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Enventis Corp 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10-q.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, 2009

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   þ No   ¨

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 May 1, 2009: 13,041,280.



 
PART I

Item 1
 
 3
 
 
 3
 
 
 4
 
 
 5
 
 
 6
Item 2
 
14
Item 3
 
24
Item 4
24
 
 
 
 
Item 1
 
25
Item 1A
 
25
Item 2
 
25
Item 3
 
25
Item 4
 
25
Item 5
 
25
Item 6
 
25
 
 
26
 
Exhibits
 



 
HICKORY TECH CORPORATION
 
 
(Unaudited)
 
             
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands, except share and per share amounts)
 
2009
   
2008
 
Operating Revenue:
           
Telecom Sector
  $ 17,672     $ 18,294  
Enventis Sector
               
   Equipment
    6,791       10,168  
   Services     8,998       7,438  
   Total Enventis Sector
    15,789       17,606  
Total operating revenue
    33,461       35,900  
                 
Costs and expenses:
               
Cost of sales, equipment, excluding
               
   depreciation and amortization
    5,999       8,697  
Cost of services, excluding
               
   depreciation and amortization
    12,465       11,690  
Selling, general and administrative expenses
    5,156       5,686  
Depreciation      5,069       4,669  
Amortization of intangibles
    214       289  
Total costs and expenses
    28,903       31,031  
                 
Operating income
    4,558       4,869  
                 
Other income and expense:
               
Interest and other income
    9       27  
Interest expense
    (1,708 )     (1,697 )
    Total other (expense)
     (1,699 )      (1,670 )
                 
Income before income taxes
    2,859       3,199  
Income tax provision
    1,233       1,418  
                 
Net income
  $ 1,626     $ 1,781  
                 
                 
Basic earnings per share
  $ 0.12     $ 0.13  
                 
Weighted average common shares outstanding
    13,018,602       13,301,409  
                 
                 
Diluted earnings per share
  $ 0.12     $ 0.13  
                 
Weighted average common and equivalent shares outstanding
    13,019,248       13,306,910  
                 
Dividends per share
  $ 0.13     $ 0.12  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 
 

HICKORY TECH CORPORATION
(unaudited)
   
(Dollars in thousands, except share and per share amounts)  
March 31, 2009
   
December 31, 2008
 
ASSETS
 
Current assets:
           
        Cash and cash equivalents
  $ 6,565     $ 1,626  
        Receivables, net of allowance for doubtful accounts of $813 and $905
    16,375       26,292  
        Inventories
    5,786       8,674  
        Income tax receivable
    -       566  
        Deferred income taxes
    2,064       2,064  
        Prepaid expenses
    2,230       1,409  
        Other
    669       1,114  
            Total current assets
    33,689       41,745  
                 
Investments
    4,306       4,066  
                 
Property, plant and equipment
    340,187       338,510  
        Accumulated depreciation
    (191,001 )     (187,157 )
            Property, plant and equipment, net
    149,186       151,353  
                 
Other assets:
               
       Goodwill
    25,239       25,239  
       Intangible assets, net
    642       856  
       Deferred costs and other
    2,128       2,249  
           Total other assets
    28,009       28,344  
                 
Total assets
  $ 215,190     $ 225,508  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
               
       Extended term payable
  $ 4,768     $ 10,474  
       Accounts payable
    2,307       3,133  
       Accrued expenses and other
    6,004       8,001  
       Accrued income taxes
    309       -  
       Deferred revenue
    5,368       6,205  
       Current maturities of long-term obligations
    1,671       1,621  
           Total current liabilities
    20,427       29,434  
                 
Long-term liabilities:
               
       Debt obligations, net of current maturities
    123,918       125,384  
       Financial derivative instruments
    2,801       3,286  
       Accrued income taxes
    7,578       7,517  
       Deferred income taxes
    18,489       18,282  
       Deferred revenue
    1,500       1,646  
       Accrued employee benefits and deferred compensation
    10,286       10,210  
           Total long-term liabilities
    164,572       166,325  
                 
                Total liabilities
    184,999       195,759  
                 
Commitments and contingencies
    -       -  
                 
Shareholders' equity:
               
       Common stock, no par value, $.10 stated value
               
           shares authorized: 100,000
               
   Shares issued and outstanding: 13,041,280 in 2009 and 12,992,376 in 2008
    1,304       1,299  
       Additional paid-in capital
    11,692       11,504  
       Retained earnings
    20,135       20,199  
       Accumulated other comprehensive (loss)
    (2,940 )     (3,253 )
              Total shareholders' equity
    30,191       29,749  
                 
Total liabilities and shareholders' equity
  $ 215,190     $ 225,508  
The accompanying notes are an integral part of the consolidated financial statements.
HICKORY TECH CORPORATION
 
 
(Unaudited)
 
       
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands)
 
2009
   
2008
 
OPERATING ACTIVITIES:
           
Net income
  $ 1,626     $ 1,781  
Adjustments to reconcile net income to net
               
  cash provided by operating activities:
               
    Depreciation and amortization
    5,283       4,958  
    Amortization of gain on sale of financial derivative instrument
    -       (332 )
    Accrued patronage refunds
    (149 )     (161 )
    Other
    134       65  
    Changes in operating assets and liabilities
               
        Receivables
    9,984       7,032  
        Prepaids
    (821 )     (276 )
        Inventories
    2,888       (695 )
        Accounts payable and accrued expenses
    (2,846 )     (2,772 )
        Deferred revenue, billings and deposits
    (983 )     (111 )
        Income taxes
    936       1,376  
        Other
    478       481  
Net cash provided by operating activities
    16,530       11,346  
                 
INVESTING ACTIVITIES:
               
Additions to property, plant and equipment
    (2,636 )     (3,413 )
Net cash (used in) investing activities
    (2,636 )     (3,413 )
                 
FINANCING ACTIVITIES:
               
Net change in extended term payables arrangement
    (5,706 )     (6,938 )
Borrowings on credit facility
    -       8,500  
Payments on credit facility and capital lease obligations
    (1,626 )     (6,638 )
Proceeds from issuance of common stock
    67       59  
Dividends paid
    (1,690 )     (1,595 )
Net cash (used in) financing activities
    (8,955 )     (6,612 )
                 
Net increase in cash and cash equivalents
    4,939       1,321  
Cash and cash equivalents at beginning of the period
    1,626       171  
Cash and cash equivalents at the end of the period
  $ 6,565     $ 1,492  
                 
Supplemental disclosure of cash flow information:
               
    Cash paid for interest
  $ 1,783     $ 2,107  
    Net cash paid for income taxes
  $ 298     $ 42  
Non-cash investing and financing activities:
               
    Property, plant and equipment acquired with capital leases
  $ 210     $ 182  
    Change in other comprehensive income from financial derivative
               
    and post-retirement benefits
  $ 313     $ (1,311 )
The accompanying notes are an integral part of the consolidated financial statements.
 


HICKORY TECH CORPORATION
March 31, 2009
PART 1. FINANCIAL INFORMATION



Note 1.   Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements of Hickory Tech Corporation (HickoryTech, we, our or the Company) 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 the Company’s 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 Company’s financial statements and present fairly the results of operations, financial position, and cash flows of the Company 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 the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, 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 Telecom Sector and the Enventis Sector. All inter-company transactions have been eliminated from the consolidated financial statements.

Cost of Sales - equipment (excluding depreciation and amortization)
Cost of sales for the Enventis 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.




Recent Accounting Developments

In April of 2009, the FASB issued FSP FAS 107-1, APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“FSP FAS 107-1, APB 28-1”). FSP FAS 107-1, APB 28-1 requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. FSP FAS 107, APB 28-1 is effective for interim and annual periods ending after June 15, 2009 and will be adopted by us in the second quarter of 2009. We currently do not expect adoption of this standard to have a material effect on our consolidated financial position or results of operations.

Effective January 1, 2009 we adopted Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS No. 141(R)”) which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired company and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. Upon adoption, this standard did not have a material effect on our consolidated financial statements.

Effective January 1, 2009 we adopted Statement of Financial Accounting Standards No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial reporting. The adoption of SFAS No. 161 did not have a material effect on our consolidated financial statements.

Effective January 1, 2009 we adopted FASB Staff Position Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”) related to our non-financial assets and non-financial liabilities. The adoption of SFAS 157 did not have a material effect on our consolidated financial statements.

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 Hickory Tech 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)
 
2009
   
2008
 
             
Net Income
  $ 1,626     $ 1,781  
                 
Weighted average shares outstanding
    13,018,602       13,301,409  
Stock options (dilutive only)
    -       3,848  
Stock subscribed (ESPP)
    646       1,653  
Total dilutive shares outstanding
    13,019,248       13,306,910  
                 
Earnings per share:
               
    Basic
  $ 0.12     $ 0.13  
    Diluted
  $ 0.12     $ 0.13  

Options to purchase 451,200 and 441,000 shares for the three months ended March 31, 2009 and 2008, 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. Listed below is the number of shares outstanding as of the record date for the first quarter of 2009 and 2008, respectively.
 
 
Shares outstanding on record date
 
2009
   
2008
 
First quarter (Feb. 15)
   
13,000,953
     
13,292,419
 

Dividends per share are based on the quarterly dividend per share as declared by the HickoryTech Board of Directors. HickoryTech paid dividends of $.13 per share and $.12 per share in the first quarter of 2009 and 2008, respectively.

During the first three months of 2009 and 2008, shareholders have elected to reinvest $67,000 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 Instrument.” Comprehensive income for the three months ended March 31, 2009 and 2008 was $1,939,000 and $470,000, respectively.

The following summary sets forth the components of accumulated other comprehensive income/(loss), net of tax:

                           
Accumulated
 
   
Unrecognized
   
Unrecognized
   
Unrecognized
   
Unrealized
   
Other
 
   
Net Actuarial
   
Prior Service
   
Transition
   
Gain/(Loss)
   
Comprehensive
 
(Dollars in thousands)
 
Loss (1)
   
Credit (1)
   
Asset (1)
   
on Derivatives
   
Income/(Loss)
 
December 31, 2008
  $ (1,375 )   246     (145 )   (1,979 )   (3,253 )
2009 Activity
    20       (8 )     9       292       313  
March 31, 2009
  $ (1,355 )   $ 238     $ (136 )   $ (1,687 )   $ (2,940 )
                                         
(1) Amounts pertain to our post-retirement benefit plans.
                                       

Note 4.   Acquisition, Disposition and Discontinued Operations

Effective December 31, 2006, we sold all of the outstanding capital stock in Collins Communications Systems Co. (“Collins”) to Skyview Capital, LLC. Contingent payments were payable to HickoryTech over a three year period if financial targets were reached by Skyview Capital, LLC. In the first quarter of 2009 Skyview Capital, LLC liquidated Collins ending our prospects for receiving contingent payments.

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 are 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 Telecom Sector, comprised of materials, as of March 31, 2009 and December 31, 2008 was $3,475,000 and $3,564,000, respectively. The inventory value in the Enventis Sector, comprised of finished goods in transit to customers, as of March 31, 2009 and December 31, 2008 was $2,311,000 and $5,110,000, respectively. The inventory level in the Enventis Sector is subject to the variations in Enventis equipment revenue and the timing of individual customer orders.

Inventories are valued using the lower of cost (perpetual weighted average-cost or specific identification) or market method. 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. As market and other conditions change, additional inventory write-downs may be recorded at the time facts that give rise to the lower value become known.



Note 6.  Intangible Assets

We are required to test acquired goodwill for impairment on an annual basis based upon a fair value approach. Additionally, goodwill shall be tested 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, 2008 which resulted in no impairment charges to goodwill. In the first quarter of 2009 there was no event or circumstance change that would have more likely than not reduce the fair value below its carrying value. Our goodwill is $25,239,000 as of March 31, 2009 and December 31, 2008.

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:

(Dollars in thousands)
     
As of March 31, 2009
   
As of December 31, 2008
 
       
Gross Carrying
   
Accumulated
   
Gross Carrying
   
Accumulated
 
   
Useful Lives
 
Amount
   
Amortization
   
Amount
   
Amortization
 
Definite-Lived Intangible Assets
                           
Customer relationships
 
1 - 8 years
  $ 4,229     $ 3,592     $ 4,229     $ 3,379  
Other intangibles
 
1 - 5 years
    730       725       730       724  
Total
      $ 4,959     $ 4,317     $ 4,959     $ 4,103  

We periodically reassess the carrying value, useful lives and classifications of identifiable assets. Amortization expense related to the definite-lived intangible assets was $214,000 and $289,000 for the three months ended March 31, 2009 and 2008, respectively. Total estimated amortization expense for the remaining nine months of 2009 and the five years subsequent to 2009 is as follows: 2009 (April 1 – December 31) – $640,000; 2010 - $2,000; with none thereafter.

 

Note 7.  Quarterly Sector Financial Summary

(Dollars in thousands)
             
Corporate and
       
Three Months Ended March 31, 2009
 
Telecom
   
Enventis
   
Eliminations
   
Consolidated
 
Revenue from unaffiliated customers
  $ 17,672     $ 15,789     $ -     $ 33,461  
Intersegment revenue
    243       141       (384 )     -  
   Total operating revenue
    17,915       15,930       (384 )     33,461  
                                 
Depreciation and amortization
    4,120       1,149       14       5,283  
Operating income
    3,385       1,155       18       4,558  
Interest expense
    33       -       1,675       1,708  
Income taxes
    1,374       474       (615 )     1,233  
Income (loss) from operations
    1,978       681       (1,033 )     1,626  
Identifiable assets
    144,972       57,296       12,922       215,190  
Property, plant and equipment, net
    110,084       38,826       276       149,186  
Capital expenditures
    1,435       1,191       10       2,636  
                                 
                   
Corporate and
         
Three Months Ended March 31, 2008
 
Telecom
   
Enventis
   
Eliminations
   
Consolidated
 
Revenue from unaffiliated customers
  $ 18,294     $ 17,606     $ -     $ 35,900  
Intersegment revenue
    130       138       (268 )     -  
   Total operating revenue
    18,424       17,744       (268 )     35,900  
                                 
Depreciation and amortization
    3,926       1,020       12       4,958  
Operating income (loss)
    3,547       1,421       (99 )     4,869  
Interest expense
    23       -       1,674       1,697  
Income taxes
    1,456       587       (625 )     1,418  
Income (loss) from operations
    2,068       834       (1,121 )     1,781  
Identifiable assets
    152,000       60,645       7,477       220,122  
Property, plant and equipment, net
    115,786       35,936       140       151,862  
Capital expenditures
    2,420       993       -       3,413  

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 2009. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 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, 2008 for a complete description of all stock-based compensation plans.

Share-based compensation expense recognized for the three months ended March 31, 2009 and 2008 was $8,000 and $14,000, respectively. Share-based compensation expense recognized in our Consolidated Statement of Operations for the first three months of 2009 and 2008 included compensation expense for share-based payment awards granted prior to, but not yet completely vested as of March 31, 2009 and 2008. Historical data is used to estimate pre-vesting forfeitures and are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.



The fair value of each option award is estimated on the date of the grant using a Black-Scholes option valuation model. We use a seven-year period to calculate the historical volatility of our stock price for use in the valuation model. The dividend yield rate is based on our current dividend payout pattern and current market price. The risk-free rate for options is based on a U.S. Treasury rate commensurate with the expected terms. The expected term of options granted is derived from historical experience and represents the period of time that options granted are expected to be outstanding.
 
There were no stock option awards granted during the three months ended March 31, 2009 and 2008, respectively.  Although we have authority to issue options under the Stock Award Plan, no current compensation programs have options as a component.

Stock options outstanding and exercisable as of March 31, 2009, did not have any aggregate intrinsic value. As of March 31, 2009 there was $3,000 of total unrecognized compensation costs related to non-vested stock options granted under the Company’s Stock Award Plan. This expense is expected to be recognized during the next twelve months.

A summary of stock option activity is as follows:
 
         
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding at January 1, 2009
    471,200     $ 12.79  
    Granted
    -       -  
    Exercised
    -       -  
    Forfeited
    -       -  
    Expired
    (20,000 )     13.19  
Outstanding at March 31, 2009
    451,200     $ 12.77  
Exercisable at March 31, 2009
    446,200     $ 12.84  

The following table provides certain information with respect to stock options outstanding at March 31, 2009:

Range of
   
Stock Options
   
Weighted Average
   
Weighted Average Remaining
 
Exercise Prices
   
Outstanding
   
Exercise Price
   
Contractual Life
 
$6.00 - $8.00
      15,000       $6.95       7.42  
$8.00 - $12.00
      177,200       10.26       4.16  
$12.00 - $16.00       205,250       13.95       2.05  
$16.00 - $21.00       53,750       18.18       1.97  
        451,200       $12.77       3.05  

The following table provides certain information with respect to stock options exercisable at March 31, 2009:

Range of
   
 Stock Options
   
 Weighted Average
   
 Weighted Average Remaining
 
Exercise Prices
   
Exercisable
   
Exercise Price
   
Contractual Life
 
$6.00 - $8.00       10,000       $6.95       7.42  
$8.00 - $12.00       177,200       10.26       4.16  
$12.00 - $16.00       205,250       13.95       2.05  
$16.00 - $21.00       53,750       18.18       1.97  
        446,200       $12.84       3.00  

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 in accordance with Statement of Financial Accounting Standards No. 133,”Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended by Statement of Financial Accounting Standard No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” which requires derivative instruments to be recorded on the balance sheet at fair value.



Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The adoption of SFAS 157 did not have a material impact on our financial condition and results of operations.

SFAS 157 defines fair value as 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. SFAS 157 also describes three levels of inputs that 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.

Effective January 1, 2009, we adopted Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), an amendment of SFAS No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of: 1) how and why an entity uses derivative instruments, 2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flow. The adoption of SFAS No. 161 did not have a material affect upon our Consolidated Financial Statements. Listed below are our current interest-rate swap agreements which lock in our interest rates on current variable-interest rate debt.
 
Interest-Rate Swap Agreement Effective Dates
 
Coverage Amount
   
Rate
 
March 2007 - March 2010
  $ 60,000,000       4.89 %
March 2008 - February 2010
  $ 40,000,000       2.54 %
March 2010 - September 2011
  $ 80,000,000       2.15 %

The fair value of our derivatives at March 31, 2009 and December 31, 2008 are recorded as financial derivative instruments under the long-term liabilities section of our Balance Sheet. The fair value of our derivatives at March 31, 2009 and December 31, 2008 is a net liability of $2,801,000 and $3,286,000, 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 Statement of Income. Proceeds of $332,000 were recognized as an offset to interest expense in the three months ended March 31, 2008 due to the termination of two interest-rate swap agreements with original maturities ending in June of 2008. The table below illustrates the effect of derivative instruments on consolidated operations for the periods ending March 31, 2009 and 2008, respectively.
 
(Dollars in thousands)
Gain/(Loss) Reported
Location of Gain/Proceeds
Amount of Gain/Proceeds
 
 
in Accumulated Other
Reclassified from Accumulated
Recognized in
 
Derivatives in Statement 133
Comprehensive Loss
Other Comprehensive Income
Income on Derivative
 
Cash Flow Hedging Relationships
2009
 
2008
into Income
2009
 
2008
 
                 
Interest Rate Contracts
 $292
 
 $(1,324)
Interest Expense
 $-
 
 $332
 

Note 11.  Employee Post-Retirement Benefits

HickoryTech provides post-retirement health care and life insurance benefits for certain employees. HickoryTech accounts for these post-retirement benefits in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” New employees are not eligible for post-retirement health care and life insurance benefits.
 
 
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands)