Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

 

**(Markone)**

** **

| **x**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                             |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                       |
| ** ** | **For the fiscal period ending December 31,  2008**                                                                                                                                                                                         |
| ** ** | ** **                                                                                                                                                                                                                                       |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                         |
| ** ** | ** **                                                                                                                                                                                                                                       |
| ** ** | **For the transition period from                 to                 ** |

 

**Commission File Number0-13721**

** **

**HICKORY TECH CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

**221 East Hickory Street**

**Mankato, MN  56002-3248**

(Address of principalexecutive offices)

 

Registrant’s telephonenumber, including area code:**(800) 326-5789**

 

**Securities registeredpursuant to Section 12(b) of the Act:**

 

| **Title of  Class**        | ** ** | **Name of  Exchange on Which Registered** |
|----------------------------|------------|-------------------------------------------|
| Common Stock, no par value |       | NASDAQ Global Select Market               |

 

Securities registered pursuant to Section 12(g) ofthe Act:  None

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No  ̈

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definition of “large accelerated filer, accelerated filer, anon-accelerated filer or smaller reporting company” in Rule 12b-2 of theExchange Act.

 
| o Large  accelerated filer | x Accelerated  filer | o  Non-accelerated filer | o Smaller  reporting company |
|----------------------------|----------------------|--------------------------|------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act).  Yes o  No x

 

The number of shares of the registrant’s common stock, no par value,outstanding as of February 27, 2009 was 13,000,953. The aggregate marketvalue of the registrant’s common stock held by non-affiliates as of June 30,2008 was $104,267,573 based on the closing sale price of $8.27 per share on TheNASDAQ Global Select Market.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Certain portions of the Company’s Proxy Statement for the AnnualMeeting of Shareholders to be held on May 12, 2009 (“Proxy Statement”) areincorporated by reference in Part III of this Form 10-K.

 

 

 

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Table ofContents

 

**TABLE OF CONTENTS**

** **
| **PART I**   |                                                                                                           |   |
|--------------|----------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                           |   |
| Item  1.     | Business                                                                                                       | 3      |
| Item  1A.    | Risk  Factors                                                                                                  | 15     |
| Item 1B.     | Unresolved  Staff Comments                                                                                     | 25     |
| Item 2.      | Properties                                                                                                     | 25     |
| Item 3.      | Legal  Proceedings                                                                                             | 25     |
| Item 4.      | Submission of  Matters to a Vote of Security Holders                                                           | 25     |
|         |                                                                                                           |   |
| **PART II**  |                                                                                                           |   |
|         |                                                                                                           |   |
| Item 5.      | Market for  Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 26     |
| Item 6.      | Selected Financial  Data                                                                                       | 29     |
| Item 7.      | Management's  Discussion and Analysis of Financial Condition and Results of Operations                         | 30     |
| Item 7A.     | Quantitative  and Qualitative Disclosures about Market Risk                                                    | 51     |
| Item 8.      | Financial  Statements and Supplementary Data                                                                   | 55     |
| Item 9.      | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                          | 80     |
| Item 9A.     | Controls and  Procedures                                                                                       | 80     |
| Item 9B.     | Other Information                                                                                              | 81     |
|         |                                                                                                           |   |
| **PART III** |                                                                                                           |   |
|         |                                                                                                           |   |
| Item 10.     | Directors,  Executive Officers of the Registrant and Corporate Governance Matters                              | 81     |
| Item 11.     | Executive Compensation                                                                                         | 81     |
| Item 12.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters               | 81     |
| Item 13.     | Certain  Relationships and Related Transactions and Director Independence                                      | 82     |
| Item 14.     | Principal  Accountant Fees and Services                                                                        | 82     |
|         |                                                                                                           |   |
| **PART IV**  |                                                                                                           |   |
|         |                                                                                                           |   |
| Item 15.     | Exhibits and  Financial Statement Schedules                                                                    | 82     |
|         |                                                                                                           |   |
| SIGNATURES   |                                                                                                           |

 

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# **Table of Contents**

 

# **Forward-LookingStatements**

# ** **

The Private Securities Litigation Reform Act of 1995 contains certainsafe harbor provisions regarding forward-looking statements. This 2008 AnnualReport on Form 10-K (“Report”) and other documents filed by HickoryTechCorporation under the federal securities laws, including Form 10-Q and Form 8-K,and future verbal or written statements by HickoryTech and its management, mayinclude forward-looking statements. These statements may include, withoutlimitation, statements with respect to anticipated future operating andfinancial performance, growth opportunities and growth rates, acquisition anddivestiture opportunities, business strategies, business and competitiveoutlook and other similar forecasts and statements of expectation. Words suchas “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”“targets,” “projects,” “will,” “may,” “continues,” and “should,” and variationsof these words and similar expressions, are intended to identify theseforward-looking statements. Such forward-looking statements are subject torisks and uncertainties that could cause HickoryTech’s actual results to differmaterially from such statements. These risks and uncertainties include thoseidentified under Part I — Item 1A — “Risk Factors” beginning on page 15.

 

Because of these risks, uncertainties and assumptions and the fact thatany forward-looking statements made by HickoryTech and its management are basedon estimates, projections, beliefs and assumptions of management, they are notguarantees of future performance and you should not place undue reliance onthem. In addition, forward-looking statements speak only as of the date theyare made which is the filing date of this Form 10-K. With the exception ofthe requirements set forth in the federal securities laws or the rules andregulations of the Securities and Exchange Commission, we do not undertake anyobligation to update or review any forward-looking information, whether as aresult of new information, future events or otherwise.

 

**PART I**

 

**Website Access to Securities and Exchange Commission Reports**

 

Our website at www.hickorytech.com provides information about our productsand services, along with general information about HickoryTech and itsmanagement, financial results and press releases. Copies of our most recentAnnual Report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to those reports filed pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934, can be obtained, free ofcharge, as soon as reasonably practical after such material is electronicallyfiled, or furnished to the Securities and Exchange Commission. To obtain thisinformation visit our website noted above and click on “Investor Relations,” orcall (507) 387-3355.

 

**Code of Ethics and Code of Conduct**

 

Our Board of Directors has adopted a Code of Ethics that is applicableto all directors, the chief executive and chief financial officers, toemployees involved in financial reporting, and to other designated employees.All employees of the Company have adopted a Code of Conduct and have undergonetraining on this code and ethics. Our Board of Directors has also adoptedwritten charters for its committees that comply with the NASDAQ Global SelectMarket. Copies of the committee charters are available on our website or uponrequest by contacting our Investor Relations department at (507) 387-3355.

 

# **Item 1. Business**

# ** **

“HickoryTech” or the “Company” refers to Hickory Tech Corporation aloneor with its wholly owned subsidiaries, as the context requires. When thisreport uses the words “we,” “our,” or “us,” it refers to the Company and itssubsidiaries unless the context otherwise requires.

 

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##### ***Company Overview and History***

##### *** ***

HickoryTech is a diversified communications company headquartered inMankato, Minnesota with more than 110 years of experience in the localtelephone exchange business. We operate in two principal business segments: theTelecom Sector and the Enventis Sector.

 

The Telecom Sector is comprised of two service and product lines. Thefirst service and product line is the operation of three local telephonecompanies or incumbent local exchange carriers (“ILECs”) and the operation ofone competitive local exchange carrier (“CLEC”) telephone company. Our originalbusiness consisted of the operation of a single ILEC and began in 1898. In1985, we formed HickoryTech Corporation as a holding company for our currentILECs and to serve as a platform to expand our business. In 1998, we formed aCLEC, which provides the competitive services of local service, long distance,high-speed Internet access (“DSL”) and digital TV. All of our ILEC and CLECoperations are operated as one integrated unit.

 

In our Telecom Sector, the second service and product line consists ofdata processing services provided through National Independent Billing, Inc.(“NIBI”), a HickoryTech subsidiary. The primary internal users of NIBI servicesare the ILECs and CLEC we operate in the Telecom Sector. NIBI activities are ofstrategic value to HickoryTech, primarily because of the support services itprovides to these captive telephone companies. NIBI also sells its servicesexternally to other companies in the telecommunications industry. The goals,objectives and management of the NIBI product line are closely aligned with,and its operating results included with, those of the Telecom Sector.

 

Our second business segment, the Enventis Sector, began when wepurchased Enventis on December 30, 2005. With a 1,500route-mile fiber optic network, Enventis provides telecommunications services,managed services, transport, security, network integration and support servicesthat combine voice and data into a single platform. Enventis****specializesin providing integrated unified communication solutions for businesses of allsizes - from enterprise multi-office organizations to small and medium-sizedbusinesses, primarily in the upper Midwest.

 

In December 2006, we sold what had been a third business segment,Enterprise Solutions, which provided telephone, data and Internet protocolequipment sales and service. Operating results of Enterprise Solutions arereflected as discontinued operations in all financial statements and schedulesin this report.

 

Our operations are currently conducted through the following sevensubsidiaries:

 

Telecom Sector

 

·                  Mankato Citizens Telephone Company (“MCTC”)

 

·                  Mid-Communications, Inc. (“Mid-Com”)

 

·                  Heartland Telecommunications Company of Iowa, Inc. (“Heartland”)

 

·                  Cable Network, Inc. (“CNI”)

 

·                  Crystal Communications, Inc. (“Crystal”)

 

·                  National Independent Billing, Inc. (“NIBI”)

 

Enventis Sector

 

·                  Enventis Telecom, Inc. (“Enventis”)

 

**IndustrySegments**

 

We report the businessoperations of our three ILECs and CLEC and their associated services along withour NIBI data processing services as a single segment that we refer to as theTelecom Sector. The second business segment, Enventis, includes predominatelybusiness-to-business operations generally outside of the Telecom Sector servicearea. The results of operations of the Enterprise Solutions Sector are reportedas discontinued operations.

 

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**TelecomSector**

 

Our Telecom Sectorprovides local exchange wireline telephone service, long distance, DSL anddigital TV services. This sector includes three ILECs - MCTC, Mid-Com andHeartland. MCTC and Mid-Com provide telephone service in south centralMinnesota, specifically Mankato (a regional hub) and eleven rural communitiessurrounding Mankato. The third ILEC, Heartland, provides telephone service foreleven rural communities in northwest Iowa. In total, there are twenty-threeILEC exchanges within the Telecom Sector. The Telecom Sector also includesCrystal, a CLEC that provides local telephone service, long distance, DSL anddigital TV on a competitive basis in south central Minnesota and near DesMoines, Iowa. NIBI is also part of the Telecom Sector and provides dataprocessing and related services for our affiliated ILECs and CLEC, as well asfor other local exchange telephone companies, CLECs, interexchange networkcarriers, wireless companies and cable TV providers.

 

We also own and operate a900 mile fiber optic network and facilities in Minnesota. These facilities areused to transport interexchange communications as a service totelecommunications customers. Our Minnesota ILECs and CLEC are the primaryusers of these fiber optic cable facilities in the Telecom Sector.

 

The cumulative effect ofongoing declines in network access revenue and the erosion of access lines inservice have reduced the profitability of the Telecom Sector in recent years.The expansion and growth of broadband services, (digital TV and DSL) has helpedto offset a portion of this revenue and profitability decline.

 

**The ILECs**

 

MCTC derives itsprincipal revenue and income from local services charged to subscribers in itsservice area, access services charged to interexchange carriers and theoperation of a toll tandem-switching center in Mankato, Minnesota. Revenue andincome for Mid-Com are also derived from local service charges in its area ofoperation and by providing access to long distance services for its subscribersthrough eleven rural exchanges in southern Minnesota, which all route theirtraffic through the toll center in Mankato. Local and interexchange telephoneaccess for the two companies is provided on an integrated basis. The local andinterexchange telephone access for both telephone companies utilize the samefacilities and equipment and are managed and maintained by a common workforce.Heartland derives its principal revenue and income from local services chargedto subscribers in its service area in Iowa, as well as from providinginterexchange access for its subscribers. Interexchange telephone access isprovided by all three of our ILEC subsidiaries by connecting the communicationsnetworks of interexchange carriers and wireless carriers with the equipment andfacilities of end-users through its switched networks or private lines. Adecline in network access revenue has been the primary reason for reducedprofitability of the Telecom Sector in the recent years.

 

As local exchangetelephone companies, MCTC, Mid-Com and Heartland provide end office switchingand dedicated circuits to long distance interexchange carriers. Theserelationships allow our telephone subscribers to place long distance telephonecalls to the telephone network. We provide interexchange access to our networkfor interexchange carriers to conduct long distance business with individualcustomers who select a long distance carrier and for termination of calls toall customers. This interexchange access business is separate and distinct fromour own long distance retail business, which is operated through Crystal. Thelong distance interexchange carriers are significant customers of ours, but nocarrier represents more than 10% of our consolidated revenue.

 

**CLEC**

 

Crystal began operationsin January of 1998 as a CLEC. Today, Crystal offers local telephoneservice, long distance, DSL and digital TV on a competitive basis to customersin southern Minnesota and Iowa and also connects communications networks ofinterexchange carriers and wireless carriers with the equipment and facilitiesof end-users. Crystal has customers in ten rural communities, through eightexchanges in Minnesota and three communities through two exchanges in Iowa thatare not in the geographies of our ILEC service areas. In addition to thesetelephone services, Crystal provides long distance service, DSL and digital TVservice in eleven communities, including communities served by some of ourILECs. The communities in which Crystal provides digital TV services includeSt. Peter (initiated in 2001), Waseca (since 2004), New Richland, Ellendale andSt. Clair (since 2005), Faribault, Lake Crystal and Eagle Lake (since 2006),and Janesville, North Mankato and Mankato (since 2007), all of which arecommunities where we provide telephone service either as an ILEC or CLEC.

 

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Crystal is not dependentupon any single customer or small group of customers. No single customeraccounts for 10% or more of HickoryTech’s consolidated revenue.

 

**NIBI**

 

NIBI’s principal activityis the provision of monthly batch processing of computerized data. The servicesprovided by NIBI for our telephone company customers include processing of longdistance telephone calls from data sources and telephone switches, preparationof subscriber telephone bills, customer record keeping and carrier accessbills.

 

In addition, NIBI hasdeveloped an integrated billing and management system called SuiteSolution®. SuiteSolution® is comparable in the majority of functionalelements to similar products/companies providing end-user billing services forsmall to medium-size independent wireline and wireless service providers inNorth America. SuiteSolution® can provide wireline and wireless carriers theindividual benefits of a billing platform or a total system solution.SuiteSolution® does not utilize unique patentable inventionsor technological innovations in the construction of the product. Commerciallyavailable programming languages are utilized in the development of code thatmay, based on needs of a prospective user, deliver solutions that are preferredover those of competing products.

 

**EnventisSector**

 

We acquired Enventis on December 30,2005. Through Enventis, we provide integrated data services, offer fiberoptic-based communication including Internet protocol (“IP”) based voice, dataand network solutions to business customers in the Upper Midwest. Enventis ownsor has long-term leases to approximately 1,500 route miles of fiber opticcable. Enventis also has extensive local fiber optic rings that directlyconnect the Enventis network with its larger clients (e.g. interexchangecarriers, retail, health care, government and education customers, etc.). Otherlocal fiber rings connect the Enventis network to the local telephoneenterprise central offices. This allows Enventis to utilize a telephone company’sconnections to access its smaller clients. Enventis serves customers throughinterconnections that are primarily leased from third parties (commonlyreferred to as “the last mile”). Enventis, through its equipment revenueproduct line, has business relationships with Cisco Systems, Inc. and iscertified by Cisco as a Gold Partner. The relationship with Cisco Systems, Inc.is a strategic partnership between Cisco (as the supplier) and Enventis (as thedistributor). Enventis provides converged IP services that allow allcommunications (e.g. voice, video and data) to use the same IP datainfrastructure. Enventis has Minnesota based offices located in Plymouth,Duluth and Rochester and operates data centers in Edina and Mankato.

 

Enventis’ productportfolio includes SingleLinkTM Unified Communications (“SingleLinkTM”), whichserves small-to-medium-sized businesses. SingleLinkTM is a hosted or managed IP communicationsservice that includes local and long distance voice, business IP telephony viaa hosted IP private branch exchange, unified messaging (a single inbox forvoicemail, e-mail, and fax) and dedicated Internet access. SingleLinkTM leverages voiceover Internet protocol (“VoIP”) or Internet protocol telephony over a privateconnection, which minimizes upfront capital investment and informationtechnology management overhead. Enventis has been granted authority to operatefrom the public utility commissions in the majority of states in the countryfor interexchange carrier (private line or long distance) services and wherenecessary has or is seeking authority in states to provide regulated localtelephone (voice) services. Those regulated services augment our VoIP service.Services provided by Enventis compete directly with those from ILECs and othercommunications providers in the area in which it operates. Enventis is notdependent upon any single customer or small group of customers.

 

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**BusinessStrategy**

 

Our vision is to be the leader in connecting business and consumerswith advanced, integrated communications solutions in the regions we serve. Oursuccess depends on the following strategies:

 

·                  **Execute on our Local Market Strategy**. We will continue to leverage the HickoryTech brandand its strong reputation in our legacy markets and offer a competitive,multi-service bundle. We will utilize value added services such as speed,content, and features along with unparalleled customer service as adifferentiator.

 

·                  **Develop and Deploy Advanced Telecommunications Technologies.**We have upgraded our networks to takeadvantage of the fastest growing areas of technology including advanced highbandwidth capabilities and services. We believe our innovative use of VoIPtechnologies combined with our Total Care Support offering will allow us toattract and maintain clients by providing proactive monitoring and deploymentof managed services. Our enhanced SingleLinkTM product, which provides customers with asingle, centrally managed and hosted VoIP-based communications system allowsbusinesses to leverage the powerful benefits of integrated IP communicationswithout the time and capital necessary for on-premise solutions.

 

·                  **Grow Monthly Recurring Revenue Services Through Business to BusinessSales.**Our focusremains on supporting business customers ranging from small to largeenterprise-sized business. We offer integrated communication solutions whichinclude IP telephony, transport, data and network integration services thatcombine voice and data into a single platform. We believe we have created asustainable competitive advantage by utilizing a consultative approach anddeveloping innovative and flexible solutions for our customers. We are able todo this by utilizing our IP expertise, leveraging our extensive fiber network,and offering a full complement of high-quality products and services.

 

·                  **Maintain Stable Cash Flows from Operations and Disciplined CapitalSpending.** Ourlegacy market base provides a recurring revenue stream generating predictablecash flow. Our focus remains on growing our services and support product linesto generate cash flow well in excess of capital expenditure needs. We haveallocated resources to maintain and upgrade our network but our main focus isto optimize our returns by completing only strategic capital outlays, such asIP-based architecture to make our network more efficient and cost effective.

 

·                  **Grow through Selective Strategic Acquisitions**. We intend to continue to pursue adisciplined process of evaluating select acquisitions of businessescomplementary to ours.

 

**RevenueSources**

 

We currently divide our business into two reportable business segments:Telecom and Enventis. The following table summarizes our primary sources ofrevenue within these two segments for the past three years:

 
| **For Year Ended December 31** | ** ** | **2008**   | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|-------------------------------------|------------|------------|------------|-------------|------------|------------|------------|
| ** **                          | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Telecom:                            |       |       |       |        |       |       |       |   |   |   |   |   |   |
| Local Service                       |       | $          | 16,296     |        | 11         | %          | $          | 17,089 |   | 11 | % | $ | 18,224 |   | 14 | % |
| Network Access                      |       | 25,859     |       | 17          | %          | 30,892     |       | 20 | % | 29,936 |   | 23 | % |
| Broadband                           |       | 10,983     |       | 7           | %          | 9,173      |       | 6 | % | 7,505 |   | 6 | % |
| Internet                            |       | 4,723      |       | 3           | %          | 4,612      |       | 3 | % | 4,467 |   | 3 | % |
| Long Distance                       |       | 4,563      |       | 3           | %          | 5,068      |       | 3 | % | 4,877 |   | 4 | % |
| Other                               |       | 10,775     |       | 7           | %          | 10,013     |       | 6 | % | 9,887 |   | 7 | % |
| Enventis:                           |       |       |       |        |       |       |       |   |   |   |   |   |   |
| ENS Equipment                       |       | 43,514     |       | 28          | %          | 51,046     |       | 33 | % | 36,191 |   | 27 | % |
| ENS Services                        |       | 12,387     |       | 8           | %          | 8,292      |       | 5 | % | 4,582 |   | 3 | % |
| ETS Services                        |       | 24,075     |       | 16          | %          | 20,464     |       | 13 | % | 17,232 |   | 13 | % |
| Total Revenue                       |       | $          | 153,175    |        | 100        | %          | $          | 156,649 |   | 100 | % | $ | 132,901 |   | 100 | % |

 

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**Telecom Segment**

 

***Local Service*** — We receive monthly recurring revenue for basic local services whichenable end-user customers to make and receive telephone calls within a definedlocal calling area for a flat monthly fee. In addition to subscribing to basiclocal telephone services, our customers may choose from a variety of customcalling features such as call waiting, call forwarding, caller ID, andvoicemail. We also receive reciprocal compensation revenue based oninterconnection agreements with wireless carriers using our network toterminate calls to their wireless subscribers.

 

***Network Access***— We provide access services to othertelecommunications carriers for the use of our facilities to terminate ororiginate long distance calls on our network. We record the details of the longdistance and private line calls through our carrier access billing system andbill the applicable carrier on a monthly basis. Additionally, we billsubscriber line charges to substantially all of our end-user customers foraccess to the public switched network. The monthly subscriber line charges areregulated and approved by the Federal Communications Commission (“FCC”). Inaddition, Network Access revenue is derived from several federally administeredpooling arrangements, designed to provide support and distribute funding to theILECs.

 

***Broadband —***We provide a variety of enhanced data network services on a monthlyrecurring basis to our end-user customers. This includes the DSL access portionof traditional Telecom DSL service. We also receive monthly recurring revenuefrom our end-user subscribers for the provision of commercial TV programming incompetition with local cable TV, satellite dish TV, and on-air TV serviceproviders. We serve 11 communities with our digital TV services and launchedservices in our largest market of Mankato, MN in July of 2007. Our digitalTV services reflect our strategy to offer competitive integrated communicationservices to residents within our geographic footprint.

 

***Internet*****—**Weprovide Internet services including dial-up and high-speed Internet to businessand residential customers. We receive revenue in various usage based and flatrate packages based on the level of service, data speeds, and features. We alsoprovide email and web hosting services.

 

***Long Distance*****—**Ourend-user customers are billed for toll or long distance service on either a percall or flat rate basis. This also includes the provision of directoryassistance, operator service, and long distance private lines.

 

***Other —***Our Telecom Sector generates revenue from directory publishing, customerpremise equipment sales, bill processing, and add/move/change services. Ourdirectory publishing revenue is monthly recurring revenue from end-usersubscribers for yellow page advertising in our telephone directories*.* Our bill processing revenue is generated from providingdata processing as a service to other telephone service providers. We collect acombination of monthly recurring revenue, software license fees, andintegration services revenue from companies with which we have established a long-termdata processing relationship.

 

**Enventis Segment**

 

***Enterprise Network Services (ENS) Equipment*** — We distribute telecommunications anddata processing equipment to customers to meet their unified communications anddata needs. This revenue is generated primarily through the invoicing ofindividual shipments of telecommunication and data products provided bymanufacturers. The customers are exclusively businesses of medium to enterprisesize. Operating results generated from this line of business can fluctuatewidely due to the non-recurring/sales order nature of businesses.

 

***Enterprise Network Services (ENS) —*** This revenue is primarily of a recurring monthlynature and includes services such as network and equipment monitoring,maintenance and equipment consulting.

 

***Enventis Transport Services (ETS) —*** We provide fiber-based transport for regional andnational telecommunications carriers, wireless carriers and other providers. Wecreate customer contracts based on individual customer needs. This revenue isprimarily of a recurring monthly basis and consists of billing for the use ofour fiber network and transport connections. It is primarily under multi-yearcontracts with either interexchange carriers or end-user businesses. We alsoprovide centrally managed and hosted unified communications services.

 

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**Competition**

 

**Telecom Sector**

 

Competition for voice, long distance and broadband services from newmarket entrants, such as cable providers, wireless providers and competitivetelephone companies, has intensified within the past few years. We compete withthese service providers by providing outstanding customer support and “bundling”our service offerings in a manner that encourages our customers to retain theseservices with us. These bundle packages are customizable and offer competitivediscounts as more services, such as features, high-speed DSL and digital TV areadded to the bundle.

 

Along with consumerssubstituting cable, wireless and VoIP for traditional voice telecommunicationsservices, we have seen increasing numbers and types of competitors within ourindustry and marketplace. We compete with companies that offer private lines inlieu of our switched voice services. Additionally, services provided by othercompanies utilizing various Internet, wireline or wireless technologies permitbypass of the local exchange network. Cable TV companies also provide voiceservices in our markets. These alternatives to the local exchange servicerepresent a potential threat to our long-term ability to provide local exchangeservice at economical rates.

 

Competition existsfor some of the services we provide to interexchange carriers, such asdedicated private lines, network switching and network routing. Thiscompetition comes primarily from the interexchange carriers who redirect theservices provided by us to their own network or other networks. Our provisionof these services is primarily month-to-month service ordered from a generaltariff, which is a schedule of terms, rates and conditions which are approvedby the appropriate state or federal agency. The interexchange carriersprimarily control the procurement of these services. As interexchange carriersmake these rearrangements our revenue in the Telecom Sector may be reduced.

 

We do not believe thatwireless technology represents a significant new threat to our business in thenear term, since wireless has co-existed with our services for two decades.However, we expect to face increased competition from wireless carriers astechnological developments in cellular telephone features, personalcommunications services, wireless network capacity and economies of scale improve,providing our customers with alternatives to the traditional local telephoneservices we provide. Additionally, as consumers look to reduce expenses, theymay be more inclined to discontinue their land line and maintain their wirelessphone.

 

Aggressive competition inthe markets we serve along with more residential customers selecting unlimitedlong distance calling plans are decreasing the rates we are able to charge ourcustomers for long distance.  Productbundling — offering customers the ability to bundle several products andservices — continues to be one of our responses to this aggressive competition.

 

The broadband market inwhich we operate is highly competitive with few barriers to entry. Cableproviders, Internet service providers, long distance carriers andsatellite-based companies currently compete in our marketplace. We believe ourability to sell broadband services on a bundled basis with other servicesenhances our competitive position for continued growth in sales of broadband accessservice.

 

NIBI competes withapproximately 20 other companies in marketing our products and services tosmall to medium-size independent wireline and wireless service providers inNorth America. Competition is based primarily on price, service and support.

 

**Enventis Sector**

 

Aggressivecompetition exists in all aspects of the equipment portion of the Enventisproduct portfolio. This includes other Cisco Value Added Resellers (“VAR’s”)as well as other equipment manufacturers and distributors.  Enventis hasachieved the Cisco Gold level of certification which provides us a favorabletier of pricing compared to most Cisco VAR’s. Competition also comes from anemerging class of services under the heading of SAAS (Software as a Service)that will impact customer procurement of equipment. Enventis has acentrally managed and hosted solution (SingleLinkTM) to address this trend.

 

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Our suite oftransport products exists in a highly competitive market with other localexchange carriers, interexchange carriers, regional fiber carriers and cablecompanies offering comparable bandwidth solutions to both the retail andwholesale market segments. We expect this to continue, and anticipate increasedcompetition from wireless service providers. The barriers to entry intransport competition are the high capital cost to build or control a networkof high bandwidth communication facilities in the proper location. Our facilitybased fiber network provides us with a competitive advantage in some of themarkets we serve.

 

**NetworkFacilities**

 

Our network is one of the most extensive in Minnesota, with SONET basedfiber throughout the state and metro rings in the major business centers. Over75% of Minnesota’s population is currently within reach of our network, whichencompasses over 2,400 miles of fiber optic cable.

 

We have made significant investments in our network during the lastseveral years adding technological augmentations such as Multi-Protocol LabelSwitching (“MPLS”) along with an IP based platform. Complimenting our basenetwork with IP based services allows us to provide services such as: Ethernet,VoIP, MPLS, and IP based digital TV services. We continually upgrade bandwidthacross our network through tactics such as migrating our metro locations up to10.0 gigabits, decentralizing our central office through use of new hubs, andusing fiber to the home in targeted new construction areas.

 

Interconnection agreements with local, regional, national and globalcarriers allow us to extend our network and provide entire solutions forcompanies nationwide and broadens the availability of our hosted communicationsservice, SingleLinkTM. We maintain a 24X7X365 level of supportto our network customers through our Network Operations Center located inMankato, MN.

 

**Regulation**

 

The following summary does not describe all present and proposedfederal, state and local legislation and regulations affecting thetelecommunications industry. Some legislation and other regulations arecurrently the subject of judicial proceedings, legislative hearings andadministrative proposals that could change the manner in which this industryoperates. Neither the outcome of any of these developments nor their potentialimpact on us can be predicted at this time. Regulation can change rapidly inthe telecommunications industry and these changes may have an adverse effect onus in the future. See “Risk Factors — Risks related to Regulations” on pages 18to 21 for a further discussion of the risks associated with regulatory change.

 

*Overview*

 

The services we offer aresubject to varying levels of regulatory oversight. Federal and state regulatoryagencies share responsibility for enforcing statutes and rules relative tothe provision of communications services. Our interstate or internationaltelecommunications services are subject to regulation by the FCC. Intrastateservices are governed by the relevant state regulatory commission. TheTelecommunications Act of 1996 and the rules enacted under it also gaveoversight of interconnection arrangements and access to network elements to thestate commissions. Our digital TV services are governed by FCC rules andalso by municipal franchise agreements on the local level. There are alsovarying levels of regulatory oversight depending on the nature of the servicesoffered or if the services are offered by an incumbent or competitive carrier.

 

MCTC, Mid-Com andHeartland are ILECs. MCTC and MidCom are public utilities operating pursuant toindeterminate permits issued by the Minnesota Public Utilities Commission (“MPUC”).Heartland is also a public utility, which operates pursuant to a certificate ofpublic convenience and necessity issued by the Iowa Utilities Board (“IUB”).Due to the size of the HickoryTech ILEC companies, neither the MPUC nor the IUBregulates their rates of return or profits. In Minnesota, regulators monitorMCTC and Mid-Com price and service levels. Heartland, our Iowa ILEC, is notprice-regulated with respect to its local service. Our companies can changelocal rates by evaluating various factors including economic and competitivecircumstances.

 

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Our CLEC businessprovides services with less regulatory oversight than our ILEC companies. Acompany must file for CLEC or interexchange authority to operate with the appropriatepublic utility commission in each state it serves. Crystal provides localexchange services to residential and business customers in Minnesota and Iowa,and Enventis provides private line services to small, medium and enterprisesize business customers in various states.

 

Both Crystal and Enventisoffer interexchange carrier services including long distance that may beregulated at both the federal and state levels. The FCC has authority overinterstate and international long distance services but has chosen to lightlyregulate these services in recent years. Long distance service is subject toconsumer protection, complaint-based regulation at the federal level. Theregulatory burden is primarily compliance reporting which includes an annualcertification of geographical rate averaging and rate integration. In-statelong distance services in Minnesota are regulated by the MPUC with respect touniform pricing statewide while in-state long distance services in Iowa areunregulated.

 

Internet access (dial-upor high speed) is unregulated at both the state and federal levels. Internetaccess for ILEC customers is provided by Crystal.

 

*FederalRegulatory Framework*

 

All carriers must comply with the Federal Communications Act of 1934 asamended, which requires, among other things, that our interstate services beprovided at just and reasonable rates and on non-discriminatory terms andconditions. The Federal Communications Act of 1934 also requires FCC approvalbefore we transfer control of our operating companies, assign, acquire ortransfer licenses or authorizations issued by the FCC, or before we discontinueany interstate service. The Federal Communications Act of 1934 was amended bythe Telecommunications Act of 1996, which has had a dramatic effect on thecompetitive environment in the telecommunications industry. In addition tothese laws, we are also subject to rules promulgated by the FCC and couldbe affected by any regulatory decisions or orders they issue.

 

*AccessCharges*

 

“Access charges” refer tothe compensation received by local exchange carriers for the use of theirnetworks to originate or terminate interexchange or international calls. Weprovide two types of access services: special access and switched access.Special access is provided through dedicated circuits which connect othercarriers to our network. Special access pricing is structured on a flat monthlyfee basis. Switched access rates, which are billed to other carriers, are basedon a per-minute of use fee basis. The FCC regulates the prices that our ILECsand CLEC charge for interstate access charges. Historically, switched accessrates for rural carriers were allowed to be higher than those for larger, moreurban companies. This was done to provide a means of implicitly subsidizing thehigh per-unit cost of local service in rural areas. However, following a seriesof court cases in 2001, which ruled that subsidies must be explicit rather thanimplicit, the FCC began to examine various proposals to reform interstatenetwork access rates. One result of those proposals was the lowering of ratescharged to carriers accessing local networks and the application of asubscriber line charge as a flat rate on the end-users’ bills. The lowering ofthe per-minute, per use access rate combined with overall lower minutes due tocompetition has resulted in a decrease in network access revenue, which maycontinue. Traffic sensitive interstate rates were last established in June 2007for the period from June 30, 2007 through July 1, 2009.

 

Each of our ILECsdetermine interstate access charges under rate of return regulation, underwhich they earn a fixed return over and above operating costs. The specificprocess of setting interstate access rates is governed by part 61.39 of the FCCrules, which applies only to service providers with fewer than 50,000 lines.Two of our ILECs (MCTC and Mid-Com), utilize an average schedule process andthe concept of pooling with other ILECs in the National Exchange CarrierAssociation (“NECA”) to arrive at rates and fair compensation. Our third ILEC(Heartland) arrives at its interstate rates through a study of its ownindividual interstate costs. Minnesota and Iowa Utility Commissions regulatethe intrastate access rates for all three of our ILECs.

 

Crystal’s interstateaccess rates were established according to an order issued by the FCC in 2001.Under that order, the switched access rates charged by a competitive carriercan be no higher than the rates charged by the incumbent carrier with whom theCLEC competes. Consequently, the rates charged by our facilities-based CLEC forswitched access are significantly lower than the rates charged by our ILECs.Because of the nature of the services provided by our other competitiveaffiliate, Enventis, it does not collect access charges from carriers.

 

 

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Prior to and since theintroduction of the Missoula Intercarrier Compensation Plan in 2006 there havebeen ongoing discussions at the FCC regarding changes in intercarriercompensation. We participate in evaluating and influencing proposed reformsthrough our industry associations and affiliations. It is possible that ourILECs could experience a change in revenue if intercarrier compensation reformwere to be adopted by the FCC. There is no definite timeline for the FCC toact, so it is not possible for us to predict when any change in revenue willoccur or the extent of the impact.

 

The MPUC has consideredintrastate access reform and universal service for several years. The MPUCopened the most recent docket on the issue of state access reform in 2006.After requesting comments to refresh the record at that time there was littleactivity in this area throughout 2008. The IUB had previously not exercisedoversight in the access rates of small local exchange carriers. In November of2007, however, the IUB indicated it intends to resume that role. In January 2009,the IUB ordered rate reductions in the rates of a tariff filed on behalf ofnumerous ILECs by a state trade association. While this ruling may affect manyIowa LECs, it does not directly impact our Iowa ILEC or CLEC as we did notadopt the association tariff and further, the intrastate access rates of ourcompanies are in line with the reduced rates ordered by the IUB. In September of2008, the IUB also issued an inquiry docket regarding establishing a stateUniversal Service Fund in Iowa. We cannot estimate the impact, if any, offuture potential state access revenue changes or the availability of stateuniversal service support.

 

In recent years,interexchange carriers and others have become more aggressive in disputinginterstate carrier access charges and/or the applicability of access charges totheir traffic. A prime example of this is the claim that companies who providevoice communication services over IP technology are exempt from having to payaccess charges. In 2005, the FCC ruled that it was impossible to separate thevoice traffic of VoIP into interstate and intrastate jurisdictions, andtherefore such providers would be regulated by the FCC and not by stateregulatory commissions. The FCC is currently considering the question ofwhether or not VoIP services are subject to access charges. In January 2009,the FCC declined to declare IP traffic as exempt from access charges. Anotherpetition requesting that the FCC specifically declare that IP traffic issubject to access charges is still pending. In the meantime, we believe thatlong distance and other communication providers will continue to challenge theapplicability of access charges either before the FCC or with their localexchange carriers. To date, no long distance or other carriers have made aclaim to us contesting the applicability of access charges. We cannot assureyou however, that such claims will not be made in the future, nor if such aclaim is made, can we estimate the impact.

 

The U.S. 8th Circuit Courtof Appeals has upheld a ruling by the United States District Court, District ofMinnesota, in issuing an injunction providing relief from regulation of anyservice provider of VoIP based services in Minnesota. In July 2006, theFCC ruled that VoIP services are subject to Federal Universal Service FundContributions, but any further regulation of VoIP under consideration at theFCC is uncertain. Future decisions regarding the regulation of VoIP may resultin a change in the business relationship between HickoryTech companies and theinterexchange carriers as interconnections with certain VoIP providers may notbe governed by tariffed access charges. We cannot, at this time, estimate therevenue impact, if any, related to these events.

 

Due to the combination ofrate reforms instituted by the FCC, competitive substitution by wireless andother carriers and customer usage trends, the aggregate amount of interstatenetwork access charges paid by long distance carriers to access providers suchas our ILECs and CLEC, has decreased and we project that this will continue.For the year ended December 31, 2008, carrier access revenue representedapproximately 16.9% of our operating revenue.

 

Wireline Interstate — OurILEC companies participate in the NECA common line pool. End-User Common Linefunds collected, are pooled and some of our ILEC revenue is based onsettlements distributed from the pool. These pool settlements are adjustedperiodically. Our ILEC companies do not participate in the NECA trafficsensitive pool, but instead, set their own access rates according to theformulas contained in Section 61.39 of the FCC rules. This process, availableto companies with less than 50,000 lines, has been used by our ILEC companiesfor many years. This biennial rate process was last completed in June 2007and established traffic sensitive interstate rates for the period from June 30,2007 through July 1, 2009.

 

 

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*UniversalService*

 

The Federal UniversalService Fund was established to overcome geographic differences in costs ofproviding service and to enable all citizens to communicate over networksregardless of geographical location and/or personal income. Prior to theadoption of the Telecommunications Act of 1996, universal service was achievedlargely through implicit support subsidies, including federal access chargespreviously discussed.

 

The FCC establisheduniversal service policies at the national level under terms contained in theTelecommunications Act of 1996. The Telecommunications Act of 1996 requiresexplicit Federal Universal Service Fund mechanisms and enlarged the scope ofuniversal service to include four distinct programs:

 

·                  High-Cost program, which subsidizes localcarriers operating in high-cost regions of the country to ensure reasonablybased telephone rates. This program has the most direct impact on our operatingcompanies,

 

·                  Low-Income Subscribers program, whichincludes the Link Up and Lifeline programs that provide subsidies for serviceinitiation and monthly fees, respectively, with eligibility based on subscriberincome,

 

·                  Rural Health Care Providers program,which subsidizes telecommunications services used by rural health careproviders and provides them with toll free access to an Internet serviceprovider, and

 

·                  Schools and Libraries program, alsocalled the E-Rate program, which provides support funding to schools andlibraries for telecommunications services, Internet access and internalconnections.

 

The National ExchangeCarrier Association collects and disburses Federal Universal Service Fundpayments. The National Exchange Carrier Association was formed by the FCC in1983 following the break-up of AT&T into separate local and long distanceoperations.

 

Federal Universal ServiceFund payments are only available to carriers that have been designated asEligible Telecommunications Carriers by a state commission. Each of our ILECshas been designated as an Eligible Telecommunications Carrier. Competitivecarriers (CLECs) are also eligible to be designated as EligibleTelecommunications Carrier, provided that they meet the requirements of theprogram and meet a public interest standard as determined by the appropriatestate regulatory agency. CLECs receive support payments based on the supportprovided to the incumbent carrier in the area in which they serve. Both theMPUC and IUB granted Eligible Telecommunications Carrier status to numerouscarriers, including many wireless companies. Under current rules, the paymentsreceived by our ILECs are not affected by the payments to the competitiveEligible Telecommunications Carriers. Because of the growing number ofcompetitive Eligible Telecommunications Carriers and the accompanying fundswhich are being disbursed to them, the FCC is considering several universalservice reforms including an interim cap on the Federal Universal Service Fundas it pertains to the competitive carriers.

 

All EligibleTelecommunications Carriers must certify to their appropriate state regulatorycommission that the funds they receive from the Federal Universal Service Fundare being used in the manner intended. The states must then certify to the FCCwhich carriers have met this standard. That certification is due to the FCC in October ofeach year in order for carriers to receive funding for the upcoming year. In2006, both Minnesota and Iowa adopted more stringent guidelines for thisdetermination as recommended by the FCC. To some extent, this increased levelof scrutiny puts our receipts of Federal Universal Service Fund payments atrisk each year.

 

The Anti-Deficiency Actprevents federal agencies from committing to provide funding in excess of theirfunds on hand. Currently, the Federal Universal Service Fund administratormakes commitments to fund recipients in advance of collecting the contributionsfrom the carriers that will pay for these commitments. In December 2007,Congress suspended the application of the Anti-Deficiency Act until December 31,2008. Congress is considering whether to permanently exempt the FederalUniversal Service Fund from the Anti-Deficiency Act requirements. If it doesnot grant additional extensions or a permanent exemption the Federal UniversalService Fund payments to our companies may be delayed or reduced in the future.

 

We cannot predict theoutcome of any FCC rulemaking or pending legislation. The outcome of any ofthese proceedings or other legislative or regulatory changes could affect theamount of universal support received by our ILECs. For the year ended December 31,2008, Federal Universal Service Fund payments represented 3.7% of our telecomrevenue and 1.8% of our total revenue.

 

 

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*Regulationof the Internet*

 

In an order released on September 23,2005, the FCC adopted a comprehensive regulatory framework for facilities-basedproviders of wireline broadband Internet access services (“WBBO”). The FCCdetermined that facilities-based wireline broadband Internet access is aninformation service, and not a telecommunications service. This designationpositioned the high-speed DSL Internet access offered by price cap telcos andCLECs on the same regulatory footing as cable modem service. Following atransitional period, which has passed, facilities-based wireline carriers areno longer obligated to provide broadband Internet access transmission tounaffiliated Internet service providers. In addition, the WBBO allowed for theprovision of WBBO on a common carrier, or non-common carrier basis. Our CLECDSL service in our CLEC markets is provided on a non-common carrier basis. Wehave, however, determined it is in the best interest of our ILEC companies tocontinue to offer DSL on a tariffed, common-carrier basis. As our circumstancescontinue to shift, we continue to re-evaluate our options.

 

*TheTelecommunications Act of 1996 and Local Competition*

 

The primary goal of theTelecommunications Act of 1996 and the FCC’s rules promulgated under itwas to open local telecommunications markets to competition while enhancinguniversal service. To some extent, Congress pre-empted the local authority ofstates to oversee local telecommunications services.

 

The TelecommunicationsAct of 1996 imposes a number of requirements on all local telecommunicationsproviders which include:

 

·                  To interconnect directly or indirectlywith other carriers,

 

·                  To allow others to resell their services,

 

·                  To provide for number portability, whichallows end-users to retain their telephone number when changing providers,

 

·                  To ensure dialing parity,

 

·                  To ensure that competitor’s customershave nondiscriminatory access to telephone numbers, operator services,directory assistance and directory listing services,

 

·                  To allow competitors access to telephonepoles, ducts, conduits and rights-or-way, and to establish reciprocalcompensation arrangements for the transport and termination oftelecommunications traffic.

 

Local Number Portability —In 2003, the FCC released a decision providing guidance on porting betweenwireline and wireless networks (inter-modal porting). All of our wirelineoperations have operated with local number portability capabilities since early2005. The effects of inter-modal porting on our wireline operations have beenminimal to date.

 

        Unbundling - There is another tier of requirements under theTelecommunications Act of 1996 which apply to incumbent carriers that are notdesignated as “rural telephone companies.” Each of our ILECs is a ruraltelephone carrier and this designation can only be removed by a petition of acompeting carrier to the state regulatory commission. Because no one haschallenged our designation, our ILECs have not had to meet these requirements.If this designation was removed, our ILECs would be required to:

 

·                  Provide non-discriminatory access todiscrete parts of the network, such as local loops and transport facilities.This is referred to as Unbundled Network Elements, and

 

·                  Provide at rates, terms and conditionsthat are just, reasonable and non-discriminatory, for the physical co-locationof equipment necessary for interconnection or access to unbundled networkelements.

 

The unbundlingrequirements of the Telecommunications Act of 1996 have been some of the mostcontroversial provisions of the act and the rules implementing them havebeen revised by the FCC over the years. While our ILECs have not been requiredto un-bundle their networks, our CLEC operating entities have taken advantageof the unbundling and co-location requirements and currently purchase bothproducts in territories served by Qwest Communications.

 

 

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**EnvironmentalRegulation**

 

We are subject to federal,state and local laws and regulations governing the use, storage, disposal of,and exposure to, hazardous materials, the release of pollutants into theenvironment and the remediation of contamination. We could be subject tocertain environmental laws that impose liability for the entire cost of cleanupat a contaminated site, regardless of fault or the lawfulness of the activitythat resulted in contamination.  Webelieve that our operations are in substantial compliance with applicableenvironmental laws and regulations.

 

**Employees**

 

        We employ 433 employees, most of whom are based in Minnesota.A total of approximately 290 employees are located at our headquarters inMankato, Minnesota. We have a collective bargaining agreement with theInternational Brotherhood of Electrical Workers Local 949, which involvesapproximately 95 of our employees. There have been no work stoppages orstrikes by our International Brotherhood of Electrical Workers Local 949employees in the past 40 years and we consider our labor relations to be good.

 

**IntellectualProperty**

 

We have trademarks, tradenames and licenses that we believe are necessary for the operation of ourbusiness as we currently conduct it. The HickoryTech logo, HickoryTechSuiteSolution and Enventis are registered trademarks of the United States. Wehave filed a trademark application for Enventis SingleLink, which is pendingapproval with the U.S. Patent and Trademark Office. We do not consider ourtrademarks, trade names or licenses to be material to the operation of ourbusiness.

 

# **Item 1A.    Risk Factors**

# ** **

Our businesses face manyrisks, the most important of which we attempt to describe below. If any of theevents or circumstances described in the following risks actually occurred, ourbusiness financial condition or results of operations may suffer and impact thetrading price of our stock.

 

**RisksRelated to Our Business**

 

*Unfavorablegeneral economic conditions in the United States could negatively impact ouroperating results and financial condition.*Unfavorable general economic conditions, including thecurrent recession in the United States and the recent financial crisisaffecting the banking system and financial markets, could negatively affect ourbusiness. While it is often difficult for us to predict the impact of generaleconomic conditions on our business, these conditions could adversely affectthe affordability of and demand for some of our products and services and couldcause customers to shift to lower priced products and services or to delay orforgo purchases of our products and services. We have, for example, noticedsome decline in our Enventis business as customers defer capital investment.Also, our customers may not be able to obtain adequate access to credit, whichcould affect their ability to make timely payments to us. If that were tooccur, we could be required to increase our allowance for doubtful accounts,and the number of days outstanding for our accounts receivable could increase.In addition, as discussed below under the heading “Risks Relating to ourIndebtedness and Capital Structure,” due to recent turmoil in the creditmarkets and the continued decline in the economy, we may not be able torefinance maturing debt at terms that are as favorable as those from which wepreviously benefited, at terms that are acceptable to us or at all. For thesereasons, among others, if the current economic conditions persist or decline,this could adversely affect our operating results and financial condition, aswell as our ability to service debt and pay other obligations.

 

*       **The telecommunications industryis generally subject to substantial regulatory changes, rapid development andintroduction of new technologies and intense competition that could cause us tosuffer price reductions, reduced operating margins or loss of market share*. The telecommunications industry hasbeen, and we believe will continue to be, characterized by several trends,including the following:

 

·                  Substantial regulatory change due to the passage and implementation ofthe Telecommunications Act of 1996, which included changes designed tostimulate competition for both local and long distance telecommunicationsservices,

 

·                  Rapid development and introduction of new technologies and services,

 

 

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·                  Increased competition within established markets from current and newmarket entrants that may provide competing or alternative services,

 

·                  The blurring of traditional dividing lines between, and the bundlingof, different services, such as local dial tone, long distance, wireless, cableTV, data and Internet services, and

 

·                  An increase in mergers and strategic alliances that allow onetelecommunications provider to offer increased services or access to widergeographic markets.

 

Some of these changeshave resulted in increased competition, decreased rates and decreasedprofitability in our traditional wireline local exchange business. We cannotassure you that further changes will not adversely affect our business.

 

*Thetelecommunications industry is highly competitive.*The Telecommunications Act of 1996permitted competition among communication companies for the rights tointerconnect with established networks and to establish new networks in orderto offer telephone service to customers in a franchised area. We serve as anILEC in a number of franchised areas, as well as a CLEC in a number of markets.Other telecommunications carriers have the authority under this legislation toprovide new networking routes, points of interconnection, technology orsignaling protocol, creating competition, which could have a material adverseaffect on our profitability. Many of our voice and data competitors, such ascable TV providers, Internet access providers, wireless service providers andlong distance carriers, have significantly greater brand name recognition andfinancial, personnel, marketing and other resources. In addition, due toconsolidation and strategic alliances within the telecommunications industry,we cannot predict the number of competitors that will emerge, especially as aresult of existing or new federal and state regulatory or legislative actions.Such increased competition from existing and new entities could lead to pricereductions and reduced operating margins or loss of market share. Although weattempt to differentiate our products and service through technology,reputation, service and price, competition has increased in the markets that weserve. This competition has impacted our profitability in the past and wecannot assure you that it will not continue to impact our profitability in thefuture.

 

*We maynot accurately predict technological trends or the success of new products inthese markets*.New product development often requires long-term forecasting of market trends,development and implementation of new technologies and processes andsubstantial capital investment. If we fail to anticipate or respond in acost-effective and timely manner to technological developments, changes inindustry standards or customer requirements, our business, operating resultsand financial condition could be materially adversely affected.

 

*We maynot be able to successfully introduce new products and services*.**Our successdepends, in part, upon our ability to successfully introduce new products andservices, our ability to offer bundled service packages on terms attractive toour customers, our ability to expand our Internet and digital TV offerings tonew markets, our ability to introduce and distribute the equipment and systemsof manufacturers of switching equipment and the suppliers of communicationstechnology compared to the competitive alternatives of other suppliers, ourability to provide transport solutions and competitive IP services, includingtelecommunications and network solutions, and the ability of our CLEC businessto provide competitive local service in new markets.

 

*Shifts inour product mix may result in declines in operating profitability*. Our traditional ILEC services carryhigher margins than many of our newer services. Changes in product mix may alsocause some of our inventory to become obsolete. We currently manage potentialobsolescence through reserves, but future technology changes may exceed currentreserves.

 

*Consolidation among our customers could result in our losing customersor experiencing a slowdown as integration takes place*. Consolidation may impact our business asour customers focus on integrating their operations. We believe that in certaininstances, customers engaged in integrating large-scale solutions may scaleback their purchases of network equipment and network services. Further, onceconsolidation occurs, our customers may choose to reduce the number of vendorsthey use to source their equipment or consolidate their circuits or networkrouting. After a consolidation occurs, there is no assurance that we willcontinue to supply equipment or network services to the survivingcommunications service provider. The impact of significant mergers on ourbusiness is likely to be unclear until sometime after such transactions haveclosed.

 

 

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*Wedepend on third parties, over whom we have no control, to deliver our services*. Because of the interconnectednature of the communications industry, we depend heavily on othertelecommunications companies, network providers, program service providers andequipment vendors to deliver our services. In addition, we are dependenton easements, franchises and licenses from various private and public entitiesin order to construct and to operate our networks. The failure to maintainthese necessary third party arrangements on acceptable terms would have anadverse effect on our ability to conduct our business.

 

*Ourpossible pursuit of acquisitions could be expensive, may not be successful and,even if successful may be more costly than anticipated*. Our acquisition strategy entailsnumerous risks. Our ability to complete future acquisitions will depend on ourability to identify suitable acquisition candidates, negotiate acceptable termsfor their acquisition and, if necessary, finance those acquisitions, in eachcase, before any attractive candidates are purchased by other parties, some ofwhom may have greater financial resources than us. Whether or not anyparticular acquisition is closed successfully, each of these activities is expensiveand time consuming and would likely require our management to spendconsiderable time and effort to accomplish them, which may detract from theirability to run our current business. We may face unexpected challenges inreceiving any required approvals from the FCC or other applicable stateregulatory commissions, which could result in delay or our not being able toconsummate the acquisition. Although we may spend considerable expense andeffort to pursue acquisitions, we may not be successful in closing them.

 

If we are successful inclosing any acquisitions, we would face several risks associated withintegration. In addition, any due diligence we perform may not prove to havebeen accurate. For example, we may face unexpected difficulties in enteringmarkets in which we have little or no direct experience or in generatingunexpected revenue and cash flow from the acquired companies or assets.

 

If we do pursue anacquisition or other strategic transactions and any of these risks materialize,they could have a material adverse effect on our business and our ability toachieve sufficient cash flow, provide adequate working capital, service andrepay our indebtedness and leave sufficient funds to pay dividends.

 

**RisksRelated to the Management of Our Operations**

 

*A failurein our operational systems or infrastructure could impair our liquidity,disrupt our business, damage our reputation and cause los*s. Shortcomings or failures in ourinternal processes, people or systems could impair our liquidity, disrupt ourbusiness, result in liability to customers or regulatory intervention, damageour reputation or result in financial loss. For example, our telephoneoperations rely on a central switch to complete local and long distance phonecalls to customers. An interruption in the switch operations could lead tointerrupted service for customers. To be successful, we will need to continueproviding our customers with a reliable and secure network. Disruptions orsystem failures may cause interruptions in service or reduced capacity forcustomers. Our inability to accommodate an increasing volume of transactionscould constrain our ability to increase revenue and expand our businesses.Despite the existence of contingency plans and facilities, our ability to conductbusiness may be adversely impacted by a disruption in the infrastructure thatsupports our businesses and the communities in which these businesses arelocated.

 

*Weoperate our network and our business under contracts and franchises that aresubject to non-renewal or termination*. Our network operates pursuant tofranchises, permits or rights from public and private entities, which areterminable if we fail to comply with material terms of the authority wereceive. These permits, and many contracts we utilize in our network, havefixed terms and must be renewed periodically. Our success is dependent oncontinuing these relationships without material increase in our expenses orrestrictions on our use.

 

 

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*Ourbusinesses may be adversely affected if we are unable to hire and retainqualified employees*.Our performance is largely dependant on the talents and efforts of highlyskilled individuals in the operation of our telecommunication businesses,including telephone operations, billing software development andtelecommunications equipment sales and service. Technological advances requireour employees to continually upgrade their knowledge base. Our ability tocompete and grow our business effectively depends upon our ability to attractqualified employees and retain and motivate our existing employees. Ourinability to attract and retain highly qualified technical and seniormanagement in the future could have a material adverse effect on our business,financial condition and results of operations. In addition, we may acquire newbusinesses in the future and our success will depend, in part, upon our abilityto retain and integrate personnel from acquired businesses, who are critical tothe continued success or the successful integration of these acquiredbusinesses.

 

*        The loss of our certification as a CiscoGold Partner, or by Cisco losing its position as a leading provider oftechnology solutions would adversely impact our Enventis operations.*The majority of our Enventis EnterpriseNetwork Solutions equipment practice is based on the Cisco product line bywhich we provide telecommunications and technological solutions for businesscustomers. If Cisco equipment and technology fall out of favor in themarketplace, our success as a distributor may decline or be delayed as we seekalternative solutions. While Cisco has made no previous indication it would doso, it could suspend our “Gold Partner” program and affect our success as aleading distributor for them. It is also possible that we may lose thecertified technicians who build the basis for our qualification as a “Gold”distributor. Our continued success in providing Cisco communications solutionswould be adversely affected if we were not classified as a special distributorwith Cisco.

 

*We mayhave unanticipated increases in capital spending, operating or administrativecosts, or seek new business opportunities that require significant up-frontinvestments***.**Weoperate in cash-flow-dependent businesses. Our existing networks require largecapitalized up-front investments for growth and maintenance. Our operatingexpenses in the form of payroll for a highly trained workforce and themaintenance cost of telecommunications networks are large uses of cash. Ourdebt service obligation and any dividends to shareholders also requiresignificant cash each year. New business development may require additionalup-front investment in assets and funding of early stage operating losses.Although we establish financial plans to attempt to ensure cash is adequate tofund operations, a sudden unanticipated increase in cash outflow after we havealready initiated our business plans could alter our future business plans,which could possibly affect our growth or ability to maintain our currentnetwork infrastructure.

 

**Risksrelated to Regulations**

 

*Thetelecommunications industry in which we operate is subject to extensivefederal, state and local regulation that could change in a manner adverse tous.* Ourlocal telephone businesses in Minnesota and Iowa are subject to extensiveregulations that impact the rates we charge, the areas we service, ourcontracts with suppliers and virtually every facet of our business. Laws andregulations may be, and in some cases have been, challenged in the courts andcould be changed by Congress, state legislatures or regulators at any time. Newregulations could be imposed by federal or state authorities further impactingour operating costs or capital requirements or that are otherwise adverse tous. We cannot predict the impact of future developments or changes to theregulatory environment or the impact such developments or changes may have onus. Adverse rulings, legislation or changes in governmental policy on issuesmaterial to us could increase our competition, cause us to lose customers tocompetitors and decrease our revenue, increase our costs and decrease ourprofitability.

 

 

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*Legislativeor regulatory changes could reduce the revenue our ILEC and CLEC operationsreceive from network access charges.*Access charges, which are intended to compensate ourILEC and CLEC operations for originating, terminating or transporting longdistance and other carriers’ calls in our service areas, accounted forapproximately 16.9% of our total revenue in 2008. The amount of network accesscharges we receive is based on interstate rates set by the FCC and intrastaterates set by the MPUC and the IUB. The large national carriers who pay thesecharges have advocated in the past that access charges should be reduced andsome network providers have argued that access charges do not apply to specifictypes of their traffic. As our business becomes increasingly competitive, theregulatory disparities regarding network access revenue, the marketplace forceson its pricing levels and our ability to enforce the historical rules forcollecting this revenue, could have a material adverse effect on our business.We cannot predict whether or when action may be taken on any of these issues,or what effect any action may have on revenue and costs of our ILEC and CLECoperations.

 

In 2001, the FCC adopted rules reformingthe network access charge system for rural carriers, including reductions inper-minute access charges and increases in both Federal Universal Service Fundsubsidies and flat-rate monthly per line charges on end-user customers. The FCCis considering more change in network access charges that could materiallyreduce our access charge revenue and we do not know whether increases in otherrevenue, such as federal subsidies and monthly line charges, will be sufficientto offset any such reductions. The MPUC and IUB may also make changes in ourintrastate network access charges, which could cause reductions in our revenue.

 

We believe that there hasbeen a general increase in the unauthorized use of telecommunications providers’networks without payment of appropriate access charges, or so-called “phantomtraffic,” due in part to advances in technology that have made it easier to usenetworks while also avoiding payment for the traffic. As a general matter, webelieve this phantom traffic is due to unintended usage and, in some cases,fraud. We are at risk for potential claims made against us contesting theapplicability of network access charges billed by our ILEC and CLEC operationsor continued or increased phantom traffic that uses our network without payingus for it. If there is a successful dispute or avoidance of the applicabilityof network access charges, our revenue could decrease and have a materialimpact.

 

*Legislativeor regulatory changes could reduce or eliminate the government subsidies wereceive.*Thefederal system of subsidies, from which we derive a significant portion of ourrevenue, is subject to modification. Our ILEC and CLEC operations receivesignificant federal subsidy payments.

 

·                  For the year ended December 31,2008, we received an aggregate of $2,699,000 from the Federal Universal ServiceFund, which comprised 1.8% of our revenue for the year.

 

·                  For the year ended December 31,2007, we received an aggregate of $3,268,000 from the Federal Universal ServiceFund, which comprised 2.1% of our revenue for the year.

 

·                  For the year ended December 31,2006, we received an aggregate of $2,495,000 from the Federal Universal ServiceFund, which comprised 1.9% of our revenue for the year.

 

During the last twoyears, the FCC has made modifications to the Federal Universal Service Fundsystem that changed the sources of support and the method for determining thelevel of support to Federal Universal Service Fund recipients. It is unclearwhether the changes in methodology will continue to accurately reflect thecosts incurred by our ILEC operations and whether we will continue to receivethe same amount of Federal Universal Service Fund support that we have receivedin the past. The FCC is also currently considering a number of issues regardingthe source and amount of contributions to, and eligibility for payment from,the Federal Universal Service Fund, and these issues may also be the subject oflegislative amendments to the Telecommunications Act of 1996.

 

 

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Congress is nowconsidering legislation to exempt the Federal Universal Service Fund from theAnti-Deficiency Act. The Anti-Deficiency Act prohibits government agencies frommaking financial commitments in excess of their funds on hand. Currently, theFederal Universal Service Fund administrator commits to fund recipients in advanceof collecting the contributions from carriers that will pay for thesecommitments. The FCC has not determined whether the Anti-Deficiency Act wouldapply to payments to our ILEC operations. If the legislation does not pass, ourFederal Universal Service Fund subsidy payments may be delayed or reduced. Wecannot predict the outcome of any federal or state legislative action or anyFCC, MPUC or IUB rulemaking or similar proceedings. If we do not continue toreceive federal and state subsidies, or if these subsidies are reduced, ourILEC operations will likely have lower revenue and may not be able to operateas profitably as they have historically.

 

In addition, under theTelecommunications Act of 1996, our competitors may obtain the same level ofFederal Universal Service Fund subsidies we do if the MPUC or IUB, asapplicable, determines that granting these subsidies to competitors would be inthe public interest and the competitors offer and advertise certain telephoneservices as required by the Telecommunications Act of 1996 and the FCC. Undercurrent rules, any such payments to our competitors would not affect the levelof subsidies received by our ILEC and CLEC operations, but they wouldfacilitate competitive entry into our ILEC and CLEC service areas and we maynot be able to compete as effectively or otherwise continue to operate asprofitably.

 

*Legislativeand regulatory changes in the telecommunications industry could raise our costsby facilitating greater competition against us and reduce potential revenue.*Legislative and regulatory changes in thetelecommunications industry could adversely affect our business by facilitatinggreater competition against us, reducing our revenue or raising our costs. Forexample, federal or state legislatures or regulatory commissions could imposenew requirements relating to standards or quality of service, credit andcollection policies, or obligations to provide new or enhanced services.

 

*Increasedregulation of the Internet could decrease our revenue*. Currently, there exists only a smallbody of law and regulation applicable to access to, or commerce on, theInternet. As the significance of the Internet expands, federal, state and localgovernments may adopt new rules and regulations or apply existing laws andregulations to the Internet. The FCC is currently reviewing the appropriateregulatory framework governing broadband consumer protections for high-speedaccess to the Internet through telephone and cable TV providers’ communicationsnetworks. The outcome of these proceedings may affect our regulatoryobligations and costs and competition for our services which could have amaterial adverse effect on our revenue.

 

*Ouroperations are subject to environmental, health and safety laws and regulationthat increase our costs of operations and could subject us to liability.* Our operations and properties aresubject to federal, state and local laws and regulations relating to theprotection of the environment, natural resources and worker health and safetythat could adversely affect our profitability. We operate under a number ofenvironmental and health and safety laws, including laws and regulationsgoverning and creating liability to, the management, storage and disposal orhazardous materials, asbestos, petroleum products and other regulatedmaterials. We are subject to environmental laws and regulations governing airemissions from our fleets of vehicles. As a result, we face several risks,including the following:

 

·                  Under certain environmental laws, wecould be held liable, jointly and severally and without regard to fault, forthe costs of investigating and the remediation of any actual or threatenedenvironmental contamination at currently and formerly owned or operatedproperties, and those of our predecessors, and for contamination associatedwith disposal by us or our predecessors of hazardous materials at third partydisposal sites,

 

·                  The presence of contamination canadversely affect the value of our properties and our ability to sell any suchaffected property or to use it as collateral,

 

·                  We could be held responsible for thirdparty property damage claims, personal injury claims or natural resource damageclaims relating to any such contamination,

 

·                  The cost of complying with existingenvironmental requirements could be significant,

 

·                  Adoption of new environmental laws,regulations or changes in existing laws or regulations or their interpretationscould result in significant compliance costs or as yet identified environmentalliabilities,

 

·                  Future acquisition of businesses orproperties subject to environmental requirements or affected by environmentalcontamination could require us to incur substantial costs relating to suchmatters, and

 

·                  In addition, environmental lawsregulating wetland, endangered species and other land use and natural resourceissues may increase costs associated with future business or expansionopportunities, delay, alter or interfere with such plans, or otherwiseadversely affect such plans.

 

 

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*A lack ofparity between us and our competitors concerning assessments and tax laws couldadversely impact our ability to profitably compete*. The telecommunications industry isheavily taxed and assessed. As regulated entities, we serve as thepass-through entity responsible for charging and collecting the fees and taxesfrom our end-user customers and remitting the monies collected to the taxingand regulatory authorities. Unless regulators and taxing authoritieschange or clarify their rules and regulations to include our competitors,or deregulate and exclude us, the lack of parity could adversely impact ourability to effectively compete on price.

 

*        The high costs of regulatory compliancecould make it more difficult for us to enter new markets, make acquisitions orchange our prices.*Regulatorycompliance results in significant costs for us and diverts the time and effortof our management and officers away from running the business. In addition,because regulations differ from state to state, we could face significant costsin obtaining information necessary to compete effectively if we try to provideservices, such as long distance services, in different states. Theseinformation barriers could cause us to incur substantial costs and to encountersignificant obstacles and delays in entering these markets. Compliance costsand information barriers could also affect our ability to evaluate and competefor new opportunities to acquire local access lines or businesses as theyarise.

 

Our intrastate servicesare also generally subject to certification, tariff filing and other ongoingstate regulatory requirements. Challenges to our tariffs by regulators or thirdparties or delays in obtaining certifications and regulatory approvals couldcause us to incur substantial legal and administrative expenses. If successful,these challenges could adversely affect the rates that we are able to charge tocustomers, which would negatively affect our revenue.

 

**RisksRelated to Our Indebtedness and Our Capital Structure**

 

*We have alarge balance of senior bank debt outstanding and may incur additionalindebtedness in the future, which could restrict our ability to pay dividendsand fund our operations*. We have senior bank debt outstanding under long-term financingagreements. As of December 31, 2008, we had $127,005,000 of totallong-term debt outstanding, including current maturities, and $29,749,000 ofstockholders’ equity. The degree to which we are leveraged could have importantconsequences including:

 

·                  Requiring us to dedicate a substantialportion of our cash flow from operations to make principal and interestpayments on our debt,

 

·                  Limiting our flexibility in planning for,or reacting to, changes in our business and the industry in which we operate,

 

·                  Making it more difficult for us tosatisfy our debt and other obligations,

 

·                  Limiting our ability to borrow additionalfunds, or to sell assets to raise funds, if needed, for working capital,capital expenditures, acquisitions or other purposes,

 

·                  Increasing our vulnerability to generaladverse economic and industry conditions, including changes in interest rates,and

 

·                  Placing us at a competitive disadvantagecompared to our competitors that have less debt.

 

We cannot assure you thatwe will generate sufficient revenue to service and repay our debt and havesufficient funds left over to achieve or sustain profitability in ouroperations, meet our working capital and capital expenditure needs, competesuccessfully in our markets or pay dividends to our stockholders.

 

*        We may not be able to refinance ourcurrent debt on favorable terms.* Most of the indebtedness under our credit facilitymatures in 2012, and we would anticipate refinancing it at that time. Due torecent turmoil in the credit markets and the continued decline in the economy,we may not be able to refinance maturing debt on terms that are as favorable asthose we are benefiting from now, on terms that are acceptable to us or at all.

 

 

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*If we seek additional financing, we may not be ableto obtain it on favorable terms, or at all, and our shareholders may experiencedilution of their ownership interest if we seek equity financing.* We currently anticipate that ouravailable cash resources, which include our credit facility, existing cash,cash equivalents and available-for sale securities, will be sufficient to meetour anticipated needs for working capital and capital expenditures to executeour near-term business plan, based on current business operations and economicconditions. If our estimates are incorrect and we are unable to generatesufficient cash flows from operations and we expend our credit facility, we mayneed to raise additional funds. In addition, if one or more of our strategicacquisition opportunities exceeds our existing resources, we may be required toseek additional capital. If we raise additional funds through the issuance ofequity or equity-related securities, our shareholders may experience dilutionof their ownership interests and the newly issued securities may have rightssuperior to those of common stock. Our existing debt covenants require aportion of the proceeds of an equity offering be applied to the outstandingdebt balance. If we raise additional funds by issuing additional debt, we maybe subject to restrictive covenants that could limit our operating flexibility,and increased interest payments could dilute earnings per share.

 

*We are subject to risks associated with changes in interest rates*. We face market risks from changes ininterest rates that could affect our results of operations and financialcondition adversely. Although we attempt to reduce this risk through the use ofderivative financial instruments, we do not enter into derivative instrumentsfor the purpose of speculation. In March 2007, we entered into an interestrate protection agreement which matures in March of 2010 on approximately$60,000,000 of our variable-interest rate debt in order to manage our exposureto interest rate movements. In March 2008, we entered into a secondinterest-rate swap agreement, effectively locking in the interestrate on an additional $40,000,000 of variable-interest rate debt through February 2010. Ifinterest rates fail to rise as anticipated when the instruments were acquired,we will experience higher-than-market-rate interest expense and would have paidfor protection that wasn’t needed. We also risk entering a higher interest rateenvironment when the interest rate protection agreements expire in 2010. Thiscould affect our future interest expense level. In addition, we have a fixedinterest rate lock on $19,500,000 of our variable interest rate debt which expiresin March of 2010. We are subject to the same positive or negative impactsrelative to variable rate alternatives as described above for our use ofderivative instruments.

 

*We aresubject to restrictive debt covenants and other requirements related to ouroutstanding debt that limits our business flexibility by imposing operating andfinancial restrictions on us.* These restrictions limit or restrict, among otherthings, our ability and the ability of our subsidiaries that are restricted bythese agreements to:

 

·                  Incur additional debt and issue preferred stock,

 

·                  The payment of dividends on, and purchase or redemption of, capitalstock,

 

·                  Make investments and prepay or redeem debt,

 

·                  Make capital expenditures,

 

·                  Create liens on our assets,

 

·                  Sell certain assets,

 

·                  Engage in some transactions with affiliates,

 

·                  Engage in business other than telecommunications businesses, and

 

·                  Make other restricted payments, including payments in connection withinvestments and acquisitions.

 

These restrictions couldlimit our ability to obtain future financing, make acquisitions or fund capitalexpenditures, withstand downturns in our business or take advantage of businessopportunities. Furthermore, the credit facilities also require us to maintainspecified total leverage and fixed charge coverage ratios and to satisfyspecified financial condition tests, and may require us to make annualmandatory prepayments with a portion of our available cash. Our ability tocomply with the ratios may be affected by events beyond our control includingprevailing economic, financial and industry conditions.

 

A breach of any of thesecovenants contained in our credit agreement could result in a default under ourcredit facilities. If we were to default the lenders could elect to declare allamounts outstanding under the credit facilities to be due and payable. If theamounts outstanding under our credit facilities were to be accelerated, wecannot assure you that our assets would be sufficient to repay in full themoney owed to the lenders or to our other debt holders.

 

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*Ourlenders may not be able to fund cash draws under our credit facility.*We have binding contracts with sixentities upon which we depend on for our daily supply of cash. The fiveentities in our senior credit facility are CoBank ACB, Rural Telephone FinanceCooperative, Wachovia Bank NA, US Bank NA, and General Electric CapitalCorporation. These entities operate under a common syndicate agreement usingunified terms and conditions. We also operate a wholesale financing agreementwith General Electric Commercial Distribution Finance Corporation in ourEnventis Sector to fund inventory purchased from certain vendors, in anextended term payable arrangement. It provides 60 days interest free paymentterms for Enventis working capital purposes. In spite of the contractualobligation of these institutions to perform under the financing agreement, andin spite of our attempts to remain informed of the capability of theseinstitutions to perform their functions for us, we may learn that our requestfor cash on any given day cannot be fulfilled.

 

**Risks Related to Financial Aspects of Our Company**

 

*Customer payment defaults could have an adverseeffect on our financial condition and results of operations*. As a result of adverse market conditions,some of our customers may experience serious financial difficulties. Some ofthe interexchange carriers and long distance companies that utilize our networkare our largest customers when it comes to recurring revenue. In some casesthese difficulties have resulted or may result in bankruptcy filings orcessation of operations. If customers experiencing financial problems defaulton amounts owed to us, we may not be able to recognize expected revenue.Although we currently manage this exposure through an allowance for doubtfulaccounts, an unexpected bankruptcy or default by a customer may not be fullyreserved for in our allowance.

 

*It may become necessary for us to offer equipmentfinancing to some of our customers in the future to remain competitive*. If we offer such financing, it would beour intent to sell all or a portion of the financing receivables to thirdparties. In the past, we have sold some receivables with recourse and have hadto compensate the purchaser for the related losses.

 

*A failure to maintain effective internal controlscould adversely affect our business*. Although we have completed the documentation andtesting of the effectiveness of our internal control over financial reportingfor fiscal 2008, as required by Section 404 of the Sarbanes-Oxley Act of2002, we expect we will have to incur continuing costs, which may include increasedaccounting fees and increased staffing levels, in order to maintain compliancewith that section of the Sarbanes-Oxley Act. In addition, our ability tointegrate the operations of other companies that we may acquire in the futurecould impact our compliance with Section 404. In the future, if we fail tocomplete the Sarbanes-Oxley 404 evaluation in a timely manner, or if ourindependent registered public accounting firm cannot attest in a timely mannerto the effectiveness of our internal controls, we could be subject toregulatory scrutiny and a loss of public confidence in our internal controls.In addition, any failure to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operating resultsor cause us to fail to meet our reporting obligations.

 

**RisksRelated to Our Common Stock**

 

*Our boardof directors could, in its discretion, depart from or change our dividendpayment practices at any time.*We are not required to pay dividends and our stockholdersare not guaranteed, and do not have contractual or other rights, to receivedividends. Our board of directors may decide at any time, at its discretion, todecrease the amount of dividends, otherwise change or revoke our past dividendpayment practices or discontinue entirely the payment of dividends. Inaddition, if we do not pay dividends for whatever reason, your shares of ourcommon stock could become less liquid and the market price of our common stockcould decline.

 

Our ability to pay dividends,and our board of directors’ determination to maintain our past dividend paymentpractices, will depend on numerous factors, including the following:

 

·                  The state of our business, theenvironment in which we operate and the various risk factors we face,including, but not limited to competition, technological change, changes in ourindustry, regulatory and other risks summarized in this Annual Report on Form 10-K,

 

·                  Our future results of operations,financial condition, liquidity needs and capital resources,

 

·                  Our cash needs, including interest andany future principal payments on our indebtedness, capital expenditures, taxes,pension and other post-retirement contributions and certain other costs, and

 

·                  Potential sources of liquidity, includingborrowing under our revolving credit facility or possible asset sales.

 

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While our cash flowavailable to pay dividends for the year ended December 31, 2008 wassufficient to pay dividends in accordance with our past dividend paymentpractices, if our estimated cash flow available to pay dividends were to fallbelow our expectations, our assumptions as to estimated cash needs are too lowor if other applicable assumptions were to prove incorrect, we may need to:

 

·                  Either reduce or eliminate dividends,

 

·                  Fund dividends by incurring additionaldebt (to the extent we were permitted to do so under agreements governing ourthen existing debt), which would increase our leverage, debt repaymentobligations and interest expense and decrease our interest coverage, resultingin, among other things, reduced capacity to incur debt for other purposes,including to fund future dividend payments,

 

·                  Amend the terms of our credit agreement,if our lenders agreed, to permit us to pay dividends or make other payments ifwe are otherwise not permitted to do so,

 

·                  Fund dividends from future issuances ofequity securities, which could be dilutive to our stockholders and negativelyaffect the price of our common stock,

 

·                  Fund dividends from other sources, suchas by asset sales or by working capital, which would leave us with less cashavailable for other purposes, and

 

·                  Reduce other expected uses of cash, suchas capital expenditures.

 

*If wecontinue to pay dividends at the level currently anticipated under our currentdividend payment practices, our ability to pursue growth opportunities may belimited.* Webelieve that our current dividend payment practices could limit, but notpreclude, our ability to grow. If we continue paying dividends at the levelcurrently anticipated under our current dividend payment practices, we may notretain a sufficient amount of cash and may need to seek financing to fund amaterial expansion of our business, including any significant acquisitions or topursue growth opportunities requiring capital expenditures significantly beyondour current expectations.

 

*Anti-takeoverprovisions in our charter documents, our shareholder rights plan and Minnesotalaw could prevent or delay a change in control of our Company*. Provisions of our articles ofincorporation and bylaws, our shareholder rights plan (also known as a “poisonpill”) and Minnesota law may discourage, delay or prevent a merger oracquisition that a shareholder may consider favorable and may limit the marketprice for our common stock. These provisions include the following:

 

·                  Advance notice requirements forshareholders proposals,

 

·                  Authorization for our Board of Directorsto issue preferred stock without shareholder approval, and

 

·                  Limitations on business combinations withinterested shareholders.

 

Some of these provisions may discourage a futureacquisition even though our shareholders would receive an attractive value fortheir shares or a significant number of our shareholders believe such a proposedtransaction would be in their best interest.

 

*Our stockprice is volatile*. Based on the trading history of our common stock and the nature of themarket for publicly traded securities of companies in our industry, we believethat some factors have caused and are likely to continue to cause the marketprice of our common stock to fluctuate substantially. These fluctuations couldoccur day-to-day or over a longer period of time and may be accentuated by thelack of liquidity in our stock. The factors that may cause such fluctuationsinclude, without limitation:

 

·                  General economic conditions in the UnitedStates or internationally,

 

·                  The financial health of HickoryTech, ourcompetitors or our customers,

 

·                  Developments in telecommunicationsregulations,

 

·                  Consolidation among our competitors orcustomers,

 

·                  Rumors or speculation regarding ourfuture business results and actions,

 

·                  Increased competition with ourcompetitors or among our customers,

 

·                  Quarterly fluctuations in our financialresults or the financial results of our competitors or customers,

 

·                  Announcements of new products andservices by us or our competitors, and

 

·                  Disputes concerning intellectual propertyrights.

 

In addition, stocks ofcompanies in our industry in the past have experienced significant price andvolume fluctuations that are often unrelated to the operating performance ofsuch companies. This market volatility may adversely affect the market price ofour common stock.

 

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# **Item 1B.   Unresolved Staff Comments**

# ** **

None.

 

# **Item 2.   Properties**

# ** **

Our business is primarilyfocused on the provision of service and our properties are used foradministrative support and to store and safeguard equipment. On December 31,2008, our gross property, plant and equipment of $338,510,000 (net balance of$151,353,000) consisted primarily of telephone switches, cable, fiber opticnetworks and network equipment. We own or lease the telephone property, plantand equipment that are utilized to operate our telephone systems. Our threeILEC subsidiaries in Minnesota and Iowa own central telephone offices withrelated real estate in all of the communities they serve. Our Telecom Sectorowns the telephone network, including telephone outside plant, fiber opticcable and central office equipment over which they provide services to itscustomers. Our Enventis Sector owns, or has indefeasible rights to use, or haslong-term leasing commitments to its extensive fiber optic network andswitching system. It is our opinion that our properties are suitable andadequate to provide modern and effective communications services within ourservice areas, including local dial-tone, long distance service, DSL, digitalTV and dedicated and switched long-haul transport.

 

Our principalproperty locations are the following;

 

1.               MCTC’s general offices and principalcentral office exchange building located in downtown Mankato, Minnesota. Thisfacility, built in 1963, is owned by MCTC and is a three-level brick and stonebuilding containing approximately 60,000 square feet of floor space.

 

2.               MCTC’s main warehouse located in Mankato,Minnesota. This warehouse, built in 1996, is owned by MCTC and is a two-storyconcrete building containing approximately 48,000 square feet. The warehouse isused to store vehicles and supplies and is also used as office space forengineers and technicians.

 

3.               Heartland’s main central office equipmentlocated in a one-story brick structure owned by Heartland in Rock Rapids, Iowacontaining approximately 1,500 square feet of space. Heartland also leasesapproximately 2,000 square feet of general office space in Rock Valley, Iowa.

 

4.               Crystal leases office space ofapproximately 6,000 square feet in Urbandale, Iowa.

 

5.               NIBI owns a four-level building inMankato, Minnesota containing approximately 17,000 square feet.

 

6.               Enventis leases approximately 16,000square feet of office space in Plymouth, Minnesota for general offices,technology services and system support.

 

7.               Enventis leases approximately 7,500square feet in Duluth, Minnesota for general offices and a network operationscenter.

 

8.               Enventis leases approximately 1,700square feet in Rochester, Minnesota for general offices and a network equipmentfacility.

 

9.               Enventis licenses approximately 2,200square feet in Edina, Minnesota for a data center.

 

10.         Enventis utilizes approximately 2,200square feet secured space within MCTC’s facility in Mankato, Minnesota for adata center.

 

# **Item 3.  Legal Proceedings**

# ** **

Other than routinelitigation incidental to our business, there are no pending material legalproceedings to which we are a party or to which any of our property is subject.

 

# **Item 4.  Submission of Matters to a Vote of SecurityHolders**

# ** **

None.

 

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**PART II**

 

# **Item 5.   Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

# ** **

Our common stock isquoted on the NASDAQ Global Select Market under the symbol “HTCO.” As of February 9,2009, there were 1,394 registered shareholders and 1,834 beneficial owners ofHickoryTech stock. The following table sets forth the high and low prices forour common stock quoted in the NASDAQ Global Select Market during 2008 and2007.

 

|             |       |     |       |    |       |             |   |
|------------------|------------|----------|------------|---------|------------|------------------|--------|
| **2008**         | ** ** | **High** | ** ** | **Low** | ** ** | **End of  Qtr.** |   |
| 4th Quarter |       | $        | 6.29       |    | $          | 4.92             |   | $ | 5.44 |   |
| 3rd Quarter |       | $        | 8.25       |    | $          | 5.81             |   | $ | 5.81 |   |
| 2nd Quarter |       | $        | 8.95       |    | $          | 7.77             |   | $ | 8.27 |   |
| 1st Quarter |       | $        | 9.48       |    | $          | 7.97             |   | $ | 8.27 |   |
|             |       |     |       |    |       |             |   |
| **2007**         | ** ** | **High** | ** ** | **Low** | ** ** | **End of  Qtr.** |   |
| 4th Quarter |       | $        | 9.85       |    | $          | 8.80             |   | $ | 9.32 |   |
| 3rd Quarter |       | $        | 9.88       |    | $          | 8.01             |   | $ | 9.69 |   |
| 2nd Quarter |       | $        | 9.29       |    | $          | 6.93             |   | $ | 9.10 |   |
| 1st Quarter |       | $        | 7.42       |    | $          | 6.84             |   | $ | 6.93 |   |
|             |       |     |       |    |       |             |   |

 

**DividendTendencies and Restrictions**

 

We declared quarterlydividends on our common stock of $0.12 per share for the first three quartersin 2008 and $0.13 per share for the fourth quarter in 2008. We declaredquarterly dividends on our common stock of $0.12 per share for the year ended December 31,2007. A quarterly cash dividend of $0.13 per share will be paid on March 5,2009 to stockholders of record at the close of business on February 15,2009.

 

Our board of directorshas adopted dividend payment practices that reflect its judgment that ourstockholders would be better served if we distributed to them a portion of thecash generated by our business in excess of our expected cash needs rather thanretaining it or using the cash for other purposes, such as to make investmentsin our business, or to make acquisitions. We expect to continue to payquarterly dividends at an annual rate of $0.52 per share during 2009, but onlyif and to the extent declared by our board of directors on a quarterly basisand subject to various restrictions on our ability to do so (see below).Dividends on our common stock are not cumulative.

 

The terms of our creditfacility include certain restrictions regarding the payment of dividends. Thedividend restriction provides that we may not make dividend distributions orrepurchase stock in an aggregate amount in excess of 100% of the previous year’snet income. In 2007, we were in violation of this dividend restriction, but awaiver was obtained.

 

The cash requirements ofour current dividend payment practices are in addition to our other expectedcash needs, both of which we expect to be funded with cash flow fromoperations. In addition, we expect we will have sufficient availability underour revolving credit facility to fund dividend payments in addition to anyexpected fluctuations in working capital and other cash needs, although we donot intend to borrow under this facility to pay dividends.

 

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**IssuerPurchases of Common Stock**

 

During the quarter ended December 31,2008, we acquired and retired 393,000 common shares in block transactionshandled through market makers. This was the first acquisition of our sharessince 2003. We do not have a formal share repurchase plan. Details of thetransactions follow: 
| ** **              | ** ** | **Total Number of**  | ** ** | **Average Price Paid** | ** ** | **Brokerage**   | ** ** | **Total Transaction** | ** ** |
|-------------------------|------------|----------------------|------------|------------------------|------------|-----------------|------------|-----------------------|------------|
| **Purchase Date**       | ** ** | **Shares Purchased** | ** ** | **per Share**          | ** ** | **Commissions** | ** ** | **Cost**              | ** ** |
| October 31,  2008  |       | 300,000              |       | $                      | 6.10       |            | $          | 13,500                |       | $ | 1,843,500 |   |
| November 20,  2008 |       | 93,000               |       | $                      | 5.55       |            | $          | 3,300                 |       | $ | 519,450 |   |

 

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**FiveYear Shareholder Return Performance Presentation**

 

The following tablecompares the cumulative total shareholder return on the common stock ofHickoryTech for the last five fiscal years with the cumulative total return onthe Russell 2000 Index and the NASDAQ Telecommunications Index. “Totalshareholder return” assumes the investment of $100 in HickoryTech’s commonstock, the Russell 2000 index and the NASDAQ Telecommunication Index on December 31,2003 and reinvestment of all dividends.

 

Total Return toShareholders (Includes reinvestment of dividends)

 

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among Hickory Tech Corporation, The Russell 2000 Index

And The NASDAQ Telecommunications Index

 

 

*$100 invested on12/31/03 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.

 
| ** **                     | ** ** | ** ** | ** ** | **ANNUAL RETURN PERCENTAGE** | ** ** |
|--------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Years Ended**              | ** ** |
| ** **                     | ** ** | ** ** | ** ** | **12/04**                    | ** ** | **12/05** | ** ** | **12/06** | ** ** | **12/07** | ** ** | **12/08** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Hickory  Tech Corporation**  | ** ** | ** ** | ** ** | **-2.95**                    | **%**      | **-22.34** | **%** | **-3.59** | **%** | **38.17** | **%** | **-37.69** | **%** |
| **Russell  2000**              | ** ** | ** ** | ** ** | **18.33**                    | **%**      | **4.55** | **%** | **18.37** | **%** | **-1.57** | **%** | **-33.79** | **%** |
| **NASDAQ  Telecommunications** | ** ** | ** ** | ** ** | **6.63**                     | **%**      | **-3.40** | **%** | **27.21** | **%** | **3.03** | **%** | **-42.03** | **%** |
| ** **                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Base**   | ** ** | **INDEXED  RETURNS**         | ** ** |
| ** **                     | ** ** | **Period** | ** ** | **Years  Ended**             | ** ** |
| ** **                     | ** ** | **12/03**  | ** ** | **12/04**                    | ** ** | **12/05** | ** ** | **12/06** | ** ** | **12/07** | ** ** | **12/08** | ** ** |
| ** **                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Hickory  Tech Corporation**  | ** ** | **100.00** | ** ** | **97.05**                    | ** ** | **75.36** | ** ** | **72.66** | ** ** | **100.39** | ** ** | **62.55** | ** ** |
| **Russell  2000**              | ** ** | **100.00** | ** ** | **118.33**                   | ** ** | **123.72** | ** ** | **146.44** | ** ** | **144.15** | ** ** | **95.44** | ** ** |
| **NASDAQ  Telecommunications** | ** ** | **100.00** | ** ** | **106.63**                   | ** ** | **103.01** | ** ** | **131.04** | ** ** | **135.00** | ** ** | **78.26** | ** ** |

# ** **

 

 

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# **Table of Contents**

 

# **Item 6. Selected Financial Data**

* *

*(Dollarsin thousands except share and per share amounts)*

 
| ** **                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **FOR THE  YEAR:**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues  (A)                          |       |       |       |       |       |       |       |       |       |       |       |
|  Telecom Sector (B)                         |       | $          | 73,199     |       | $          | 76,847     |       | $          | 74,896     |       | $          | 77,922 |   | $ | 78,807 |   |
|  Enventis Sector (C)                        |       |       |       |       |       |       |       |       |       |       |       |
| Equipment  revenue                               |       | 43,514     |       | 51,046     |       | 36,191     |       | —     |       | —     |       |
| Services revenue                                 |       | 36,462     |       | 28,756     |       | 21,814     |       | —     |       | —     |       |
|  Total Enventis Sector                      |       | 79,976     |       | 79,802     |       | 58,005     |       | —     |       | —     |       |
| Total revenues                                   |       | $          | 153,175    |       | $          | 156,649    |       | $          | 132,901    |       | $          | 77,922 |   | $ | 78,807 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
| Income from  continuing operations               |       | $          | 8,029      |       | $          | 8,635      |       | $          | 5,235      |       | $          | 8,566 |   | $ | 8,681 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
| **PER  SHARE:**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Basic EPS - continuing operations          |       | $          | 0.61       |       | $          | 0.65       |       | $          | 0.40       |       | $          | 0.65 |   | $ | 0.66 |   |
|  Basic EPS - discontinued operations        |       | —     |       | —     |       | (0.23      | )          | —     |       | (0.08      | )          |
|                                             |       | $          | 0.61       |       | $          | 0.65       |       | $          | 0.17       |       | $          | 0.65 |   | $ | 0.58 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
|  Diluted EPS - continuing operations        |       | $          | 0.61       |       | $          | 0.65       |       | $          | 0.40       |       | $          | 0.65 |   | $ | 0.66 |   |
|  Diluted EPS - discontinued operations      |       | —     |       | —     |       | (0.23      | )          | —     |       | (0.08      | )          |
|                                             |       | $          | 0.61       |       | $          | 0.65       |       | $          | 0.17       |       | $          | 0.65 |   | $ | 0.58 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
|  Dividends per share                        |       | $          | 0.49       |       | $          | 0.48       |       | $          | 0.48       |       | $          | 0.48 |   | $ | 0.44 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
| **AT YEAR  END: (C)**                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Total assets (A)                           |       | $          | 225,508    |       | $          | 227,495    |       | $          | 226,900    |       | $          | 216,834 |   | $ | 160,658 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
|  Shareholders’ equity (D)              |       | $          | 29,749     |       | $          | 31,932     |       | $          | 30,086     |       | $          | 35,009 |   | $ | 31,545 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
|  Current maturites of long-term obligations |       | $          | 1,621      |       | $          | 731        |       | $          | 1,560      |       | $          | 1,778 |   | $ | 5,323 |   |
|  Long term debt                             |       | 125,384    |       | 128,475    |       | 141,529    |       | 140,980    |       | 97,661     |       |
|  Total debt, long-term and current          |       | $          | 127,005    |       | $          | 129,206    |       | $          | 143,089    |       | $          | 142,758 |   | $ | 102,984 |   |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
|  Debt ratio (E)                             |       | 81.0       | %          | 80.2       | %          | 82.6       | %          | 80.3       | %          | 76.6       | %          |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
| **CUSTOMER  DATA (year end):**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Business access  lines                           |       | 25,274     |       | 27,403     |       | 27,014     |       | 27,145     |       | 28,666     |       |
| Residential  access lines                        |       | 33,757     |       | 37,428     |       | 41,029     |       | 42,945     |       | 45,892     |       |
| Total access  lines (F)                          |       | 59,031     |       | 64,831     |       | 68,043     |       | 70,090     |       | 74,558     |       |
| Long distance  subscribers (G)                   |       | 38,458     |       | 40,956     |       | 41,196     |       | 40,321     |       | 43,702     |       |
| DSL customers  (H)                               |       | 18,696     |       | 17,427     |       | 15,724     |       | 13,022     |       | 10,430     |       |
| Digital TV  customers (I)                        |       | 8,368      |       | 6,487      |       | 4,632      |       | 2,766      |       | 1,941      |       |
|                                             |       |       |       |       |       |       |       |       |       |       |       |
| **OTHER  DATA:**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Employees (year end) (C)(J)                |       | 433        |       | 400        |       | 399        |       | 460        |       | 394        |       |
|  Capital expenditures (K)                   |       | $          | 17,691     |       | $          | 17,500     |       | $          | 21,058     |       | $          | 19,434 |   | $ | 16,588 |   |
|  Shares outstanding (year end)              |       | 12,992,376 |       | 13,284,903 |       | 13,207,970 |       | 13,124,928 |       | 13,057,106 |       |
|  Share price (L) (year end)            |       | $          | 5.44       |       | $          | 9.32       |       | $          | 7.15       |       | $          | 7.89 |   | $ | 10.69 |   |
|  Shareholders                               |       |       |       |       |       |       |       |       |       |       |       |
| Registered                                       |       | 1,394      |       | 1,430      |       | 1,470      |       | 1,511      |       | 1,559      |       |
| Beneficial  owners (M)                           |       | 1,834      |       | 1,778      |       | 1,792      |       | 1,701      |       | 1,677      |       |
|  Total shareholders                         |       | 3,228      |       | 3,208      |       | 3,262      |       | 3,212      |       | 3,236      |       |

 

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A.           Revenue and total assets for all periodshave been restated to exclude revenue and assets of the Enterprise Solutionsoperations, which are included in discontinued operations for all periodspresented. We sold our Enterprise Solutions Sector in December 2006.

 

 

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B.             Operating revenue for NIBI, which priorto 2006 had been reported in the Information Solutions Sector, has been recastfor all years presented to consolidate our reporting for similar operations forall years presented. Revenue is now being reported as part of the TelecomSector results.

 

C.             Enventis was purchased by HickoryTech asof December 30, 2005.

 

D.            Shareholders’ Equity at December 31,2006 includes the impact of adopting SFAS No. 158 as described in Note 10to the Notes to the Consolidated Financial Statements.

 

E.              Debt Ratio = Total Debt / (Total Debt +Shareholders’ Equity as of December 31).

 

F.              Access Lines refer to the ILEC and CLECaccess lines in the Telecom Sector.

 

G.             Long Distance services are provided inthe Telecom Sector.

 

H.            DSL services are provided in the TelecomSector. DSL line counts were reduced by 478 in the 2007 due to a dataconversion. There was no restatement of prior periods.

 

I.                 Digital TV services are provided in theTelecom Sector.

 

J.                All employee counts reflect actualemployee counts at year-end. No numbers have been restated for the discontinuedEnterprise Solutions operations. The Enventis acquisition in 2005 added 75employees. The Enterprise Solutions sale in 2006 reduced employee counts by 64employees.

 

K.            Capital expenditures have been restatedto exclude Enterprise Solutions operations for all years presented.

 

L.              Share price is the last day closingprice.

 

M.         The number of beneficial shareholders isthe approximate number of company registrations in street name accounts.

 

# **Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

# ** **

*        The following discussion should be readin conjunction with our historical financial statements and the related notescontained elsewhere in this report.*

 

**Overview**

 

HickoryTech is a holdingcompany offering a diverse array of products and services. Our legacy businessof traditional wireline local exchange telecommunications is complemented bystate-of-the-art broadband services in the retail communications field —including high-speed data and digital TV service — serving dominant marketshares of residential and business customers in specific cities in Minnesotaand Iowa. We also provide fiber network capacity and integrated IP telephonyand data services to an exclusively commercial business market. From our baseincumbent telephone companies, we began to expand beyond our ILEC business in1998 via a CLEC edge-out strategy. We chose to serve both residential andbusiness customers in communities in close proximity to our ILEC service areaon a total overbuild basis, meaning we use our own network and switchingassets. We began an aggressive broadband service campaign with DSL in 1999,deployed residential digital TV service in 2001 and added business high-speeddata applications (Ethernet) in 2004. We purchased Enventis, a Minnesota-basedregional provider of integrated fiber network, IP telephony and data serviceswith 1,500 route miles of fiber network serving business customers in the UpperMidwest in December 2005. Our acquisition of Enventis enhanced thebusiness-to-business service strength already in place at HickoryTech.

 

We operate in twobusiness segments: the Telecom and Enventis Sectors. Our legacy product andservice line (since 1898) has been the operation of ILECs or traditionalwireline telephone service. In 1998, we formed a CLEC and started offeringservices on a competitive basis in several market areas. This product andservice line competes for the telephone dial tone, Internet dial-up andbroadband access, data, digital TV and long distance calling business in ILECterritories. Both ILEC and CLEC operations are managed as one coordinated unit,and both are accounted for and reported within our Telecom Sector. NIBI, whichprovides computer data processing and software for our Telecom Sectoroperations as well as to other telecommunications companies, is also accountedfor within our Telecom Sector.

 

Our operations inthe Telecom Sector consist primarily of providing services to customers for afee. Because many of these services are recurring in nature, backlog orders andseasonality are not significant factors. Working capital requirements for theTelecom Sector include financing construction of networks, consisting ofswitches and cable, data, IP and digital TV. Capital is also needed to maintainour networks and infrastructure, for software development, to pay payroll costsof highly skilled labor, to maintain inventory to service capital projects andnetwork and telephone equipment customers, and to provide for the carryingvalue of trade accounts receivable, which may take several months to collect inthe normal course of business.

 

 

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Through our EnventisSector, we serve wholesale communications carriers with fiber networkconnectivity in several states and provide integrated dedicated voice and datacircuits, IP telephony, and data services to large/enterprise and small/mediumsize retail business customers. Enventis Sector operating results can fluctuatedue to the timing of activity in the equipment product line. Periods ofincreased sales and system implementation — and the related revenue recognition— can lead to uneven results on a quarter-to-quarter or year-to-year basis.These activities are important to building valuable customer relationships andsustainable recurring revenue streams based on our ability to providehigh-quality solutions, delivery, and support. It is the relatively highermargin and recurring revenue-generating managed services parts of the divisionon which we intend to focus our future growth. Working capital is required inthe Enventis Sector to construct fiber/optical equipment and IP equipment, forpayroll costs, to fund work-in-process, and for inventory. Enventis workingcapital is also required for the carrying value of trade accounts receivable,particularly in the equipment revenue product line, where receivables may takeseveral months to collect in the normal course of business due to extendedproject timelines.

 

The materials andsupplies that are necessary for the operation of our businesses are availablefrom a variety of sources. Our Telecom Sector relies upon one vendor to supplya key piece of equipment to support our digital TV product in markets that donot utilize our IP protocol TV platform. We are currently working with othervendors to potentially supply this equipment. All of our central officeswitches are supplied by Nortel. A majority of the equipment sold in ourEnventis Sector is supplied by Cisco. Nortel and Cisco are leading suppliers ofcommunications and data equipment, and our dependence on these vendors is notviewed as a significant risk.

 

From 1990 to 2006, wealso owned Collins Communications Systems Company (“Collins”), and its resultsof operations were reported in the Enterprise Solutions Sector. We acquiredCollins in 1990 and it operated as a telecommunications, data and IP equipmentdistributor from a base in Minneapolis/St. Paul, Minnesota. We sold our Collinsoperations on December 31, 2006. All financial statements and scheduleshave been restated to reflect Collins operations as discontinued operations forall periods presented.

 

**Highlights**

 

**2008Compared to 2007**

 

·                  Telecom Sector broadband services revenuegrew by 19.7% in 2008, illustrating the results of our broadband strategy ofproviding multiple services over one high-speed connection to the home.

 

·                  Our strategic focus to grow recurringservices revenue resulted in a 49.4% growth in Enterprise Network Servicesrevenue and 17.7% growth in Enventis Transport Services revenue.

 

·                  Enventis Sector equipment revenuedeclined 14.8% in 2008, due primarily to the widespread economic downturnexperienced in the second half of 2008 which has delayed customer purchases.

 

·                  In 2008 Telecom Network Access revenuecontinued a downward trend that began in the third quarter of 2007. Networkaccess revenue declined $5,033,000 or 16.3% in 2008. A switched access disputewith a large interexchange carrier which resulted in non-recurring revenue of$1,890,000 in 2007 significantly impacts the year-over-year comparability.Without the impact of the non-recurring access settlement, network accessrevenue would have decreased by $3,143,000 or 10.8% in 2008. This decrease inrevenue is primarily due to access line losses combined with the decrease ininterstate access rates which went into effect on July 1, 2007.

 

·                  2008 net income decreased $582,000 or6.8%. Without the non-recurring settlement from a switched access dispute witha large interexchange carrier which increased net income by $1,134,000 in 2007,net income would have increased $552,000 or 7.4% in 2008 compared to 2007.

 

·                  We used cash flow from operations toreduce our outstanding long-term debt balance by $2,201,000 in 2008 andinvested $2,363,000 to repurchase and retire our own capital stock.

 

**2007Compared to 2006**

 

·                  We posted double-digit growth in revenue,a 46% increase in operating income, and earnings per share (EPS) increased by282% to 65 cents during 2007.

 

·                  Enventis completed its second year as awholly owned subsidiary. Enventis Sector revenue for 2007 represented a 37.6%increase over revenue for 2006 and Enventis Sector net income increased 198.9%over that same time period.

 

 

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·                  Telecom Sector revenue was aided bynon-recurring revenue of $1,890,000 due to the settlement of a switched accessrevenue dispute. Without the non-recurring settlement, revenue would haveincreased $268,000 of 0.4% in 2007 compared to 2006.

 

·                  We expanded our residential triple-playservice area, which includes voice, high-speed internet and digital TVservices. We also launched IPTV services and doubled our digital TV servicearea.

 

·                  We continued to see erosion in local access lines which decreased by4.7% in 2007. Our Telecom business experienced increased competition in 2007 ascable providers launched voice services. We also continued to experience priceerosion in our core voice business.

 

·                  Selling, General and Administrative Expenses were $24,244,000 in 2007,a $953,000 or 4.1% increase compared to 2006. The Enventis Sector recordedacquisition integration costs of approximately $2,400,000 in 2006 which did notrecur in 2007. Without these one-time costs, our selling, general andadministrative expenses would have increased 16.0% in 2007 compared to 2006.This substantial increase in costs was used to support the higher activitylevels of the Enventis Sector operations in 2007.

 

·                  We were able to reduce our outstandinglong-term debt by $13,900,000 or 10% in 2007 compared to 2006.

 

·                  Capital expenditures decreased by$3,558,000 in 2007 compared to 2006 and were focused on strategic capitalinvestments.

 

**Trends**

 

        In 2008, we achieved solid results following a year ofextraordinary growth in 2007. Without the non-recurring settlement of aswitched access dispute with a large interexchange carrier, which increased netincome by $1,134,000 in 2007, net income would have increased $552,000 or 7.4%in 2008 compared to 2007. A deliberate focus to grow our recurring servicesrevenue resulted in 49.4% growth in our Enterprise Network Services revenue and17.7% growth in Enventis Transport Services revenue within our Enventis Sectorin 2008 compared to 2007.

 

        Our focus in 2008 to strategically grow ourbusiness-to-business services remains steadfast in 2009. Our business customersare increasingly demanding customized and integrated voice, data and Internetservices. Our managed service offerings include diverse combinations ofemerging technology products and services, such as VoIP, Ethernet, MPLS,hosting services, unified communications, security and monitoring. We believeour business customers will continue to demand turnkey solutions, such asmanaged services, that afford them more flexibility and total support of theircommunications needs. These types of services also allow us to act as astrategic partner with our business customers in improving the effectivenessand efficiency of their operations. We believe this gives us an opportunity toform stronger bonds with these customers. Some of our key managed servicesofferings include security, monitoring, total care support, and our EnventisSingleLinkTM Unified Communications.

 

The number and type ofcompetitors within our industry continues to grow and competition remainsintense. Our Telecom Sector has continued to experience competition from cableTV providers, VoIP providers, wireless and other competitors during the pastyear. To help offset declines in local service revenue, we implemented a localrate increase in January 2009, our first rate increase since December of2001. Competition combined with consumers substituting other methods fortraditional voice services has and will continue to negatively impact ourcurrent and future local and network access revenue streams. Line lossestotaled 5,800 or 9.0% in 2008 and 3,212, or 4.7% in 2007. Our access line losspercentage was exaggerated in 2008 by a large customer removing 1,332 lines inthe fourth quarter. Our local access line loss in 2008 would have been 4,468 or6.9% in 2008 without the removal of these lines.

 

As we experience accessline losses, our network access revenue will continue to decline consistentwith industry wide trends. A combination of changing minutes of use, carriersoptimizing their network costs and lower demand for dedicated lines may impactour future network access revenue. Our network access revenue is alsosignificantly impacted by potential changes in rate regulation at the state andfederal levels. We continue to monitor regulatory changes as we believe theywill be under close scrutiny and are subject to change with a newadministration.

 

 

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Our strategy to build astate-of-the-art broadband network and increase connectivity speeds to ourcustomers along with the bundling of our data, Internet and video services hasallowed us to generate continuous double-digit growth in Telecom Sectorbroadband revenue. We continue to focus on advanced, high-growth products,which include broadband services, private line, MPLS, VoIP, digital video(DTV), and IPTV services.

 

Our Enventis Sectorutilizes our statewide fiber network along with expertise in designing andimplementing communications solutions to grow this sector’s bottom lineresults. Operating income grew 1.7% in 2008 despite a $7,532,000 or 14.8%decline in revenue from equipment sales. Services revenue in our EnterpriseNetwork Services product line grew $4,095,000 or 49.4% in 2008 and $3,710,000or 81% in 2007. Our employees have deep experience helping businesses of allsize realize the operational, technical and financial rewards of newtechnologies. Our Enventis Transport Services product line continued toexperience growth across all segments of its business. We believe our growth inthe services lines of our Enventis Sector will continue in 2009 and partiallyoffset possible declines in equipment sales, which are impacted by a tighteningeconomy.

 

Interest expense decreasedby $1,251,000 or 15.4% in 2008 compared to 2007 due to the combined effects oflower interest rates and interest rate protection strategies. Amortization ofgains related to interest-rate swap agreements sold at a gain in early 2007benefited 2008 interest expense by $664,000.

 

 

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**Sector Results of Operations**

 

**Telecom Sector**

The followingtable provides a breakdown of the Telecom Sector operating results.

 

**TELECOM  SECTOR**

 
| ** **                                                  | ** ** | **For Year Ended December 31** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands)**                                  | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue before  intersegment eliminations                   |       |                                |       |   |   |   |   |
|                                                        |       |                                |       |   |   |   |   |
| Revenue                                                     |       |                                |       |   |   |   |   |
| Local Service                                               | ** ** | **$**                               | **16,296** |   | $ | 17,089 |   | $ | 18,224 |   |
| Network Access                                              | ** ** | **25,859**                          |       | 30,892 |   | 29,936 |   |
| Long Distance                                               | ** ** | **4,563**                           |       | 5,068 |   | 4,877 |   |
| Data                                                        | ** ** | **7,561**                           |       | 6,900 |   | 6,048 |   |
| Internet                                                    | ** ** | **4,723**                           |       | 4,612 |   | 4,467 |   |
| Digital TV                                                  | ** ** | **3,422**                           |       | 2,273 |   | 1,457 |   |
| Directory                                                   | ** ** | **4,119**                           |       | 3,854 |   | 3,624 |   |
| Bill Processing                                             | ** ** | **3,325**                           |       | 2,474 |   | 2,127 |   |
| Intersegment                                                | ** ** | **644**                             |       | 467 |   | 260 |   |
| Other                                                       | ** ** | **3,331**                           |       | 3,685 |   | 4,136 |   |
| Total Telecom  Revenue                                      | ** ** | **$**                               | **73,843** |   | $ | 77,314 |   | $ | 75,156 |   |
|                                                        |       |                                |       |   |   |   |   |
| Total Telecom  revenue before intersegment eliminations     |       |                                |       |   |   |   |   |
| Unaffiliated  customers                                     | ** ** | **$**                               | **73,199** |   | $ | 76,847 |   | $ | 74,896 |   |
| Intersegment                                                | ** ** | **644**                             |       | 467 |   | 260 |   |
|                                                        | ** ** | **73,843**                          |       | 77,314 |   | 75,156 |   |
|                                                        |       |                                |       |   |   |   |   |
| Cost of services  (excluding depreciation and amortization) | ** ** | **31,141**                          |       | 30,893 |   | 32,046 |   |
| Selling, general  and administrative expenses               | ** ** | **13,521**                          |       | 13,407 |   | 13,001 |   |
| Depreciation and  amortization                              | ** ** | **16,136**                          |       | 15,218 |   | 15,009 |   |
| Operating Income                                            | ** ** | **$**                               | **13,045** |   | $ | 17,796 |   | $ | 15,100 |   |
|                                                        |       |                                |       |   |   |   |   |
| Net income                                                  | ** ** | **$**                               | **8,104**  |   | $ | 10,460 |   | $ | 9,237 |   |
|                                                        |       |                                |       |   |   |   |   |
| Capital  expenditures                                       | ** ** | **$**                               | **11,102** |   | $ | 11,489 |   | $ | 15,631 |   |
|                                                        |       |                                |       |   |   |   |   |
| Key metrics                                                 |       |                                |       |   |   |   |   |
| Business access  lines                                      | ** ** | **25,274**                          |       | 27,403 |   | 27,014 |   |
| Residential  access lines                                   | ** ** | **33,757**                          |       | 37,428 |   | 41,029 |   |
| Total access  lines                                         | ** ** | **59,031**                          |       | 64,831 |   | 68,043 |   |
| Long distance  customers                                    | ** ** | **38,458**                          |       | 40,956 |   | 41,196 |   |
| Digital  Subscriber Line customers*(1)*                     | ** ** | **18,696**                          |       | 17,427 |   | 15,724 |   |
| Digital TV  customers                                       | ** ** | **8,368**                           |       | 6,487 |   | 4,632 |   |

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*(1) *DSL line counts were reduced by 478 in2007 due to a data conversion.There was no restatement of prior periods.

 

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**Revenue**

 

**        *Local Service.**** *Weprimarily receive monthly recurring revenue for basic voice telephone service,enhanced calling features, local private lines and circuits, reciprocalcompensation from wireless carriers, and miscellaneous local services. Localservice revenue was $16,296,000, which is $793,000 or 4.6% lower in 2008compared to 2007 and was $17,089,000, which is $1,135,000 or 6.2% lower in 2007compared to 2006. The decrease in both periods is primarily attributable to theloss of access lines. Line losses totaled 5,800 or 9.0% in 2008 and 3,212, or4.7% in 2007. Our access lines decreased in the later part of 2008 due to alarge customer reconfiguring their network causing the removal of 1,332 linesin the fourth quarter. Our local access line loss in 2008 would have been 4,468or 6.9% in 2008 without the removal of these lines.

 

        The number of access lines we serve asan incumbent local exchange carrier has been decreasing, which is consistentwith the general trend in our industry. To help offset declines in localservice revenue, we implemented a local rate increase in January 2009, ourfirst rate increase since December of 2001. Our overall strategy continuesto focus on selling a competitive bundle of services. Our focus on marketingcompetitive service bundles to our customers creates a compelling value forcustomers to maintain their local voice line. These bundle packages arecustomizable and offer competitive discounts as more services, such asfeatures, high-speed DSL and digital TV, are added to the bundle.

 

        Additionally, we experienced a decreasein local service revenue in 2007 compared to 2006 due to a decline inreciprocal compensation received from wireless carriers under contract usingminute-of-use pricing of $494,000. Many of these contracts and their associatedpricing were negotiated in the first nine months of 2007.

 

*        **Network Access**.*We receive avariety of fees and settlements to compensate us for the origination,transport, and termination of calls and traffic on our network. These includethe fees assessed to interexchange carriers, subscriber line charges imposed onend-users, and settlements from nationally administered pools. Network accessrevenue was $25,859,000, which is $5,033,000 or 16.3% lower in 2008 compared to2007. Network access revenue was $30,892,000 which is $956,000 or 3.2% higherin 2007 compared to 2006. A switched access dispute with a large interexchangecarrier resulted in a non-recurring increase in revenue of $1,890,000 in 2007,significantly impacting the year-over-year comparability of trends in thisrevenue line. Without the impact of the 2007 non-recurring access settlement,network access revenue would have decreased $3,143,000 or 10.8% in 2008compared to 2007 and decreased $934,000 or 3.1% in 2007 compared to 2006.Underlying the decreases in both 2008 and 2007 are the line losses and lowerminutes of use on our network. An additional impact to 2007, and to a greaterextent on 2008, was the bi-annual interstate rate decrease which went intoeffect on July 1, 2007.

 

        In 2008, a dispute with the UniversalService Administration Company (“USAC”) stemming from its reversal of standardinterpretations of revenue distribution rules decreased 2008 reportednetwork access revenue by $739,000. We are appealing the USAC interpretation asarbitrary and unprecedented. Additionally, in late 2008, network access revenuewas reduced $244,000 due to an adjustment of an estimate in interstate poolingwith NECA.

 

        ***Long Distance****.*Our end-user customers are billed for toll or longdistance service on either a per-call or flat-rate basis. This includes theprovision of directory assistance, operator service, and long distance privatelines. Long distance revenue was $4,563,000, which is $505,000 or 10.0% lowerin 2008 compared to 2007. The decrease is the result of the loss of 6.1% of thecustomer base during 2008 compared to 2007, more residential customersselecting unlimited long distance calling plans, decreased rates per minutecharged to customers due to aggressive competition in the markets we serve, anda local in-bound call center customer going out of business.

 

        Long distance revenue was $5,068,000,which is $191,000 or 3.9% higher in 2007 compared to 2006. Despite a 0.6%decrease in the customer base at December 31, 2007 compared to December 31,2006, long distance revenue increased largely due to a 7.6% increase in minutesof use in 2007 compared to 2006 which was primarily driven by increasedbusiness customer usage.

 

        ***Data****.*We provide a variety of enhanced data network services ona monthly recurring basis to our end-user customers. This includes the DSLaccess portion of Telecom DSL service. Data revenue was $7,561,000, which is$661,000 or 9.6% higher in 2008 compared to 2007 and was $6,900,000, which is$852,000 or 14.1% higher in 2007 compared to 2006. The increase in both periodswas driven by DSL customer growth of 7.3% in 2008 and 10.8% in 2007. Continuedgrowth in this area has been driven by customer migration from dial-up internetto broadband products such as our DSL service along with aggressively packagingour Select service bundles.

 

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        Additionally, growth in our Ethernetproduct has increased data revenue by $276,000 and $561,000 during 2008 and2007, respectively.

 

        ***Internet.***Wereceive monthly recurring revenue by providing dial-up and high speed internetaccess to residential and business customers. Internet revenue was $4,723,000,which is $111,000 or 2.4% higher in 2008 compared to 2007, and was $4,612,000,which is $145,000 or 3.2% higher in 2007 compared to 2006. The increase in bothperiods was primarily due to the growth in high speed internet from DSL alongwith increased demand for dedicated internet access within the business sector.

 

*        **Digital TV**.*We receivemonthly recurring revenue from our end-user subscribers for the provision ofcommercial TV programming. Digital TV revenue was $3,422,000, which is$1,149,000 or 50.6% higher in 2008 compared to 2007, and was $2,273,000, whichis $816,000 or 56.0% higher in 2007 compared to 2006. Launching IPTV servicesto three additional communities including our largest market, Mankato, Minn. in2007 more than doubled our digital TV service area, growing our customer baseby 1,881 or 29.0% in 2008 and 1,855 or 40.0% in 2007. Also contributing to theincrease in digital TV revenue in both periods was an increase in rates chargedto customers of approximately 6.0% and 5.0%, which went into effect in April 2008and 2007, respectively.

 

*        **Directory**.*We receive monthly recurring revenue fromend-user subscribers for the yellow page advertising in our telephonedirectories. Directory revenue was $4,119,000, which is $265,000 or 6.9% higherin 2008 compared to 2007 and was $3,854,000, which is $230,000 or 6.3% higherin 2007 compared to 2006. The increase in both periods was the result offavorable sales cycles of yellow-page advertising experienced during thepast two years. Our directory cycle goes into effect in the beginning of thethird quarter of each year.

 

        ***Bill Processing****.*We provide data processing as a service to other telephoneservice providers and sell our systems to external businesses. We collect acombination of monthly recurring revenue, software license fees, andintegration services revenue from companies with which we have established along-term data processing relationship. Bill processing revenue was $3,325,000,which is $851,000 or 34.4% higher in 2008 compared to 2007 and was $2,474,000,which is $347,000 or 16.3% higher in 2007 compared to 2006. The increase inboth periods was driven by project integration services revenue related to thesale of our billing and management system SuiteSolution® to several newcustomers.

 

        ***Other Revenue***.Other revenue consists primarily of sales of customer premise equipment,circuit private lines, maintenance, and adds, moves and change revenue. Otherrevenue was $3,331,000, which is $354,000 or 9.6% lower in 2008 compared to2007. This decrease was primarily due to a decrease in customer premiseequipment revenue of $338,000. This decline is due to our decision to phase outsales of Nortel customer premise equipment in favor of the Cisco brand. AllCisco sales results are reported within the Enventis Sector. Also contributingto lower revenue was lower paystation revenue of $110,000 offset by increasedTelecom contract services revenue of $139,000.

 

        Other revenue was $3,685,000, which is$451,000 or 10.9% lower in 2007 compared to 2006. This decrease was primarilydue to lower revenue of $767,000 associated with the SOCRATES contract whichwas discontinued in 2006, offset by an increase in Telecom contract services of$179,000 and an increase in customer premise equipment revenue of $114,000.Until June 2006, we had provided Internet access and video conferencingfor Project SOCRATES which is a distance-learning network connecting schoolsand libraries in a 12-county region in south central Minnesota. Our contractwith Project SOCRATES ended on June 30, 2006.

 

**Cost of Services (excluding Depreciation and Amortization)**

 

        Telecom Sector cost of services(excluding depreciation and amortization) was $31,141,000, which is $248,000 or..8% higher in 2008 compared to 2007. This increase was primarily due to a$764,000 increase in programming expense required to support the increase indigital TV services and a $333,000 increase in directory expenses associatedwith the increase in directory revenue. These increases were partially offsetby the following items: 1) a decrease in co-location expenses of $277,000 dueprimarily to credits received from a vendor in 2008, 2) a $252,000 decrease inwages and benefits primarily due to one-time severance payments made in 2007and 3) a $224,000 decrease in contract labor costs.

 

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        In May of 2008 we were served witha civil lawsuit by the City of St. Peter, Minn. regarding our contract paymentsto the municipality in support of our CLEC voice and data services. We do notagree with the contract interpretations made by the City of St. Peter, Minn.and are vigorously defending the suit. We cannot predict the outcome of suchproceedings nor their impact, if any, on the Company.

 

        Telecom Sector cost of services(excluding depreciation and amortization) was $30,893,000, which was $1,153,000or 3.6% lower in 2007 compared to 2006. This decrease was primarily due to thefollowing items: 1) a $733,000 decrease in professional and consulting fees dueto lower fees associated with the conversion of our enterprise resourceplanning software and provisioning software, 2) a $444,000 decrease in contractlabor largely due to the retirement of mainframe computer functions in the NIBIbusiness in 2006, 3) a $416,000 decrease in charges to the inventory reserve,4) a $233,000 decrease in circuit expenses and 5) a $193,000 decrease in baddebt expense largely associated with the settlement of a switched accessdispute with a large interexchange carrier in 2007. These decreases werepartially offset by the following items: 1) a $674,000 increase in programmingexpense to support the increase in digital TV services and 2) a $263,000increase in incentive compensation payments in 2007.

 

**Selling, General and Administrative Expenses**

 

        Telecom Sector selling, general andadministrative expenses were $13,521,000, which is $114,000 or .9% higher in2008 compared to 2007. Telecom Sector selling, general and administrativeexpenses were $13,407,000, which is $406,000 or 3.1% higher in 2007 compared to2006. The increase in 2007 compare to 2006 was primarily due to a $170,000increase in corporate expense, a $162,000 increase in incentive compensationexpense in 2007 and a $159,000 increase in franchise fees associated withdigital TV contracts with various cities.

 

**Depreciation and Amortization**

 

        Telecom Sector depreciation andamortization was $16,136,000, which is $918,000 or 6.0% higher in 2008 comparedto 2007, and was $15,218,000, which is $209,000 or 1.4% higher in 2007 comparedto 2006. The increase in both periods was primarily due to capital expendituresmade in 2008, 2007 and 2006 to support our broadband and infrastructureenhancements.

 

**Operating Income**

 

        Telecom Sector operating income was$13,045,000, which is $4,751,000 or 26.7% lower in 2008 compared to 2007.Excluding the non-recurring interexchange carrier settlement of $1,890,000 ouroperating income decreased $2,861,000 or 18% in 2008 compared to 2007. Thisdecrease was primarily due to decreases in revenue along with an increase indepreciation and amortization expenses, all of which are described above.

 

        Telecom Sector operating income was$2,696,000 or 17.9% higher in 2007 compared to 2006. This increase wasprimarily due to the $2,158,000 increase in revenue (principally due to theinterexchange carrier settlement of $1,890,000), along with the $1,153,000decrease in cost of services (excluding depreciation and amortization) offsetby the $406,000 increase in selling, general and administrative expenses.

 

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**Enventis Sector**

 

        The following table provides a breakdownof the Enventis Sector operating results.

 

**ENVENTIS SECTOR**

 
| ** **                                                          | ** ** | **For Year Ended December 31** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands)**                                          | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue before  intersegment eliminations                           |       |                                |       |   |   |   |   |
| * *                                                            | * *   | * *                            | * *   | * * | * * | * * | * * |
| Revenue                                                             |       |                                |       |   |   |   |   |
| ENS equipment                                                       | ** ** | **$**                               | **43,514** |   | $ | 51,046 |   | $ | 36,191 |   |
| ENS services                                                        | ** ** | **12,387**                          |       | 8,292 |   | 4,582 |   |
| ETS services                                                        | ** ** | **24,075**                          |       | 20,464 |   | 17,232 |   |
| Intersegment                                                        | ** ** | **515**                             |       | 440 |   | 50 |   |
| Total Enventis  revenue                                             | ** ** | **$**                               | **80,491** |   | $ | 80,242 |   | $ | 58,055 |   |
|                                                                |       |                                |       |   |   |   |   |
| Total Enventis  revenue before intersegment eliminations            |       |                                |       |   |   |   |   |
| Unaffiliated  customers                                             | ** ** | **$**                               | **79,976** |   | $ | 79,802 |   | $ | 58,005 |   |
| Intersegment                                                        | ** ** | **515**                             |       | 440 |   | 50 |   |
|                                                                | ** ** | **80,491**                          |       | 80,242 |   | 58,055 |   |
|                                                                |       |                                |       |   |   |   |   |
| Cost of sales,  equipment (excluding depreciation and amortization) |       | **37,355**                          |       | 45,340 |   | 31,152 |   |
| Cost of services  (excluding depreciation and amortization)         |       | **21,894**                          |       | 14,767 |   | 12,641 |   |
| Selling, general  and administrative expenses                       | ** ** | **9,801**                           |       | 9,476 |   | 8,974 |   |
| Depreciation and  amortization                                      | ** ** | **4,417**                           |       | 3,755 |   | 3,048 |   |
| Operating income                                                    | ** ** | **$**                               | **7,024**  |   | $ | 6,904 |   | $ | 2,240 |   |
| Net income                                                          | ** ** | **$**                               | **4,369**  |   | $ | 4,074 |   | $ | 1,363 |   |
| Capital  expenditures                                               | ** ** | **$**                               | **6,408**  |   | $ | 5,928 |   | $ | 5,324 |   |

 

        HickoryTech acquired Enventis on December 30, 2005. Wecontinue to manage and evaluate the Enventis operations in their entirety. Thefollowing table provides an illustration of the significant growth experiencedin and relative contributions from each of the Enventis primary product lines.Certain allocations have been made, particularly in the area of Selling,General and Administrative Expenses, in order to develop these tables.

 

**ENVENTISPRODUCT LINE REPORTING**

 
| ** **                                                          | ** ** | **For Year Ended December 31**   | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **Enterprise Network Services (ENS)** | ** ** | **Enventis Transport Services (ETS)** | ** ** |
| **(Dollars in thousands)**                                          | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue before  intersegment eliminations:                          | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equipment                                                           | ** ** | **$**                                 | **43,514** |   | $ | 51,046 |   | $ | 36,191 | ** ** | **$** | **—** |   | $ | — |   | $ | — |   |
| Service                                                             | ** ** | **12,387**                            |       | 8,292 |   | 4,582 | ** ** | **24,075** |   | 20,464 |   | 17,232 |   |
| Intersegment                                                        | ** ** | **—**                            |       | — |   | — | ** ** | **515** |   | 440 |   | 50 |   |
| Total Enventis  revenue                                             | ** ** | **$**                                 | **55,901** |   | $ | 59,338 |   | $ | 40,773 | ** ** | **$** | **24,590** |   | $ | 20,904 |   | $ | 17,282 |   |
|                                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Cost of sales,  equipment (excluding depreciation and amortization) |       | **37,342**                            |       | 45,001 |   | 30,779 |   | **13** |   | 339 |   | 373 |   |
| Cost of services   (excluding depreciation and  amortization)  |       | **10,102**                            |       | 4,539 |   | 3,871 |   | **11,792** |   | 10,228 |   | 8,770 |   |
| Selling, general  and administrative expenses                       | ** ** | **5,264**                             |       | 5,115 |   | 4,587 | ** ** | **4,537** |   | 4,361 |   | 4,387 |   |
| Depreciation and  amortization                                      | ** ** | **515**                               |       | 494 |   | 349 | ** ** | **3,902** |   | 3,261 |   | 2,699 |   |
| Operating income                                                    | ** ** | **$**                                 | **2,678**  |   | $ | 4,189 |   | $ | 1,187 | ** ** | **$** | **4,346** |   | $ | 2,715 |   | $ | 1,053 |   |
| Net income                                                          | ** ** | **$**                                 | **1,670**  |   | $ | 2,478 |   | $ | 720 | ** ** | **$** | **2,699** |   | $ | 1,596 |   | $ | 643 |   |
| Capital  expenditures                                               | ** ** | **$**                                 | **468**    |   | $ | 587 |   | $ | 258 | ** ** | **$** | **5,940** |   | $ | 5,341 |   | $ | 5,066 |   |

 

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**Revenue**

 

        **Enterprise NetworkServices — Equipment***.*Weprovide telecommunications and data processing equipment to customers to meettheir unified communications needs. This revenue is generated primarily throughthe invoicing of individual shipments of telecommunications and data productsprovided by manufacturers. The customers are exclusively business ofmedium-to-enterprise size. Enterprise Network Services equipment revenue was$43,514,000, which is $7,532,000 or 14.8% lower in 2008 compared to 2007 andwas $51,046,000, which is $14,855,000 or 41% higher in 2007 compared to 2006.Periods of increased sales and system implementation — and the related revenuerecognition — can lead to uneven results on a quarter-to-quarter oryear-to-year basis. Due to the “one-time” nature of equipment sales, theEnterprise Network Services equipment growth from year-to-year is dependantupon the addition of new customers to replace and exceed revenue received fromexisting customers. Sales slowed significantly in the second half of 2008 as aresult of a nationwide economic slowdown and the resulting hesitancy of ourcustomers’ to invest in capital equipment. Our customer base includes customerswho continue to invest in state-of-the-art communications infrastructure and weare well-positioned to maintain our market share.

 

        **Enterprise NetworkServices — Service**. This revenue is primarily of a recurringmonthly basis and includes services such as network and equipment monitoring,maintenance, and professional consulting. Enterprise Network Services revenuewas $12,387,000, which is $4,095,000 or 49.4% higher in 2008 compared to 2007.Primary contributors to this growth were revenue from contract services whichincludes the design, configuration, and installation of voice and dataequipment and support fee revenue earned by providing around-the-clocktechnology support and monitoring for all our products and services including aCustomer Service Center that is staffed by experienced support engineers. Eachof these service lines grew by more than 50% in 2008.

 

        Enterprise Network Services revenue was$8,292,000, which is $3,710,000 or 81.0% higher in 2007 compared to 2006. Thisincrease was primarily due to a $1,880,000 increase in maintenance revenue,which was largely the result of an increase in maintenance recognized to onecustomer of $1,331,000 in 2007 compared to 2006. Also contributing to theincrease in services revenue in 2007 compared to 2006 was a $1,858,000 increasein contract services revenue associated with an increase in design,configuration and installation services.

 

*       ***Enventis Transport Services.** This revenue is primarily of a recurringmonthly basis and consists of billing for the use of our fiber network andnetwork connections. Enventis Transport Services revenue was $24,075,000, whichis $3,611,000 or 17.6% higher in 2008 compared to 2007 and was $20,464,000,which is $3,232,000 or 18.8% higher in 2007 compared to 2006. We providecommunications solutions to three major categories of customers. Our wholesaleservice provides fiber based transport for regional and nationaltelecommunications carriers, local exchange carriers, Internet ServiceProviders, wireless carriers and other service providers. We experienceddouble-digit growth in monthly recurring revenue from our wholesale service inboth 2008 and 2007. Our enterprise service provides transport services bybuilding customized and innovative communications solutions for businesscustomers. The monthly recurring revenue stream from this service alsoincreased in 2008 and 2007. Our SingleLinkTM Unified Communications service provides asingle centrally managed and hosted VoIP communications solution. Monthly recurringrevenue, consisting of hosted services revenue and fiber transport revenueincreased more than 50% in 2008 and by more than a third in 2007.

 

**Cost of Sales — Equipment (excluding Depreciation and Amortization)**

 

        Enventis Sector cost of sales (excludingdepreciation and amortization) associated with equipment revenue was$37,355,000, which is $7,985,000 or 17.6% lower in 2008 compared to 2007.Equipment sales decreased by 14.8% in 2008 from 2007 levels, but we benefitedsignificantly from our focus on selling new VoIP technologies as a higherportion of our product mix. These sales generate greater rebates from our CiscoValue Incentive Program. Rebates act as a cost reduction, thereby lowering costof sales.

 

        Enventis Sector cost of sales (excludingdepreciation and amortization) associated with equipment revenue was$45,340,000, which is $14,188,000 or 45.5% higher in 2007 compared to 2006.This increase was primarily due to the costs incurred to support the 41.0%increase in revenue in the Enterprise Network Services product line.

 

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        Enventis Sector cost of sales areprimarily equipment material costs. Labor associated with installation work isnot included in this category, but is included in cost of services (excludingdepreciation and amortization) described below.

 

**Cost of Services (excluding Depreciation and Amortization)**

 

**       **Enventis Sector cost of services(excluding depreciation and amortization) was $21,894,000, which is $7,127,000or 48.3% higher in 2008 compared to 2007 and was $14,767,000, which is$2,126,000 or 16.8% higher in 2007 compared to 2006. The increase in bothperiods was primarily due to the following items: 1) a $3,090,000 increase in2008 and a $1,092,000 increase in 2007 of wages and benefits due to increasedstaffing levels, 2) a $2,537,000 increase in 2008 and a $548,000 increase in2007 for professional fees due to external project management consulting and 3)a $780,000 increase in 2008 and a $1,179,000 increase in 2007 for circuitexpenses, which supported the increase in off-net revenue. Offsetting theincrease in cost of services in 2007 was a $904,000 decrease in bad debtexpense, which was the result of the collection of several previouslywritten-off customer accounts and a lower amount of bad debt accruals.Associated with our commitment to grow the services element of the Enventisbusiness is our investment in the staff and contract labor to deliver higherlevels of service. The costs incurred are out in front of the revenue growthexpected.

 

**Selling, General and Administrative Expenses**

 

        Enventis Sector selling, general and administrative expenseswere $9,801,000, which was $325,000 or 3.4% higher in 2008 compared to 2007.This increase was primarily due to a $578,000 increase in corporate expense anda $129,000 increase in advertising expenses. Offsetting this increase was a$449,000 decrease in wages, benefits, and commissions, which was the result ofthe release of temporary support staff and the realignment of support staff toour corporate offices. In addition, we began advertising our business servicesin several of our markets to drive the growth in our monthly recurring services.

 

        Enventis Sector selling, general and administrative expenseswere $9,476,000, which is $502,000 or 5.6% higher in 2007 compared to 2006.This increase was primarily due to the following items: 1) a $656,000 increasein corporate expense, 2) a $209,000 increase in computer expenses and a 3)$183,000 increase in professional fees. Offsetting the increase was a $632,000decrease in wages and commissions, which was the result of non-recurring bonusand overtime payments made in 2006.

 

        The Enventis Sector recorded acquisition integration costs ofapproximately $2,400,000 in 2006, which did not reoccur in 2007. Without theseone-time costs, Enventis Sector selling, general and administrative expenseswould have increased 44.1% in 2007 compared to 2006. This substantial increasein costs was used to support the higher activity and operation levels of theEnventis Sector in 2007.

 

**Depreciation and Amortization**

 

        Enventis Sector depreciation andamortization was $4,417,000, which is $662,000 or 17.6% higher in 2008 comparedto 2007 and was $3,755,000, which is $707,000 or 23.2% higher in 2007 comparedto 2006. This increase was due to assets placed in service in 2006, 2007 and2008. We acquired Enventis on December 30, 2005. Enventis property, plantand equipment was recorded at fair value at the time of acquisition consistentwith Statement of Financial Accounting Standards No. 141, “BusinessCombinations” (“SFAS No. 141”) as it pertains to accounting for assetsunder purchase accounting. Depreciation will continue to increase in the nextfew years due to the fact that our fiber network constitutes the majority ofour asset base and has depreciable lives of 16 to 20 years. Enventis Sectoramortization remained constant in 2008 and 2007, respectively, and is attributedto intangible assets related to the Enventis acquisition in 2005.

 

**Operating Income**

 

**       **Enventis Sectoroperating income was$7,024,000, which is $120,000 or 1.7% higher in 2008 compared to 2007. Thisincrease was primarily due to the $7,985,000 decrease in cost of sales(excluding depreciation and amortization), offset by the $7,127,000 increase incost of services (excluding depreciation and amortization) and the $662,000increase in depreciation.

 

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        Enventis Sector operating income was$6,904,000, which is $4,664,000 or 208.2% higher in 2007 compared to 2006. Thisincrease was due to the $22,187,000 increase in operating revenue, offset bythe $14,188,000 increase in cost of sales (excluding depreciation andamortization), the $2,126,000 increase in cost of services (excludingdepreciation and amortization), the $707,000 increase in depreciation and the $502,000increase in selling, general and administrative expenses.

 

**Discontinued Operations — Enterprise Solutions Sector**

 

        Effective December 31, 2006, we soldCollins to Skyview Capital, LLC. The selling price was comprised of a $100,000note and up to $1,650,000 of earn-out payments in exchange for all of theCollins outstanding capital stock. The remaining selling price is due incontingent payments payable over the next four years based on financial targetsreached by Skyview Capital, LLC. We have received no payments to-date relatedto this earn-out provision. HickoryTech recorded a pre-tax loss on the sale of$3,385,000 ($2,040,000 net of income taxes). The Collins results of operationswere formerly reported in the Enterprise Solutions Sector. The consolidatedstatements of operations for all periods presented have been restated toreflect the Collins operations as discontinued operations (see Note 3 to theNotes to the Consolidated Financial Statements).

 

**Interest Expense**

 

        The outstanding balance of the revolvingcredit facility was $126,400,000 at December 31, 2008, $128,675,000 at December 31,2007 and $142,700,000 at December 31, 2006. Interest expense of $6,870,000decreased $1,251,000 or 15.4% in 2008 compared to 2007. This decrease wasprimarily due to the combined effects of lower interest rates, implementationof interest rate protection strategies and the amortization of gains related tointerest-rate swap agreements sold at a gain in early 2007 which benefited 2008interest expense by $664,000.

 

        Interest expense of $8,121,000,increased $759,000 or 10.3% in 2007 compared to 2006. Interest expenseincreased in 2007 compared to 2006 because we received lower cooperativedividends in 2007 from one of our participating lenders and because we establishedlonger-term interest rate protection which increased the overall effectiveinterest rate. Cooperative dividends are accounted for as an offset to interestexpense when earned.

 

        In March 2007, we terminated twooutstanding interest-rate swap agreements, with original maturities of June 2008,in exchange for $1,936,000 in proceeds. The proceeds were to be recognized asan offset to interest expense over the remainder of the original term of theagreement which expired June 2008. Proceeds of $664,000 and $1,272,000were recognized as an offset to interest expense in 2008 and 2007,respectively. Without this offset, interest expense would have been $7,534,000in 2008, a decrease of $587,000 or 7.2% compared to 2007 and would have been$9,393,000 in 2007, an increase of $2,031,000 or 27.6% compared to 2006. Theeffective interest rate was 5.22%, 5.94% and 5.13% in 2008, 2007 and 2006,respectively. Interest expense has become more predictable in 2008 since$119,500,000 or 94.0% of the long-term debt plus current portion is subject tofixed interest rates, either via debt term or interest rate swap agreements.

 

**Income Taxes**

 

Income tax expensedecreased $1,275,000 to $5,420,000 from 2007 to 2008. The effective taxrate was 40.3%, 43.7% and 39.2% for 2008, 2007 and 2006,respectively. The effective tax rate in 2008 was reduced by $400,000 oftax benefits we recognized in the fourth quarter to adjust ourprovision to match tax returns filed for2007 and amended tax returns for 2006. The increase ineffective tax rate in 2007 as compared to 2006 was primarily the result of theadoption of FIN No. 48 during 2007 and the release of a tax reserve in2006 which decreased the 2006 effective tax rate.

 

**Inflation**

 

        It is the opinion of management that theeffects of inflation on operating revenue and expenses over the past threeyears have been immaterial. Management anticipates that this trend willcontinue in the near future.

 

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** **

**Liquidityand Capital Resources**

 

**CapitalStructure**

 

The total capital structure (long-term and short-termdebt obligations plus shareholders’ equity) of HickoryTech was $156,754,000 at December 31,2008, reflecting 19.0% equity and 81.0% debt. This compares to a capitalstructure of $161,138,000 at December 31, 2007, reflecting 19.8% equityand 80.2% debt. In the telecommunications industry debt financing is based onoperating cash flows and not on the asset position of a company. Managementbelieves adequate operating cash flows and other internal and externalresources are available to finance ongoing operating requirements, includingcapital expenditures, business development, debt service, temporary financingof trade accounts receivable and the payment of dividends for at least the next12 months. We employ an extended term payable financing arrangement forinventory purchases in the Enventis Sector and view this arrangement as more ofa structured accounts payable that is paid within 60 days with no separateinterest charge. As such, the extended term payable financing amount of$10,474,000 and $14,443,000 as of December 31, 2008 and 2007 respectively,is not considered to be part of our capital structure and has been excludedfrom the above amounts (see Note 8 to the Notes to the Consolidated FinancialStatements).

 

**CashFlows**

 

We expect our liquidityneeds to arise from payment of dividends, interest and principal payments onour indebtedness, income taxes, and capital expenditures. We utilize our seniorrevolving credit facility to manage the temporary increases and decreases inour cash balances.

 

Unfavorable general economic conditions, including thecurrent recession in the United States and the recent financial crisisaffecting the banking system and financial markets, could negatively affect ourbusiness and the related cash flows. While it is often difficult for us topredict the impact of general economic conditions on our business we believethat we will be able to meet our current and long-term cash commitments throughour operating cash flows. We currently are in full compliance with our debtcovenants as of December 31, 2008 and anticipate that we will be able tomeet all requirements in the future.

 

The following table summarizes our cash flow:

 
| ** **                                        | ** ** | **For Year Ended December 31** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|
| **(Dollars in thousands)**                        | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net cash  provided by (used for):                 |       |                                |       |   |   |   |   |
| Operating  activities                             |       | $                                   | 33,770     |   | $ | 30,731 |   | $ | 17,562 |   |
| Investing  activities                             |       | (17,271                             | )          | (17,400 | ) | (20,870 | ) |
| Financing  activities                             |       | (15,044                             | )          | (13,220 | ) | 2,909 |   |
| Discontinued  operations                          |       | —                              |       | (24 | ) | (118 | ) |
| Increase  (decrease) in cash and cash equivalents |       | $                                   | 1,455      |   | $ | 87 |   | $ | (517 | ) |

 

Cash generated from operationswas $33,770,000 in 2008 which is primarily attributable to net income plusnon-cash expenses, including depreciation and amortization of $20,606,000. Wepaid $1,542,000 and $3,935,000 of cash for income taxes in 2008 and 2007,respectively. Cash paid for interest was $7,962,000 and $9,319,000 in 2008 and2007, respectively. The increase in cash provided by operating activities isdue to a decrease in accounts receivables which is a result of our focus onreceiving payment from customers on outstanding balances, decreased incometaxes offset by an increase in inventory. Due to economic conditions, theaccounts receivable balances will continue to be a focus of our attention.

 

Cash generated from operations was $30,731,000 in2007, which was primarily attributable to net income plus non-cash expenses,including depreciation and amortization of $19,004,000. The increase in changesin operating assets and liabilities of $9,190,000 from 2006 to 2007 wasprimarily due to a decrease in the amount of inventory on hand of $11,966,000along with decreased accounts payable and accrued expenses of $3,123,000, whichwere offset by an increase in the receivables outstanding as of December 31,2007 of $3,485,000. The decrease in inventory levels was due to the timing ofprojects in process in the Enterprise Network Services equipment revenueproduct line of the Enventis Sector.

 

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Cash generated from operations in 2006 was$17,562,000. Cash provided by operations in 2006 was attributable to net incomeplus non-cash expenses, including depreciation and amortization of $18,121,000and the loss on discontinued operations totaling $2,967,000. Cash provided byoperations in 2006 declined from 2005 by $14,367,000 due to changes inoperating assets and liabilities of $14,219,000. The most significant of thesechanges was an increase in the inventory on hand, offset by a related decreasein prepaid inventory resulting in a net cash usage of $4,116,000, an increasein the outstanding accounts receivable balance of $4,032,000 and a decrease inoutstanding accounts payables and accrued expenses of $3,255,000, all of whichcontributed to lower cash provided by operations. The increase in inventory onhand was the result of supporting the increased projects in process in theEnventis Sector as well as an increase in the average days of inventory onhand. Increased outstanding account receivable balances were primarily theresult of the sales growth in the equipment revenue portion of the EnventisSector and an increase in the average days’ of sales outstanding. The year2006, which was the first year of integrated operations with Enventis, was aless typical year for cash flow from operations.

 

Cash used for investingactivities is driven by capital expenditures which slightly increased from 2007to 2008. We are continuing a focused effort to concentrate our capital spendingon revenue generating products, services and key strategic initiatives. Weexpect the level of total capital spending in 2009 to be slightly less than thelevel of capital spending seen in 2008 and 2007. Capital spending in 2006 washigher than subsequent years due to our efforts to complete our networkbroadband expansion.

 

Cash used for financingactivities was $15,044,000 in 2008 and was a result of our reduction of creditfacility and capital lease obligations by $2,632,000, dividends paid to thestockholders of $6,492,000, and the repurchase of stock made in the fourthquarter of $2,363,000. We also saw a decrease in the extended term payablebalance of $3,969,000 which is used to finance Enventis’ equipment purchases.In 2007, cash used for financing activities was $13,220,000 due to a$14,406,000 pay down of our credit facility and capital lease obligations andthe payment of dividends in the amount of $6,357,000. The extended term payablebalance increased by $6,724,000 and related to the sales growth seen in theEnventis sector. In 2006, cash provided by financing activities was $2,909,000.This was primarily attributable to the use of the extended term payablesarrangement in the Enventis sector of $7,719,000 and the payment of dividendsof $6,316,000.

 

Cash used in discontinuedoperations was $24,000 in 2007 and $118,000 in 2006. In 2006, cash provided byoperating activities was the result of the net operating loss of $927,000,which was offset by a decrease in the accounts receivable balances of $658,000.

 

**Working Capital**

 

Working capital (i.e. current assets minus currentliabilities) was $12,311,000 as of December 31, 2008 compared to workingcapital of $8,228,000 as of December 31, 2007. The ratio of current assetsto current liabilities was 1.4 and 1.3 as of December 31, 2008 and 2007,respectively.

 

**Extended-Term Payable**

 

The Enventis Sector has a $20,000,000 wholesalefinancing agreement with a financing company to fund inventory purchased fromcertain approved vendors. Advances under the financing arrangement arecollateralized by the accounts receivable and inventory of Enventis and aguaranty of an amount up to $18,000,000 from HickoryTech. The financingagreement provides 60 day interest-free payment terms for inventory purchasesand can be terminated at any time by either party. The balance outstandingunder the financing arrangement was $10,474,000 and $14,443,000 at December 31,2008 and 2007, respectively. These balances are classified as currentliabilities in the accompanying balance sheets and are not considered part ofour debt financing.

 

**Long-Term Debt and Revolving Credit Facilities**

 

Our long-term obligations as of December 31, 2008were $125,384,000, excluding current maturities of $1,300,000 on debt and$321,000 on current maturities of capital leases. Long-term obligations as of December 31,2007, were $128,475,000 excluding current maturities of $475,000 on debt and$256,000 of capital leases. On December 30, 2005, HickoryTech entered intoa $160,000,000 credit agreement with a syndicate of banks (subsequently reducedto a $155,200,000 facility as of December 31, 2008), which amended ourprevious credit facility. The credit facility is comprised of a $30,000,000revolving credit component that expires on December 30, 2011 and a$130,000,000 term loan component.

 

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The term loan componentis comprised of two components, which are defined as term loan B and term loanC. The outstanding principal balance of term loan B is $105,800,000 as of December 31,2008, and is held in varying amounts by three lenders in the syndicate, USBank, GE Commercial Distribution Finance Corporate and CoBank. Under the termsof term loan B, we are required to make quarterly principal payments of$275,000 from December 31, 2008 through December 31, 2011 with theremainder of the aggregate principal due in two payments on March 31, 2012and June 30, 2012. Due to the aggressive pay down of debt in 2007, wewere not required to make quarterly principle payments during the first threequarters of 2008. The outstanding principal balance of term loan C is$19,400,000 as of December 31, 2008 and is held entirely by the RuralTelephone Finance Cooperative (“RTFC”). Under the terms of term loan C, we arerequired to make quarterly principal payments of $50,000 on the aggregateprincipal amount from December 31, 2008 through December 31, 2012with the remainder of the aggregate principal due in two payments on March 31,2013 and June 30, 2013.

 

Our credit facilityrequires us to comply, on a consolidated basis, with specified financial ratiosand tests. These financial ratios and tests include maximum leverage ratio,minimum interest coverage ratio, and maximum capital expenditures. We were infull compliance with these ratios and tests as of December 31, 2008. Ourobligations under the credit facility are secured by a first-priority lien onall property and assets, tangible and intangible of HickoryTech and its currentsubsidiaries, including, but not limited to accounts receivable, inventory,equipment and intellectual property, general intangibles, cash and proceeds ofthe foregoing. We have also given a first-priority pledge of the capital stock ofHickoryTech’s current subsidiaries to secure the credit facility. Our creditfacility permits us to pay dividends to holders of our common stock, or to makerepurchases of our common stock with restrictions related to net income of theprior year. The credit facility contains certain restrictions that, among otherthings, limit or restrict our ability to create liens or encumbrances, incuradditional debt, issue stock, make asset sales, transfers, or dispositions andengage in mergers and acquisitions over a specified maximum value.

 

Our Telecom Sector leasescertain computer equipment under capital lease arrangements. This Sectorrecorded additions to property, plant and equipment of $433,000, $522,000 and$266,000 in 2008, 2007 and 2006, respectively, related to these capital leasearrangements.

 

**Obligationsand Commitments**

 

The following table setsforth our contractual obligations, along with the cash payments due eachperiod.

 
| **(Dollars in thousands)**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **         | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------------|------------|------------------|------------|--------------------|------------|
| **Contractual Obligations**         | ** ** | **Total**  | ** ** | **2009**   | ** ** | **2010 to 2011** | ** ** | **2012 to 2013** | ** ** | **2014 and after** | ** ** |
| Long-term Debt                      |       | $          | 126,400    |       | $          | 1,300            |       | $                | 3,800      |               | $          | 121,300 |   | $ | — |   |
| Interest on  Long-term Debt (A)     |       | 18,250     |       | 6,531      |       | 9,074            |       | 2,645            |       | —             |       |
| Capital Lease  Obligations          |       | 605        |       | 321        |       | 284              |       | —           |       | —             |       |
| Interest on  Capital Leases         |       | 76         |       | 56         |       | 20               |       | —           |       | —             |       |
| Purchase  Obligations (B)           |       | 2,446      |       | 2,446      |       | —           |       | —           |       | —             |       |
| Pension Benefit  Obligations (C)    |       | 1,993      |       | 206        |       | 395              |       | 402              |       | 990                |       |
| Operating Leases                    |       | 5,910      |       | 1,346      |       | 1,810            |       | 1,136            |       | 1,618              |       |
| Total  Contractual Cash Obligations |       | $          | 155,680    |       | $          | 12,206           |       | $                | 15,383     |               | $          | 125,483 |   | $ | 2,608 |   |

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A.           Interest on long-term debt is estimatedusing rates in effect as of December 31, 2008. We use interest rate swapagreements to manage our exposure to interest rate movements on a portion ofour variable rate debt obligations (see Note 12 to the Notes to theConsolidated Financial Statements).

 

B.             Purchase obligations consist primarily ofcommitments incurred for construction projects.

 

C.             Pension Benefit Obligations consist ofthe expected net premium payment and life insurance benefits to be paidrelative to our Post Retirement Benefit Plan.

 

In addition, we have change of control agreements withkey employees. These potential commitments are not included in the aboveschedule.

 

As of December 31, 2008, we have recognized aliability for uncertain tax positions of approximately $6,748,000 according toFIN No. 48, “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109.” The liability has not beenassigned to any particular year in the table above due to the inherentuncertainty regarding the timing and necessity of future cash outflows.

 

**CriticalAccounting Policies and Estimates**

 

Management’s discussion and analysis of financialcondition and results of operations stated in this 2008 Annual Report on Form 10-Kare based upon HickoryTech’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States and, where applicable, conform to the accounting principles asprescribed by federal and state telephone utility regulatory authorities. Wepresently give accounting recognition to the actions of regulators whereappropriate, as prescribed by Statement of Financial Accounting Standards No. 71,“Accounting for the Effects of Certain Types

 

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of Regulation” (“SFAS No. 71”). The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities. Senior management hasdiscussed the development and selection of accounting estimates and the relatedManagement Discussion and Analysis disclosure with the Audit Committee. For asummary of all our accounting policies, see Note 1 to the Notes to theConsolidated Financial Statements. There were no significant changes to theseaccounting policies during the year ended December 31, 2008.

 

***Revenue Recognition***

 

We recognize revenue when (i) persuasive evidenceof an arrangement between the customer and us exists, (ii) delivery of theproduct to the customer has occurred or service has been provided to thecustomer, (iii) the price to the customer is fixed or determinable and (iv) collectibilityis reasonably assured.

 

*Telecom Sector RevenueRecognition:***Revenue in the ILEC and CLEC companies is earned frommonthly billings to customers for telephone services, long distance, digitalTV, DSL, Internet services, and hardware and other services. ILEC and CLECrevenue is also derived from charges for network access to our local exchangetelephone network from subscriber line charges and from contractual arrangementsfor services such as billing and collection and directory advertising. Somerevenue is realized under pooling arrangements with other telephone companiesand is divided among the companies based on respective costs and investments toprovide the services. The companies that take part in pooling arrangements mayadjust their costs and investments for a period of two years, which causes thedollars distributed by the pool to be adjusted retroactively. We believe thatrecorded amounts represent reasonable estimates of the final distribution fromthese pools. However, to the extent that the companies participating in thesepools make adjustments, there will be corresponding adjustments to our recordedrevenue in future periods. Revenue is recognized in the period in which serviceis provided to the customer. With multiple billing cycles and cut-off dates, weaccrue for revenue earned but not yet billed at the end of a quarter. We alsodefer services billed in advance and recognize them as income when earned basedon billing dates.

 

*Enventis Sector RevenueRecognition:*Revenuein the**Enventis Sector is generated from thefollowing primary sources: i) the sale of voice and data communicationsequipment provided primarily through Cisco, ii) providing design, configurationand installation services related to voice and data equipment, iii) theprovision of Cisco maintenance support contracts, iv) the sale of professionalsupport services related to customer voice and data systems, v) the sale oftransport services over the Company-owned and leased fiber optic network, andvi) the sale of managed voice and data services, including resale of longdistance services. Our revenue recognition policy for each of these types ofproducts and services is as follows:

 

·                  In instances where Enventis sells Ciscovoice 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. Ininstances where Enventis sells Cisco voice and data communications equipmentwith installation obligations, terms of the agreements typically provide forinstallation services without customer-specific acceptance provisions, butsometimes may provide customer-specific acceptance provisions. For arrangementswith no customer-specific acceptance arrangements, we recognize revenue whentitle passes to the customer. For contracts with customer specific acceptanceprovisions, we defer revenue recognition until the receipt of formal customeracceptance, assuming that all other revenue recognition criteria have been met.When a sale involves multiple elements, revenue is allocated to each respectiveelement in accordance with Emerging Issues Task Force No. 00-21, “AccountingFor Revenue Arrangements with Multiple Deliveries” (“EITF No. 00-21”),which addresses certain aspects of the accounting by a vendor for arrangementsunder which it will perform multiple revenue-generating activities. EITF No. 00-21

 

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provides guidanceon how an arrangement involving multiple deliverables should be divided intoseparate units of accounting, but does not change otherwise applicable revenuerecognition criteria. In the event that we enter into a multiple elementarrangement and there are undeliverable elements as of the balance sheet date,we assess whether the elements are separable and have determinable fair valuesin assessing the amount of revenue to record. Allocation of revenue to elementsof the arrangement is based on fair value of the element being sold on astand-alone basis.

 

·                  When we sell equipment to customers, wealso typically sell Cisco support contracts (“SmartNet” contracts). Thesesupport contracts state that Cisco will provide all support services, productwarranty and updates directly to the customer. Because Enventis has no serviceobligations under these types of contracts, the earnings process has culminatedfor us upon the sale of the contract and therefore revenue is recognizedimmediately. Further, we are serving in an agency relationship to the customerfor the sale of the contract and therefore the revenue is recorded net of thecost that we pay Cisco for the contract. Support services also include Enventisoffered “24X7” support of a customer’s voice and data systems. Most of thesecontracts are billed on a time and materials basis and revenue is recognizedeither as services are provided or over the term of the contract. Supportservices also include Enventis sponsored professional support services. Suchservices are typically sold on a time and materials basis, but may be sold as apre-paid block of time. This revenue is recognized as the services are provided(deferred and recognized as utilized if pre-paid). In the event that theseservices are part of a multiple element arrangement, the fair value of theservices are measured and deferred in accordance with EITF No. 00-21mentioned above. Allocation of revenue to elements of the arrangement is basedon fair value of the element being sold on a stand-alone basis.

 

·                  Transport services are sold primarilythrough a contractual flat monthly fee. The revenue generated by these servicesis typically billed one month in advance and is deferred until the appropriatemonth of recognition.

 

·                  Enventis also manages customer voiceand/or data services. Under these contracts, Enventis bills either a flatmonthly fee or a fee that is variable based on the number of “seats” that thecustomer has. This revenue is recognized on a monthly basis as the services areprovided.

 

***Allowance for Doubtful Accounts***

 

We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments. In making the determination of the appropriate allowance fordoubtful accounts, we consider specific accounts, historical write-offs,changes in customer relationships and credit worthiness and concentrations ofcredit risk. Specific accounts receivable are written off once a determinationis made that the account is uncollectible. Additional allowances may berequired if the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments. The allowance fordoubtful accounts was $905,000 and $1,184,000 as of December 31, 2008 and2007, respectively.

 

***Inventories***

 

Inventory includes parts, materials and suppliesstored in our warehouses to support basic levels of service and maintenance aswell as scheduled capital projects and equipment awaiting configuration forcustomers. Inventory also includes parts and equipment shipped directly fromvendors to customer locations while in transit and parts and equipment returnedfrom customers which is being returned to vendors for credit, as well asmaintenance contracts associated with customer sales which have not yettransferred to the customer. The inventory value in the Telecom Sector,comprised of materials, as of December 31, 2008 and December 31, 2007was $3,564,000 and $3,312,000, respectively. The inventory value in theEnventis Sector, comprised of finished goods, as of December 31, 2008 and December 31,2007 was $5,110,000 and $3,742,000, respectively.

 

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Inventories are valued usingthe lower of cost (perpetual weighted average-cost or specific identification)or market method. Similar to our allowance for doubtful accounts, we makeestimates related to the valuation of inventory. We adjust our inventory carryingvalue for estimated obsolescence or unmarketable inventory to the estimatedmarket value based upon assumptions about future demand and market conditions.As market and other conditions change, additional inventory reserves may beestablished at a time when the facts that give rise to the lower value arewarranted.

 

***Financial Derivative Instruments***

 

We use financial derivative instruments to manage ouroverall exposure to fluctuations in interest rates. We account for derivativeinstruments in accordance with Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), asamended by Statement of Financial Accounting Standards No. 149, “Amendmentof Statement 133 Accounting for Derivative Instruments and Hedging Activities”(“SFAS 149”), which requires derivative instruments to be recorded on thebalance sheet at fair value. Changes in fair value of derivative instrumentsmust be recognized in earnings unless specific hedge accounting criteria aremet, in which case the gains and losses are included in other comprehensiveincome rather than in earnings.

 

Effective January 1,2008, we adopted Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (“SFAS 157”) for our financial assets. SFAS 157 definesfair value, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles and expands disclosures about fairvalue measurements. The adoption of SFAS 157 did not have a material impact onour financial condition and results of operations. Financial AccountingStandards Board staff position 157-2 delays the effective date of SFAS 157 tofiscal years beginning after November 15, 2008 for nonfinancial assets andliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis.

 

SFAS 157 defines fairvalue as the price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. The fair value of our interest rate swap agreements weredetermined based on Level 2 inputs using observable inputs other than quotedprices in active markets for identical assets and liabilities to determine fairvalue.

 

We utilize interest-rate swap agreements that qualifyas cash-flow hedges to manage our exposure to interest rate fluctuations on aportion of our variable-interest rate debt. The market value of the cumulativegain or (loss) on financial derivative instruments is reported as a componentof accumulated other comprehensive income (loss) in shareholders’ equity and isrecognized in earnings over the term of the swap agreement. In March 2007,we terminated two outstanding interest-rate swap agreements with originalmaturities of June 2008 in exchange for $1,936,000 in proceeds. Proceedsof $664,000 and $1,272,000 were recognized as an offset to interest expenseduring 2008 and 2007, respectively.

 

***Intangible Assets***

 

We amortize our definite-lived intangible assets overtheir estimated useful lives. Customer lists and other intangibles areamortized from one to eight years. Intangible assets with finite lives areamortized over their respective estimated useful lives to their estimatedresidual values. Identifiable intangible assets that are subject toamortization are evaluated for impairment.

 

Goodwill assets are not amortized, but are subject toan impairment test annually as well as upon certain events that indicate thatimpairment may be present. The goodwill impairment test requires management todetermine the fair value of several of our reporting units (as defined byStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS No. 142”)). We determine the fair value of ourreporting units by application of a discounted cash flow analysis. Managementmakes estimates that are included in its discounted cash flow analysis basedupon the best available information at the time that the determinations of fairvalue are made. Our estimates of fair value could change based on generalmarket or industry conditions and could result in a determination of additionalimpairment charges to reduce the carrying value of goodwill. As of December 31,2008 and 2007, we completed our annual impairment tests for acquired goodwill.This testing resulted in no impairment charges to goodwill.

 

Unfavorable general economic conditions, including thecurrent recession in the United States, could

 

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negatively affect our industry, our business and the related fair valueof our intangible assets. While it is often difficult for us to predict theimpact of the general economic conditions on our business, we believe that ourintangible assets will retain their value.

 

***Income Taxes***

 

We account for income taxes in accordance withStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes” (“SFAS No. 109”), as clarified by FIN No. 48. Underthis method deferred income taxes are based on the estimated future tax effectsof differences between the financial statement and tax basis of assets andliabilities given the provisions of enacted tax laws. Deferred income taxprovisions and benefits are based on changes to the assets or liabilities fromyear to year. In providing for deferred taxes we consider tax regulations ofthe jurisdictions in which we operate, estimates of future taxable income, andavailable tax planning strategies. If tax regulations, operating results, orthe ability to implement tax-planning strategies vary from our assumptions, wemay be required to adjust the carrying value of deferred tax assets andliabilities. Valuation allowances are recorded related to deferred tax assetsbased on the “more likely than not” criteria of SFAS No. 109.

 

FIN No. 48 requires us to recognize the financialstatement benefit of a tax position only after determining that the relevanttax authority would more likely than not sustain the position following anaudit. For tax positions meeting the more-likely-than-not threshold, the amountrecognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimate settlementwith the relevant tax authority. See additional disclosures regardingapplication of FIN No. 48 in Note 11 to the Notes to the ConsolidatedFinancial Statements.

 

As part of the process ofpreparing our consolidated financial statements, we are required to estimateincome taxes in each of the jurisdictions in which we operate. This processinvolves estimating the current tax exposure together with assessing temporarydifferences resulting from the differing treatments of items such as deferredrevenue for tax and accounting purposes. These differences result in deferredtax assets and liabilities, which are included within our consolidated balancesheet. We assess the likelihood that deferred tax assets will be recovered fromfuture taxable income and to the extent recovery is not likely, the carryingvalue of the deferred tax asset is reduced by a valuation allowance. To the extentthat we establish a valuation allowance or increase an allowance in a period,it must be included as an expense within the tax provision in the statement ofoperations. We had valuation allowances of $1,687,000 and $1,550,000 at December 31,2008 and 2007, respectively, due to uncertainty about the realization ofcertain benefits associated with net operating losses generated in the statesof Iowa and Minnesota. In addition, we carry reserves for income taxcontingencies. These reserves relate to various tax years subject to audit bytax authorities. We believe our current income tax reserves are adequate.However, the ultimate outcome may differ from estimates, and assumptions couldimpact the provision for income taxes reflected in the consolidated statementsof operations.

 

Unfavorable generaleconomic conditions, including the current recession in the United States,could negatively affect our business and the opportunity to derive benefitsfrom our deferred tax assets.  While itis often difficult for us to predict the impact of general economic conditionson our operating results, we anticipate that we will be able to fully utilizeour deferred tax assets, net of the current valuation allowance, within thecurrently projected timeframes.

 

***Post-Retirement Benefits***

 

The net post-retirementbenefit expense was $825,000, $859,000 and $924,000 in 2008, 2007 and 2006,respectively. Post-retirement benefit expense is recorded in cost of servicesand selling, general and administrative expenses. The post-retirement benefitexpense and liability are calculated utilizing various actuarial assumptionsand methodologies. These assumptions include, but are not limited to, thediscount rate and the expected health care cost trend rate.

 

Post-retirementbenefits were calculated in accordance with the methods specified in Statement of Financial AccountingStandards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans — anamendment of FASB statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”),and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits OtherThan

 

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Pensions” (“SFAS No. 106”). Where SFAS No. 106provides alternative methods for determining net periodic benefit costs, weadopted the following policies: Any prior service cost or cumulative net gainsand losses in excess of 10% of the SFAS No. 106 corridor, are amortized ona straight-line basis over the average future service lives of the coveredgroup. There are no substantive commitments for benefits other than as statedin the written plan. According to the guidance of paragraph 186 of SFAS No. 106,“the objective of selecting assumed discount rates is to measure the singleamount that, if invested at the measurement date in a portfolio of high-qualitydebt instruments, would provide the necessary future cash flows to pay theaccumulated benefits when due.” The assumed discount rate represents thediscounted value of necessary future cash flows required to pay the accumulatedbenefits when due. The rate was determined based on available market dataregarding the spot rate yields in half year increments on high-quality fixedincome securities with the effects of puts and calls removed that provide cashflows at the same time and in the same amount as the projected cash flows ofthe plan.

 

Inmeasuring the accumulated post-retirement benefit obligation as of December 31,2008, we assumed a weighted average discount rate of 6.0%. The reduction in thediscount rate by 25 basis points would increase the accumulated post-retirementbenefit obligation by approximately $380,000 as of December 31, 2008 andwould increase the net periodic cost by approximately $44,000 as of December 31,2008.

 

Thehealth care cost trend rate is based upon an evaluation of the historicaltrends and experience, taking into account current and expected marketconditions. The health care cost trend rate represents the expected annual rateof change in the cost of health care benefits currently provided due to factorsother than changes in the demographics of plan participants. If the assumptionsutilized in determining the post-retirement benefit expense and liabilitydiffer from actual events, the results of operations for future periods couldbe impacted.

 

Inmeasuring the accumulated post-retirement benefit obligation as of December 31,2008, the initial health care inflation rate for 2009 was assumed to be 7.9%and decreases gradually until it reaches 5.6% in 2017 and ultimately 4% in2084. These assumptions were provided based on a study of the ten-year historyof our self-funded medical benefits plan. This has resulted in HickoryTechconsistently having lower increases in health care costs than the nationalaverages. A one-percentage point increase in the healthcare inflation rate for each year would increase the accumulatedpost-retirement benefit obligation by $1,442,000. A one-percentage pointdecrease in the health care inflation rate for each year would decrease theaccumulated post-retirement benefit obligation by $1,168,000.

 

Whenactual events differ from the assumptions or when the assumptions used change,an unrecognized actuarial gain or loss results. As of December 31, 2008,the unrecognized net actuarial loss was $2,285,000. During each of the lastthree years, we adjusted the discount rate assumption due to changes ininterest rates. In recent years, we adjusted the health care cost trend rateassumption to reflect the current trend of medical costs. The remainder of thenet actuarial loss amount primarily related to differences between the assumedmedical costs and actual experience and changes in the employee population. Therecognized net actuarial loss outside the allowable corridor is expected to berecognized over the next 11.6 years. This amount will change in future years aseconomic and market conditions generate gains and losses.

 

***Property, Plant and Equipment***

 

Property, plant and equipment are recorded at originalcost of acquisition or construction. When regulated ILEC telephone assets aresold or retired, the assets and related accumulated depreciation are removedfrom the accounts and any gains or losses on disposition are amortized with theremaining net investment in telephone plant. When other plant and equipment issold or retired, the cost and related accumulated depreciation or amortizationare removed from the respective accounts and any resulting gain or loss isincluded in operating income. Maintenance and repairs are charged to expense asincurred.

 

On December 30, 2005 we acquired Enventis. TheEnventis property, plant and equipment, consisting primarily of a fiber opticcommunications network was valued under SFAS No. 141 as it pertains toaccounting for assets under Purchase Accounting. We recorded the assets at fairvalue at the time of acquisition. Also included in the

 

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Enventis property, plant and equipment is fiber optic cable andindefeasible right of use of fiber installed by others accompanied by ownershiprights. Both of these categories of assets have depreciable lives of 16 to 20years on the assets acquired on December 30, 2005 and 25 years for newadditions.

 

Depreciation for financial statement purposes isdetermined using the straight-line method based on the lives of the variousclasses of depreciable assets. The composite depreciation rates on the ILECtelephone plant were 5.0%, 4.8% and 4.9% for 2008, 2007 and 2006, respectively.All other property, plant and equipment are depreciated over estimated usefullives of 3 to 20 years.

 

The Telecom Sector leases certain computer equipmentunder capital lease arrangements. We have recorded the present value or fairvalue of the future minimum lease payments as a capitalized asset and relatedlease obligation. Assets under these capital leases are included in property,plant and equipment.

 

***Incentive Compensation***

 

We recognize stock compensation charges related tostock award plans when management concludes it is probable that the participantwill earn the award. Such compensation charges are recorded based upon the fairvalue of our stock and is recognized during the service period specified by thestock award plan. Changes in estimated compensation are recorded in the periodin which the change occurs.

 

On January 1, 2006, we adopted Statement ofFinancial Accounting Standards No. 123(R) (revised 2004), “ShareBased Payment” (“SFAS No. 123(R)”), which requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors, including employee stock options and employee stockpurchases related to the employee stock purchase plan, based on estimated fairvalues. SFAS No. 123(R) supersedes our previous accounting underAccounting Principles Board No. 25, “Accounting for Stock Issued toEmployees” (“APB No. 25”), for periods beginning in 2006. In March 2005,the FASB issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SABNo. 107”), which relates to SFAS No. 123(R). We have applied theprovisions of SAB No. 107 in its adoption of SFAS No. 123(R). Weadopted SFAS No. 123(R) using the modified prospective transitionmethod, which requires the application of the accounting standard as of January 1,2006.

 

Our Consolidated Financial Statements for 2006 reflectthe impact of SFAS No. 123(R). In accordance with the modified prospectivetransition method, the Consolidated Financial Statements for prior periods havenot been restated to reflect, and do not include, the impact of SFAS No. 123(R) orany modifications to outstanding stock options prior to the adoption of SFAS No. 123(R).The adoption of SFAS No. 123(R) had minimal impact on earnings pershare, diluted earnings per share and cash flow from financing and operationsin 2006, 2007 and 2008.

 

Share-based compensation expense recognized during aperiod is based on the value of the portion of share-based payment awards thatare ultimately expected to vest during the period. Share-based compensationexpense recognized in the Consolidated Statements of Operations includescompensation expense for share-based payment awards granted prior to, but notyet vested as of December 31, 2005, based on the grant date fair valueestimated in accordance with the fair value provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), as well as grants in 2006 under SFAS No. 123(R).Because share-based compensation expense recognized in the ConsolidatedStatements of Operations is based on awards ultimately expected to vest, it hasbeen reduced for estimated forfeitures. We use historical data to estimatepre-vesting forfeitures. SFAS No. 123(R) requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates.

 

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The fair value ofeach option award is estimated on the date of grant using a Black-Scholesoption valuation model. We use a seven-year period to calculate the historicalvolatility of its stock price for use in the valuation model. The dividendyield rate is based on our current dividend payout pattern and current marketprice. The risk-free rate for options is based on a U.S. Treasury ratecommensurate with the expected terms. The expected term of options granted isderived from historical experience and represents the period of time thatoptions granted are expected to be outstanding.

 

**Off-BalanceSheet Arrangement/Contingent Commitments**

 

We are not engagedin any transactions, arrangements or other relationships with unconsolidatedentities or other third parties that are reasonably likely to have a materialeffect on its liquidity, or on its access to, or requirements for capitalresources. In addition, we have not established any special purpose entities.

 

**Other**

 

We have notconducted any public equity offering in our history and operate with originalequity capital, retained earnings and financing in the form of bank term debtwith revolving lines of credit. By utilizing cash flow from operations andcurrent asset balances, we believe that we have adequate resources to meet theanticipated operating, capital expenditures and debt service requirements ofour current business plan.

 

**RecentAccounting Developments**

 

See Note 1, “AccountingPolicies — Recent Accounting Developments,” in the Notes to the ConsolidatedFinancial Statements for a discussion of recent accounting developments.

 

# **Item7A. Quantitative and Qualitative Disclosures aboutMarket Risk**

# ** **

We do not haveoperations subject to risks of foreign currency fluctuations. We do, however,use derivative financial instruments to manage exposure to interest ratefluctuations. Our objectives for holding derivatives are to minimize interestrate risks using the most effective methods to eliminate or reduce the impactof these exposures. Variable rate debt instruments are subject to interest raterisk. In March 2007, we terminated two outstanding interest-rate swapagreements, with original maturities of June 2008, in exchange for$1,936,000 in proceeds. The proceeds were to be recognized as an offset tointerest expense over the remainder of the original term of the agreement whichended June 2008. Proceeds of $664,000 and $1,272,000 were recognized as anoffset to interest expense during 2008 and 2007, respectively. Immediatelyfollowing the termination of the two agreements discussed above, we executed anew interest-rate swap agreement, effectively locking in the interest rate on$60,000,000 of variable-rate debt through March of 2010. In March 2008,we entered into a second interest-rate swap agreement, effectively locking inthe interest rate on an additional $40,000,000 of variable-interest rate debtthrough February 2010.

 

The cumulativegain or loss on current derivative instruments is reported as a component ofaccumulated other comprehensive income (loss) in shareholders’ equity and isrecognized in earnings when the term of the protection agreement is concluded.Our earnings are affected by changes in interest rates as a portion of itslong-term debt has variable interest rates based on LIBOR. If interest ratesfor the portion of our long-term debt based on variable rates had averaged 10%more for the year ended December 31, 2008 and December 31, 2007, ourinterest expense would have increased $128,000 and $398,000, respectively.

 

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## ***REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS***

## *** ***

Board ofDirectors and Shareholders

HickoryTech Corporation

 

We have auditedthe accompanying consolidated balance sheets of Hickory Tech Corporation andsubsidiaries (the “Company”) as of December 31, 2008 and 2007, and the relatedconsolidated statements of operations, shareholders’ equity and comprehensiveincome, and cash flows for each of the two years in the period ended December 31,2008. Our audit of the basic consolidated financial statements included thefinancial statement schedule listed in the index appearing under Item 15(a)(2).These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Hickory TechCorporation and subsidiaries as of December 31, 2008 and 2007, and theconsolidated results of their operations and their cash flows for each of thetwo years in the period ended December 31, 2008, in conformity withaccounting principles generally accepted in the United States of America. Alsoin our opinion, the related financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

As discussed inNote 11 to the consolidated financial statements, effective January 1,2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,*Accounting for Uncertainty in Income Taxes.*

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the Company’s internal control over financialreporting as of December 31, 2008, based on criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report dated March 4, 2009, expressed an unqualified opinion onthe effectiveness of the Company’s internal control over financial reporting.

 

/s/ Grant Thornton LLP

 

 

Minneapolis, Minnesota

March 4, 2009

 

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Board of Directors andShareholders

Hickory Tech Corporation

 

We have auditedHickory Tech Corporation and subsidiaries’ (the “Company”) internal controlover financial reporting as of December 31, 2008, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion,Hickory Tech Corporation and subsidiaries maintained, in all material respects,effective internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl—Integrated Framework* issued by COSO*.*

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of HickoryTech Corporation and subsidiaries as of December 31, 2008 and 2007, andthe related consolidated statements of operations, shareholders’ equity andcomprehensive income, and cash flows for each of the two years in the periodended December 31, 2008, and our report dated March 4, 2009, whichincludes an explanatory paragraph discussing the adoption of FinancialAccounting Standards Board Interpretation No. 48, expressed an unqualifiedopinion on those consolidated financial statements.

 

/s/ Grant Thornton LLP

 

 

Minneapolis, Minnesota

March 4, 2009

 

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To the Shareholderand Board of Directors

Hickory TechCorporation:

 

In our opinion,the consolidated statements of operations, comprehensive income, shareholders’equity and cash flows for the year ended December 31, 2006 present fairly,in all material respects, the results of operations and cash flows of HickoryTech Corporation and its subsidiaries for the year ended December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in our opinion, the financial statementschedule for the year ended December 31, 2006 presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit. Weconducted our audit of these statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

/s/PricewaterhouseCoopers LLP

 

 

Minneapolis, Minnesota

March 14, 2007

 

 

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# **Item 8.  Financial Statements and Supplementary Data**

 

 

**HICKORYTECH CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**Years EndedDecember 31**

 

*(Dollars in thousands, except shareand per share amounts)*

* *
| ** **                                                                                   | ** ** | **2008**       | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Operating  Revenue:                                                                          |       |           |       |       |       |       |       |
| Telecom Sector                                                                               | ** ** | **$**          | **73,199** |       | $          | 76,847     |       | $ | 74,896 |   |
| Enventis Sector                                                                              |       |           |       |       |       |       |       |
| Equipment                                                                                    | ** ** | **43,514**     |       | 51,046     |       | 36,191     |       |
| Services                                                                                     | ** ** | **36,462**     |       | 28,756     |       | 21,814     |       |
| Total Enventis  Sector                                                                       | ** ** | **79,976**     |       | 79,802     |       | 58,005     |       |
|                                                                                         |       |           |       |       |       |       |       |
| Total operating  revenue                                                                     | ** ** | **153,175**    |       | 156,649    |       | 132,901    |       |
|                                                                                         |       |           |       |       |       |       |       |
| Costs and  expenses:                                                                         |       |           |       |       |       |       |       |
| Cost of sales,  equipment, excluding depreciation and amortization                           |       | **37,355**     |       | 45,340     |       | 31,152     |       |
| Cost of  services, excluding depreciation and amortization                                   |       | **52,004**     |       | 44,881     |       | 44,506     |       |
| Selling, general  and administrative expenses                                                | ** ** | **22,984**     |       | 24,244     |       | 23,291     |       |
| Depreciation                                                                                 | ** ** | **19,479**     |       | 17,847     |       | 16,949     |       |
| Amortization of  intangibles                                                                 | ** ** | **1,127**      |       | 1,157      |       | 1,172      |       |
|                                                                                         |       |           |       |       |       |       |       |
| Total costs and  expenses                                                                    | ** ** | **132,949**    |       | 133,469    |       | 117,070    |       |
|                                                                                         |       |           |       |       |       |       |       |
| Operating income                                                                             | ** ** | **20,226**     |       | 23,180     |       | 15,831     |       |
|                                                                                         |       |           |       |       |       |       |       |
| Other income and  expense:                                                                   |       |           |       |       |       |       |       |
| Interest and  other income                                                                   | ** ** | **93**         |       | 287        |       | 138        |       |
| Interest expense                                                                             | ** ** | **(6,870**     | **)**      | (8,121     | )          | (7,362     | )          |
|                                                                                         |       |           |       |       |       |       |       |
| Total other  (expense)                                                                       | ** ** | **(6,777**     | **)**      | (7,834     | )          | (7,224     | )          |
|                                                                                         |       |           |       |       |       |       |       |
| Income from  continuing operations before income taxes                                       |       | **13,449**     |       | 15,346     |       | 8,607      |       |
| Income tax  provision                                                                        | ** ** | **5,420**      |       | 6,711      |       | 3,372      |       |
| Income from  continuing operations                                                           | ** ** | **8,029**      |       | 8,635      |       | 5,235      |       |
| Discontinued  operations (Note 3)                                                            |       |           |       |       |       |       |       |
| Loss from operations  of discontinued component including loss on disposal of $3,385 in 2006 |       | **—**     |       | (40        | )          | (4,556     | )          |
| Income tax  benefit                                                                          | ** ** | **—**     |       | (16        | )          | (1,589     | )          |
| Loss on  discontinued operations                                                             | ** ** | **—**     |       | (24        | )          | (2,967     | )          |
|                                                                                         |       |           |       |       |       |       |       |
| Net income                                                                                   | ** ** | **$**          | **8,029**  |       | $          | 8,611      |       | $ | 2,268 |   |
|                                                                                         |       |           |       |       |       |       |       |
| Basic earnings  per share - continuing operations:                                           | ** ** | **$**          | **0.61**   |       | $          | 0.65       |       | $ | 0.40 |   |
| Basic loss per  share - discontinued operations:                                             | ** ** | **—**     |       | —     |       | (0.23      | )          |
|                                                                                         | ** ** | **$**          | **0.61**   |       | $          | 0.65       |       | $ | 0.17 |   |
|                                                                                         |       |           |       |       |       |       |       |
| Weighted average  common shares outstanding                                                  | ** ** | **13,248,731** |       | 13,258,369 |       | 13,163,480 |       |
|                                                                                         |       |           |       |       |       |       |       |
| Diluted earnings  per share - continuing operations:                                         | ** ** | **$**          | **0.61**   |       | $          | 0.65       |       | $ | 0.40 |   |
| Diluted loss per  share - discontinued operations:                                           | ** ** | **—**     |       | —     |       | (0.23      | )          |
|                                                                                         | ** ** | **$**          | **0.61**   |       | $          | 0.65       |       | $ | 0.17 |   |
| Weighted average  common and equivalent shares outstanding                                   | ** ** | **13,259,933** |       | 13,260,087 |       | 13,163,480 |       |
|                                                                                         |       |           |       |       |       |       |       |
| Dividends per  share                                                                         | ** ** | **$**          | **0.49**   |       | $          | 0.48       |       | $ | 0.48 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

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**HICKORYTECH CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**As of December 31**

 

*(Dollarsin thousands except share and per share amounts)*

 
| ** **                                                                | ** ** | **2008**     | ** **  | **2007** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|-------------|----------|------------|
| ASSETS                                                                    |       |         |        |     |       |
| Current Assets:                                                           |       |         |        |     |       |
| Cash and cash  equivalents                                                | ** ** | **$**        | **1,626**   |     | $          | 171 |   |
| Receivables, net  of allowance for doubtful accounts of $905 and $1,184   | ** ** | **26,292**   |        | 28,357   |       |
| Inventories                                                               | ** ** | **8,674**    |        | 7,054    |       |
| Income taxes  receivable                                                  | ** ** | **566**      |        | 1,013    |       |
| Deferred income  taxes, net                                               | ** ** | **2,064**    |        | 1,334    |       |
| Prepaid expenses                                                          | ** ** | **1,409**    |        | 1,713    |       |
| Other                                                                     | ** ** | **1,114**    |        | 1,196    |       |
| Total current  assets:                                                    | ** ** | **41,745**   |        | 40,838   |       |
|                                                                      |       |         |        |     |       |
| Investments                                                               | ** ** | **4,066**    |        | 3,830    |       |
|                                                                      |       |         |        |     |       |
| Property, plant and equipment                                             | ** ** | **338,510**  |        | 322,249  |       |
| Accumulated  depreciation                                                 | ** ** | **(187,157** | **)**       | (169,318 | )          |
| Property, plant  and equipment, net                                       | ** ** | **151,353**  |        | 152,931  |       |
|                                                                      |       |         |        |     |       |
| Other assets:                                                             |       |         |        |     |       |
| Goodwill                                                                  | ** ** | **25,239**   |        | 25,239   |       |
| Intangible  assets, net                                                   | ** ** | **856**      |        | 1,983    |       |
| Deferred costs  and other                                                 | ** ** | **2,249**    |        | 2,674    |       |
| Total other  assets                                                       | ** ** | **28,344**   |        | 29,896   |       |
|                                                                      |       |         |        |     |       |
| Total assets                                                              | ** ** | **$**        | **225,508** |     | $          | 227,495 |   |
|                                                                      | ** ** | ** **   | ** **  |     |       |   |   |
| LIABILITIES &  SHAREHOLDERS’ EQUITY                         |       |         |        |     |       |
| Current liabilities:                                                      |       |         |        |     |       |
| Extended term  payable                                                    | ** ** | **$**        | **10,474**  |     | $          | 14,443 |   |
| Accounts payable                                                          | ** ** | **3,133**    |        | 4,538    |       |
| Accrued expenses  and other                                               | ** ** | **8,001**    |        | 7,740    |       |
| Deferred revenue                                                          | ** ** | **6,205**    |        | 5,158    |       |
| Current  maturities of long-term obligations                              | ** ** | **1,621**    |        | 731      |       |
| Total current  liabilities:                                               | ** ** | **29,434**   |        | 32,610   |       |
|                                                                      |       |         |        |     |       |
| Long-term liabilities:                                                    |       |         |        |     |       |
| Debt  obligations, net of current maturities                              | ** ** | **125,384**  |        | 128,475  |       |
| Financial  derivative instruments                                         | ** ** | **3,286**    |        | 1,451    |       |
| Accrued income  taxes                                                     | ** ** | **7,517**    |        | 7,747    |       |
| Deferred income  taxes                                                    | ** ** | **18,282**   |        | 14,901   |       |
| Deferred revenue                                                          | ** ** | **1,646**    |        | 1,527    |       |
| Accrued employee  benefits and deferred compensation                      | ** ** | **10,210**   |        | 8,852    |       |
| Total long-term  liabilities                                              | ** ** | **166,325**  |        | 162,953  |       |
|                                                                      |       |         |        |     |       |
| Total  liabilities                                                        | ** ** | **195,759**  |        | 195,563  |       |
|                                                                      |       |         |        |     |       |
| Commitments and contingencies                                             | ** ** | **—**   |        | —   |       |
|                                                                      |       |         |        |     |       |
| Shareholders’ equity:                                                |       |         |        |     |       |
| Common stock, no  par value, $.10 stated value                            |       |         |        |     |       |
| Shares  authorized: 100,000,000                                           |       |         |        |     |       |
| Shares issued  and outstanding: 12,992,376 in 2008 and 13,284,903 in 2007 | ** ** | **1,299**    |        | 1,329    |       |
| Additional  paid-in capital                                               | ** ** | **11,504**   |        | 11,031   |       |
| Retained  earnings                                                        | ** ** | **20,199**   |        | 20,639   |       |
| Accumulated  other comprehensive income/(loss)                            | ** ** | **(3,253**   | **)**       | (1,067   | )          |
| Total  shareholders’ equity                                          | ** ** | **29,749**   |        | 31,932   |       |
|                                                                      |       |         |        |     |       |
| Total liabilities and shareholders’ equity                           | ** ** | **$**        | **225,508** |     | $          | 227,495 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

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**HICKORY TECH CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Years Ended December 31**

 

*(Dollarsin thousands)*

* *
| ** **                                                                                      | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| OPERATING  ACTIVITIES:                                                                          |       |        |       |     |       |     |       |
| Net income                                                                                      | ** ** | **$**       | **8,029**  |     | $          | 8,611    |       | $ | 2,268 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:              |       |        |       |     |       |     |       |
| Loss from  discontinued operations                                                              |       | —      |       | 24       |       | 2,967    |       |
| Depreciation and  amortization                                                                  | ** ** | **20,606**  |       | 19,004   |       | 18,121   |       |
| Amortization of  gain on sale of financial derivative instrument                                | ** ** | **(664**    | **)**      | (1,272   | )          | —   |       |
| Provision for  losses on accounts receivable                                                    | ** ** | **286**     |       | 139      |       | 1,043    |       |
| Deferred income  tax provision (benefit)                                                        | ** ** | **3,660**   |       | 1,523    |       | (155     | )          |
| Stock-based  compensation                                                                       | ** ** | **415**     |       | 688      |       | 320      |       |
| Employee  retirement benefits and deferred compensation                                         | ** ** | **652**     |       | 670      |       | 1,680    |       |
| Accrued  patronage refunds                                                                      | ** ** | **(563**    | **)**      | (230     | )          | (1,049   | )          |
| Other                                                                                           | ** ** | **(207**    | **)**      | 80       |       | 63       |       |
| Changes in  operating assets and liabilities net of   effects of acquisitions and dispositions: |       |        |       |     |       |     |       |
| Receivables                                                                                     | ** ** | **1,780**   |       | (7,814   | )          | (4,329   | )          |
| Prepaids                                                                                        | ** ** | **304**     |       | 190      |       | 3,123    |       |
| Inventories                                                                                     | ** ** | **(1,620**  | **)**      | 4,239    |       | (7,727   | )          |
| Accounts payable  and accrued expenses                                                          | ** ** | **(1,135**  | **)**      | 2,190    |       | (933     | )          |
| Deferred  revenue, billings and deposits                                                        | ** ** | **1,165**   |       | 601      |       | 153      |       |
| Income taxes                                                                                    | ** ** | **218**     |       | 1,237    |       | 1,107    |       |
| Other                                                                                           | ** ** | **844**     |       | 851      |       | 910      |       |
| Net cash  provided by operating activities                                                      | ** ** | **33,770**  |       | 30,731   |       | 17,562   |       |
|                                                                                            |       |        |       |     |       |     |       |
| INVESTING  ACTIVITIES:                                                                          |       |        |       |     |       |     |       |
| Additions to  property, plant and equipment                                                     | ** ** | **(17,691** | **)**      | (17,500  | )          | (21,058  | )          |
| Redemption of  investments                                                                      | ** ** | **—**  |       | —   |       | 21       |       |
| Acquisitions,  adjustments to purchase price                                                    | ** ** | **—**  |       | —   |       | 124      |       |
| Other                                                                                           | ** ** | **420**     |       | 100      |       | 43       |       |
| Net cash (used  in) investing activities                                                        | ** ** | **(17,271** | **)**      | (17,400  | )          | (20,870  | )          |
|                                                                                            |       |        |       |     |       |     |       |
| FINANCING ACTIVITIES:                                                                           |       |        |       |     |       |     |       |
| Net change in  extended term payables arrangement                                               | ** ** | **(3,969**  | **)**      | 6,724    |       | 7,719    |       |
| Change in cash  overdraft                                                                       | ** ** | **—**  |       | (1,475   | )          | 961      |       |
| Borrowings on  credit facility                                                                  | ** ** | **34,500**  |       | 15,500   |       | 26,000   |       |
| Payments on  credit facility and capital lease obligations                                      | ** ** | **(37,132** | **)**      | (29,906  | )          | (25,874  | )          |
| Proceeds from  the sale of financial derivative instrument                                      | ** ** | **—**  |       | 1,936    |       | —   |       |
| Proceeds from  issuance of common stock                                                         | ** ** | **412**     |       | 358      |       | 419      |       |
| Dividends paid                                                                                  | ** ** | **(6,492**  | **)**      | (6,357   | )          | (6,316   | )          |
| Stock  repurchase/retirement                                                                    | ** ** | **(2,363**  | **)**      | —   |       | —   |       |
| Net cash provided  by (used in) financing activities                                            | ** ** | **(15,044** | **)**      | (13,220  | )          | 2,909    |       |
|                                                                                            |       |        |       |     |       |     |       |
| DISCONTINUED  OPERATIONS:                                                                       |       |        |       |     |       |     |       |
| Net cash  provided by (used in) operating activities                                            | ** ** | **—**  |       | (24      | )          | 6        |       |
| Net cash (used  in) investing activities                                                        | ** ** | **—**  |       | —   |       | (124     | )          |
| Net cash (used  in) discontinued operations                                                     | ** ** | **—**  |       | (24      | )          | (118     | )          |
|                                                                                            |       |        |       |     |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                                           | ** ** | **1,455**   |       | 87       |       | (517     | )          |
| Cash and cash  equivalents at beginning of the year                                             | ** ** | **171**     |       | 84       |       | 601      |       |
| Cash and cash  equivalents at the end of the year                                               | ** ** | **$**       | **1,626**  |     | $          | 171      |       | $ | 84 |   |
|                                                                                            |       |        |       |     |       |     |       |
| Supplemental  disclosure of cash flow information:                                              |       |        |       |     |       |     |       |
| Cash paid for  interest                                                                         | ** ** | **$**       | **7,962**  |     | $          | 9,319    |       | $ | 7,749 |   |
| Net cash paid  for income taxes                                                                 | ** ** | **$**       | **1,542**  |     | $          | 3,935    |       | $ | 1,485 |   |
| Non-cash  investing activities:                                                                 |       |        |       |     |       |     |       |
| Property, plant  and equipment acquired with capital leases                                     | ** ** | **$**       | **433**    |     | $          | 522      |       | $ | 266 |   |

 

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

 

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**HICKORY TECH CORPORATION**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

**Years Ended December 31**

 

*(Dollarsin thousands)*

* *
| ** **                                         | ** ** | **Common Stock** | ** ** | **Additional  Paid - In** | ** ** | **Retained** | ** ** | **Accumulated Other Comprehensive** | ** ** | **Total Shareholders’** | ** ** | **Total Comprehensive** | ** ** |
|----------------------------------------------------|------------|------------------|------------|---------------------------|------------|--------------|------------|-------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **Shares**       | ** ** | **Amount**                | ** ** | **Capital**  | ** ** | **Earnings**                        | ** ** | **Income (Loss)**            | ** ** | **Equity**              | ** ** | **Income** | ** ** |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| **Balance,  December 31, 2005**               |       | 13,124,928       |       | $                         | 1,312      |         | $          | 9,262                               |       | $                            | 22,371     |                    | $          | 2,064 |   | $ | 35,009 |   |   |   |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| Stock Award Plan                                   |       | 17,386           |       | 2                         |       | 139          |       |                                |       |                         |       | 141                     |       |   |   |
| Employee Stock  Purchase Plan                      |       | 24,089           |       | 3                         |       | 171          |       |                                |       |                         |       | 174                     |       |   |   |
| Directors’ Stock  Retainer Plan               |       | 9,013            |       | 1                         |       | 64           |       |                                |       |                         |       | 65                      |       |   |   |
| Dividend  Reinvestment Plan                        |       | 32,554           |       | 3                         |       | 242          |       |                                |       |                         |       | 245                     |       |   |   |
| Stock based  compensation                          |       |             |       |                      |       | 114          |       |                                |       |                         |       | 114                     |       |   |   |
| Net Income                                         |       |             |       |                      |       |         |       | 2,268                               |       |                         |       | 2,268                   |       | $ | 2,268 |   |
| Dividends Paid                                     |       |             |       |                      |       |         |       | (6,316                              | )          |                         |       | (6,316                  | )          |   |   |
| Other  Comprehensive Income, Net of Income Taxes   |       |             |       |                      |       |         |       |                                |       | (567                         | )          | (567                    | )          | (567 | ) |
| Adoption of SFAS  No. 158, net of tax of $690 |       |             |       |                      |       |         |       |                                |       | (1,047                       | )          | (1,047                  | )          |   |   |
| Total Comprehensive  Income                        |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       | $ | 1,701 |   |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| **Balance,  December 31, 2006**               |       | 13,207,970       |       | 1,321                     |       | 9,992        |       | 18,323                              |       | 450                          |       | 30,086                  |       |   |   |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| Stock Award Plan                                   |       | 27,590           |       | 3                         |       | 196          |       |                                |       |                         |       | 199                     |       |   |   |
| Employee Stock  Purchase Plan                      |       | 13,792           |       | 1                         |       | 275          |       |                                |       |                         |       | 276                     |       |   |   |
| Directors’ Stock  Retainer Plan               |       | 7,586            |       | 1                         |       | 232          |       |                                |       |                         |       | 233                     |       |   |   |
| Dividend  Reinvestment Plan                        |       | 27,965           |       | 3                         |       | 233          |       |                                |       |                         |       | 236                     |       |   |   |
| Stock based  compensation                          |       |             |       |                      |       | 103          |       |                                |       |                         |       | 103                     |       |   |   |
| Net Income                                         |       |             |       |                      |       |         |       | 8,611                               |       |                         |       | 8,611                   |       | $ | 8,611 |   |
| Dividends Paid                                     |       |             |       |                      |       |         |       | (6,357                              | )          |                         |       | (6,357                  | )          |   |   |
| Adoption of FIN  48                                |       |             |       |                      |       |         |       | 62                                  |       |                         |       | 62                      |       |   |   |
| Other  Comprehensive Loss, Net of Income Taxes     |       |             |       |                      |       |         |       |                                |       | (1,517                       | )          | (1,517                  | )          | (1,517 | ) |
| Total  Comprehensive Income                        |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       | $ | 7,094 |   |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| **Balance,  December 31, 2007**               |       | 13,284,903       |       | 1,329                     |       | 11,031       |       | 20,639                              |       | (1,067                       | )          | 31,932                  |       |   |   |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| Stock Award Plan                                   |       | 10,493           |       | 1                         |       | 110          |       |                                |       |                         |       | 111                     |       |   |   |
| Employee Stock  Purchase Plan                      |       | 23,992           |       | 2                         |       | 268          |       |                                |       |                         |       | 270                     |       |   |   |
| Directors’ Stock  Retainer Plan               |       | 13,803           |       | 1                         |       | 22           |       |                                |       |                         |       | 23                      |       |   |   |
| Directors’  Incentive Stock Plan              |       | 18,000           |       | 2                         |       | 166          |       |                                |       |                         |       | 168                     |       |   |   |
| Dividend  Reinvestment Plan                        |       | 34,185           |       | 3                         |       | 241          |       |                                |       |                         |       | 244                     |       |   |   |
| Stock Repurchase                                   |       | (393,000         | )          | (39                       | )          | (347         | )          | (1,977                              | )          |                         |       | (2,363                  | )          |   |   |
| Stock based  compensation                          |       |             |       |                      |       | 13           |       |                                |       |                         |       | 13                      |       |   |   |
| Net Income                                         |       |             |       |                      |       |         |       | 8,029                               |       |                         |       | 8,029                   |       | $ | 8,029 |   |
| Dividends Paid                                     |       |             |       |                      |       |         |       | (6,492                              | )          |                         |       | (6,492                  | )          |   |   |
| Other  Comprehensive Loss, Net of Income Taxes     |       |             |       |                      |       |         |       |                                |       | (2,186                       | )          | (2,186                  | )          | (2,186 | ) |
| Total  Comprehensive Income                        |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       | $ | 5,843 |   |
|                                               |       |             |       |                      |       |         |       |                                |       |                         |       |                    |       |   |   |
| **Balance,  December 31, 2008**               |       | 12,992,376       |       | $                         | 1,299      |         | $          | 11,504                              |       | $                            | 20,199     |                    | $          | (3,253 | ) | $ | 29,749 |   |   |   |

 

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

 

 

 

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** **

**HICKORYTECH CORPORATION, INC.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**FiscalYears Ended December 31, 2008, 2007 and 2006**

 

**Note1.   Summary of Significant AccountingPolicies**

 

The accountingpolicies of HickoryTech are in conformity with generally accepted accountingprinciples and, where applicable, conform to the accounting principles asprescribed by federal and state telephone utility regulatory authorities. Wepresently give accounting recognition to the actions of regulators whereappropriate, as prescribed by SFAS No. 71. SFAS No. 71 providesguidance in preparing general purpose financial statements for most publicutilities. In general, the type of regulation covered by this statement permitsrates (prices) for some services to be set at levels intended to recover theestimated costs of providing regulated services or products, including the costof capital (interest costs and a provision for earnings on shareholders’investments).

 

***Principles of Consolidation***

 

Our consolidatedfinancial statements include HickoryTech Corporation and its subsidiaries inthe following two business segments: the Telecom Sector and the EnventisSector. Inter-company transactions have been eliminated from the consolidatedfinancial statements.

 

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

 

Cost of servicesincludes all costs related to delivery of communication services and productsfor all sectors. These operating costs include all costs of performing servicesand providing related products including engineering, customer service, billingand collections, network monitoring and transport costs.

 

Selling, generaland administrative expenses include direct and indirect selling expenses,advertising and all other general and administrative costs associated with theoperations of the business.

 

On December 29,2006, we sold Collins to Skyview Capital, LLC. The Collins operations wereformerly reported in the Enterprise Solutions Sector. The results of operationsof the Enterprise Solutions Sector are reported as discontinued operations forall periods presented (see Note 3 to the Notes to the Consolidated FinancialStatements).

 

***Use of Estimates***

 

The preparation ofthe consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets, liabilities,revenue and expenses and disclosure of contingent assets and liabilities. Theestimates and assumptions used in the accompanying consolidated financialstatements are based upon management’s evaluation of the relevant facts andcircumstances as of the date of the financial statements. Actual results maydiffer from these estimates and assumptions.

 

***Revenue Recognition***

 

We recognizerevenue when (i) persuasive evidence of an arrangement between thecustomer and us exists, (ii) delivery of the product to the customer hasoccurred or service has been provided to the customer, (iii) the price tothe customer is fixed or determinable and (iv) collectibility isreasonably assured. Revenue is reported net of all applicable sales tax.

 

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* *

*TelecomSector Revenue Recognition:***Revenue in the ILEC and CLEC companies is earned frommonthly billings to customers for telephone services, long distance, digitalTV, DSL, Internet services, and hardware and other services. ILEC and CLECrevenue is also derived from charges for network access to our local exchangetelephone network from subscriber line charges and from contractualarrangements for services such as billing and collection and directoryadvertising. Some revenue is realized under pooling arrangements with othertelephone companies and is divided among the companies based on respectivecosts and investments to provide the services. The companies that take part inpooling arrangements may adjust their costs and investments for a period of twoyears, which causes the dollars distributed by the pool to be adjustedretroactively. We believe that recorded amounts represent reasonable estimatesof the final distribution from these pools. However, to the extent that thecompanies participating in these pools make adjustments, there will becorresponding adjustments to our recorded revenue in future periods. Revenue isrecognized in the period in which service is provided to the customer. Withmultiple billing cycles and cut-off dates, we accrue for revenue earned but notyet billed at the end of a quarter. We also defer services billed in advanceand recognize them as income when earned based on billing dates.

 

*EnventisSector Revenue Recognition:*Revenue in the**EnventisSector is generated from the following primary sources: i) the sale of voiceand data communications equipment provided primarily through Cisco, ii)providing design, configuration and installation services related to voice anddata equipment, iii) the provision of Cisco maintenance support contracts, iv)the sale of professional support services related to customer voice and datasystems, v) the sale of transport services over the Company-owned and leasedfiber optic network, and vi) the sale of managed voice and data services,including resale of long distance services. Our revenue recognition policy foreach of these types of products and services is as follows:

 

·                  In instances where Enventis sells Ciscovoice 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. Ininstances where Enventis sells Cisco voice and data communications equipmentwith installation obligations, terms of the agreements typically provide forinstallation services without customer-specific acceptance provisions, butsometimes may provide customer-specific acceptance provisions. For arrangementswith no customer-specific acceptance arrangements, we recognize revenue whentitle passes to the customer. For contracts with customer specific acceptanceprovisions, we defer revenue recognition until the receipt of formal customeracceptance, assuming that all other revenue recognition criteria have been met.When a sale involves multiple elements, revenue is allocated to each respectiveelement in accordance with EITF No. 00-21, which addresses certain aspectsof the accounting by a vendor for arrangements under which it will performmultiple revenue-generating activities. EITF No. 00-21 provides guidanceon how an arrangement involving multiple deliverables should be divided intoseparate units of accounting, but does not change otherwise applicable revenuerecognition criteria. In the event that we enter into a multiple elementarrangement and there are undeliverable elements as of the balance sheet date,we assess whether the elements are separable and have determinable fair valuesin assessing the amount of revenue to record. Allocation of revenue to elementsof the arrangement is based on fair value of the element being sold on astand-alone basis.

 

·                  When we sell equipment to customers, wealso typically sell Cisco support contracts (“SmartNet” contracts). Thesesupport contracts state that Cisco will provide all support services, productwarranty and updates directly to the customer. Because Enventis has no serviceobligations under these types of contracts, the earnings process has culminatedfor us upon the sale of the contract and therefore revenue is recognizedimmediately. Further, we are serving in an agency relationship to the customerfor the sale of the contract and therefore the revenue is recorded net of thecost that we pay Cisco for the contract. Support services also include Enventisoffered “24X7” support of a customer’s voice and data systems. Most of thesecontracts are billed on a time and materials basis and revenue is recognizedeither as services are provided or over the term of the contract. Supportservices also include Enventis sponsored professional support services. Suchservices are typically sold on a time and materials basis, but may be sold as apre-paid block of time. This revenue is recognized as the services are provided(deferred and recognized as utilized if pre-paid). In the event that theseservices are part of a multiple element arrangement, the fair value of the servicesare measured and deferred in accordance with EITF No. 00-21 mentionedabove. Allocation of revenue to elements of the arrangement is based on fairvalue of the element being sold on a stand-alone basis.

 

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·                  Transport services are sold primarilythrough a contractual flat monthly fee. The revenue generated by these servicesis typically billed one month in advance and is deferred until the appropriatemonth of recognition.

 

·                  Enventis also manages customer voiceand/or data services. Under these contracts, Enventis bills either a flatmonthly fee or a fee that is variable based on the number of “seats” that thecustomer has. This revenue is recognized on a monthly basis as the services areprovided.

 

***Advertising Expense***

 

Advertising isexpensed as incurred. Advertising expense charged to operations was $1,415,000,$1,335,000 and $1,377,000 in 2008, 2007 and 2006, respectively.

 

***Cash and Cash Equivalents***

 

At December 31,2008,******cash equivalents totaled $1,626,000including short-term investments with original maturities of three months orless. The carrying value of cash and cash equivalents approximates its fairvalue due to the short maturity of the instruments. Our cash deposits mayoccasionally exceed federally insured limits.

 

***Accounts Receivable***

 

As of December 31,2008, consolidated accounts receivable totaled $26,292,000, net of theallowance of doubtful accounts. As of December 31, 2008, we believeaccounts receivable are recorded at their fair value. As there may by exposureor risk with accounts receivable, we routinely monitor our accounts receivableand adjust the allowance for doubtful accounts when certain events occur thatmay potentially impact the collection of accounts receivable.

 

***Allowance for Doubtful Accounts***

 

We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. In making thedetermination of the appropriate allowance for doubtful accounts, we considerspecific accounts, historical write-offs, changes in customer relationships andcredit worthiness credit risk. Specific accounts receivable are written-offonce a determination is made that the account is uncollectible. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. The allowance for doubtful accounts was $905,000 and $1,184,000 as ofDecember 31, 2008 and 2007, respectively.

 

***Inventories***

 

Inventory includesparts, materials and supplies stored in our warehouses to support basic levelsof service and maintenance as well as scheduled capital projects and equipmentawaiting configuration for customers. Inventory also includes parts andequipment shipped directly from vendors to customer locations while in transitand parts and equipment returned from customers which is being returned tovendors for credit, as well as maintenance contracts associated with customersales which have not yet transferred to the customer. The inventory value inthe Telecom Sector, comprised of raw materials, as of December 31, 2008and December 31, 2007 was $3,564,000 and $3,312,000, respectively. Theinventory value in the Enventis Sector is comprised of finished goods in transitto customers as of December 31, 2008 and December 31, 2007 was$5,110,000 and $3,742,000, respectively.

 

Inventories arevalued using the lower of cost (perpetual weighted average-cost or specificidentification) or market method. We adjust our inventory carrying value forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions. As market andother conditions change, additional inventory write-downs may be recorded atthe time acts that give rise to the lower value become known.

 

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*** ***

***Investments***

 

Investmentsinclude $2,532,000 of non-interest bearing Subordinated Capital Certificatesfrom RTFC and $1,534,000 from Co-Bank which, are accounted for under the costmethod of accounting. This method requires us to periodically evaluate whethera non-temporary decrease in the value of the investment has occurred, and ifso, to write this investment down to its net realizable value.

 

***Property, Plant and Equipment***

 

Property, plantand equipment are recorded at original cost of acquisition or construction.When regulated ILEC telephone assets are sold or retired, the assets andrelated accumulated depreciation are removed from the accounts and any gains orlosses on disposition are amortized with the remaining net investment intelephone plant. When other plant and equipment is sold or retired, the costand related accumulated depreciation or amortization are removed from therespective accounts and any resulting gain or loss is included in operatingincome. Maintenance and repairs are charged to expense as incurred.

 

The components ofproperty, plant and equipment as of December 31, 2008 and 2007,respectively are summarized as follows:

 
| **(Dollars in thousands)**           | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Telecom property  and equipment      |       | $        | 278,138    |     | $          | 268,566 |   |
| Enventis  property and equipment     |       | 41,235   |       | 34,914   |       |
| Enventis Indefeasable  Rights to Use |       | 5,394    |       | 5,482    |       |
| Other property  and equipment        |       | 13,743   |       | 13,287   |       |
| Total                                |       | 338,510  |       | 322,249  |       |
| Accumulated  depreciation            |       | (187,157 | )          | (169,318 | )          |
| Property, plant,  and equipment, net |       | $        | 151,353    |     | $          | 152,931 |   |

 

Included in theEnventis property, plant and equipment is fiber optic cable and indefeasibleright of use of fiber installed by others accompanied by ownership rights. Bothof these categories of assets have depreciable lives of 16 to 20 years on theassets acquired on December 30, 2005 (acquisition date of Enventis) and 25years for new additions.

 

Depreciation forfinancial statement purposes is determined using the straight-line method basedon the lives of the various classes of depreciable assets. The compositedepreciation rates on ILEC telephone plant were 5.0%, 4.8% and 4.9% for 2008,2007 and 2006, respectively. All other property, plant and equipment aredepreciated over estimated useful lives of three to 20 years.

 

The Telecom Sectorleases certain computer equipment under capital lease arrangements. We haverecorded the present value or fair value of the future minimum lease paymentsas a capitalized asset and related lease obligation. Assets under this capitallease are included in property, plant and equipment and amounted to $561,000and $505,000 ($1,323,000 and $1,412,000 asset, net of accumulated depreciationof $762,000 and $907,000) as of December 31, 2008 and 2007, respectively.

 

***Capitalized Software Costs***

 

Software costsassociated with software that is developed or purchased for internal use onlyare accounted for in accordance with the American Institute of Certified PublicAccountants Statement of Position No. 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.” We capitalize costs(including right to use fees) associated with externally acquired software forinternal use. Costs associated with internally developed software aresegregated into three project stages: preliminary project stage, applicationdevelopment stage and post-implementation stage. Costs associated with both thepreliminary project stage and post-implementation stage, are expensed asincurred. Costs associated with the application development stage arecapitalized. Software maintenance and training costs are expensed as incurred.Amortization of software costs commences when the software is ready for itsintended use, and is amortized over a period of three to ten years.

 

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During 2008, 2007 and2006, we capitalized $134,000, $403,000, and $1,254,000, respectively, of costsassociated with software purchased or developed for internal use only. The 2008costs primarily relate to software purchased for enterprise software anddesktop applications. The 2007 costs primarily relate to software purchased tosupport the Enventis Sector VoIP monitoring and managed services. The 2006costs related to costs associated with integrating the new enterprise resourceplanning software that we converted to on January 1, 2006. Costs incurredin 2006 related primarily to the Enventis Sector, which was purchased in December 2005and their migration to the software platform. Total capitalized software forinternal use of $8,237,000 and $8,103,000 are included in property, plant andequipment at December 31, 2008 and 2007, respectively. Amortizationexpense relating to these costs amounted to $583,000 and $686,000 in 2008 and2007, respectively, resulting in accumulated amortization of $5,321,000 and$4,727,000 at December 31, 2008 and 2007, respectively. Capitalizedinternal software costs, net of accumulated amortization of $2,916,000 and$3,376,000 are included in property, plant and equipment at December 31,2008 and 2007, respectively.

 

***Intangible Assets and Goodwill***

 

Goodwill andintangible assets with indefinite useful lives are not amortized, but testedfor impairment at least annually. See Note 2 to the Notes to the ConsolidatedFinancial Statements for a more detailed discussion of the intangible assetsand goodwill. We did not have changes to goodwill in 2008 and expect thegoodwill balance of $25,239,000 to be deductible for tax purposes. As of December 31,2008 and 2007, we completed our annual impairment tests for acquired goodwill.This testing resulted in no impairment charges to goodwill.

 

***Accrued Incentive Compensation***

 

Our employeeincentive compensation plans provide for distributions based on achievement ofspecific organizational operating results or individual employee objectives.Accrued expenses included amounts accrued for Employee Incentive Compensationof $1,777,000 and $2,035,000 at December 31, 2008 and December 31,2007, respectively.

 

***Income Taxes***

 

We account forincome taxes in accordance with SFAS No. 109, as clarified by FIN No. 48,which requires an asset and liability approach to financial accounting andreporting for income taxes. Accordingly, deferred tax assets and liabilitiesarise from the difference between the tax basis of an asset or liability andits reported amount in the financial statements. Deferred tax amounts aredetermined using the tax rates expected to be in effect when the taxes willactually be paid or refunds received, as provided under currently enacted taxlaw. Valuation allowances are established when necessary to reduce deferred taxassets to the amount expected to be realized. Income tax expense or benefit isthe tax payable or refundable, respectively, for the period plus or minus thechange in deferred tax assets and liabilities during the period.

 

FIN No. 48requires us to recognize the financial statement benefit of a tax position onlyafter determining that the relevant tax authority would more likely than notsustain the position following an audit. For tax positions meeting the morelikely than not threshold, the amount recognized in the financial statements isthe largest benefit that has a greater than 50% likelihood of being realizedupon ultimate settlement with the relevant tax authority. See Note 11 to theNotes to the Consolidated Financial Statements for additional informationregarding income taxes.

 

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*** ***

***Earnings (Loss) Per Share***

 

Basic earnings pershare are computed by dividing net income by the weighted average number ofshares of common stock outstanding during the year. Shares used in the earningsper share assuming dilution calculation are based on the weighted averagenumber of shares of common stock outstanding during the year increased bypotentially dilutive common shares. Potentially dilutive common shares includestock options and stock subscribed under the Hickory Tech Corporation Amendedand Restated Employee Stock Purchase Plan. Dilution is determined using thetreasury stock method.

 

 
| ** **                                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Weighted Average  Shares Outstanding                             |       | 13,248,731 |       | 13,258,369 |       | 13,163,480 |       |
| Stock Options                                                    |       | 958        |       | 1,718      |       | —     |       |
| Stock Subscribed  (ESPP)                                         |       | 10,244     |       | —     |       | —     |       |
| Total Weighted  Average Common and Equivalent Shares Outstanding |       | 13,259,933 |       | 13,260,087 |       | 13,163,480 |       |

 

Options topurchase 456,200 shares as of December 31, 2008, 441,000 shares as of December 31,2007 and 515,884 shares as of December 31, 2006 were not included in thecomputation of earnings per share assuming dilution because their effect onearnings per share would have been anti-dilutive.

 

Dividends pershare are based on the quarterly dividend per share as declared by the HickoryTechBoard of Directors.

 

***Post-Retirement Benefits***

 

The post-retirement benefit expense and liabilityare calculated utilizing various actuarial assumptions and methodologies. Theseassumptions include, but are not limited to, the discount rate and the expectedhealth care cost trend rate.

 

Post-retirement benefits were calculated in accordance with the methodsspecified in SFAS No. 158 and SFAS No. 106. Where SFAS No. 106provides alternative methods for determining net periodic benefit costs, weadopted the following policies: Any prior service cost, or cumulative net gainsand losses in excess of 10% of the SFAS No. 106 corridor, are amortized ona straight-line basis over the average future service lives of the coveredgroup. There are no substantive commitments for benefits other than as statedin the written plan. According to the guidance of paragraph 186 of SFAS No. 106,“the objective of selecting assumed discount rates is to measure the singleamount that, if invested at the measurement date in a portfolio of high-qualitydebt instruments, would provide the necessary future cash flows to pay theaccumulated benefits when due.” The assumed discount rate represents thediscounted value of necessary future cash flows required to pay the accumulatedbenefits when due. This rate was determined based on available market dataregarding the spot rate yields in half year increments on high-quality fixedincome securities with the effects of puts and calls removed that provide cashflows at the same time and in the same amount as the projected cash flows ofthe plan.

 

The health care cost trend rate is based upon an evaluation of thehistorical trends and experience, taking into account current and expectedmarket conditions. The health care cost trend rate represents the expectedannual rate of change in the cost of health care benefits currently provideddue to factors other than changes in the demographics of plan participants. Ifthe assumptions utilized in determining the post-retirement benefit expense andliability differ from actual events, the results of operations for futureperiods could be impacted. When actual events differ from the assumptions orwhen the assumptions used change, an unrecognized actuarial gain or lossresults.

 

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*** ***

***Stock Compensation***

 

On January 1,2006, we adopted SFAS No. 123(R), which replaces SFAS No. 123 andsupersedes APB No. 25. We adopted SFAS No. 123(R) using themodified prospective method. Under this method, prior periods are not restated.Prior to January 1, 2006, we accounted for stock-based compensation inaccordance with APB No. 25, which required the use of the intrinsic valuemethod. Accordingly, no compensation expense was recognized in prior periodsfor stock options granted, since the exercise price was equal to the fairmarket value of the shares at the grant date. The grant date fair value ofstock options is estimated using the Black-Scholes valuation model.Compensation expense is reduced based on estimated forfeitures with adjustmentsto actual recorded at time of vesting. Forfeitures are estimated based onhistorical experience. Compensation costs are recognized over the vestingperiod. Our stock options vest over a three-year period. See Note 7 to theNotes to the Consolidated Financial Statements for more information regardingstock-based compensation.

 

***Recent Accounting Developments***

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (“SFAS No. 141(R)”), which establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquired company and the goodwill acquired.SFAS No. 141(R) also establishes disclosure requirements to enablethe evaluation of the nature and financial effects of the business combination.SFAS No. 141(R) is effective as of the beginning of an entity’sfiscal year that begins after December 15, 2008, and will be adopted by usin the first quarter of 2009. The primary effect of SFAS No. 141(R) withrespect to our consolidated financial statements will be the treatment oftransaction costs in the income statement. In previous transactions we recordedthese costs in our balance sheet. Since this will only have an impact in theevent of a transaction, we cannot estimate an effect, if any of SFAS No. 141(R).

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controllingInterests in Consolidated Financial Statements — an amendment of AccountingResearch Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 willchange the accounting and reporting for minority interests, which will bere-characterized as non-controlling interests and classified as a component ofequity. This new consolidation method will significantly change the accountingfor transactions with minority interest holders. SFAS No. 160 is effectivefor fiscal years beginning after December 15, 2008, and will be adopted byus in the first quarter of 2009. SFAS No. 160 is currently not expected tohave a material effect on our consolidated financial statements.

 

In March 2008,the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133” (“SFAS No. 161”). SFAS No. 161 requiresenhanced disclosures about an entity’s derivative and hedging activities and iseffective for financial statements issued for fiscal years beginning after November 15,2008. We are currently assessing the impact of SFAS No. 161 on ourdisclosures.

 

Financial AccountingStandards Board staff position 157-2 delays the effective date of SFAS 157 tofiscal years beginning after November 15, 2008 for nonfinancial assets andliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis. We do not expect the adoption ofFASB 157 for nonfinancial assets and liabilities to have a significant impacton our financial statements or disclosures.

 

**Note 2.   Goodwill andOther Intangible Assets**

 

We are required totest acquired goodwill for impairment on an annual basis based upon a fairvalue approach. Additionally, goodwill shall be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of an entity below its carrying value. No suchevent occurred during 2008 or 2007. As of December 31, 2008 and 2007, wecompleted our annual impairment tests for acquired goodwill. This testingresulted in no impairment charges to goodwill as the determined fair value wassufficient to pass the first step impairment test. The carrying value of ourgoodwill is $25,239,000 as of December 31, 2008 and 2007, respectively.

 

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Intangible assetswith finite lives are amortized over their respective estimated useful lives totheir estimated residual values. Identifiable intangible assets that aresubject to amortization are evaluated for impairment. The components ofintangible assets are as follows:

 
| ** **                        | ** ** | ** **       | ** ** | **As of December  31, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------------------|------------|------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| **(Dollars in thousands)**        | ** ** | **Useful Lives** | ** ** | **Gross Carrying Amount**         | ** ** | **Accumulated Amortization**     | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** |
| Definite-Lived  Intangible Assets |       |             |       |                              |       |                             |       |   |   |   |   |
| Customer  relationships           |       | 1 - 8 years      |       | $                                 | 4,229      |                             | $          | 3,379 |   | $ | 4,229 |   | $ | 2,456 |   |
| Other  intangibles                |       | 1 - 5 years      |       | 730                               |       | 724                              |       | 730 |   | 520 |   |
| Total                             |       |             |       | $                                 | 4,959      |                             | $          | 4,103 |   | $ | 4,959 |   | $ | 2,976 |   |

 

As required by SFAS No. 142, we periodically reassessthe carrying value, useful lives and classifications of identifiable assets.Amortization expense related to the definite-lived intangible assets for 2008,2007 and 2006 was $1,127,000, $1,157,000, and $1,172,000, respectively. Totalestimated amortization expense for the five years subsequent to 2008 is asfollows: 2009 - $853,000; 2010 - $3,000; with none thereafter.

 

**Note 3.   Disposition andDiscontinued Operations**

 

***Dispositions***

 

Effective December 31,2006, we sold all of the outstanding capital stock in Collins to SkyviewCapital, LLC for an initial price of $100,000, paid by delivery of a promissorynote, plus up to $1,650,000 of earn-out payments. The remaining selling priceis due in contingent payments payable over the next four years if financialtargets are reached by Skyview Capital, LLC. We have received no paymentsto-date related to this earn-out provision. We recorded a pre-tax loss on thesale of $3,385,000 ($2,040,000 net of income taxes). The Collins results of operationswere formerly reported in the Enterprise Solutions Sector. The consolidatedstatements of operations for all periods presented have been restated toreflect the Collins operations as discontinued operations.

 

The followingtable includes certain summary statement of operations information related tothe operations of Enterprise Solutions business reflected in discontinuedoperations for the years ended December 31, 2007 and 2006, respectively.

 

 
| **(Dollars in thousands)**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Revenues and  sales                       |       | $        | —     |     | $          | 11,049 |   |
| Operating  expenses                       |       | —   |       | 12,115   |       |
| Depreciation and  amortization            |       | —   |       | 104      |       |
| Operating loss                            |       | —   |       | (1,170   | )          |
| Loss on sale of  discontinued operations  |       | —   |       | (3,385   | )          |
| Other  income/expense                     |       | (40      | )          | (1       | )          |
| Pretax loss from  discontinued operations |       | (40      | )          | (4,556   | )          |
| Income tax  benefit                       |       | (16      | )          | (1,589   | )          |
| Net loss of  discontinued operations      |       | $        | (24        | )        | $          | (2,967 | ) |

 

**Note 4.   Fair Value of FinancialInstruments**

 

The fair value ofour long-term obligations, after deducting current maturities, is estimated tobe $132,157,000 at December 31, 2008 and $128,791,000 at December 31,2007, compared to carrying values of $125,384,000 and $128,475,000,respectively. The fair value estimates are based on the overall weightedaverage interest rates and maturity compared to rates and terms currentlyavailable in the long-term financing markets. Our financial instruments alsoinclude cash equivalents, trade accounts receivable, and accounts payable forwhich current carrying amounts approximate fair market value.

 

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** **

**Note****5.  Accumulated Other Comprehensive Income (Loss)**

 

**       **We follow the provisions of Statement ofFinancial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFASNo. 130”). This statement established rules for the reporting ofcomprehensive income (loss) and its components. In addition to net income, ourcomprehensive income includes changes in unrealized gains and losses onderivative instruments qualifying and designated as cash flow hedges andrecognized Net Periodic Benefit Cost related to our Post-Retirement BenefitPlans. Comprehensive income for the year ended December 31, 2008 and 2007was $5,843,000 and $7,094,000, respectively.

 

        In March 2007, we terminated ourtwo outstanding interest-rate swap agreements with original maturities in June 2008,in exchange for $1,936,000 in proceeds. Immediately following the terminationof these two agreements, we executed a new interest-rate swap agreement,effectively locking in the interest rate on $60,000,000 of variable-interestrate debt through March 2010. In March 2008, we entered into a secondinterest-rate swap agreement, effectively locking in the interest rate on anadditional $40,000,000 of variable interest rate debt through February 2010.The cumulative gain or (loss) on the market value of financial derivativeinstruments is reported as a component of accumulated other comprehensiveincome (loss) in shareholders’ equity.

 

The following summarysets forth the components of accumulated other comprehensive income (loss), netof 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,  2005        |         | $                 | —     |                | $          | —             |       | $                  | —     |              | $          | 2,064 |   | $ | 2,064 |   |
| 2006 Activity                  |         | —            |       | —              |       | —             |       | (567               | )          | (567              | )          |
| Adoption of SFAS  No. 158 |         | (867              | )          | 37                  |       | (217               | )          | —             |       | (1,047            | )          |
| December 31,  2006        |         | (867              | )          | 37                  |       | (217               | )          | 1,497              |       | 450               |       |
| 2007 Activity                  |         | (87               | )          | 242                 |       | 36                 |       | (1,708             | )          | (1,517            | )          |
| December 31,  2007        |         | (954              | )          | 279                 |       | (181               | )          | (211               | )          | (1,067            | )          |
| 2008 Activity                  |         | (421              | )          | (33                 | )          | 36                 |       | (1,768             | )          | (2,186            | )          |
| December 31,  2008        |         | $                 | (1,375     | )                   | $          | 246                |       | $                  | (145       | )                 | $          | (1,979 | ) | $ | (3,253 | ) |

----

*(1) *Amounts pertain to our postretirementbenefit plans.

 

        The increase (decrease) in income tax benefits associatedwith each component of accumulated other comprehensive income (loss) is asfollows:

 
| **(Dollars in thousands)**                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax (liability)  related to OCI components             |       |     |       |     |       |     |       |
| beginning of  year                                            |       | $        | 1,141      |     | $          | (301     | )          | $ | (1,365 | ) |
| Income tax  (liability) changes related to:                   |       |     |       |     |       |     |       |
| Unrecognized net  actuarial loss                              |       | 281      |       | 57       |       | 571      |       |
| Unrecognized  prior service credit                            |       | 21       |       | (159     | )          | (24      | )          |
| Unrecognized  transition asset                                |       | (24      | )          | (24      | )          | 143      |       |
| Unrecognized  gain on derivatives                             |       | 731      |       | 1,568    |       | 374      |       |
| Income tax  (liability) related to OCI components end of year |       | $        | 2,150      |     | $          | 1,141    |       | $ | (301 | ) |

 

 

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**Note6.   Business Segments**

 

**       **Our operations are conducted in two business segmentsas: (i) Telecom Sector and (ii) Enventis Sector.

 

        The Telecom Sector provides telephoneservices to Mankato and adjacent areas of south central Minnesota and to elevencommunities in northwest Iowa as an ILEC. The Telecom Sector operates fiberoptic cable transport facilities in Minnesota. The Telecom Sector offers analternative choice for local telecommunications service, known as CLEC servicein the telecommunications industry, to customers in Minnesota and Iowa notcurrently in HickoryTech’s ILEC service area. In addition, the Telecom Sectorresells long distance service to Minnesota and Iowa subscribers in its ILEC andCLEC markets. The Telecom Sector, through NIBI, also provides data processingand related services to HickoryTech’s other product lines and to other externaltelephone companies, municipalities, utilities and wireless and cable TV providers.Prior to the sale of Collins, the Enterprise Solutions Sector designed, sold,installed and serviced business telephone systems and data communicationsequipment primarily in metropolitan Minneapolis/St. Paul, Minnesota. TheEnterprise Solutions Sector operations are reported as discontinued operationsfor all periods presented.

 

        The Enventis Sector specializes inproviding telecommunications and network solutions for companies of all sizes.In addition to its statewide fiber optic network, Enventis provides innovativeIP services that combine voice and data onto a single platform.

 

        Business segment information for the years ended December 31,2008, 2007 and 2006 is as follows:

 

For Year Ended December 31

*        (Dollars in thousands)*

 
| ** **                                      | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **2008**                                        | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers            |       | $           | 73,199     |         | $          | 79,976            |       | $                | —     |   | $ | 153,175 |   |
| Intersegment  revenue                           |       | 644         |       | 515          |       | (1,159            | )          | —           |       |
| Total operating  revenue                        |       | 73,843      |       | 80,491       |       | (1,159            | )          | 153,175          |       |
|                                            |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization                  |       | 16,136      |       | 4,417        |       | 53                |       | 20,606           |       |
| Operating income                                |       | 13,045      |       | 7,024        |       | 157               |       | 20,226           |       |
| Interest expense                                |       | 85          |       | —       |       | 6,785             |       | 6,870            |       |
| Income taxes                                    |       | 4,879       |       | 2,660        |       | (2,119            | )          | 5,420            |       |
| Income (loss)  from  continuing operations |       | 8,104       |       | 4,369        |       | (4,444            | )          | 8,029            |       |
| Identifiable  assets                            |       | 148,238     |       | 68,481       |       | 8,789             |       | 225,508          |       |
| Property, plant  and equipment, net             |       | 112,497     |       | 38,575       |       | 281               |       | 151,353          |       |
| Capital  expenditures                           |       | 11,102      |       | 6,408        |       | 181               |       | 17,691           |       |
|                                                 |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

** **

 

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For Year Ended December 31

*        (Dollars in**thousands**)*

** **
| ** **                                      | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **2007**                                        | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers            |       | $           | 76,847     |         | $          | 79,802            |       | $                | —     |   | $ | 156,649 |   |
| Intersegment  revenue                           |       | 467         |       | 440          |       | (907              | )          | —           |       |
| Total operating  revenue                        |       | 77,314      |       | 80,242       |       | (907              | )          | 156,649          |       |
|                                            |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization                  |       | 15,218      |       | 3,755        |       | 31                |       | 19,004           |       |
| Operating income  (loss)                        |       | 17,796      |       | 6,904        |       | (1,520            | )          | 23,180           |       |
| Interest expense                                |       | 72          |       | —       |       | 8,049             |       | 8,121            |       |
| Income taxes                                    |       | 7,287       |       | 2,904        |       | (3,480            | )          | 6,711            |       |
| Income (loss)  from  continuing operations |       | 10,460      |       | 4,074        |       | (5,899            | )          | 8,635            |       |
| Identifiable  assets                            |       | 152,961     |       | 66,842       |       | 7,692             |       | 227,495          |       |
| Property, plant  and equipment, net             |       | 117,078     |       | 35,700       |       | 153               |       | 152,931          |       |
| Capital  expenditures                           |       | 11,489      |       | 5,928        |       | 83                |       | 17,500           |       |
|                                                 |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

 
| ** **                                      | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **2006**                                        | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers            |       | $           | 74,896     |         | $          | 58,005            |       | $                | —     |   | $ | 132,901 |   |
| Intersegment revenue                            |       | 260         |       | 50           |       | (310              | )          | —           |       |
| Total operating  revenue                        |       | 75,156      |       | 58,055       |       | (310              | )          | 132,901          |       |
|                                            |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization                  |       | 15,009      |       | 3,048        |       | 64                |       | 18,121           |       |
| Operating income  (loss)                        |       | 15,100      |       | 2,240        |       | (1,509            | )          | 15,831           |       |
| Interest expense                                |       | (79         | )          | —       |       | 7,441             |       | 7,362            |       |
| Income taxes                                    |       | 5,960       |       | 879          |       | (3,467            | )          | 3,372            |       |
| Income (loss)  from  continuing operations |       | 9,237       |       | 1,363        |       | (5,365            | )          | 5,235            |       |
| Identifiable  assets                            |       | 157,058     |       | 59,856       |       | 9,986             |       | 226,900          |       |
| Property, plant  and equipment, net             |       | 120,202     |       | 32,533       |       | 100               |       | 152,835          |       |
| Capital  expenditures                           |       | 15,631      |       | 5,324        |       | 103               |       | 21,058           |       |
|                                                 |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

 

**NOTE 7.   STOCK COMPENSATION**

 

***Employee Stock Purchase Plan***

 

        Under the terms of an employee stockpurchase plan, participating employees may acquire shares of common stockthrough payroll deductions of not more than 10% of their compensation. Theprice at which shares can be purchased is 85% of the fair market value forshares on one specified date, the end of the plan year. As of December 31,2008, there were 500,000 common shares reserved for this plan and 462,216shares still available for issuance. As of December 31, 2008 and December 31,2007 employees had subscribed to purchase approximately 35,907 and 23,992shares for the plan year ended August 31, 2009 and August 29, 2008,respectively. We recorded stock compensation expense in the amount of $26,000and $24,000 during 2008 and 2007, respectively, related to this plan.

 

 

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***Retainer Stock Plans for Directors***

 

        Under the terms of a corporate retainerstock plan for directors, participating directors may acquire shares of commonstock in exchange for their quarterly retainers. The price at which the sharescan be purchased is 100% of the fair market value for such shares on the dateof purchase. In addition to any voluntary acquisitions of shares in exchangefor quarterly retainers, directors receive $7,500 of their annual retainersolely in shares of HickoryTech stock from this plan. As of December 31,2008, there were 300,000 common shares reserved for this plan and 216,619shares still available for future issuance.

 

***Non-Employee Directors’ Incentive Plan***

 

        Beginning in May 2005, we beganoffering a Directors’ Incentive Plan to attract and retain outside Directors.The plan provides for each director to receive 2,000 shares of our common stockcontingent upon HickoryTech meeting pre-established objectives. The plan paidout 18,000 shares, 0 shares and 10,000 shares in 2008, 2007, and 2006,respectively. As of December 31, 2008 there were 200,000 common sharesreserved for this plan and 172,000 shares available for future grants.

 

***Stock Award Plan***

 

        HickoryTech’s stock award plan providesfor the granting of non-qualified stock options, stock awards and restrictedstock awards to employees. The plan provides for stock awards based on theattainment of certain financial targets and for individual achievements. Stockoptions issued under the stock option component of the stock award plan may beexercised no later than ten years after the date of grant, with one-third ofthe options vesting each year. As of December 31, 2008, there were1,750,000 common shares****reserved forthis plan and 978,779 shares available for future grants.

 

        We recognize stock compensation chargesrelated to stock award plans when management concludes it is probable that theparticipant will earn the award. Such compensation charges are recorded basedupon the fair value of our stock and is recognized during the service periodspecified by the stock award plan. Changes in estimated compensation arerecorded in the period in which the change occurs.

 

        On January 1,2006, we adopted SFAS No. 123(R), which requires the measurement andrecognition of compensation expense for all share-based payment awards made toemployees and directors, including employee stock options and employee stockpurchases related to the employee stock purchase plan, based on estimated fairvalues. SFAS No. 123(R) supersedes our previous accounting under APB No. 25for periods beginning in 2006. In March 2005, the SEC issued SAB No. 107relating to SFAS No. 123(R). We have applied the provisions of SAB No. 107in its adoption of SFAS No. 123(R). We adopted SFAS No. 123(R) usingthe modified prospective transition method, which requires the application ofthe accounting standard as of January 1, 2006.

 

        TheConsolidated Financial Statements for 2006 reflect the impact of SFAS No. 123(R).In accordance with the modified prospective transition method, the ConsolidatedFinancial Statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS No. 123(R) or any modifications tooutstanding stock options prior to the adoption of SFAS No. 123(R). Theadoption of SFAS No. 123(R) had minimal impact on earnings per share,diluted earnings per share and cash flow from financing and operations in 2006,2007 and 2008.

 

        Share-based compensation expenserecognized during a period is based on the value of the portion of share-basedpayment awards that are ultimately expected to vest during the period.Share-based compensation expense recognized in the Consolidated Statements ofOperations includes compensation expense for share-based payment awards grantedprior to, but not yet vested as of December 31, 2005, based on the grantdate fair value estimated in accordance with the fair value provisions of SFAS No. 123as well as grants in 2006 under SFAS No. 123(R). Because share-basedcompensation expense recognized in the Consolidated Statements of Operations isbased on awards ultimately expected to vest, it has been reduced for estimatedforfeitures. We use historical data to estimate pre-vesting forfeitures. SFAS No. 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

 

 

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        The fairvalue of each option award is estimated on the date of grant using aBlack-Scholes option valuation model. We use a seven-year period to calculatethe historical volatility of our stock price for use in the valuation model.The dividend yield rate is based on our current dividend payout pattern andcurrent market price. The risk-free rate for options is based on a U.S.Treasury rate commensurate with the expected terms. The expected term ofoptions granted is derived from historical experience and represents the periodof time that options granted are expected to be outstanding.

 

        Therewere no stock option awards granted during 2008 or 2007. In September 2006,Mr. John W. Finke, current President and Chief Executive Officer, receiveda one-time grant of 15,000 options associated with his acceptance of the ChiefExecutive Officer position. The weighted average grant date fair value of theseoptions was $1.43 per share. Other than the one-time stock option award issuedto Mr. Finke, options were last granted under the Company’s Stock AwardPlan in February 2005. The Stock Award Plan provides for the issuance ofstock options, but no current compensation programs have options as acomponent.

 

        The following table details the keyassumptions used in computing fair value using the Black-Scholes Optionvaluation model for the year ended December 31, 2006:

 

|                      |   | **2006** |   |
|---------------------------|--------|----------|--------|
| Volatility                |   | 37.0     | %      |
| Dividend Yield            |   | 6.9      | %      |
| Risk-Free  Interest Rates |   | 4.8      | %      |
| Expected Life in  Years   |   | 7        |   |

 

        A summary of all stock option activityfor the three-year period ended December 31, 2008 is as follows:

 
| ** **                                                                        | ** ** | ** **  | ** **   | ** **         | ** ** | ** **   | ** ** | **Weighted Average** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|--------------|--------------------|------------|--------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **Options** | ** **   | **Exercise Price** | ** ** |
| ** **                                                                        | ** ** | **2008**    | ** **   | **2007**           | ** ** | **2006**     | ** ** | **2008**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Outstanding at  Beginning of Year                                                 |       | 476,000     |         | 515,884            |       | 578,850      |       | $                    | 12.79      |   | $ | 12.75 |   | $ | 12.63 |   |
| Granted                                                                           |       | —      |         | —             |       | 15,000       |       | —               |       | — |   | 6.95 |   |
| Exercised                                                                         |       | —      |         | —             |       | —       |       | —               |       | — |   | — |   |
| Forfeited                                                                         |       | —      |         | (499               | )          | (28,448      | )          | —               |       | 10.76 |   | 11.15 |   |
| Expired                                                                           |       | (4,800      | )            | (39,385            | )          | (49,518      | )          | 13.38                |       | 12.22 |   | 10.50 |   |
| Outstanding at  End of Year                                                       |       | 471,200     |         | 476,000            |       | 515,884      |       | $                    | 12.79      |   | $ | 12.79 |   | $ | 12.75 |   |
|                                                                              |       |        |         |               |       |         |       |                 |       |   |   |   |   |
| Exercisable at  End of Year                                                       |       | 466,200     |         | 454,335            |       | 462,556      |       | $                    | 12.85      |   | $ | 12.97 |   | $ | 13.07 |   |
| Weighted Average  Fair  Value of Options Granted  During the Year  |       | $           | —  |               | $          | —  |       | $                    | 1.43  |   |   |   |   |   |   |   |
| Fair Value of  Options Vesting  During the Year                              |       | $           | 41,000       |               | $          | 156,000      |       | $                    | 186,000    |   |   |   |   |   |   |   |
| Intrinsic Value  of Options  Exercised During the Year                       |       | $           | —       |               | $          | —       |       | $                    | —     |   |   |   |   |   |   |   |

 

All stock options grantedin 2006 had an exercise price equal to the fair market value of our commonstock on the date of grant.

 

 

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The followingtable provides certain information with respect to stock options outstanding atDecember 31, 2008: 

 

| ** **          | ** ** | ** **        | ** ** | **Weighted**       | ** ** | **Weighted**          | ** ** |
|---------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| **Range of**        | ** ** | **Stock Options** | ** ** | **Average**        | ** ** | **Average Remaining** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**   | ** ** | **Exercise Price** | ** ** | **Contractual Life**  | ** ** |
| $6.00 - $8.00       |       | 15,000            |       | $                  | 6.95       |                  | 7.7 years  |   |
| $8.00 - $12.00      |       | 177,200           |       | 10.26              |       | 4.4 years             |       |
| $12.00 - $16.00     |       | 225,250           |       | 13.88              |       | 2.1 years             |       |
| $16.00 - $21.00     |       | 53,750            |       | 18.18              |       | 2.2 years             |       |
|                |       | 471,200           |       | $                  | 12.79      |                  | 3.2 years  |   |

 

        The following table provides certaininformation with respect to stock options exercisable at December 31,2008:

 

| ** **          | ** ** | ** **        | ** ** | **Weighted**       | ** ** | **Weighted**          | ** ** |
|---------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| **Range of**        | ** ** | **Stock Options** | ** ** | **Average**        | ** ** | **Average Remaining** | ** ** |
| **Exercise Prices** | ** ** | **Exercisable**   | ** ** | **Exercise Price** | ** ** | **Contractual Life**  | ** ** |
| $6.00 - $8.00       |       | 10,000            |       | $                  | 6.95       |                  | 7.7 years  |   |
| $8.00 - $12.00      |       | 177,200           |       | 10.26              |       | 4.4 years             |       |
| $12.00 - $16.00     |       | 225,250           |       | 13.88              |       | 2.1 years             |       |
| $16.00 - $21.00     |       | 53,750            |       | 18.18              |       | 2.2 years             |       |
|                |       | 466,200           |       | $                  | 12.85      |                  | 3.1 years  |   |

 

        Stock options outstanding and exercisableas of December 31, 2008 did not have any aggregate intrinsic value. As of December 31,2008, there was $4,000 of total unrecognized compensation costs related tonon-vested stock options granted under the Company’s Stock Award Plan. Weexpect to recognize this expense during 2009.

 

**Note 8.   Extended Term Payable**

 

        The Enventis Sector has a $20,000,000wholesale financing agreement with a financing company to fund inventorypurchased from certain approved vendors. Advances under this financingarrangement are collateralized by the accounts receivable and inventory ofEnventis and a guaranty of an amount up to $18,000,000 by HickoryTech. Thefinancing agreement provides 60 day interest-free payment terms for workingcapital and can be terminated at any time by either party. The balanceoutstanding under the financing arrangement was $10,474,000 and $14,443,000 at December 31,2008 and 2007, respectively. These balances are classified as currentliabilities in the accompanying Balance Sheet and are not considered part ofour debt financing.

 

**Note 9.   Debt and OtherObligations**

 

        Our long-term obligations as of December 31,2008, were $125,384,000, excluding current maturities of $1,300,000 on debt and$321,000 on current maturities of capital leases. Long-term obligations as of December 31,2007, were $128,475,000 excluding current maturities of $475,000 on debt and$256,000 of capital leases.

 

 

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| ** **                                                                           | ** ** | **As of December 31** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **(Dollars in thousands)**                                                           | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| Credit facility,  average interest at 5.2%, maturing in varying amounts through 2013 |       | $                          | 126,400    |   | $ | 128,675 |   |
| Capitalized  lease obligations, average interest at 10.7%, maturing March 2011  |       | 605                        |       | 531 |   |
| Total                                                                                |       | 127,005                    |       | 129,206 |   |
| Less current  maturities                                                             |       | 1,621                      |       | 731 |   |
| Long-Term  obligations                                                               |       | $                          | 125,384    |   | $ | 128,475 |   |

 

        On December 30, 2005, we entered into a $160,000,000credit agreement with a syndicate of banks (subsequently reduced to a$155,200,000 facility as of December 31, 2008 through normal quarterlyamortization), which amended our previous credit facility. The credit facilityis comprised of a $30,000,000 revolving credit component ($28,680,000 availableto borrow as of December 31, 2008) that expires on December 31, 2011and a $130,000,000 term loan component (subsequently reduced to $125,200,000 asof December 31, 2008 through normal quarterly amortization).

 

        The term loan component is comprised of two components whichare defined as term loan B and term loan C. The outstanding principal balanceof term loan B is $105,800,000 as of December 31, 2008, and is held invarying amounts by three lenders in the syndicate, US Bank, GE CommercialDistribution Finance Corporate and CoBank. Under the terms of term loan B, weare required to make quarterly principal payments of $275,000 from December 31,2008 through December 31, 2011 with the remainder of the aggregateprincipal due in two payments on March 31, 2012 and June 30, 2012.Due to the aggressive pay down of debt in 2007, we were not required to makequarterly principle payments during the first three quarters of 2008. Theoutstanding principal balance of term loan C is $19,400,000 as of December 31,2008, and is held entirely by RTFC. Under the terms of term loan C, we arerequired to make quarterly principal payments of $50,000 on the aggregateprincipal amount from December 31, 2008 through December 31, 2012with the remainder of the aggregate principal due in two payments on March 31,2013 and June 30, 2013.

 

        The term loan component has a provision whereby weperiodically receive patronage capital refunds. This patronage refund isrecorded as an offset to interest expense and amounted to $563,000 in 2008,$230,000 in 2007 and $1,049,000 in 2006.

 

        Our credit facility requires us tocomply, on a consolidated basis, with specified financial ratios and tests.These financial ratios and tests include maximum leverage ratio, minimuminterest coverage ratio, and maximum capital expenditures. We were in fullcompliance with these ratios and tests as of December 31, 2008. The termsof our credit facility include certain restrictions regarding the payment ofdividends. The dividend restriction provides that we will not make dividenddistributions or repurchase stock in an aggregate amount in excess of 100% ofthe previous year’s net income. At December 31, 2007, we were in violationof this dividend restriction, but a waiver was obtained. At December 31,2008, we were in full compliance with our debt covenants.

 

        Our obligations under the credit facility are secured by afirst-priority lien on all property and assets, tangible and intangible ofHickoryTech and its current subsidiaries, including, but not limited toaccounts receivable, inventory, equipment and intellectual property, generalintangibles, cash and proceeds of the foregoing. We have also given afirst-priority pledge of the capital stock of our current subsidiaries tosecure the credit facility. The credit facility contains certain restrictionsthat, among other things, limit or restrict our ability to create liens orencumbrances; incur additional debt; issue stock; make asset sales, transfers,or dispositions; and engage in mergers and acquisitions over a specifiedmaximum value.

 

 

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        The credit facility also requires us to maintain interestrate protection agreements on at least 50% of the term loan componentsoutstanding balance, to manage our exposure to interest rate fluctuations. Wecontinually monitor the interest rates on our bank loans and have implementedinterest-rate swap agreements on $100,000,000 of our variable-interest ratedebt and we have established fixed interest rates on another $19,500,000 of ourdebt, for a total of $119,500,000 or 94% of our debt which is not subject tointerest rate fluctuations. The current rate locks expire in February and March 2010.Our effective interest rate was 5.22%, 5.97% and 5.13% in 2008, 2007 and 2006,respectively.

 

        Annual requirements for principal paymentsfor the years subsequent to 2008 are as follows: 2009 - $1,300,000; 2010 -$1,300,000; 2011 - $2,500,000; 2012 - $102,700,000; and 2013 - $18,600,000.

 

**Note 10.   Employee RetirementBenefits**

 

        Employees who meet certain service requirements are coveredunder a defined contribution retirement savings plan, which includes IRS Section 401(k) provisions.We contribute up to 6.0% of the employee’s eligible compensation, based on theemployee’s voluntary contribution. Our contributions and costs for the retirementsavings plan were $1,366,000 in 2008, $1,432,000 in 2007 and $1,350,000 in2006.

 

        In addition to providing retirementsavings benefits, we provide post-retirement health care and life insurancebenefits for eligible employees. We account for these post-retirement benefitsin accordance with SFAS No. 158 (see below). We are not currently fundingthese post-retirement benefits, but have accrued these liabilities. Newemployees hired on or after January 1, 2007 are not eligible forpost-retirement health care and life insurance benefits. At December 31,2008, post-retirements benefits expected to be paid for the next five years andthereafter are as follows: 2009 - $206,000; 2010- $197,000; 2011 - $198,000; 2012 - $200,000;  2013 — $202,000and thereafter — $990,000.

 

        We adopted SFAS No. 158 as of December 31, 2006.SFAS No. 158 requires that we recognize the funded status of ourpostretirement benefit plans on the consolidated balance sheet and recognize asa component of accumulated other comprehensive income, net of tax, the gains orlosses and prior service costs or credits that arise during the period but arenot recognized as components of net periodic benefit cost.  The impact of SFAS No. 158, net of taxon our December 31, 2006 consolidated financial statements based on theactuarial measurements of plan assets and obligations dated December 31,2006 was $1,047,000.

 

        The following table summarizes the balance sheet impact,including the benefit obligations and assets associated with our postretirementbenefit plans as of December 31, 2008 and 2007, respectively.

 
| **(Dollars in thousands)**                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Change in  Benefit Obligation              |       |     |       |     |       |
| Benefit  Obligation at Beginning of Year   |       | $        | 7,958      |     | $          | 7,672 |   |
| Service Cost                               |       | 254      |       | 286      |       |
| Interest Cost                              |       | 487      |       | 455      |       |
| Amendments                                 |       | —   |       | (413     | )          |
| Actuarial Gain                             |       | 781      |       | 215      |       |
| Benefits Paid                              |       | (255     | )          | (257     | )          |
| Benefit  Obligation at End of Year         |       | $        | 9,225      |     | $          | 7,958 |   |
|                                       |       |     |       |     |       |
| Change in Plan  Assets                     |       |     |       |     |       |
| Fair Value of  Assets at Beginning of Year |       | $        | —     |     | $          | — |   |
| Actual Return on  Assets                   |       | —   |       | —   |       |
| Employer  Contribution                     |       | 255      |       | 257      |       |
| Distributions                              |       | (255     | )          | (257     | )          |
| Fair Value of  Assets at End of Year       |       | $        | —     |     | $          | — |   |

 

 

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| ** **                                                                  | ** ** | **As of December 31** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------|------------|
| **(Dollars in thousands)**                                                  | ** ** | **2008**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Components of Net Periodic Benefit Cost                                     |       |                       |       |   |   |   |   |
| Service Cost                                                                |       | $                          | 254        |   | $ | 286 |   | $ | 322 |   |
| Interest Cost                                                               |       | 487                        |       | 455 |   | 429 |   |
| Expected Return on Plan Assets                                              |       | —                     |       | — |   | — |   |
| Amortization of Transition Obligation                                       |       | 60                         |       | 60 |   | 60 |   |
| Amortization of Prior Service Cost                                          |       | (55                        | )          | (12 | ) | (11 | ) |
| Recognized Net Actuarial Loss                                               |       | 79                         |       | 70 |   | 124 |   |
| Net Periodic Benefit Cost                                                   |       | $                          | 825        |   | $ | 859 |   | $ | 924 |   |
|                                                                        |       |                       |       |   |   |   |   |
| Discount Rate Used to Determine Benefit Obligation As of  December 31: |       | 6.00                       | %          | 6.20 | % | 6.00 | % |

 

In 2009, we expect to recognize approximately $60,000 of the transitionobligation, ($55,000) of the prior service credit and $134,000 of the net actuarialloss as a component of total period post-retirement benefit expense.

 
| **Health  Care Trend Rates for the Year Ending December 31, 2008** | ** ** | **Year**  | ** ** | **Trend Rate** |
|-------------------------------------------------------------------------|------------|-----------|------------|----------------|
|                                                                    |       | 2009-2010 |       | 7.90%          |
|                                                                    |       | 2010-2011 |       | 6.60%          |
|                                                                    |       | 2011-2012 |       | 5.80%          |
|                                                                    |       | 2012-2013 |       | 5.80%          |
|                                                                    |       | 2013-2014 |       | 5.70%          |
|                                                                    |       | 2014-2015 |       | 5.70%          |
|                                                                    |       | 2015-2016 |       | 5.70%          |
|                                                                    |       | 2016-2017 |       | 5.70%          |
|                                                                    |       | 2017-2083 |       | 5.6% to 4.00%  |
|                                                                    |       | 2084      |       | 4.00%          |

 
| **(Dollars in thousands)**                                         | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| **Effect of 1% Increase and 1% Decrease in Trend  Rate**           | ** ** | **1%  Increase** | ** ** | **1%  Decrease** | ** ** |
| Accum. Post-Retirement Benefit Oblig. as of December 31, 2008 |       |             |       |             |       |
| Dollar                                                             |       | $                | 1,442      |             | $          | (1,168 | ) |
| Percentage Change in Retiree Medical                               |       | 17.0             | %          | (13.0            | )%         |
|                                                               |       |             |       |             |       |
| Service Cost and Interest Cost for Fiscal 2008                     |       |             |       |             |       |
| Dollar                                                             |       | $                | 145        |             | $          | (114 | ) |
| Percentage Change in Retiree Medical                               |       | 21.0             | %          | (18.0            | )%         |

 

As of December 31, 2008, we adopted anew methodology for applying health care trend rates when measuring theaccumulated post retirement benefit obligation. This methodology is based onguidance published by the Society of Actuaries titled “How Health Care TrendRates are Best Measured” and is the methodology adopted by our third partyconsultants. Under the new method, health care rates trend downward in thecalculations in smaller increments over a longer period of time. The healthcare cost trend rate used in determining the accumulated post-retirementbenefit obligations was 7.9% in 2009 and decreases gradually until it reaches5.6% in 2017 and ultimately 4% in 2084. These initial trend rate assumptionswere provided based on a study of the ten-year history of our self-fundedmedical benefits plan.

 

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In December 2003, the MedicarePrescription Drug, Improvement and Modernization Act of 2003 was enacted, whichintroduced a prescription drug benefit under Medicare, as well as a federalsubsidy to sponsors of retiree health care benefit plans that provide a benefitthat is at least actuarially equivalent to the Medicare plan. In May 2004,the FASB issued FASB Staff Position No. 106-2, “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003,” which requires current recognition of the federalsubsidy that employers may receive for providing prescription drug coverage toretirees. Substantial portions of the prescription drug benefits provided underits post-retirement benefit plan are deemed actuarially equivalent to thebenefits provided under Medicare Part D. Consequently, we re-measured ouraccumulated post-retirement benefit obligation as of June 30, 2004 toaccount for the federal subsidy. As of December 31, 2008 and 2007, thereduction in the accumulated post-retirement benefit obligation due to thesubsidy was $1,134,000 and $961,000, respectively.

 

**Note 11.   Income Taxes**

 

The income tax provision (benefit) for operations for the years ended December 31,2008, 2007 and 2006 include the following components:

** **
| **(Dollars in thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current Income Taxes:      |       |     |       |     |       |     |       |
| Federal                    |       | $        | 1,370      |     | $          | 4,027    |       | $ | 972 |   |
| State                      |       | 390      |       | 1,145    |       | 276      |       |
| Deferred Income Taxes:     |       |     |       |     |       |     |       |
| Federal                    |       | 3,356    |       | 1,031    |       | 218      |       |
| State                      |       | 304      |       | 492      |       | 317      |       |
| Total Income Tax Provision |       | $        | 5,420      |     | $          | 6,695    |       | $ | 1,783 |   |

 

Income tax expense is included in the financial statements as follows:

 
| **(Dollars in thousands)** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Continuing Operations      |       | $        | 5,420      |     | $          | 6,711    |       | $ | 3,372 |   |
| Discontinued Operations    |       | —   |       | (16      | )          | (1,589   | )          |
| Total Income Tax Provision |       | $        | 5,420      |     | $          | 6,695    |       | $ | 1,783 |   |

 

Deferred tax liabilities and assets are comprised of the following at December 31:

 
| **(Dollars in thousands)**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Tax Liabilities:                                   |       |     |       |     |       |
| Depreciation and Fixed Assets                      |       | $        | 17,924     |     | $          | 14,342 |   |
| Intangible Assets                                  |       | 6,075    |       | 5,668    |       |
| Other                                              |       | —   |       | 124      |       |
| Gross Deferred Tax Liability                       |       | $        | 23,999     |     | $          | 20,134 |   |
|                                               |       |     |       |     |       |
| Tax Assets:                                        |       |     |       |     |       |
| Deferred Compensation and Post-Retirement Benefits |       | $        | 4,461      |     | $          | 3,835 |   |
| Receivables and Inventories                        |       | 460      |       | 630      |       |
| Accrued Liabilities                                |       | 1,167    |       | 829      |       |
| Derivatives                                        |       | 1,309    |       | 578      |       |
| State Net Operating Loss                           |       | 1,767    |       | 1,550    |       |
| Capital Loss                                       |       | —   |       | 695      |       |
| Other                                              |       | 304      |       | —   |       |
| Gross Deferred Tax Asset                           |       | 9,468    |       | 8,117    |       |
| Valuation Allowance                                |       | (1,687   | )          | (1,550   | )          |
| Net Deferred Tax Liability                         |       | 16,218   |       | 13,567   |       |
| Current Deferred Tax Asset                         |       | 2,064    |       | 1,334    |       |
| Net Non-Current Deferred Tax Liability             |       | $        | 18,282     |     | $          | 14,901 |   |

 

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We have Iowa net operating loss carry-forwards for tax purposesavailable to offset future income of approximately $26,600,000 at December 31,2008. The Iowa net operating loss carry-forwards expire in varying amountsbetween 2018 and 2028. Due to the continued generation of net operating lossesby our subsidiaries operating in Iowa, the utilization of these net operatingloss carry-forwards is doubtful. A valuation allowance has been established toreduce the carrying value of the benefits associated with the Iowa netoperating losses incurred by our subsidiaries in the state of Iowa. We alsohave a net operating loss carry-forward of approximately $3,800,000 incurred bythe parent company in the state of Minnesota. Management believes that it isunlikely that we will realize all of the benefits associated with the Minnesotanet operating loss prior to the expiration of the carry forward period.Therefore, a valuation allowance was established to reduce the carrying valueof the benefits associated with the net operating losses incurred by the parentcompany in Minnesota. Future events and changes in circumstances could causethis valuation allowance to change.

 

The reconciliation of the U.S. income tax rate to the effective incometax rate for continuing operations is as follows:

 
| ** **                                               | ** ** | **For Year Ended December 31** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                               | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Statutory Tax Rate                                       |       | 35.0                                | %          | 35.0 | % | 34.0 | % |
| Effect of:                                               |       |                                |       |   |   |   |   |
| State Income Taxes Net of Federal Tax Benefit            |       | 6.0                                 |       | 6.1 |   | 6.1 |   |
| Release of Income Tax Reserve and Prior Year Adjustments |       | (7.8                                | )          | 0.6 |   | (1.2 | ) |
| Medicare Part D Subsidy                             |       | (0.4                                | )          | (0.3 | ) | (0.6 | ) |
| FASB Interpretation No. 48                          |       | 3.2                                 |       | 2.5 |   | — |   |
| Expiration of Capital Loss                               |       | 5.2                                 |       | — |   | — |   |
| Other, Net                                               |       | (0.9                                | )          | (0.2 | ) | 0.9 |   |
| Effective Tax Rate                                       |       | 40.3                                | %          | 43.7 | % | 39.2 | % |

 

We adopted the provisions of FIN No. 48 on January 1, 2007.Among other things, FIN No. 48 provides guidance to address uncertainty intax positions and clarifies the accounting for income taxes by prescribing aminimum recognition threshold that income tax positions must achieve beforebeing recognized in the financial statements. As of the date of adoption, we hadapproximately $7,242,000 of unrecognized tax benefits (excluding interest), ofwhich approximately $748,000 relates to a deferred tax asset that is fullyreserved for financial reporting purposes.

 

As of December 31, 2008, we had unrecognized tax benefits totaling$6,748,000 (net of tax) excluding interest. The amount of unrecognized taxbenefits, if recognized, that would affect the effective income tax rate infuture periods is $6,729,000. It is reasonably possible that the total amountof unrecognized tax benefits may decrease by approximately $4,500,000 duringthe next 12 months as a result of expirations of statute of limitations.

 

We recognize interest and penalties related to income tax matters asincome tax expense. As of the date of the FIN No. 48 adoption, we had$172,000 (net of tax) accrued for interest and nothing accrued for penaltiesrelated to tax matters. As of December 31, 2008 we had accrued $769,000(net of tax) for interest related to unrecognized tax benefits.

 

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The following roll-forward of unrecognized tax benefits excludesinterest accrued on unrecognized tax benefits and is presented gross of anyexpected federal tax benefits related to unrecognized state tax benefits asrequired by Fin No. 48.

 
| **(Dollars in thousands)**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrecognized tax benefits opening balance (excluding interest) |       | $        | 7,591      |     | $          | 6,768 |   |
| Increases:                                                     |       |     |       |     |       |
| Tax positions taken in current period                          |       | 41       |       | 27       |       |
| Tax position taken in prior periods                            |       | 357      |       | 811      |       |
| Decreases:                                                     |       |     |       |     |       |
| Tax positions taken in prior periods                           |       | (750     | )          | —   |       |
| Lapse of statute limitations                                   |       | —   |       | (15      | )          |
| Unrecognized tax benefits                                      |       | —   |       | —   |       |
| Ending balance (excluding interest)                            |       | $        | 7,239      |     | $          | 7,591 |   |

 

We file consolidated income tax returns in the United States federaljurisdiction and combined or separate income tax returns in various statejurisdictions. In general, we are no longer subject to United States federalincome tax examinations and examinations by state tax authorities for the yearsprior to 2005 except to the extent of losses utilized in subsequent years. In November 2008,the Internal Revenue Service commenced an examination of our 2006 federalconsolidated income tax return. We do not expect that any settlement or paymentthat may result from the audit will have a material effect on our results ofoperations.

 

**Note 12.  Financial Derivative Instruments**

 

We use financial derivative instruments to manage our overall exposureto fluctuations in interest rates. We account for derivative instruments inaccordance with SFAS No. 133, as amended by SFAS No. 149, whichrequires derivative instruments to be recorded on the balance sheet at fairvalue. Changes in fair value of derivative instruments must be recognized inearnings unless specific hedge accounting criteria are met, in which case thegains and losses are included in other comprehensive income rather than inearnings.

 

Effective January 1,2008, we adopted SFAS 157 related to our financial assets and liabilities whichdefines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. The adoption of SFAS 157 did nothave a material impact on our financial condition and results of operations.Financial Accounting Standards Board staff position 157-2 delays the effectivedate of SFAS 157 to fiscal years beginning after November 15, 2008 fornonfinancial assets and liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis.

 

SFAS 157 definesfair value as the price that would be received for an asset or paid to transfera liability (an exit price) in the principal or most advantageous market forthe asset or liability in an orderly transaction between market participants onthe measurement date. SFAS 157 also describes three levels of inputs that maybe used to measure fair value:

 

·                  Level1 — quoted prices in active markets for identical assets and liabilities.

 

·                  Level2 — observable inputs other than quoted prices in active markets for identicalassets and liabilities.

 

·                  Level3 — 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 ourinterest rate swap agreements were determined based on Level 2 inputs.

 

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We utilize interest-rate swap agreements that qualify as cash-flowhedges to manage our exposure to interest rate fluctuations on a portion of ourvariable-interest rate debt. In March 2007, we terminated two outstandinginterest-rate swap agreements, with original maturities of June 2008, inexchange for $1,936,000 in proceeds. Proceeds of $664,000 and $1,272,000 wererecognized as an offset to interest expense in 2008 and 2007, respectively.Immediately following the termination of the two swap agreements discussedabove, we executed a new interest-rate swap agreement, effectively locking inthe interest rate on $60,000,000 of variable-interest rate debt through March,2010. In March 2008, we entered into a second interest-rate swapagreement, effectively locking in the interest rate on an additional$40,000,000 of variable-interest rate debt through February 2010.

 

The cumulative gain or (loss) on the market value of financialderivative instruments is reported as a component of accumulated othercomprehensive income (loss) in shareholders’ equity. The fair value of ourderivatives at December 31, 2008 and 2007 is a net liability of $3,286,000and $1,451,000, respectively.

 

**Note 13.   Commitments,Contingencies, and Concentrations**

 

We are involved in certain contractual disputesin the ordinary course of business but do not believe the ultimate resolutionof any of these existing matters will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

We have built our Enventis Enterprise NetworkServices product line practice around the Cisco brand. We generated sales ofapproximately $56,000,000, $59,000,000, and $41,000,000 in the years ended2008, 2007, and 2006 respectively. Loss of Cisco as our principle suppliercould significantly impact this revenue stream. We consider our relationshipwith Cisco to be sound.

 

We have a collective bargaining agreement withthe International Brotherhood of Electrical Workers Local 949, which involvesapproximately 21.5% of our employees. This bargaining agreement expires in 2010.

 

*Operating Lease Commitments*

 

We own most of our major facilities, but do lease certain office space,land and equipment under principally non-cancelable operating leases.****Rental expense was $1,439,000 in 2008,$1,404,000 in 2007 and $1,831,000 in 2006. At December 31, 2008, futureminimum operating lease rental obligations for the next five years andthereafter are as follows: 2009 - $1,346,000; 2010- $1,000,000; 2011 - $810,000; 2012 - $604,000;  2013 — $532,000and thereafter — $1,618,000.

 

**Note 14.   Quarterly FinancialInformation (Unaudited)**

 
| *** ***                                         | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|
| **(Dollars in thousands except  per share amounts)** | ** ** | **4th**  | ** ** | **3rd** | ** ** | **2nd** | ** ** | **1st** | ** ** |
| Operating revenues                                   |       | $        | 37,670     |   | $ | 39,860 |   | $ | 39,745 |   | $ | 35,900 |   |
| Operating income                                     |       | $        | 4,106      |   | $ | 5,360 |   | $ | 5,891 |   | $ | 4,869 |   |
| Income from continuing operations                    |       | $        | 1,679      |   | $ | 2,072 |   | $ | 2,497 |   | $ | 1,781 |   |
| Income from disc. ops., net of taxes                 |       | $        | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Net income                                           |       | $        | 1,679      |   | $ | 2,072 |   | $ | 2,497 |   | $ | 1,781 |   |
| Basic EPS - continuing operations                    |       | $        | 0.13       |   | $ | 0.16 |   | $ | 0.19 |   | $ | 0.13 |   |
| Basic EPS - discontinued operations                  |       | $        | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Fully Diluted EPS - continuing operations            |       | $        | 0.13       |   | $ | 0.16 |   | $ | 0.19 |   | $ | 0.13 |   |
| Fully Diluted EPS - discontinued operations          |       | $        | —     |   | $ | — |   | $ | — |   | $ | — |   |
|                                                 |       |     |       |   |   |   |   |   |   |
| Dividends Per Share                                  |       | $        | 0.13       |   | $ | 0.12 |   | $ | 0.12 |   | $ | 0.12 |   |

 

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| ** **                                           | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|
| **(Dollars in thousands except  per share amounts)** | ** ** | **4th**  | ** ** | **3rd** | ** ** | **2nd** | ** ** | **1st** | ** ** |
| Operating revenues                                   |       | $        | 38,261     |   | $ | 35,859 |   | $ | 45,602 |   | $ | 36,927 |   |
| Operating income                                     |       | $        | 4,886      |   | $ | 5,574 |   | $ | 7,653 |   | $ | 5,067 |   |
| Income from continuing operations                    |       | $        | 1,531      |   | $ | 2,082 |   | $ | 3,254 |   | $ | 1,768 |   |
| Income from disc. ops., net of taxes                 |       | $        | (7         | ) | $ | (8 | ) | $ | (8 | ) | $ | (1 | ) |
| Net income                                           |       | $        | 1,524      |   | $ | 2,074 |   | $ | 3,246 |   | $ | 1,767 |   |
| Basic EPS - continuing operations                    |       | $        | 0.12       |   | $ | 0.16 |   | $ | 0.25 |   | $ | 0.13 |   |
| Basic EPS - discontinued operations                  |       | $        | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Fully Diluted EPS - continuing operations            |       | $        | 0.12       |   | $ | 0.16 |   | $ | 0.25 |   | $ | 0.13 |   |
| Fully Diluted EPS - discontinued operations          |       | $        | —     |   | $ | — |   | $ | — |   | $ | — |   |
|                                                 |       |     |       |   |   |   |   |   |   |
| Dividends Per Share                                  |       | $        | 0.12       |   | $ | 0.12 |   | $ | 0.12 |   | $ | 0.12 |   |

 

The summation of quarterly earnings per share computations may notequate to the year-end computation as the quarterly computations are performedon a discrete basis.

 

**Note 15.   Subsequent Events**

 

HickoryTech’s Board of Directors has declared a regular quarterlydividend of 13 cents per share, payable March 5, 2009 to shareholders ofrecord on February 15, 2009.

 

# **Item9.   Changes in and Disagreements withAccountants on Accounting and**Financial Disclosure

# ** **

None.

 

# **Item9A.  Controls and Procedures**

# ** **

**EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES AND CHANGES IN INTERNAL CONTROLS**

 

As of the end of the period covered by this Annual Report on Form 10-K,we carried out an evaluation under the supervision and with the participationof our Disclosure Committee and our management, including the Chief ExecutiveOfficer and the Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e).Disclosure controls and procedures are designed to ensure that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934 (the “Exchange Act”) is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and thatsuch information is accumulated and communicated to our management, includingthe Chief Executive Officer and Chief Financial Officer, to allow timelydecisions regarding required disclosure. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of our disclosure controls and procedures were effective as of December 31,2008.

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and15d-15(f). Our internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

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Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting as of December 31, 2008 based on the criteria established in *Internal Control — Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on theresults of this evaluation, we concluded that our internal control overfinancial reporting was effective as of December 31, 2008.

 

The effectiveness of our internal control over financial reporting asof December 31, 2008 has been audited by Grant Thornton LLP, anindependent registered public accounting firm, as stated in their report whichis included in Part II of this Annual Report on Form 10-K.

 

**CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

There were no changes in our internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 that was conducted during the lastfiscal quarter of 2008, that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

# **Item9B.   Other Information**

# ** **

None.

 

**PART III**

 

# **Item10.  Directors, Executive Officers of theRegistrant and Corporate Governance Matters**

# ** **

Information as to Directors and Executive Officers of HickoryTechincluded in the Proxy Statement under the headings “Proposal 1: Election ofDirectors,” “Security Ownership,” “Other Executive Officers” and “Section 16(a) BeneficialOwnership Reporting Compliance” is incorporated by reference. Disclosurerelating to the audit committee, including the audit committee financialexpert, found under the heading of “Audit Committee Report” in the ProxyStatement is incorporated by reference.

 

We have adopted a Code of Ethics that applies to our Chief ExecutiveOfficer, Chief Financial Officer, all officers of HickoryTech, Director ofRegulatory Affairs, Director of Public and Investor Relations, Controller, theBoard of Directors and other appropriate personnel as identified.

 

# **Item11.   Executive Compensation**

# ** **

Information as to executive compensation included under the headings of“Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grantsof Plan-Based Awards in 2008,” “Outstanding Equity Awards at 2008 FiscalYear-End,” “2008 Option Exercises and Stock Vested,” “Non-Qualified DeferredCompensation for 2008,” “Employment Contracts, Change of Control Agreements,Severance Agreements and Other Agreements,” “Compensation Committee Report onExecutive Compensation” and “Compensation of Directors” in the Proxy Statementis incorporated by reference.

 

# **Item12.   Security Ownership of CertainBeneficial Owners and Management and**Related Stockholder Matters

 

No beneficial owner held more than 5% of HickoryTech’s common stock asof December 31, 2008. The information as to security ownership ofmanagement included under the heading of “Security Ownership” in the ProxyStatement is incorporated by reference.

 

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        The following table provides information on equitycompensation plans under which equity securities of the Company are authorizedfor issuance, as of December 31, 2008.

 
| ** **                                                   | ** ** | **A**                                                                                                  | ** ** | **B**                                                                                  | ** ** | **C**                                                                                                                                               | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                            | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights** | ** ** | **Weighted-  average  exercise  price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column A)** | ** ** |
|                                                         |       |                                                                                                   |       |                                                                                   |       |                                                                                                                                                |       |
| Equity  compensation plans approved by security holders (1): |       | 471,200                                                                                                |       | $                                                                                      | 12.79      |                                                                                                                                                | 1,829,614  |   |
|                                                         |       |                                                                                                   |       |                                                                                   |       |                                                                                                                                                |       |
| Equity  compensation plans not approved by security holders: |       | —                                                                                                 |       | —                                                                                 |       | —                                                                                                                                              |       |
|                                                         |       |                                                                                                   |       |                                                                                   |       |                                                                                                                                                |       |
| Total                                                        |       | 471,200                                                                                                |       | $                                                                                      | 12.79      |                                                                                                                                                | 1,829,614  |   |

----

(1)          Includes the Company’s Employee StockPurchase Plan, Retainer Stock Plans for Directors, Non-Employee Director StockOption Plan, Non-Employee Directors’ Incentive Plan and Stock Award Plan.

 

# **Item 13.   Certain Relationships and RelatedTransactions and Director Independence**

# ** **

**       **We****do not know of any transactions with related personsrequired to be reported under this item. The information regarding directorindependence under the caption “Corporate Governance Matters — The Board ofDirectors and Committees,” in the Proxy Statement is incorporated by reference.

 

# **Item 14.   Principal Accountant Fees and Services**

# ** **

        Theinformation under the heading “Independent Auditors and Payment of Fees to Auditors,”in the Proxy Statement is incorporated herein by reference.

 

**PART IV**

 

# **Item 15.   Exhibits and Financial Statement Schedules**

# ** **

        Thefollowing documents are filed as part of this Annual Report on Form 10-K:

 

**1.**     **Index of Consolidated Financial Statements**

 

        Thefollowing consolidated financial statements are included at the indicated pages inthis Annual Report on Form 10-K and incorporated in this Item 15(a) byreference:

 
| ** **                                                                            | **Page** |
|---------------------------------------------------------------------------------------|----------|
| Reports of Independent Registered Public Accounting  Firms                            | 52       |
|                                                                                  |     |
| Consolidated Statements of Operations                                                 | 55       |
|                                                                                  |     |
| Consolidated Balance Sheets                                                           | 56       |
|                                                                                  |     |
| Consolidated Statements of Cash Flows                                                 | 57       |
|                                                                                  |     |
| Consolidated Statements of Shareholder’s Equity and  Comprehensive Income (Loss) | 58       |
|                                                                                  |     |
| Notes to Consolidated Financial Statements                                            | 59       |

 

**2.     FinancialStatement Schedule**

 
| ** **                                           | **Page** |
|------------------------------------------------------|----------|
| Schedule II — Valuation and Qualifying Accounts | 86       |

 

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**3.     Exhibits**

 

        The followingdocuments are filed as Exhibits to this Form 10-K or incorporate byreference herein.  Any documentincorporated by reference is identified by a parenthetical reference to the SECfiling which included such document.

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                              |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(a)        |       | Restated Articles of Incorporation (Incorporated by  reference to Exhibit 3 to the Registrant’s Form 10-Q filed  May 7, 1999)                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 3(b)        |       | Amended and Restated By-Laws (Incorporated by  reference to Exhibit 3.1 to the Registrant’s Form 10Q filed  May 3, 2007)                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 3(c)        |       | Certificate of Designations of Series A Junior  Participating Preferred Stock of HickoryTech Corporation (Incorporated by  reference to Exhibit 3(c) to the Registrant’s Form 10-K filed  March 29, 2000)                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4(a)        |       | Shareholder Rights Agreement (Incorporated by  reference to Exhibit 1 to the Registrant’s Form 8-A filed  March 9, 1999)                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 4(b)        |       | Third Amended and Restated Credit Agreement dated as  of December 30, 2005, by and among HickoryTech Corporation, as Borrower,  the Lenders referred to herein and Wachovia (formerly known as First Union  National Bank), as Administrative Agent (Incorporated by reference to  Exhibit 4.1 to the Registrant’s Form 8-K filed January 6,  2006) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1+       |       | Supplemental Retirement Agreement dated  January 31, 1984, between registrant’s subsidiary, Mankato Citizens  Telephone company, and David A. Christensen (Incorporated by reference to  Exhibit 10(b) to the Registrant’s Form S-8 filed May 11,  1993                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2+       |       | HickoryTech Corporation Directors’ Stock Option Plan  Amended and Restated February 5, 2003 (Incorporated by reference to  Exhibit 10(g) to the Registrant’s Form 10-K filed  March 9, 2004)                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3+       |       | HickoryTech Corporation Retainer Stock Plan for  Directors Restated and Amended effective September 1, 1996 (Incorporated  by reference to Exhibit 10(m) to the Registrant’s Form 10-Q  filed August 12, 1996)                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4+       |       | HickoryTech Corporation 1993 Stock Award Plan  (Amended and Restated effective September 26, 2001) (Incorporated by  reference to Exhibit 10(l) to the Registrant’s Form 10-K dated  March 26, 1997)                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5+       |       | Summary of the HickoryTech Corporation Long-Term  Executive Incentive Program (Incorporated by reference to  Exhibit 10(q) to the Registrant’s Form 8-K filed  February 22, 2005)                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6+       |       | Form of Stock Option Agreement Used in  connection with Grants Under the 1993 Stock Award (Incorporated by reference  to Exhibit 10(r) to the Registrant’s Form 10-K filed  March 4, 2005)                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7+       |       | HickoryTech Corporation Directors’ Incentive Plan  (Incorporated by reference to Exhibit 10(s) to the Registrant’s  Form 8-K filed May 9, 2005)                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8        |       | Stock Purchase Agreement by and between HickoryTech  Corporation and Minnesota Power Enterprises, Inc. dated November 9,  2005 (Incorporated by reference from Exhibit 2.1 to the Registrant’s  Current Report on Form 8-K filed on November 10, 2005)                                                                                         |

 

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| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9        |       | First Amendment to the Stock Purchase Agreement by  and between HickoryTech Corporation and Minnesota Power  Enterprises, Inc., dated December 30, 2005 (Incorporated by  reference to Exhibit 2.1A to the Registrant’s Current Report on  Form 8-K filed on January 05, 2006)                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10       |       | Agreement for Wholesale Financing between  HickoryTech and GE Commercial Distribution Finance Corporation dated  February 23, 2006, as amended (Incorporated by reference to the  Registrant’s Current Report on Form 8-K filed April 7, 2006)                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11+      |       | Change of Control Agreement between HickoryTech  Corporation and Walter E. Prahl (Incorporated by reference to  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed  November 30, 2007)                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12+      |       | Amended and Restated HickoryTech Corporation  Employee Stock Purchase Plan, dated August 1, 2006 (Incorporated by  reference to Exhibit 10.14 to the Registrants Form 10-K dated  February 29, 2008)                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.13+      |       | Amended and Restated Change of Control Agreement  dated November 29, 2007 between HickoryTech Corporation and John W.  Finke (Incorporated by reference to Exhibit 10.15 to the Registrants  Form 10-K dated February 29, 2008)                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14+      |       | Change of Control Agreement between HickoryTech and  John P. Morton dated November 29, 2007(Incorporated by reference to  Exhibit 10.16 to the Registrants Form 10-K dated February 29,  2008)                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15+      |       | Amended and Restated Change of Control Agreement  dated November 29, 2007 between HickoryTech Corporation and David A.  Christensen (Incorporated by reference to Exhibit 10.17 to the  Registrants Form 10-K dated February 29, 2008)                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16+      |       | Amended and Restated Change of Control Agreement  dated November 29, 2007 between HickoryTech Corporation and Lane C.  Nordquist (Incorporated by reference to Exhibit 10.18 to the Registrants  Form 10-K dated February 29, 2008)                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.17+      |       | Amended and Restated Change of Control Agreement  dated November 29, 2007 between HickoryTech Corporation and Mary T.  Jacobs (Incorporated by reference to Exhibit 10.19 to the Registrants  Form 10-K dated February 29, 2008)                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.18+      |       | Change of Control Agreement between HickoryTech and  Damon D. Dutz dated November 29, 2007 (Incorporated by reference to  Exhibit 10.20 to the Registrants Form 10-K dated February 29,  2008)                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.19+      |       | Employment Agreement between the HickoryTech and  John W. Finke, President and Chief Executive Officer of the Company, dated  August 10, 2006 which includes a Supplemental Retirement Agreement  (Incorporated by reference to the Registrants Current Report on Form 8-K  filed August 16, 2006) Amendment to Employment Agreement dated  November 29, 2007(Incorporated by reference to Exhibit 10.21 to the  Registrants Form 10-K dated February 29, 2008) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.20+      |       | Employment Agreement between HickoryTech and John P.  Morton dated December 20, 2006 and Amendment to Employment Agreement  dated November 29, 2007 (Incorporated by reference to Exhibit 10.22  to the Registrants Form 10-K dated February 29, 2008)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.21+ *    |       | HickoryTech Corporation Executive Incentive Plan  Amended and Restated January 1, 2009                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 14          |       | Code of Ethics (Incorporated by reference to  Exhibit 14 to the registrant’s Form 10-K filed March 14, 2004)                                                                                                                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21*         |       | Subsidiaries of HickoryTech Corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1*       |       | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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| **Exhibit** | ** ** | **Description**                                                                                                                                  |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 23.2*       |       | Consent of Independent Registered Public Accounting  Firm                                                                                        |
|        |       |                                                                                                                                             |
| 31(a)*      |       | Certification of Chief Executive Officer Under  Rule 13a-14(a) Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|        |       |                                                                                                                                             |
| 31(b)*      |       | Certification of Chief Financial Officer Under  Rule 13a-14(a) Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|        |       |                                                                                                                                             |
| 32(a)*      |       | Certification of Chief Executive Officer Under 18  U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002      |
|        |       |                                                                                                                                             |
| 32(b)*      |       | Certification of Chief Financial Officer Under 18  U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002      |

----

*      Filed herewith.

 

+      Management compensation plan or arrangement required to befiled as an exhibit.

 

85

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**SCHEDULE II - VALUATION ANDQUALIFYING ACCOUNTS**

**HickoryTechCorporation**

***(Dollars in thousands)***

 
| ** **                              | ** ** | ** **       | ** ** | **Additions**  | ** ** | ** **     | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                              | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | **Other**      | ** ** | ** **     | ** ** | **End of** | ** ** |
| **Description**                         | ** ** | **Period**       | ** ** | **Expenses**   | ** ** | **Accounts**   | ** ** | **Deductions** | ** ** | **Period** | ** ** |
|                                    |       |             |       |           |       |           |       |           |       |   |   |
| Year Ended  December 31, 2006      |       |             |       |           |       |           |       |           |       |   |   |
| Allowance for  Doubtful Accounts        |       | $                | 334        |           | $          | 1,043          |       | $              | —     |   | $ | (526 | ) | $ | 851 |   |
| Inventory  Valuation Reserve            |       | 266              |       | 438            |       | —         |       | (242           | )          | 462 |   |
| Deferred Tax  Asset Valuation Allowance |       | 1,531            |       | 85             |       | —         |       | —         |       | 1,616 |   |
| Total                                   |       | $                | 2,131      |           | $          | 1,566          |       | $              | —     |   | $ | (768 | ) | $ | 2,929 |   |
|                                    |       |             |       |           |       |           |       |           |       |   |   |
| Year Ended  December 31, 2007      |       |             |       |           |       |           |       |           |       |   |   |
| Allowance for  Doubtful Accounts        |       | $                | 851        |           | $          | 139            |       | $              | —     |   | $ | 194 |   | $ | 1,184 |   |
| Inventory  Valuation Reserve            |       | 462              |       | 161            |       | —         |       | (225           | )          | 398 |   |
| Deferred Tax  Asset Valuation Allowance |       | 1,616            |       | —         |       | —         |       | (66            | )          | 1,550 |   |
| Total                                   |       | $                | 2,929      |           | $          | 300            |       | $              | —     |   | $ | (97 | ) | $ | 3,132 |   |
|                                    |       |             |       |           |       |           |       |           |       |   |   |
| Year Ended  December 31, 2008      |       |             |       |           |       |           |       |           |       |   |   |
| Allowance for  Doubtful Accounts        |       | $                | 1,184      |           | $          | 286            |       | $              | —     |   | $ | (565 | ) | $ | 905 |   |
| Inventory  Valuation Reserve            |       | 398              |       | 184            |       | —         |       | (333           | )          | 249 |   |
| Deferred Tax  Asset Valuation Allowance |       | 1,550            |       | 137            |       | —         |       | —         |       | 1,687 |   |
| Total                                   |       | $                | 3,132      |           | $          | 607            |       | $              | —     |   | $ | (898 | ) | $ | 2,841 |   |

 

86

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**SIGNATURES**

 

**       **Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Dated:     March 5, 2009 | HICKORYTECH CORPORATION |
|---------------------------------------------------|-------------------------|
|                                              |                    |
|                                              | By:                     | /s/ David A. Christensen |
|                                              |                    |   |
|                                              |                    | David A. Christensen, Secretary |
|                                              |                    | Senior Vice President, Chief Financial |
|                                              |                    | Officer and Treasurer |

 

        Pursuantto the requirements of the Securities Exchange Act of 1934, the followingpersons on behalf of the registrant and in the capacities and on the datesindicated have signed this report.

 
| /s/ James W. Bracke                                                                                                                                            |   | March 5, 2009 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|
| James W. Bracke, Chair                                                                                                                                         |   |               |
|                                                                                                                                                           |   |               |
| /s/ John W. Finke                                                                                                                                              |   | March 5, 2009 |
| John W. Finke                                                                                                                                                  |   |               |
| President, Chief Executive Officer and Director                                                                                                                |   |               |
| (principal executive officer)                                                                                                                                  |   |               |
|                                                                                                                                                           |   |               |
| /s/ David A. Christensen                                                                                                                                       |   | March 5, 2009 |
| David A. Christensen, Secretary, Senior Vice  President, Chief Financial Officer and Treasurer  (principal financial officer and principal accounting officer) |   |               |
|                                                                                                                                                           |   |               |
| /s/ R. Wynn Kearney, Jr.                                                                                                                                  |   | March 5, 2009 |
| R. Wynn Kearney, Jr., Director                                                                                                                            |   |               |
|                                                                                                                                                           |   |               |
| /s/ Robert D. Alton                                                                                                                                            |   | March 5, 2009 |
| Robert D. Alton, Director                                                                                                                                      |   |               |
|                                                                                                                                                           |   |               |
| /s/ Lyle T. Bosacker                                                                                                                                           |   | March 5, 2009 |
| Lyle T. Bosacker, Director                                                                                                                                     |   |               |
|                                                                                                                                                           |   |               |
| /s/ Dale E. Parker                                                                                                                                             |   | March 5, 2009 |
| Dale E. Parker, Director                                                                                                                                       |   |               |

 

(a majority ofdirectors)

 

87

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