| HICKORY TECH CORP Item 1A Risk Factors |
| Additional risks of which we are currently unaware or believe to be immaterial may also result in events that could impair our business operations |
| If any of the events or circumstances described in the following risks actually occur, our business, financial condition or results of operations may suffer, and the trading price of our stock could decline |
| 8 ______________________________________________________________________ We may not be able to successfully introduce new products and services |
| Our success depends upon our ability to successfully introduce new products and services, such as the ability of our competitive local exchange carrier (CLEC) business, which we initiated in 1998, to provide competitive local service in new markets, the ability of our Information Solutions subsidiary (which is a billing and data services company) to implement, market, and sell its SuiteSolution billing system, our ability to offer bundled service packages on terms attractive to our customers, our ability to successfully expand our long distance and Internet offerings to new markets, our ability to introduce and distribute the equipment and systems of manufacturers of switching equipment and the suppliers of communications technology compared to the competitive alternatives of other suppliers and the ability of Enventis to provide competitive IP services, including telecommunications and network solutions |
| We may not accurately predict technological trends or the success of new products in these markets |
| New product development often requires long-term forecasting of market trends, development and implementation of new technologies and processes and substantial capital investment |
| In addition, we do not know whether our products and services will meet with market acceptance or be profitable |
| Many of our competitors have greater resources than we do |
| If we fail to anticipate or respond in a cost-effective and timely manner to technological developments, changes in industry standards or customer requirements, if we have any significant delays in product development or introduction, or if any of our relationships with our vendors are negatively impacted, our business, operating results and financial condition could be materially adversely affected |
| Possible changes in the demand for our products and services including lower-than-anticipated-demand for telephone services, reductions in access lines per household or minutes of use volume associated with telephone service, declines in demand for data processing services or billing systems for the Information Solutions Sector, in communication and data equipment for the Telecom, Enterprise Solutions and the Enventis Sectors, migration in technology from circuit switched to IP based technology for services for all sectors, and for network solutions for our Telecom and Enventis Sectors, may result in lower gross margins and operating profitability |
| In addition, our gross margins could decrease based on the amount of new products we sell that have lower startup gross margins than our existing products and services |
| We currently manage potential obsolescence through reserves, but future technology changes may exceed current reserves |
| Some sectors of our business have experienced lower customer demand in recent years |
| Over the past several years, we have experienced lower customer demand for our billing services out of our Information Solutions Sector due to the reluctance of customers to spend capital dollars on billing software and services offered by our Information Solutions Sector |
| We do not know whether customer demand for these services will increase |
| Also, due to the general slowdown in the economy over the past several years, and due to innovation in the Internet Protocol network migration of communications systems, our Enterprise Solutions Sector has experienced reduction of demand for its products and services |
| During downturns in the economy and during periods of technology migration, customers are hesitant to spend capital dollars on telephone and communications equipment offered by Enterprise Solutions as they seek to retain the use of their existing systems |
| We cannot estimate when customer demand for Enterprise Solutions’ products and services will increase |
| 9 ______________________________________________________________________ We may experience difficulty integrating Enventis into our existing business |
| We acquired Enventis on December 30, 2005 and are in the beginning stages of selecting effective integration strategies |
| Enventis is a self-contained operations entity, with its own sales, service, customer support, accounting, planning and management |
| It is capable of being a successful addition to HickoryTech as a subsidiary with minimal change and with a transition of corporate support functions only |
| The seller of Enventis has executed a nine-month transition support agreement with us, and we believe this provides adequate time to bring accounting systems from the Oracle database environment where they are now operated, to the PeopleSoft environment we will utilize in 2006 |
| In addition to systems, there is the risk of integrating the market served |
| Enventis and HickoryTech operate in similar industries, but our niche markets are different |
| Only in rare cases did Enventis and HickoryTech bid on the same business account |
| In summary, systems and market integration are risks in bringing Enventis into HickoryTech in 2006 |
| If we experience difficulty integrating Enventis, then maximum cash flow potential for the acquisition may not be realized |
| Technological advances in the telecommunications industry create increased operating costs |
| The telecommunications industry has seen ever increasing technological advances over the past several years |
| These technological advances increase costs to maintain and improve networks and provided top-end communication products and services that are demanded by our customer base in order to stay competitive with other companies that offer similar services |
| Innovation in the Internet Protocol network migration of switched communication services as well as in our communication system products may create challenges to our ability to provide high-quality service and may create reduced demand as customers wait to study their choices |
| Wireless communications, mobile/non-fixed point service and various Internet and satellite communication innovations also create technological competition for us |
| The telecommunications industry is highly competitive |
| The Telecommunications Act of 1996 permitted competition among communication companies for the rights to interconnect with established networks and to establish new networks in order to offer telephone service to customers in a franchised area |
| We serve as an incumbent local exchange carrier in a number of franchised areas, as well as competing in a number of markets against other established incumbents |
| The differentiating competitive factors include products and service, technology advancement, reputation and price |
| We believe that competition and pricing pressures will increase in the future as competitors seek to increase market share by offering new products and services or reduced pricing |
| This enhances the risk that we may not be able to respond on a timely or profitable basis |
| In addition, other telecommunication carriers look to stay competitive by altering their choice of networking routes, points of interconnection, technology or signaling protocol, and other telecommunication issues, all which could have a material adverse affect on our profitability |
| Future regulation may result in lower revenues |
| The outcome of future regulatory and judicial proceedings pertaining to interconnection agreements and access charge reform may result in greater-than-anticipated reductions in revenues received from federal and state access charges for switching long distance traffic |
| Regulatory rules and policies also may adversely affect our ability to change our prices for telephone services in response to competitive pressures |
| We may not be able to manage our growth effectively |
| Our ability to manage our growth effectively, including our ability to integrate the operations of new businesses internally developed or external businesses acquired into our operations, may adversely affect our business results of operations and financial condition |
| In addition, our ability to manage our business sectors’ development of and migration to SuiteSolution as its primary software platform for billing and customer care management and our ability to achieve projected economies of scale and cost savings, meet pro forma cash flow projections in valuing newly acquired businesses, successfully absorb the impact of changes in accounting policies as required by generally accepted accounting principles, conform with existing debt covenants and negotiate new debt facilities, and identify future acquisition opportunities for growth may also adversely affect our business results of operations and financial condition |
| 10 ______________________________________________________________________ A failure in our operational systems or infrastructure could impair our liquidity, disrupt our business, damage our reputation and cause loss |
| Shortcomings or failures in our internal processes, people or systems could impair our liquidity, disrupt our business, result in liability to customers or regulatory intervention, damage our reputation or result in financial loss |
| For example, our telephone operations rely on a central switch to complete local and long distance phone calls to various customers |
| An interruption in the switch operations could lead to interrupted service for customers |
| In addition, our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, thereby adversely affecting our ability to process transactions |
| Our inability to accommodate an increasing volume of transactions also could constrain our ability to increase revenues and expand our businesses |
| Despite the existence of contingency plans and facilities, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which these businesses are located |
| Our businesses may be adversely affected if we are unable to hire and retain qualified employees |
| Our performance is largely dependant on the talents and efforts of highly skilled individuals in the operations of our telecommunication businesses, including telephone operations, billing software development and telecommunications equipment sales and service |
| Technological advances force our employees to upgrade their knowledge base continually in order to keep pace with these advances |
| Our ability to compete effectively depends upon our ability to attract new qualified employees and retain and motivate our existing employees |
| In addition, because we just acquired Enventis in December 2005 and may acquire additional businesses in the future, our success will depend, in part, upon our ability to retain and integrate personnel from acquired businesses who are necessary to the continued success or the successful integration of these acquired businesses |
| Unanticipated increases in capital spending, operating or administrative costs, or the impact of new business opportunities requiring significant up-front investments |
| Our existing networks require large capitalized up-front investments for growth and maintenance |
| Our operating expenses in the form of payroll for a highly trained workforce and the maintenance cost of telecommunications networks are also large uses of cash |
| Our debt service obligation and our dividends to shareholders also require significant cash each year |
| New business development may require additional up-front investment in assets and funding of early stage operating losses |
| We have business plans which provide adequate sources of cash from operations to fund these endeavors, and we select the balance of old and new business to appropriately fund the company |
| The risk is from any sudden unanticipated increases in cash outflow after we have already initiated our business plans |
| If this were to happen, we would have to alter our future business plans, which possibly could affect our growth |
| Customer payment defaults could have an adverse effect on our financial condition and results of operations |
| As a result of adverse conditions in the communications market, some of our customers have experienced and may continue to experience serious financial difficulties |
| In some cases these difficulties have resulted or may result in bankruptcy filings or cessation of operations |
| If customers experiencing financial problems default on paying amounts owed to us, we may not be able to collect these amounts or recognize expected revenue |
| It is possible those customers from whom we expect to derive substantial revenue will default or that the level of defaults will increase |
| Any material payment defaults by our customers would have an adverse affect on our results of operations and financial condition |
| We currently manage this exposure through an allowance for doubtful accounts |
| An unexpected bankruptcy or default from a customer may not be fully reserved in our allowance |
| In addition, some of our competitors engage in financing transactions with some of their customers for the purchase of equipment |
| To remain competitive, it may become necessary for us to offer similar financing arrangements |
| If such financings occur, it would be our intent to sell all or a portion of these commitments and outstanding receivables to third parties |
| In the past, we have sold some receivables with recourse and have had to compensate the purchaser for the related losses |
| 11 ______________________________________________________________________ We may encounter litigation that has a material impact on our business |
| We are a party to various lawsuits, proceedings and claims arising in the ordinary course of business or otherwise |
| Many of these disputes may be resolved amicably without resort to formal litigation |
| The amount of monetary liability resulting from the ultimate resolution of these matters cannot be determined at this time |
| None of the matters we are aware of have required us to record loss reserves, and at this time we believe the ultimate resolution of these lawsuits, proceedings and claims will not have a material adverse impact on our business, results of operations or financial condition |
| Because of the uncertainty inherent in litigation, it is possible that unfavorable resolutions of these or other lawsuits, proceedings and claims against us have a material adverse affect on our business, results of operations or financial condition |
| A failure to maintain effective internal controls could adversely affect our business |
| Although we have completed the documentation and testing of the effectiveness of our internal control over financial reporting for fiscal 2005, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we expect we will have to incur continuing costs, including increased accounting fees and increased staffing levels, in order to maintain compliance with that section of the Sarbanes-Oxley Act |
| In addition, our ability to integrate the operations of Enventis or other companies that we acquire in the future could impact our compliance with Section 404 |
| In the future, if we fail to complete the Sarbanes-Oxley 404 evaluation in a timely manner, or if our independent registered public accounting firm cannot attest in a timely manner to our evaluation or to the efficacy of our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls |
| In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations |
| Anti-takeover provisions in our charter documents, our shareholder rights plan and Minnesota law could prevent or delay a change in control of our company |
| Provisions of our articles of incorporation and bylaws, our shareholder rights plan (also known as a “poison pill”) and Minnesota law may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable and may limit the market price for our common stock |
| These provisions include the following: • advance notice requirements for shareholder proposals; • authorization for our Board of Directors to issue preferred stock without shareholder approval; and • limitations on business combinations with interested shareholders |
| Some of these provisions may discourage a future acquisition of HickoryTech even though our shareholders would receive an attractive value for their shares or a significant number of our shareholders believe such a proposed transaction would be in their best interest |
| Based on the trading history of our common stock and the nature of the market for publicly traded securities of companies in our industry, we believe that some factors have caused and are likely to continue to cause the market price of our common stock to fluctuate substantially |
| These fluctuations could occur day-to-day or over a longer period of time |
| The factors that may cause such fluctuations include, without limitation: • announcements of new products and services by us or our competitors; • quarterly fluctuations in our financial results or the financial results of our competitors or customers; • increased competition with our competitors or among our customers; • consolidation among our competitors or customers; • disputes concerning intellectual property rights; • the financial health of HickoryTech, our competitors or our customers; • developments in telecommunications regulations; • general economic conditions in the US or internationally; and • rumors or speculation regarding HickoryTech’s future business results and actions |
| In addition, stocks of companies in our industry in the past have experienced significant price and volume fluctuations that are often unrelated to the operating performance of such companies |
| This market volatility may adversely affect the market price of our common stock |
| 12 ______________________________________________________________________ We are subject to risks associated with changes in interest rates |
| We face market risks from changes in interest rates |
| Market fluctuations could affect our results of operations and financial condition adversely |
| At times, we reduce this risk through the use of derivative financial instruments |
| However, we do not enter into derivative instruments for the purpose of speculation |
| We have entered into these interest rate protection agreements, which have remaining maturities of thirty months, in order to manage our exposure to interest rate movements |
| If interest rates fail to rise as anticipated when the instruments were acquired, the affect on the company will be that it will experience higher-than-market-rate interest expense, and have paid for protection which wasn’t needed |
| We also risk entering a higher interest rate environment when the interest rate protection agreements expire in 2008 |
| This could affect our future interest expense level |
| Consolidation among our customers could result in our losing a customer or experiencing a slowdown as integration takes place |
| Consolidation may impact our business as our customers focus on integrating their operations |
| We believe that in certain instances customers engaged in integrating large-scale acquisitions may scale back their purchases of network equipment while the integration is ongoing |
| Further, once consolidation occurs, our customers may choose to reduce the number of vendors they use to source their equipment or consolidate their circuits or network routing, although we have not yet seen this impact |
| After a consolidation occurs, there can be no assurance that we will continue to supply equipment or network services to the surviving communications service provider |
| The impact of significant mergers on our business is likely to be unclear until sometime after such transactions have closed |
| If we seek to secure additional financing, we may not be able to obtain it |
| Also, if we are able to secure additional financing, our shareholders may experience dilution of their ownership interest or we may be subject to limitations on our operations |
| We currently anticipate that our available cash resources, which include our credit facility, existing cash, cash equivalents and available-for sale securities, will be sufficient to meet our anticipated needs for working capital and capital expenditures to execute our near-term business plan, based on current business operations and economic conditions |
| If our estimates are incorrect and we are unable to generate sufficient cash flows from operations and we expend our credit facility, we may need to raise additional funds |
| In addition, if one or more of our strategic acquisition opportunities exceeds our existing resources, we may be required to seek additional capital |
| If we raise additional funds through the issuance of equity or equity-related securities, our shareholders may experience dilution of their ownership interests and the newly issued securities may have rights superior to those of common stock |
| Our existing debt covenants require a portion of the proceeds of an equity offering be applied to the outstanding debt balance |
| If we raise additional funds by issuing additional debt, we may be subject to restrictive covenants that could limit our operating flexibility and interest payments could dilute earnings per share |
| Employee misconduct is difficult to detect and prevent and may have an adverse effect on the Company’s business |
| Although we have not experienced any significant employee misconduct to date, there have been a number of highly publicized cases with other companies involving fraud or other misconduct by employees in recent years, and we may run the risk that employee misconduct could occur |
| It is not always possible to deter or prevent employee misconduct, and the precautions that we take to prevent and detect this activity may not be effective in all cases |