodwill resulting from the acquisition of CP Telecom is not deductible for tax purposes. CP Telecom has been fully integrated with our fiber and data product line.

Note 14.  Subsequent Events

On March 4, 2011, the Board of Directors approved the merger of CP Telecom, Inc. and Enventis Telecom, Inc. effective April 30, 2011. Both entities are reported within the Business Sector and this will have no effect on the financial statements or material impact on operations.

On April 4, 2011, the company announced the addition of the position of chief operating officer who was also appointed as a corporate officer, vice president of HickoryTech. Please see the exhibits for additional information regarding the agreements associated with her employment. As part of the employment agreement the chief operating officer received a one-time grant of options to acquire 10,000 shares with one-third of the options vesting over the next three years.

We have evaluated and disclosed subsequent events through the filing date of the Quarterly Report on Form 10-Q.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “targets,” “projects,” “will,” “may,” “continues,” and “should,” and variations of these words and similar expressions, are intended to identify these forward-looking statements. Such forward-looking statements are subject to risks and uncertainties that could cause HickoryTech’s actual results to differ materially from such statements. Factors that might cause such a difference include, but are not limited to, those contained in Item 1A of Part II, “Risk Factors” of this quarterly report on Form 10-Q and Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010 which is incorporated herein by reference.

Because of these risks, uncertainties, and assumptions and the fact that any forward-looking statements made by HickoryTech and its management are based on estimates, projections, beliefs, and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. In addition, forward-looking statements speak only as of the date they are made. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we do not undertake any obligations to update any forward-looking information, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. A description of the accounting policies that we consider particularly important for the portrayal of our results of operations and financial position, and which may require a higher level of judgment by our management, is contained under the caption, “Critical Accounting Policies,” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.


Results of Operations

Overview-Trends and Highlights

We conduct our operations in two business segments: (i) Business Sector and (ii) Telecom Sector. Our Business Sector serves customers across a five-state region with IP-based voice, transport, data and network solutions, managed services, network integration and support services. Through its regional fiber network, this Sector provides wholesale services to regional and national service providers, such as interexchange and wireless carriers within the communications business. It also specializes in providing integrated unified communication solutions for businesses of all sizes - from enterprise multi-office organizations to small and medium-sized businesses, primarily in the upper Midwest.

Our Telecom Sector provides bundled residential and business services including high-speed Internet, broadband services, digital TV, local voice and long distance services in our legacy telecom service area. Telecom is comprised of two markets. The first includes an incumbent local exchange carrier (“ILEC”) operating in 13 south central Minnesota communities and 13 rural northwest Iowa communities. The second market is a competitive local exchange carrier (“CLEC”) operation. We own our network in both the ILEC and CLEC communities. The Telecom Sector, through National Independent Billing, Inc., also provides data processing and related billing services to HickoryTech and external communication providers including wireline, wireless, and entertainment providers.

First quarter consolidated net income increased by $715,000 or 50% impacted by a $523,000 decline in interest expense paid on a year-over-year basis. The decline in interest expense is due to the implementation of interest rate protection strategies and lower interest rates due to our debt to EBITDA ratio. As of March 31, 2011 a significant portion of our credit facility is presented as a current liability. We are in the process of renewing this facility, as we have successfully done on three previous occasions since the year 2000. In addition, the first quarter of 2010 contained a $279,000 non-cash income tax expense due to the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010.

Operating income for the first quarter increased $206,000 or 5% with a decline in operating costs offsetting a slight decline in overall operating revenue. Recurring revenue streams within our Business Sector grew $1,620,000 or 14% while sales of Cisco equipment declined $1,689,000 or 17%. Due to the one-time nature of equipment sales, the equipment revenue fluctuates quarterly. Telecom revenue remained stable in the first quarter compared to last year, offsetting the gradual decline we have experienced in local service and network access revenue with strong broadband growth.

In 2010, we initiated several key investments to strategically grow our Business Sector fiber and data services. We increased bandwidth capacity on our core network, expanded our fiber network to Sioux Falls, South Dakota and Fargo, North Dakota, constructed a local fiber route in Des Moines, Iowa and increased network capacity to our Des Moines facilities. Additionally we secured a grant of federal stimulus funds providing the means by which we can extend our fiber-optic network in northern Minnesota connecting health care organizations, educational institutions and state offices. This project, which will begin in 2011, is expected to be completed in 2013 and is funded by $16,800,000 in future federal grant money and $7,200,000 of our own capital.

Business Sector fiber and data service revenue grew by $1,248,000 or 13% in the first quarter. We are aggressively targeting business services gaining market share within the small-to-medium business, enterprise and wholesale customer segments. We continue to leverage our existing network, secure opportunities in new markets and designate success-based capital for projects that provide a solid rate-of-return.

In the first quarter of 2011 Telecom broadband services grew by 14% driven by demand for business Ethernet services and continued market penetration for our DSL and digital TV services. Our Telecom broadband revenues are further enhanced by our success in serving a regional consortium of schools and libraries. We continue to invest in our broadband infrastructure to ensure that we offer the highest quality broadband services in order to retain customers and preserve the strong cash flow generated by this sector. Overall Telecom Sector revenue remained stable year-over-year while operating income increased by $76,000 or 3% for the first quarter.


Sector Results of Operations

Business Sector

The following table provides a breakdown of the Business Sector operating results.

We manage and evaluate our business operations in their entirety. The following table provides an illustration of the contributions and associated trends from each of the primary product lines. Certain allocations have been made, particularly in the area of selling, general and administrative expenses, in order to develop these tables.
 
BUSINESS SECTOR
 
                   
   
Three Months Ended March 31
   
%
 
(Dollars in thousands)
 
2011
   
2010
   
Change
 
Operating revenue before intersegment eliminations
                 
Equipment
  $ 8,195     $ 9,884       -17 %
Support Services
    2,229       1,857       20 %
   Equipment
    10,424       11,741       -11 %
                         
Fiber and Data
    10,861       9,613       13 %
Intersegment
    161       133       21 %
Total operating revenue
  $ 21,446     $ 21,487       0 %
                         
Total Business revenue before intersegment eliminations
                       
   Unaffiliated customers
  $ 21,285     $ 21,354          
   Intersegment
    161       133          
      21,446       21,487          
                         
Cost of sales  (excluding depreciation and amortization)
    6,999       8,475       -17 %
Cost of services  (excluding depreciation and amortization)
    7,499       6,699       12 %
Selling, general and administrative expenses
    3,311       3,042       9 %
Depreciation and amortization
    1,654       1,364       21 %
   Total Business costs and expenses
    19,463       19,580       -1 %
                         
Operating income
  $ 1,983     $ 1,907       4 %
Net income
  $ 1,178     $ 1,122       5 %
                         
Capital expenditures
  $ 1,812     $ 2,064       -12 %
 
 
BUSINESS PRODUCT LINE REPORTING
 
                                     
   
Three Months Ended March 31
         
Three Months Ended March 31
       
   
Equipment
   
%
   
Fiber and Data
   
%
 
(Dollars in thousands)
 
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
Operating revenue before intersegment eliminations:
                                   
Equipment
  $ 8,195     $ 9,884       -17 %   $ -     $ -      0
Service
    2,229       1,857       20 %     10,861       9,613       13 %
Intersegment
    -       -               161       133       21 %
Total operating revenue
  $ 10,424     $ 11,741       -11 %   $ 11,022     $ 9,746       13 %
                                                 
Cost of sales  (excluding depreciation and amortization)
    6,999       8,475       -17 %     -       -       0 %
Cost of services  (excluding depreciation and amortization)
    1,678       1,719       -2 %     5,821       4,980       17 %
Selling, general and administrative expenses
    1,181       1,123       5 %     2,130       1,919       11 %
Depreciation and amortization
    68       73       -7 %     1,586       1,291       23 %
   Total costs and expenses
    9,926       11,390       -13 %     9,537       8,190       16 %
                                                 
Operating income
  $ 498     $ 351       42 %   $ 1,485     $ 1,556       -5 %
Net income
  $ 295     $ 224       32 %   $ 883     $ 898       -2 %
                                                 
Capital expenditures
  $ 6     $ 85       -93 %   $ 1,806     $ 1,979       -9 %
 
Revenue

Equipment. This revenue is generated primarily from the sale of communications and data products provided by third party manufacturers. Due to the non-recurring nature of equipment sales, equipment revenue fluctuates quarterly and is entirely dependent upon new sales from existing and new customers.

Equipment revenue decreased by 17% in the first quarter of 2011 compared to the same period a year ago. Revenue in the first quarter of 2010 was heightened by a significant equipment project for an existing customer.

Support Services. We earn this revenue by providing services related to our equipment sales, such as network and equipment monitoring, maintenance, and professional service consulting and equipment installation.

Support services revenue increased by $372,000 or 20% in the first quarter of 2011 compared to the same period in 2010. Revenue from the sale of Cisco maintenance contracts increased $253,000 during the period benefitting from our ability to attach maintenance contracts to orders for equipment. We serve in an agency relationship with our customers for the sale of maintenance contracts and therefore revenue is recorded net of the cost that we pay Cisco for the contract.  Cisco rebates reward us for high maintenance contract renewal rates. Our success in this area has increased our overall margin on this product and is a primary contributor to the 2011 revenue increase.

Fiber and Data. This revenue is primarily of a monthly recurring basis and consists of billing for the use of our fiber network and network connections through multi-year contracts with retail business, regional and national service providers and wireless carriers. This product line also includes revenue from all of our B2B communication products and services including our VoIP product along with SMB retail sales.


Fiber and Data services revenue grew $1,248,000 or 13% in the first quarter of 2011 compared to the same period in 2010. In 2010, we invested in several key projects to strategically grow revenue from our wholesale, enterprise and small-to-medium business services. We increased bandwidth capacity on our core network, expanded our fiber network to Sioux Falls, South Dakota and Fargo, North Dakota, constructed a local fiber route in Des Moines, Iowa and increased network capacity to our Des Moines facilities. We also invested in SMB products through mid-band Ethernet upgrades and the addition of network collocations.

Cost of Sales (excluding Depreciation and Amortization)

Business Sector cost of sales (excluding depreciation and amortization) associated with equipment revenue decreased $1,476,000 or 17% in direct proportion to the 17% decrease in equipment sales in the first quarter of 2011 compared to the same period in 2010.

Business Sector cost of sales is composed primarily of equipment material costs. Labor associated with installation work is included in cost of services (excluding depreciation and amortization) described below.

Cost of Services (excluding Depreciation and Amortization)

Business Sector cost of services (excluding depreciation and amortization) increased by $800,000 or 12% in the first quarter of 2011 compared to the same period in 2010. The increase was primarily due to the following items: 1) a $279,000 increase in wages and benefits due to increased staffing levels to support our strategic growth in fiber and data services, 2) a $240,000 increase in volume-driven circuit costs supporting increased revenue, 3) a $120,000 increase in long-distance access expense, 4) a $96,000 increase in bad debt expense primarily relating to the bankruptcy of a customer and 5) a $74,000 increase in regulatory fees. These increases were offset by a $126,000 decrease in contract labor expense primarily within our equipment product line.

Selling, General and Administrative Expenses

Business Sector selling, general and administrative expenses increased $269,000 or 9% in the first quarter of 2011 compared to 2010. This increase was primarily due to increased commission expense of $101,000 which was driven by higher fiber and data revenue, higher incentive compensation expense of $95,000 along with increased corporate support expense of $57,000.

Depreciation and Amortization

Business Sector depreciation and amortization increased by $290,000 or 21% in the first quarter of 2011 compared to 2010. We invested $8,738,000 and $14,464,000 in 2009 and 2010, respectively in capital expenditures adding technological augmentations to our network supporting our strategic five year plan to grow services revenue. We will continue to experience increases in depreciation for the next few years as we continue to invest in our fiber network. Our network constitutes the majority of our asset base and the related assets are depreciated over 12 to 25 years.

Operating Income

Business Sector operating income increased $76,000 or 4% in the first quarter of 2011 compared to the same period in 2010. Double-digit growth within this Sector’s recurring revenue streams fell just short of offsetting the decline in equipment revenue. Operating expenses declined by $117,000 or 1% in the first quarter of 2011 compared to the same period in 2011.


Telecom Sector

The following table provides a breakdown of the Telecom Sector operating results.
 
TELECOM SECTOR
 
                   
   
Three Months Ended March 31
   
%
 
(Dollars in thousands)
 
2011
   
2010
   
Change
 
Operating revenue before intersegment eliminations
                 
    Local Service
  $ 3,693     $ 3,864       -4 %
    Network Access
    5,812       6,128       -5 %
    Long Distance
    729       820       -11 %
    Broadband
    5,054       4,433       14 %
    Directory
    872       917       -5 %
    Bill Processing
    737       775       -5 %
    Intersegment
    412       429       -4 %
    Other
    440       429       3 %
Total Telecom operating revenue
  $ 17,749     $ 17,795       0 %
                         
Total Telecom revenue before intersegment eliminations
                       
   Unaffiliated customers
  $ 17,337     $ 17,366          
   Intersegment
    412       429          
      17,749       17,795          
                         
Cost of services (excluding depreciation and amortization)
    7,761       8,004       -3 %
Selling, general and administrative expenses
    3,084       2,950       5 %
Depreciation and amortization
    4,003       4,016       0 %
   Total Telecom costs and expenses
    14,848       14,970       -1 %
                         
Operating Income
  $ 2,901     $ 2,825       3 %
                         
Net income
  $ 1,716     $ 1,406       22 %
                         
Capital expenditures
  $ 1,930     $ 1,365       41 %
                         
Key metrics
                       
    Business access lines
    23,932       24,902       -4 %
    Residential access lines
    26,678       29,596       -10 %
Total access lines
    50,610       54,498       -7 %
Long distance customers
    33,513       35,731       -6 %
Digital Subscriber Line customers
    20,032       19,494       3 %
Digital TV customers
    10,591       9,789       8 %

Certain revenue amounts in our 2010 Telecom Sector financial statements have been reclassified to conform to the presentation in our 2011 financial statement.

Revenue

Local Service We receive monthly recurring revenue from end-user customers primarily for providing local telephone services, enhanced calling features, miscellaneous local services and reciprocal compensation from wireless carriers.


Local service revenue declined by $171,000 or 4% in the first quarter of 2011 compared to the same quarter in 2010 driven by a $206,000 or 7% reduction in first-line and feature revenue which is equal to the 7% decline in residential and business access lines during the same period.  Offsetting a portion of the revenue decline is an increase in hosted VoIP services to our business customers.

Our efforts to retain access lines center around marketing a competitive broadband service bundle, increasing customer loyalty and creating value for our customers. Our local customer service and an active and visible presence in the communities we serve are important differentiators in the marketplace.
 
Network Access. We receive a variety of fees and settlements to compensate us for the origination, transport, and termination of calls and traffic on our network. These include the fees assessed to interexchange carriers; subscriber line charges imposed on end-users, and settlements from nationally administered and jointly funded revenue pools.

Network access revenue declined by $316,000 or 5% in the first quarter of 2011 compared to 2010. The main drivers of the decline are reduced minutes of use, lower utilization of our network by interexchange carriers and a lower quantity of end-user subscriber line-based charges due to residential and business access line loss. We expect these factors to continue causing network access to trend lower in 2011 and thereafter.

Long Distance. We charge our end-user customers for toll or long distance service on either a per-call or flat-rate basis. Services include the provision of directory assistance, operator service, and long distance private lines.

Long distance revenue declined by $91,000 or 11% in the three months ended March 31, 2011 compared to 2010. The customer loss rate in our long distance base was 6% in the first quarter, consistent with loss rates experienced in 2010. Our declining customer base, a growing number of residential customers selecting unlimited long distance calling plans and our decision to reduce rates-per-minute charged to customers due to aggressive competition in the markets we serve are the factors for the decline.

Broadband. We receive monthly recurring revenue for a variety of broadband data network services to our customers. Broadband services include: the DSL access portion of DSL service, Internet service, digital TV services, and business Ethernet and other data services.

Broadband revenue grew by 14% in the first quarter of 2011 compared to the same period in 2010 due to business data service offerings such as Ethernet and on-going growth in our digital TV and DSL product lines. Business data services grew by $235,000 or 40% during this period benefiting from a contract to provide broadband services to a consortium of schools in south central Minnesota beginning July 1, 2010. Expansion of our digital TV service to four additional communities in 2010 has allowed us to increase revenue by $222,000 or 18% and reach 10,591 customers, an increase in our customer base of 8% from one year ago.

Our DSL customer base grew by 3% in the first quarter of 2011 compared to 2010 contributing $99,000 to overall broadband revenue growth. While our DSL customer base continues to grow, the growth rates have declined from prior years as our markets mature due to successful market penetration and intensifying competition.

Intersegment. We record revenue for product charges for services provided by one business segment to another. In the first quarter of 2011 revenue recorded was $412,000 compared to $429,000 in the same period in 2010 primarily due to a change in our accounting treatment for certain intersegment charges. In 2010, intersegment revenue included charges to our Business Sector for wholesale long distance services. In 2011 long distance expenses are recorded as a contra-expense within cost of services. All intersegment transactions are eliminated on a consolidated basis.

Cost of Services (excluding Depreciation and Amortization)

Cost of services (excluding depreciation and amortization) decreased by $243,000 or 3% in the first quarter of 2011 compared to 2010. The decline in cost of services is primarily due to two factors including reduced access expense of $117,000 relating to the recording of intersegment long distance expenses as noted above and a reduction in expenses of $129,000 relating to bad debt and inventory reserve balances.


Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $134,000 or 5% in the first quarter of 2011 compared to 2010.  The increase was primarily due to a $51,000 increase in wages and benefits, a $35,000 one-time lease expense fee and a $32,000 increase in corporate support expense.

Operating Income
 
The Telecom Sector increase in operating income of $76,000 was a result of a decline of $46,000 in Telecom operating revenue in the first quarter of 2011 compared to the same period in 2010, offset by a decline in operating expense of $122,000 during the same period. There was a 3% growth in operating income for the first quarter of 2011.

Consolidated Results

Interest Expense

Consolidated interest expense declined 33% in the three months ended March 31, 2011 compared to the same period in 2010. Interest expense has decreased due to lower interest rates and the implementation of interest rate protection strategies. Our outstanding balance of our debt obligations (long-term and current portion) has increased $2,621,000 from $116,165,000 at March 31, 2010 to $118,786,000 as of March 31, 2011 which is $173,000 lower than our December 31, 2010 balance of $118,959,000.

Income Taxes

Income tax expense was $1,466,000 which is similar to the same period in 2010. The effective income tax rate for the first quarter of 2011 and 2010 was 40.7% and 50.9%, respectively. The effective tax rate in 2010 was affected by a $279,000 noncash income tax expense related to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. The $279,000 charge increased the effective tax rate for the first quarter of 2010 by 9.6%. The effective tax rate from operations differs from the federal statutory rate primarily due to state income taxes.

Liquidity and Capital Resources

Capital Structure

The total capital structure (long-term and current maturities of long-term debt obligations plus shareholders’ equity) was $161,024,000 at March 31, 2011, reflecting 26% equity and 74% debt. This compares to a total capital structure of $160,263,000 at December 31, 2010, reflecting 26% equity and 74% debt. Management believes we will have the ability to meet our current and long-term liquidity and capital requirements through operating cash flows, borrowings available under our credit facility and other internal and available external resources. Our primary uses of cash include capital expenditures, business development, debt service, temporary financing of trade accounts receivable and the payment of potential dividends.

We employ an extended term payable financing arrangement within our Business Sector for the equipment provisioning portion of our equipment product line and view this arrangement as a structured accounts payable that is paid within 60 days with no separate interest charge. As such, the extended term payable financing amount of $6,958,000 and $8,254,000 as of March 31, 2011 and December 31, 2010, respectively, is not considered to be part of our capital structure and has been excluded from the amounts above.

For the most recent quarter our primary source of liquidity continues to be from internal operations of our business. We have invested in capital expenditures, paid interest, taxes, dividends and other obligations, while our debt balance (current and long-term portion) remained relatively consistent (i.e. $118,786,000 March 31, 2011; $118,959,000 December 31, 2010). We have not changed our equity capitalization and equity was not a source of liquidity during this period. Our liquidity situation has been similar since December 2005.


Cash Flows

The following table summarizes our cash flow:

 
 
Three Months Ended March 31
 
(Dollars in thousands)  
2011
   
2010
 
Net cash provided by (used for):
           
   Operating activities
  $ 16,897     $ 2,291  
   Investing activities
    (3,673 )     (3,276 )
   Financing activities
    (3,438 )     (1,373 )
Increase in cash and cash equivalents
    9,786       (2,358 )
 
We expect our liquidity needs to arise from routine payment of dividends, interest and principal payments on our indebtedness, income taxes and capital expenditures. We use our cash inflow to manage the temporary increases in cash demand and utilize our senior revolving credit facility for more significant fluctuations in liquidity caused by growth initiatives. We have shifted to a strategy of holding higher levels of cash on hand in 2011. We feel that this combined with our access to funds in our revolving credit agreement with our senior lenders, provides further protection against any interruption to our business plan due to financing.

While it is often difficult for us to predict the impact of general economic conditions on our business, we believe that we will be able to meet our current and long-term cash requirements through our operating cash flows. As of March 31, 2011 we were in full compliance with our debt covenants and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.

Our primary source of funds continues to be cash generated from operations. Cash generated from operations was $16,897,000 in the first three months of 2011 compared to $2,291,000 in the first three months of 2010. Collection of accounts receivable balances primarily within our Business Sector and the receipt of routine tax refunds related to the benefit of bonus depreciation permitted by legislation signed in 2010 allowed increased cash flow from operations.

Our use of cash for capital expenditures was similar in 2011 as compared to 2010. A portion of our capital spending is designated for success-based capital projects as we continue to expand and enhance our network as well as a portion is designated for maintenance to sustain our current revenue streams. Capital expenditures for 2011 are expected to range from $20,500,000 to $24,000,000 which is comparable to the capital spending level in 2010.

In August 2010, we were awarded $16,800,000 a grant in future federal stimulus funds associated with the American Recovery and Reinvestment Act of 2009 to extend our fiber-optic network across greater Minnesota connecting governmental, educational and healthcare institutions with an advanced broadband network. We anticipate an investment of $7,200,000 or 30% of the total project cost over the next three years to build the fiber optic network. Our expected 2011 capital spending level falls within our senior debt agreement and available sources of financing. Our 2012 and future levels of capital spending will be addressed by the revision of our senior debt agreement which is currently in the renewal process.  We anticipate our senior debt agreement will be the sole external source of financing, and serves to augment the substantial levels of internal financial support provided by our successful operations.

Cash used for financing activities primarily includes the payment of our quarterly dividend and principal payments on our outstanding debt. Cash used in financing activities was $3,438,000 in the first three months of 2011 compared to $1,373,000 in 2010. Our long and short-term debt totals $118,786,000 as of March 31, 2011, a $173,000 decrease from year-end.

Extended-Term Payable

The Business Sector utilizes an $18,000,000 wholesale financing agreement with a financing company to fund the equipment provisioning portion of the equipment product line from certain approved vendors. Advances under the financing arrangement are collateralized by the accounts receivable and inventory of the Business Sector and a guaranty of up to $18,000,000 from HickoryTech. The financing agreement provides 60-day, interest-free payment terms for inventory purchases and can be terminated at any time by either party. The balance outstanding under the financing arrangement decreased from $8,254,000 at December 31, 2010 to $6,958,000 at March 31, 2011. These balances are classified as current liabilities in the accompanying balance sheets and are not considered part of our debt financing.
 
 
Long-Term Debt Obligations

Our long-term obligations as of March 31, 2011 were $56,418,000. Current maturities of $62,075,000 on debt and $293,000 on capital leases are primarily driven by the expiration of the existing senior credit agreement in 2011 and 2012. Long-term obligations as of December 31, 2010, were $114,067,000 excluding current maturities of $4,550,000 on debt and $342,000 on capital leases.

On December 30, 2005, we entered into a $160,000,000 credit agreement with a syndicate of banks (subsequently reduced to a $129,005,000 facility as of March 31, 2011 through normal quarterly amortization and our prepayments). The credit facility is comprised of a $30,000,000 revolving credit component ($20,430,000 available to borrow as of March 31, 2011) that expires on December 31, 2011 and a $130,000,000 term loan component (subsequently reduced to $108,575,000 as of March 31, 2011 through normal quarterly amortization). The outstanding principal balance under the revolving credit component as of March 31, 2011 is $9,500,000.

The term loan is comprised of two components, which are defined as term loan B and term loan C. The outstanding principal balance of term loan B is $100,425,000 as of March 31, 2011, and is held in varying amounts by three lenders in the syndicate; US Bank, GE Commercial Distribution Finance Corporate and CoBank. Under the terms of term loan B, we are required to make quarterly principal payments of $275,000 from March 31, 2011 through December 31, 2011 with the remainder of the aggregate principal due in two payments on March 31, 2012 and June 30, 2012. The outstanding principal balance of term loan C is $8,150,000 as of March 31, 2011 and is held entirely by the Rural Telephone Finance Cooperative (“RTFC”). Under the terms of term loan C, we are required to make quarterly principal payments of $50,000 on the aggregate principal amount from March 31, 2011 through December 31, 2012 with the remainder of the aggregate principal due in two payments on March 31, 2013 and June 30, 2013. Due to pay down of debt in early 2011, we are not required to make quarterly principal payments on term loan C for the remainder of 2011.

Our credit facility requires us to comply, on a consolidated basis, with specified financial ratios and tests. These financial ratios and tests include maximum leverage ratio, minimum interest coverage ratio and maximum capital expenditures. The terms of our credit facility include certain restrictions regarding the payment of dividends. The dividend restriction provides that we will not make dividend distributions or repurchase stock in an aggregate amount in excess of 100% of the previous year’s net income. At March 31, 2011, we were in full compliance with our debt covenants.

Our obligations under the credit facility are secured by a first-priority lien on most of the property and assets, tangible and intangible of HickoryTech and its current subsidiaries, including, but not limited to accounts receivable, inventory, equipment and intellectual property, general intangibles, cash and proceeds of the foregoing. We have also given a first-priority pledge of the capital stock of our current subsidiaries to secure the credit facility. The credit facility contains certain restrictions that, among other things, limit or restrict our ability to create liens or encumbrances; incur additional debt; issue stock; make asset sales, transfers, or dispositions; and engage in mergers and acquisitions over a specified maximum value.

We continually monitor the interest rates on our bank loans. We currently have an interest rate swap agreement, effectively fixing the LIBOR rate portion of the interest rate on $80,000,000 of our variable interest rate debt until September 2011. The LIBOR rate portion of the interest rate we have is fixed at a rate of 2.15% by our swap agreement. This swap rate is in addition to the applicable margin under our credit agreement, which is 1.5%.

A portion of our credit facility with our bank syndicate is due to mature on December 31, 2011. We are currently in the process of renewing this facility and we expect a new senior credit agreement to be effective by the third quarter of 2011. We expect to experience changes to the terms of the facility to coincide with market conditions for similar financing with other companies. At this time, the only significant change anticipated is a potential increase in the interest rate of approximately 150 to 200 basis points (current facility is priced 150 basis points above LIBOR, with no LIBOR floor), and to pay one-time fees between $1,500,000 and $2,000,000 in 2011, which will be borrowed through the new facility and amortized into operations over the life of the agreement. We anticipate that our interest expense could increase by $2,500,000 to $3,000,000 on an annual basis bringing our agreement up to current market terms. We foresee that our renewed credit facility will provide the liquidity required to supplement our internal sources of liquidity and our future business plans, in a similar manner as we have experienced since our previous refinancing in 2005, and similar refinance exercises dating back to the year 2000.


Working Capital

At March 31, 2011, our current liabilities exceeded our current assets by $45,497,000. Our working capital deficit is driven by the reclassification of long-term borrowings to a current liability.  See above for more information regarding our long-term debt obligations. Working capital as of December 31, 2010 was $8,731,000 with current assets exceeding current liabilities. The ratio of current assets to current liabilities was .47 and 1.29 as of March 31, 2011 and December 31, 2010, however the March 31, 2011 ratio is influenced by the treatment of the current portion of debt due to the pending refinancing.

New Accounting Pronouncements

The financial statement impact relating to new accounting standards that have not yet been adopted by us can be found under Note 1. Basis of Presentation and Consolidation - “Recent Accounting Developments.”

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not have operations subject to risks of foreign currency fluctuations. We do, however, use derivative financial instruments to manage exposure to interest rate fluctuations. Our objective for holding derivatives is to minimize interest rate risks using the most effective methods to eliminate or reduce the impact of these exposures. Variable rate debt instruments are subject to interest rate risk. For any portion of our debt not covered with interest rate swap agreements, our earnings are affected by changes in interest rates as a portion of its long-term debt has variable interest rates based on LIBOR. If interest rates for the portion of our long-term debt based on variable rates had averaged 10% more for the quarter ended March 31, 2011, our interest expense would have increased $33,000.

The market value of the cumulative gain or (loss) on financial derivative instruments is reported as a component of accumulated other comprehensive income (loss) in shareholder’s equity and is recognized in earnings when the term of a protection agreement is concluded. Additional information on our interest-rate swap agreements can be found under Note 10. “Financial Derivative Instruments.”
 
Item 4.  Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

Item 1.  Legal Proceedings.

Other than routine litigation incidental to our business there are no pending material legal proceedings to which we are a party or to which any of our property is subject.

Item 1A.  Risk Factors.

There have not been any material changes to the risk factors previously disclosed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Removed and Reserved.

None.

Item 5.  Other Information.

None.

Item 6.  Exhibits Listing.

Exhibit 10.1 Employment Agreement between HickoryTech Corporation and Carol Wirsbinski, Chief Operating Officer of the Company, dated April 4, 2011

Exhibit 10.2 Change of Control Agreement dated April 4, 2011 between HickoryTech Corporation and Carol Wirsbinski

Exhibit 10.3 HickoryTech Corporation Executive Incentive Plan Amended and Restated January 1, 2011

Exhibit 31.1 Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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 the undersigned, thereunto duly authorized.

Dated: May 3, 2011
 
HICKORY TECH CORPORATION


By:  /s/ John W. Finke
John W. Finke, President and Chief Executive Officer


By:  /s/ David A. Christensen_
David A. Christensen, Senior Vice President and Chief Financial Officer

EX-10.1 2 ex10-1.htm EX 10.1 ex10-1.htm
Exhibit 10.1
EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”), dated as of April 4, 2011, (the “Effective Date”), is entered into by and between HICKORYTECH CORPORATION, a Minnesota corporation (the “Company”), and CAROL WIRSBINSKI (“Executive”).

WHEREAS, Executive possesses certain skills, experience and expertise which will be of use to the Company; and

WHEREAS, the Company desires to employ Executive, and Executive desires to commence employment with the Company subject to the terms and conditions of this Agreement.
 
WHEREAS, the parties acknowledge that: (i) Executive was not employed by the Company prior to her execution of this Agreement; and (ii) execution of this Agreement is a condition precedent to the beginning of an employment relationship.
 
WHEREAS, in light of the foregoing, the Company has offered to employ Executive as the Chief Operating Officer of the Company, and Executive has accepted such employment;

NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements herein contained, the Company and Executive hereby agree as follows:

Section 1.  Employment Agreement

1.1           Employment and Duties.  The Company employs Executive as the Chief Operating Officer.  In this capacity, Executive will report to and perform such duties as shall reasonably be assigned by the Company’s Chief Executive Officer or his delegate.  Executive shall perform such duties on a full time basis, and carry out Executive’s responsibilities hereunder faithfully and to the best of Executive’s ability.  Executive confirms that she is under no contractual obligations which would preclude or restrict her: (i) performance of her duties and responsibilities in her position with the Company; or (ii) execution of this Agreement.

Section 2.  Compensation and Benefits

2.1           Compensation.

(a) Base Salary.  The Company shall pay Executive a salary at an annual rate of Two Hundred and Twenty Thousand and no/100 Dollars ($220,000.00) to be paid in bi-weekly installments, in arrears (the “Base Salary”).  The Base Salary shall be subject to periodic review and adjustment.

(b) Annual Incentive Compensation.  Executive shall be a participant in the HickoryTech Executive Incentive Plan (the “EIP”) and shall be eligible to receive an annual cash incentive award pursuant to the EIP in accordance with its terms, as they may be amended or modified from time to time.  Executive shall be eligible to receive an annual cash incentive award of 55% of her Base Salary for “at target” performance, subject to the terms of the EIP.  Executive’s incentive award eligibility is subject to periodic review and adjustment.  For the first year of employment, any EIP award earned will be pro-rated based on the Executive’s hire date.
 

 
 

 
 
     (c) Stock Compensation
 
(i)  Executive shall be a participant in the HickoryTech Corporation Long-Term Executive Incentive Program (the “LTEIP”) and shall be eligible to receive stock awards granted under the 1993 Stock Award Plan, as amended, in accordance with the terms of the LTEIP, as they may be amended or modified from time to time.  Executive will be eligible for existing Program Periods under the LTEIP as follows:  A)  No eligibility for the 2009-2011 Program Period; B) Eligible for the 2010-2012 Program Period pro-rated at two-thirds (2/3) of any earned award; and C) Full eligibility for the 2011-2013 Program Period and future Program Periods that may be initiated under the LTEIP.  Executive’s incentive award eligibility is subject to periodic review and adjustment.
 
(ii)  Executive will receive a one-time grant of options to acquire 10,000 shares of HickoryTech stock subject to the terms of the 1993 Stock Award Plan, as amended, and the Stock Option Agreement.  The grant date shall be April 4, 2011.

2.2           Participation in Company Benefit Plans.  Executive shall be entitled to participate in all employee benefit plans or programs of the Company offered to other employees to the extent that Executive’s position, tenure, salary, and other qualifications make Executive eligible to participate in accordance with the terms of such plans, except as otherwise expressly provided in this Agreement.  The Company does not guarantee the continuance of any particular employee benefit plan or program except as expressly provided in this Agreement, and Executive’s participation in any such plan or program shall be subject to all terms, provisions, rules and regulations applicable thereto.  Executive will be entitled to 232 hours of earned paid time off per year, to be used and administered in accordance with the Company’s paid time off policy as it may change from time to time, but such amount will be prorated for 2011 based on the date of hire, and Executive will be eligible for 174 hours of paid time off in 2011.

2.3           Expenses.  The Company will pay or reimburse Executive for all reasonable and necessary out-of-pocket expenses incurred by Executive in the performance of her duties under this Agreement including mileage reimbursement for travel associated with business. Executive shall provide to the Company detailed and accurate records of such expenses for which payment or reimbursement is sought, and Company payments shall be in accordance with the regular expense reimbursement guidelines maintained by the Company from time to time.

2.4           Executive Perquisites.  During the term of her employment under this Agreement, the Company shall:

(a) Provide Executive with a cellular telephone for her business use per Company’s policy.
 
(b) Provide for Executive’s periodic executive physical examination in accordance with the Company’s guidelines for executive physical examinations.
 
2.5           Withholding Taxes.  All compensation, payments or benefits provided to, or for the benefit of, Executive shall be made subject to withholding and otherwise treated and reported by the Company as required to ensure compliance with all applicable laws and regulations.

Section 3.  Termination of Employment

3.1           Definitions.  As used in Section 3 of this Agreement, the following terms shall have the meaning set forth for each below:
 

 
 
2

 
 
         (a) Cause” shall mean any of the following:
 
          (i) the material neglect, failure or refusal of Executive to perform Executive’s duties hereunder (other than as a result of Executive’s death or Disability) provided Executive has failed to cure such deficiency after having been given written notice of such deficiency and a period of twenty-one (21) days following written notice to cure such deficiency;
 
          (ii) an act or acts of personal dishonesty or perpetration of an intentional or knowing fraud against or affecting the Company or any affiliate, customer, supplier, agent or employee thereof;
 
          (iii) any conduct, act or omission that intended or likely to injure the reputation, financial condition, business or business relationships of the Company or Executive’s reputation or business relationships;
 
          (iv) conviction (including conviction on a plea of nolo contendere) of a felony or any crime involving fraud, dishonesty, misrepresentation or moral turpitude whether relating to employment or otherwise;
 
          (v) the material breach by Executive of this Agreement (including, without limitation, the Employment Covenants set forth in Section 4 of this Agreement) or any other Agreement between Executive and the Company which is not cured within twenty-one (21) days after receipt of written notice from the Company specifying the nature of the breach; or
 
          (vi) the failure or continued refusal to carry out the directives of the Chief Executive Officer or his delegate, which is not cured within twenty-one (21) days after Executive has received written notice specifying the nature of such failure or refusal.

(b) Date of Termination” shall mean the date specified in the Notice of Termination (as hereinafter defined) except in the case of Executive’s death, in which case the Date of Termination shall be the date of death.

(c) Notice of Termination” shall mean a written notice from the Company to Executive that indicates the specific provision of Section 3 of this Agreement relied upon as the basis for such termination and the Date of Termination.

(d) Good Reason” shall mean in the context of Executive’s voluntary termination of employment:
 
          (i) Company, without Executive’s consent, effects a material and substantial reduction of Executive’s title, position, total compensation as specified in Sections 2.1 and 2.2 above, authority or duties;
   
          (ii) any requirement that Executive, without her consent, move her regular office to a location more than one hundred (100) miles from Executive’s  current regularly assigned Company office location;
 
 
 
3

 
 
      (iii) the material failure by Company, or its successor, if any, to pay compensation or provide benefits or perquisites to Executive as and when required by the terms of this Agreement; or
 
          (iv) any material breach by Company of any material term of this Agreement.

The Executive shall have Good Reason to terminate Executive’s employment if (i) within ten (10) days following Executive’s actual knowledge of the event which Executive determines constitutes Good Reason, Executive notifies the Company in writing that Executive has determined a Good Reason exists and specifies the event creating Good Reason, and (ii) following receipt of such notice, the Company fails to remedy such event within twenty-one (21) days.  If either condition is not met, Executive shall not have a Good Reason to terminate Executive’s employment.

3.2           Termination Upon Death or Disability.  This Agreement, and Executive’s employment hereunder, shall terminate automatically and without the necessity of any action on the part of the Company upon the death or Disability (as defined below) of Executive.  For purposes of this Section, “Disability” shall mean the inability of the Executive to perform the duties and responsibilities of her employment, with or without reasonable accommodation, by reasons of illness or other physical or mental impairment or condition, if such inability continues for an uninterrupted period of ninety (90) calendar days or more.  A period of inability shall be “uninterrupted” unless and until the Executive is no longer considered disabled by the Company’s long term disability insurer.

(a) The determination of whether the Executive is suffering from a Disability shall be made on the same basis as the Company provided long-term disability benefit, which is a fully insured benefit provided by an independent third party.  If the Executive meets the disability criteria for long term disability benefits under this Company provided benefit, the Executive will also be considered to have a Disability under this Agreement.

(b) The Executive agrees to make herself available for and to submit to examinations by such physicians as may be requested by the Company or the Company’s long term disability insurer.  The Executive’s failure to submit to examinations by such physicians as may be requested shall result in a conclusive determination that Executive does, in fact, have a Disability.

3.3           Company’s and Executive’s Right to Terminate.  This Agreement and Executive’s employment hereunder may be terminated at any time by the Company for Cause or, if without Cause, upon thirty (30) days prior written notice to Executive, subject to the provisions of Section 3.4(b) below.  In the event the Company should give Executive a Notice of Termination without Cause, the Company may, at its option, elect to provide Executive with salary in lieu of Executive’s continued active employment during the notice period.  This Agreement and Executive’s employment hereunder may be terminated by Executive at any time for Good Reason and, if without Good Reason, upon thirty (30) days prior written notice to the Company.

 
4

 
 
3.4           Compensation Upon Termination.

(a) Severance.  In the event the Company terminates this Agreement without Cause, or in the event Executive terminates this Agreement for Good Reason, Executive shall be entitled to receive: (i) Executive’s then current Base Salary through the Date of Termination, and (ii) a severance payment in an amount equal to the greater of: (i) eighteen (18) months of Executive’s then current Base Salary, or (ii) eighteen (18) months of Executive’s Base Salary as of execution of this Agreement (or $220,000),  payable in one lump sum on the 70th day following the Date of Termination, provided that Executive has signed the Release described in Section 3.4(b) and the revocation and rescission period described in such Release has expired without revocation or rescission.  Notwithstanding the foregoing, the Company shall, to the extent necessary, modify the timing of delivery of severance benefits to Executive if the Company reasonably determines that the timing would subject the severance benefits to any additional tax or interest assessed under Section 409A of the Code.  In such event, the delayed payments will be made in a lump sum as soon as practicable without causing the severance benefits to trigger such additional tax or interest under Section 409A of the Code.  In the event this Agreement is terminated for any reason other than by the Company without Cause, or by Executive for Good Reason, Executive shall not be entitled to the continuation of any compensation, bonuses or benefits provided hereunder, or any other payments following the Date of Termination, other than the then current Base Salary earned through such Date of Termination.
 
(b) Release.  Anything to the contrary contained herein notwithstanding, as a condition to Executive receiving any severance benefits to be paid pursuant to this Agreement, Executive shall execute and deliver to the Company a general release of all claims on terms satisfactory to the Company.  The Company shall have no obligation to provide any severance benefits to Executive until it has received the general release from Executive and any revocation or rescission period applicable to the release shall have expired without revocation or rescission.
 
3.5           Set Off.  The Company shall have the absolute right to offset against any and all payments or consideration due Executive under Section 3.4 above for any damages to which the Company is entitled due to Executive’s breach of the covenants set forth in Section 4 below.
 
Section 4.  Employment Covenants

4.1           Restrictive Covenants.  As an essential inducement to the Company to enter into this Agreement, and as consideration for the foregoing promises of the Company, and the severance payment to be provided subject to the limitations of Section 3.4(a), Executive agrees as follows:

(a) Executive acknowledges that: (i) during her employment with the Company, she will be exposed to and entrusted with Confidential Information (defined below); and (ii) such Confidential Information will be disclosed to her in confidence and for the sole benefit of the Company.  Therefore, commencing on the date of this Agreement, Executive will both during the course of employment and after the termination of employment: (iii) diligently protect the confidentiality of all Confidential Information, (iv) not disclose or communicate any Confidential Information to any third party without the written consent of the Company or as may be required by law, and (v)  not make use of Confidential Information on her own behalf or on behalf of any third party.  In view of the nature of Executive’s employment and the nature of the Confidential Information which Executive will receive during such employment, Executive agrees that any unauthorized use, or disclosure of such information to or on behalf of third parties, would cause irreparable harm to the confidential status of such information and to the Company and that, therefore, the Company shall be entitled to an injunction prohibiting Executive from any such disclosure, use, or threatened disclosure or use.  When Confidential Information becomes generally available to the public by means other than Executive’s acts or omissions, it is no longer subject to this Agreement.  Executive expressly acknowledges that the undertakings set forth in this subparagraph shall survive the expiration or termination of other agreements or duties in this Agreement forever.
 
 
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As used in this Agreement, “Confidential Information” shall mean one or more of the following types of information concerning the Company, whether in written, oral or electronic form: (i) trade secrets, (ii) any confidential, proprietary or secret designs, programs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, (iii) any customer or supplier lists, (iv) any confidential, proprietary or secret development or research work, (v) any strategic or other business, marketing or sales plans, including proposals prepared for any customers or prospective customers, (vi) any financial data or plan that is not publicly reported, (vii) any software, regardless of the stage of its development, (viii) any information relating to the compensation or benefits generally made available to employees of the Company, and specifically, the compensation and benefits received by any employee other than Executive; (ix) any information provided to or entrusted to the Company by one of its customers that is not in the public domain; and/or, (x) any and all other confidential or proprietary information, or secret aspects of the business of the Company. All information originated by Executive, or disclosed to Executive, or to which Executive otherwise gains access, during the period of Executive’s employment with the Company, or that is characterized or treated by the Company as being Confidential Information, or that would be of economic value to a third-party, shall be presumed to be Confidential Information.
 
(b) During the term of this Agreement and continuing through the period ending on a date that is eighteen (18) months following the Date of Termination, regardless of the reason for termination, Executive agrees she will not:
 
             (i) directly or indirectly, render services to any Conflicting Organization (as defined below) or otherwise engage in competition with the Company in any manner or capacity within the Territory (as defined below), nor direct any other individual or business enterprise to engage in competition with the Company, e.g., as an advisor, principal, joint venturer, agent, partner, employee, officer, director or shareholder (except by ownership of less than five percent of the outstanding stock of a publicly held corporation), on any products or services competitive with the Company’s existing, planned or announced products or services or any products or services which have not yet been offered or announced but which were under active development by the Company as of the Date of Termination.  For purposes of this Agreement: (A) “Conflicting Organization” means any person, corporation, partnership or other entity that develops, manufactures, sells or provides products, services or equipment that competes with or replaces products, services or equipment provided by the Company; and (B) “Territory” shall be defined as: (i) the states of Minnesota and Iowa, and (ii) any other location within a one hundred (100) mile radius surrounding any existing or planned office or facility of the Company (including administrative, executive, technical, sales, and service offices) in which the Company, as of the Date of Termination, is engaged in or actively planning to engage in the sale or provision of products, services or equipment;
 
             (ii) assist any other person or legal entity of any kind, in the Territory to establish a conflicting business that is or would be competitive in any way with any facet of the Company’s business, or to enhance or augment an existing business that is or would be competitive with any facet of the Company’s business;
 
             (iii)  obtain employment with or provide services to a customer or prospective customer of the Company, unless provided written permission to do so by the Company’s Chief Executive Officer or his designee;
 
             (iv) directly or indirectly assist, solicit, entice, or induce (or assist any other person or entity in soliciting, enticing, or inducing) any customer or vendor, supplier, or other business affiliate doing business with the Company or any potential customer that has been or is being actively solicited for business by the Company (or agent, employee, or consultant of any customer or potential customer) during the period of Executive’s employment with the Company, to deal with any competitor of the Company;
 
             (v) directly or indirectly in any manner, solicit, assist or encourage (or assist any other person or entity in soliciting or encouraging) any other officer or employee of the Company working with the Company at any time prior to the twelve (12) months preceding Executive’s own termination to work or otherwise provide services for the Executive or for any entity in which the Executive participates in the ownership, management, operation, or control of, or is connected with in any manner as an employee, independent contractor, consultant, or otherwise.

 
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4.2           Other Confidentiality Obligations.  Executive acknowledges and agrees: (i) that the Company may, from time to time, have agreements with other persons or entities which impose confidentiality obligations or other restrictions on the Company; and (ii) to be bound by all such obligations and restrictions and shall take all actions necessary to discharge the obligations of the Company thereunder, including without limitation, signing any confidentiality or other agreements required by such third parties.

4.3           Return of Confidential Information.  At any time during Executive’s employment with the Company, upon the Company’s request, and in the event of Executive’s termination of employment with the Company for any reason whatsoever, Executive shall immediately surrender and deliver to the Company all records, materials, notes, equipment, drawings, documents and data of any nature or medium, and all copies thereof, relating to any Confidential Information (collectively the “Company Materials”) which is in Executive’s possession or under Executive’s control.  Executive shall not remove any of the Company Materials from the Company’s business premises or deliver any of the Company Materials to any person or entity outside of the Company, except as required in connection with Executive’s duties of employment.

4.4           No Prior Restrictions. Executive affirmatively represents and warrants to the Company that: (i) Executive is not a party to any agreement restricting in any way her ability to be employed by the Company or to perform the services contemplated in conjunction with her employment; (ii) she will not use or bring to the performance of work on behalf of the Company any information subject to any confidentiality or non-disclosure agreement Executive entered with any prior employer; and (iii) if the Executive has entered into such agreement with a prior employer, a copy of such agreement has been provided to the Company prior to accepting employment. Nevertheless, it remains the Executive’s full and total responsibility to remain in compliance with any such agreement and the Company does not intend for Executive to breach that agreement.

4.5           Other Obligations.  The terms of this Section 4 are in addition to, and not in lieu of, any statutory or other contractual or legal obligation to which Executive may be subject relating to the protection of Confidential Information.

4.6           Exclusivity of Employment.  Executive shall not directly or indirectly, without prior approval of the Company’s CEO, engage in any activity competitive with or adverse to the Company’s business or welfare or render a material level of services of a business, professional or commercial nature to any other person or firm, whether for compensation or otherwise; provided however, that Executive may serve on various trade or industry boards or, with the prior approval of the Chief Executive Officer, serve on the boards of other unrelated corporations, as well as participate in charitable and civic activities, provided that such activities do not in any way interfere with the performance of Executive’s duties to the Company.

 
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4.7           Remedies and Judicial Enforcement.

(a) Executive acknowledges and agrees that: (i) a breach or threatened breach of any portion of this Section 4 will cause irreparable harm to the Company, it would be impossible to measure in money the damages which will accrue to the Company by reason of a failure by Executive to perform her obligations under this Section 4, and thus, the Company’s damages could not be compensated by money damages; (ii) the Company’s remedy at law for any breach of the provisions of this Section 4 will be inadequate; and (iii) in any action to enforce the provisions of Section 4, Executive shall and does hereby waive the right to claim that the Company has an adequate remedy at law.  Accordingly, in addition to damages and any other rights and remedies of the Company herein or otherwise, the Executive specifically agrees that the Company shall be entitled to injunctive relief and / or specific performance to enforce the provisions of this Section 4 and that such relief may be granted without the necessity of proving actual damages.  The Company’s rights with respect to obtaining injunctive relief, however, will not diminish its rights to pursue any other available remedies for such breach or threatened breach, including the recovery of actual damages.
 
(b) Should any court of competent jurisdiction determine that any of the covenants set forth in this Section 4 are overbroad or otherwise invalid in any respect, the parties agree that the court so holding shall revise such covenant in duration or in scope, or in both, or in any other manner which the court determines sufficient to render the covenant enforceable against the Executive, and shall then enforce the same to that more limited extent.

(c) In the event the Company obtains an injunction to enforce its rights under this Section 4, the agreement not to compete or solicit shall be extended for the longer period of: (i) six months, or (ii) the number of months the Executive was engaged in such solicitation in violation of this Agreement after the date the prohibition on solicitation was to expire hereunder and, if expired, shall apply for such additional period after the date on which such injunction is obtained.

(d) In addition to the foregoing, the Company shall be entitled to collect from Executive any attorney’s fees and costs incurred in bringing any action against Executive for violation of this Section 4 , as well as any attorney’s fees and costs for the collection of any judgments in the Company’s favor arising out of this Agreement.

Section 5.  General Terms

5.1           Notices.  All notices or other communications which are required or permitted hereunder shall be deemed to be sufficient if contained in a written instrument given by personal delivery or registered or certified mail, postage prepaid, return receipt requested, addressed to such party at the address set forth below or such other address as may thereafter be designated in a written notice from such party to the other party:

 
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    To Company:                    Hickory Tech Corporation
221 East Hickory Street
P.O. Box 3248
Mankato, Minnesota  56002-3248
Attention:  Vice President of Human Resources

To Executive:
Carol Wirsbinski
 
Eagan, MN  55123

All such notices and communications shall be deemed to have been delivered and received (i) in the case of personal delivery, on the date of such delivery, and (ii) in the case of mailing, on the third business day following such mailing.

5.2           Headings.  The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed a part of or affect the construction or interpretation of any provision hereof.

5.3           Modifications; Waiver.  No modification of any provision of this Agreement or waiver of any right or remedy herein provided shall be effective for any purpose unless specifically set forth in a writing signed by the party to be bound thereby.  No waiver of any right or remedy in respect of any occurrence or event on one occasion shall be deemed a waiver of such right or remedy in respect of such occurrence or event on any other occasion.

5.4           Entire Agreement.  This Agreement, together with the various plans, programs and policies expressly referenced herein, contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all other agreements, oral or written, heretofore made with respect thereto.

5.5           Severability.  Any provision of this Agreement that may be prohibited by, or unlawful or unenforceable under, any applicable law of any jurisdiction shall, as to such jurisdiction, be ineffective without affecting any other provision hereof.  To the full extent, however, that the provisions of such applicable law may be waived, they are hereby waived, to the end that this Agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms.

5.6           Controlling Law.  This Agreement has been entered into by the parties in the State of Minnesota and shall be enforced in accordance with the laws of Minnesota.

5.7           Arbitration.  Any controversy, claim, or breach arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in the State of Minnesota in accordance with the rules of the American Arbitration Association for employment / commercial disputes and the judgment upon the award rendered shall be entered by consent in any court having jurisdiction thereof; provided however, that this provision shall not preclude the Company from seeking injunctive or similar relief from the courts to enforce its rights under the Employment Covenants set forth in Section 4 of this Agreement.  It is understood and agreed that, in the event the Company provides a Notice of Termination to Executive for Cause, and it should be finally determined in a subsequent arbitration that Executive’s termination was not for Cause as defined in this Agreement, then the remedy awarded to Executive shall be limited to such compensation and benefits as Executive would have received in the event of Executive’s termination other than for Cause at the same time as the original termination.

5.8           Assignments.  The Company shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder to any entity that controls the Company, that the Company controls or that may be the result of the merger, consolidation, acquisition or reorganization of the Company and another entity, provided the assignee assumes all of the Company’s obligations hereunder.  Executive agrees that this Agreement is personal to Executive and Executive’s rights and interest hereunder may not be assigned, nor may Executive’s obligations and duties hereunder be delegated (except as to delegation in the normal course of operation of the Company), and any attempted assignment or delegation in violation of this provision shall be void.

 
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5.9           Read and Understood.  Executive has read this Agreement carefully and understands each of its terms and conditions.  Executive has sought independent legal counsel of Executive’s choice to the extent Executive deemed such advice necessary in connection with the review and execution of this Agreement.

5.10           Affiliates.  For the purposes of this Agreement, the rights, benefits, and protections granted to the Company shall also be granted to the Company’s Affiliates.  “Affiliates” mean any other means an individual, partnership, corporation, limited liability company, or other entity, trust, or joint venture (“Person”) who directly or indirectly controls, is controlled by, or is under direct or indirect common control with the Company, and any Person in like relation to an Affiliate.  A Person shall be deemed to control a Person if such Person possesses, directly or indirectly, the power to appoint a majority of the board of directors of or the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the term “controlled” shall have a similar meaning.
 
5.11           Counterparts.  This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all of which, when taken together, will be deemed to constitute one and the same agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

 
HICKORYTECH CORPORATION
 
By: /s/ John W. Finke
Its:  President and Chief Executive Officer

/s/ Carol Wirsbinski
Carol Wirsbinski 
 
 
 
 
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EX-10.2 3 ex10-2.htm EX 10.2 ex10-2.htm
Exhibit 10.2
Originally Entered into as of April 4, 2011
 
           This Change of Control Agreement (this “Agreement”) was orginally entered into as of the 4th day of April, 2011, by and between HickoryTech Corporation, a Minnesota corporation (the “Company”), and Carol Wirsbinski (the “Executive”).
 
WITNESSETH:
 
           WHEREAS, the Executive will devote substantial skill and effort to the affairs of the Company, and the Board of Directors of the Company desires to recognize the significant personal contribution that the Executive will make to further the best interests of the Company; and
 
           WHEREAS, it is desirable and in the best interests of the Company and its stockholders to continue to obtain the benefits of the Executive’s services and attention to the affairs of the Company, and
 
           WHEREAS, it is desirable and in the best interests of the Company and its stockholders to provide inducement for the Executive (1) to remain in the service of the Company in order to facilitate an orderly transition in the event of a change in control of the Company and (2) to remain in the service of the Company in the event of any threatened or anticipated change in control of the Company; and
 
           WHEREAS, it is desirable and in the best interests of the Company and its stockholders that the Executive be in a position to make judgments and take actions with respect to a proposed change in control of the Company without regard to the possibility that his or her employment may be terminated without compensation in the event of certain changes in control of the Company; and
 
           WHEREAS, the Executive desires to be protected in the event of certain changes in control of the Company; and
 
           WHEREAS, for the reasons set forth above, the Company and the Executive desire to enter into this Agreement.
 
           NOW, THEREFORE, in consideration of the facts recited above and the mutual covenants and agreements contained herein, the Company and the Executive agree as follows:
 
1.
Right to Payment.  If the Executive’s employment with the Company or its Successor is terminated within two (2) years following an Event (as defined in Paragraph 2 below) for any reason other than a reason specified in Paragraph 3(a) through (d) below, then the Executive shall be entitled to receive the Benefits set out in Paragraph 4 below.  If a subsequent Event occurs, and if the Executive is an employee of the Company or its Successor, without limiting any rights the Executive may have, Executive shall have all rights provided by the first sentence of this Paragraph 1 relating to such subsequent event.
 
2.
Change of Control Events.  An “Event” shall be deemed to have occurred if:
 
 
(a)
A majority of the directors of the Company shall be persons other than persons
 
 
(1)
for whose election proxies shall have been solicited by the Board of Directors of the Company; or
 
 
(2)
who are then serving as directors and who were initially appointed or elected by the Board of Directors to fill vacancies on the Board of Directors caused by death or resignation (but not by removal), or to fill newly created directorships created by the Board of Directors;
 
provided, however, that a person shall not be deemed to be a director subject to clause (1) or (2), above, if his or her initial assumption of office occurs as a result of an actual or threatened election contest with respect to the threatened election or removal of directors (or other actual or threatened solicitation of proxies or consents) by or on behalf of any person other than the Board of Directors of the Company; or
 
 
 

 
 
 
(b)
30% or more of the outstanding voting stock of the Company or all or substantially all of the assets or stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities and Exchange Act of 1934, as amended, or any successor rule thereto), directly or indirectly, by any Person (other than by the Company, a subsidiary of the Company, an employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries, or by the Employee or a group of persons, including the Employee, acting in concert) or group of Persons, acting in concert, whether by acquisition of assets, merger, consolidation, statutory share exchange (other than a merger, consolidation or statutory share exchange described in clause (c)(i) or (ii), below), tender offer, exchange offer, or otherwise;
 
 
(c)
The Company is merged into or consolidated with another corporation (other than a subsidiary of the Company) or a statutory share exchange for the Company’s outstanding voting stock of any class is consummated unless (i) a majority of the voting power of the voting stock of the surviving corporation is, immediately following the merger, consolidation or statutory share exchange, beneficially owned, directly or indirectly, by the Employee (or a group of Persons, including the Employee, acting in concert) or (ii) immediately following the merger, consolidation or statutory share exchange, more than 50% of the voting power of the voting stock of the surviving corporation is beneficially owned, directly or indirectly, by the persons who beneficially owned voting stock of the Company immediately prior to such merger, consolidation or statutory share exchange in substantially the same proportion as their ownership of the voting stock of the Company immediately prior to such merger, consolidation or statutory share exchange; or
 
 
(d)
The shareholders of the Company approve the complete liquidation or dissolution of the Company.
 
3.
Termination Not Entitling Executive to Benefits.  The Executive shall not be entitled to the Benefits set out in Paragraph 4 if his or her employment is terminated during the two (2) year period following an Event for any of the following reasons:
 
 
(a)
Death.  The Executive’s death.
 
 
(b)
Disability.  The Executive’s disability.  “Disability” shall mean the inability of the Executive to perform the duties and responsibilities of his or her employment by reasons of illness or other physical or mental impairment or condition, if such inability continues for an uninterrupted period of ninety (90) calendar days or more.  A period of inability shall be “uninterrupted” unless and until the Executive is no longer considered disabled by the Company’s Long Term Disability Insurer.
 
 
(1)
The determination of whether the Executive is suffering from a “disability” as defined herein shall be made.  The determination of whether the Executive is disabled shall be on the same basis as the Company provided Long-Term Disability benefit, which is a fully insured benefit provided by an independent third party.  If the Executive meets the disability criteria for long term disability benefits under this Company provided benefit, the Executive will also be considered disabled under this Agreement.
 
 
(2)
The Executive agrees to make himself or herself available for and to submit to examinations by such physicians as may be requested by the Company or the Company’s Long Term Disability Insurer.  The Executive’s failure to submit to examinations by such physicians as may be requested shall disqualify Executive from receiving Benefits under this Agreement.
 
 
(c)
Voluntary Termination.  The Executive’s voluntary retirement or voluntary termination of employment.  However, the Executive’s retirement or termination of employment shall not be considered voluntary if, following the Event and subject to the provisions for notification set forth below, one or more of the following has occurred without Executive’s express written consent and results in a material negative change to Executive:
 
 
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(1)
There has been a failure to provide the Executive with substantially equivalent reporting responsibilities, titles, offices or positions, or Executive has been removed from, or has not been re-elected to, any of such positions, which has the effect of materially diminishing the Executive’s responsibility or authority;
 
 
(2)
There has been a failure to provide the Executive with: (a) the same base salary, or (b) substantially equivalent (or greater) total salary opportunity, or (c) employee benefits which are, in the aggregate, substantially equivalent to those provided to the Executive at the time of the Event;
 
 
(3)
There has been a failure to provide the Executive with substantially equivalent office space or administrative support; or
 
 
(4)
Executive has been required to perform his or her services in a location that is more than fifty (50) miles from the Executive’s regularly assigned office location at the time of the Event, or Executive is required to undertake substantially more job -related traveling.
 
In the event of an occurrence of the type enumerated in subparagraphs (1) through (4) above, Executive shall, within ten (10) days following Executive’s actual knowledge of such occurrence, notify the Company in writing of the specific occurrence which Executive believes would render his/her retirement or termination not voluntary and, following receipt of such notice, the Company shall be afforded a period of thirty (30) days within which to remedy such occurrence. If the Company fails to timely remedy, the occurrences specified in subparagraphs (1) through (4) above may be relied upon by Executive to characterize his/her retirement or termination as not voluntary, provided that such termination shall occur no later than sixty (60) days following the occurances specified in subparagraphs (1) through (4) above.  In the event that Executive fails to provide such notice or to afford such opportunity to remedy the occurrence, or in the event the Company does remedy the occurrence within thirty (30) days, then none of the occurrences specified in subparagraphs (1) through (4) above may be relied upon by Executive to characterize his/her retirement or termination as not voluntary.
 
 
(d)
Involuntary Termination For Cause.  The Executive’s involuntary termination “for cause.”  “For cause” shall mean:
 
 
(1)
A persistent failure by the Executive to perform the duties and responsibilities of his or her job, which failure is willful and deliberate on the Executive’s part and is not remedied within a reasonable period of time after the Executive’s receipt of written notice from the Company or its Successor specifying the act or omission constituting such failure;
 
 
(2)
A criminal act or acts undertaken by the Executive and intended to result in substantial gain or personal enrichment of the Executive at the expense of the Company or its Successor;
 
 
(3)
Unlawful conduct or gross misconduct that is willful and deliberate on the Executive’s part and that, in either event, is materially injurious to the Company or its Successor; or
 
 
(4)
The conviction of the Executive of a felony.
 
 
(e)
Subsequent Occurrences.  If the Executive’s employment is terminated under circumstances in which Executive would be entitled to Benefits as defined in Paragraph 4, and thereafter there is an occurrence that would have justified the termination of the Executive’s employment with no entitlement to Benefits (such as the Executive’s death, disability, voluntary termination, or involuntary termination for cause [all as defined above in this Paragraph]), that subsequent occurrence shall not disqualify the Executive (or the Executive’s legal representative) from receiving or continuing to receive the Benefits provided under this Agreement.  If the Executive’s employment is terminated under circumstances in which the Executive would be entitled to Benefits as defined in Paragraph 4, and thereafter the executive is re-employed by the Company, the Executive would be entitled to continue to receive payments provided under this Agreement.
 
4.
Benefits.  If the Executive’s employment is terminated under circumstances entitling the Executive to Benefits, the Executive shall receive the following:
 
 
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(a)
Lump Sum Payment.  The Executive shall be entitled to a lump sum cash payment in the amount of One Month’s Salary times 24.  One Month’s Salary shall be determined by taking the sum of: (i) the Executive’s then-current annual base salary for the year in which the termination occurs; (ii) the bonus that the Executive would have earned under the HickoryTech Annual Executive Incentive Plan for the year in which the termination occurs had “target” goals been achieved; and (iii) the target bonus dollar amount awarded to the Executive under the Long-Term Executive Incentive Program for the performance period that begins in the year in which the termination occurs; and dividing that sum by twelve (12).  The foregoing sum shall be determined without regard to any reduction in pay under subparagraph 3(c).  This lump sum payment shall be made by the Company or its Successor at the time of the Executive’s termination of employment, and shall be subject to withholding of all taxes and other amounts required by law to be withheld or paid to others.
 
 
(b)
Section 280G Parachute Tax In the event it shall be determined that any payment or distribution by the Company or other amount with respect to the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, (a “Payment”) is (or will be) subject to the excise tax imposed by Section 280G of the Internal Revenue Code or any interest or penalties are (or will be) incurred by the Executive with respect to the excise tax imposed by Section 280G of the Internal Revenue Code with respect to the Company (the excise tax, together with any interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), and if a reduction in the Payment sufficient to avoid the Excise Tax would result in an increase in the total amount of Payment net of all applicable taxes, then, and only then, the Payment shall be reduced to the amount that, when combined with all other payments and transfers of property required to be taken into account under Section 280G of the Internal Revenue Code, is $1 less than the smallest sum that would subject the Executive to the Excise Tax.
 
 
(c)
Continued Insurance Coverage.  The Executive shall be entitled to continuation of his or her Company-provided insurance coverage (health, life, dental, accidental death and dismemberment, and any other applicable insured health and welfare benefit programs, excluding short and long-term disability) for two years after the Executive’s employment termination, at the same levels and coverages and on the same terms and conditions as if the Executive were still an active employee of the Company or its Successor throughout such period, including the right (if provided to active employees) to elect spousal or family coverage.  In the event that the participation of the Executive in any such insurance plan or program is barred, the Company or its Successor, at its sole cost and expense, shall arrange to provide the Executive with benefits substantially similar to those which the Executive would otherwise be entitled to receive under such plans and programs.  Notwithstanding the foregoing, however, the Company or its Successor shall not be required to provide any continuation coverage under this subparagraph 4(c) to the extent that such coverage is duplicative of any coverage the Executive is receiving under any other policy provided at the expense of the Company.
 
 
 
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(d)
Continuation of any other benefits or perquisites being received by the Executive at the time of the Executive’s employment termination will be negotiated with the Company or its Successor.
 
5.
Benefits Offset By Other Severance Payments.  The lump sum payment provided in subparagraph 4(a) shall be in addition to any salary or other remuneration otherwise payable to the Executive on account of the Executive’s employment by the Company or its Successor.  This payment shall be in lieu of any severance payments under any other agreement resulting from his or her termination of employment with the Company or its Successor.
 
6.
No Duty to Mitigate.  The Executive shall not be required to mitigate the amount of any payment or other benefit provided for in Paragraph 4 by seeking other employment or otherwise, nor (except as specifically provided in subparagraph 4(c) above) shall the amount of any payment or other benefit provided for in Paragraph 4 be reduced by any compensation earned by the Executive as the result of employment after the Executive’s employment termination.
 
7.
Definition of Certain Terms.
 
 
(a)
Successor.  “Successor” means any Person that succeeds to the business of the Company through merger, consolidation, or acquisition, including any Person acquiring all or substantially all of the assets or stock of the Company.
 
 
(b)
Person.  “Person” means an individual, partnership, corporation, estate, trust, or other entity.
 
8.
Successors and Assigns.
 
 
(a)
This Agreement shall be binding upon and inure to the benefit of the legal representatives, successors, and assigns of the parties hereto; provided, however, that the Executive shall not have any right to assign, pledge, or otherwise dispose of or transfer any interest in this Agreement or any payments hereunder, whether directly or indirectly or in whole or in part, without the written consent of the Company or its Successor.
 
 
(b)
The Company will require any Successor, by agreement in form and substance satisfactory to the Executive, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.
 
9.
Attorneys’ Fees, Costs and Interest.  If the Executive (or the Executive’s legal representative) successfully challenges, in whole or in part, the refusal of the Company or its Successor to provide Benefits under this Agreement or to abide by any other provision of this Agreement, then the Company or its Successor shall pay to the Executive (or the Executive’s legal representative):
 
 
(a)
All legal fees, costs, disbursements, and expenses incurred as a result of the refusal to provide Benefits or to abide by the other provisions of the Agreement; and
 
 
(b)
Interest on any funds (or on the fair market value of any benefits) that were wrongfully withheld by the Company or its Successor, calculated by reference to the prime rate as in effect during the applicable period.
 
10.
Governing Law.  This Agreement shall be construed in accordance with the laws of the State of Minnesota, without giving effect to principles of conflicts of laws.
 
 
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11.
Notices.  All notices, requests, and demands given to or made pursuant hereto shall be in writing and be either hand-delivered or mailed to any such party at its address which:
 
 
 
(a)
In the case of the Company shall be:
 
HickoryTech Corporation
221 East Hickory Street
P.O. Box 3248
Mankato, MN  56002-3248

 
(b)
In the case of the Executive shall be:
 
Carol Wirsbinski
Eagan, MN  55123

Either party may, by notice hereunder, designate a changed address.  Any notice, if properly addressed and sent prepaid by registered or certified mail, shall be deemed dispatched on the registered date or that stamped on the certified mail receipt, and shall be deemed received within the second business day thereafter or when it is actually received, whichever is sooner.  Any notice sent regular mail or hand-delivered shall be deemed received when it is actually received by the other party.
 
12.
Severability.  In the event that any portion of this Agreement may be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the other portions of this Agreement, and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable, and enforceable.
 
13.
Incentive Compensation Plan and Stock Options.  In the case of a payment being due as described in Paragraph 1, the Executive’s benefits under the Annual Award of the HickoryTech Corporation Executive Incentive Plan shall become immediately payable and any outstanding stock options and unvested restricted shares shall be immediately vested.  Any Restricted Stock or Performance Stock Awards under the Long Term Executive Incentive Program which are payable due to achievement of Performance Objectives through the year in which the payment under this Agreement becomes due will be paid and fully vested immediately upon the audited close of the fiscal year financials, but in no case later than March 15 of the year following when the payment becomes due under this Agreement.  The Long Term Executive Incentive Program Awards that are not earned based on results at the close of the fiscal year in which the payment under this Agreement becomes due will not be payable.  Awards issued to the Executive shall immediately have all restrictions removed.
 
14.
Amendment or Termination of this Agreement.
 
 
(a)
Prior to the Occurrence of an Event.  Prior to the occurrence of an Event, the Company, by resolution of the Compensation Committee of the Board of Directors, has the unilateral power to amend or terminate this Agreement at any time and for any reason, and may do so without the Executive’s consent.  Notwithstanding the foregoing, however:
 
 
(1)
No such amendment or termination of this Agreement shall be effective with respect to the Executive until two weeks following the date that Executive is provided with written notice of the change.
 
 
(2)
No such amendment or termination of this Agreement shall be effective with respect to the Executive, unless otherwise agreed by the Executive, if an Event occurs during the one-year period following the date of adoption of the resolution amending or terminating this Agreement.
 
 
(b)
After the Occurrence of an Event.  After the occurrence of an Event, the Company, by resolution of the Compensation Committee of the Board of Directors, may amend or terminate this Agreement, but no such amendment or termination of this Agreement shall be effective unless the Executive consents thereto in writing.  Any waiver by an Executive of rights of any benefits due under this agreement for any reason (rehire or other) must be express and in writing.
 
 
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           IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set out above.
 
EXECUTIVE  HICKORYTECH CORPORATION 
 
/s/ Carol Wirsbinski
By: /s/ John W. Finke
Carol Wirsbinski
Its: President and Chief Executive Officer 
 
 

 
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EX-10.3 4 ex10-3.htm EX 10.3 ex10-3.htm
Exhibit 10.3
HICKORYTECH CORPORATION
EXECUTIVE INCENTIVE PLAN
(Amended & Restated as of January 1, 2011)
 

 
Section I. Establishment and Purpose


A.           Establishment

HickoryTech Corporation, a Minnesota corporation (the "Company"), has established, effective January 1, 1989, the HICKORYTECH EXECUTIVE INCENTIVE PLAN, which has since been amended (the "Plan").

B.           Purpose

The purpose of this Plan is to provide a means whereby key executives of the Company may be rewarded according to their impact on, and contribution to, the operating success of the Company and its component organizations.  It is also the purpose of this Plan to motivate such executives to achieve a continuing, high level of personal effectiveness.
 
Section II. Definitions, Gender and Number


A.           Definitions

As used in this Plan, the following terms are defined as indicated unless the context clearly requires a different meaning:

1.  
"Adjusted Cash Flow" means EBITDA less CAPEX.

2.  
"Annual Award" means the total annual cash award earned under the provisions of this Plan.

3.  
"Board of Directors" or "Board" means the Board of Directors of the Company.

4.  
"Chair" means the Chair of the Board of the Company.

5.  
"Committee" or "Compensation Committee" means a committee appointed by and responsible to the Board to administer this Plan, among other things, and whose  members shall be ineligible to participate in this Plan.

6.  
"Company" means Hickory Tech Corporation, a Minnesota corporation and any successor thereto, including all Subsidiaries.

7.  
"EBITDA" means earnings before interest expense, income taxes, depreciation, and amortization, and it includes employee Team Award expense.
 
 
 

 
 
8.  
"EBITDA Minus CAPEX" means EBITDA minus the capital and expenditures for   property, plant and equipment, and capitalized software and any other capitalized expenditures approved by the Compensation Committee to be included in this definition.

9.  
"Net Income" means after-tax net income as defined by Generally Accepted Accounting Principles.

10.  
"Participant" means an executive of the Company who has been selected to participate in the Plan.

11.  
"Performance Account" means an account maintained in the name of a Participant with credits in Company stock.

12.  
"Plan" means the HickoryTech Executive Incentive Plan, as stated herein and as further amended from time to time.

13.  
"Plan Year" means any fiscal year of the Company for which the Plan is in effect.

14.  
"Retirement" means termination for any reason (other than death or permanent and total disability) after attaining age 55 with ten years of service or after attaining age 62 irrespective of service.

15.  
"Revenue" means after-elimination operating revenue as defined by Generally Accepted Accounting Principles.

16.  
"Subsidiary" means a corporation, the majority of whose stock is owned by the Company.

17.  
"Trustee" means Trustee for the Trust under the HickoryTech Corporation Executive Plan. This Trust holds shares of Company Stock for the eligible Participants’ Performance Award Accounts.

B.           Gender and Number

Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural.
 
 
 
 
2

 

Section III. Summary of Plan


A.
Annual Award Opportunity

Each fiscal year, an award opportunity will be established for each Plan Participant, expressed as a percent of the Participant's base salary as of the close of the plan year.  (See Attachment A)

B.