**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q/A**

** **

**(AMENDMENT NO.1)**

 
| **(Mark One)** |
|----------------|
| **ý**     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           | **FOR THE QUARTERLY PERIOD ENDED September  30, 2003 OR** |
|           |   |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           | **FOR THE TRANSITION PERIOD  FROM                     TO                      ** |

 

**Commission file number   0-13721**

 

**HICKORY TECH CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Minnesota**                                                                       |   | **41-1524393**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| **221 East Hickory Street**                                                         |
| **Mankato, Minnesota 56002-3248**                                                   |
| (Address of principal executive offices and zip code)                               |
|                                                                                |   |                                  |
| **(800) 326-5789**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |                                  |
|                                                                                |   |                                  |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.    Yes  ý      No  o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  ý      No  o

 

The total number of shares of the registrant’s common stock outstandingas of September 30, 2003: 13,997,543.

 

 

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# **EXPLANATORY NOTE**

 

Hickory Tech Corporation (the “Company”) is filing this Amendment No. 1to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003,originally filed November 14, 2003 (the “Form 10-Q”), solely to amend specificitems of the Form 10-Q to reflect a $7,415,000 reduction in the amount of the deferred income tax benefit related to theloss on disposal previously reported in the third quarter of fiscal 2003. Thisrevision increased the previously reported third quarter loss from discontinuedoperations by $7,415,000, and correspondingly reduced long-term deferred incometax assets by $5,211,000 and increased long-term deferred income taxliabilities by $2,204,000, both at September 30, 2003. The revision increased each of the previouslyreported basic and diluted loss per share amounts from discontinued operationsfor the three and nine months ended September 30, 2003 by $0.53 and the netincome per share amounts for the three and nine month periods by $0.53.However, the revision had no effect on the Company’s previously reportedrevenue, operating income, income from continuing operations (and related pershare amounts) or cash flows. This Amendment No. 1 amends only portionsof the Form 10-Q; the remainder of the Form 10-Q is unchanged and is notreproduced in this Amendment No. 1. This Amendment No. 1 does not reflectevents occurring after the original filing of the Form 10-Q.

 

This Amendment No. 1 contains changes to the following disclosures:

 

•      Part I - Item 1. Financial Statements(Unaudited)

 

•      Part I - Item 2. Management’s Discussionand Analysis of Results of Operations and Financial Condition 

 

1

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**HICKORY TECH CORPORATION**

September30, 2003

PARTI. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(UNAUDITED)

 
|                                                                                                        |   | **For  Quarter Ended** |    | **For Nine  Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|----------------------------|--------|
| **(In Thousands Except Per Share  Amounts)**                                                                |   | **9/30/2003**          |    | **9/30/2002**              |   | **9/30/2003** |   | **9/30/2002** |   |
|                                                                                                        |   | **Restated  (Note 1)** |    |                       |   | **Restated  (Note 1)** |   |   |   |
| OPERATING REVENUES:                                                                                         |   |                   |    |                       |   |   |   |   |   |
| Telecom Sector                                                                                              |   | $                      | 18,810  |                       | $      | 18,100 |   | $ | 56,058 |   | $ | 52,857 |   |
| Information Solutions Sector                                                                                |   | 702                    |    | 981                        |   | 2,609 |   | 3,064 |   |
| Enterprise Solutions Sector                                                                                 |   | 3,565                  |    | 5,257                      |   | 10,859 |   | 11,655 |   |
| TOTAL OPERATING REVENUES                                                                                    |   | 23,077                 |    | 24,338                     |   | 69,526 |   | 67,576 |   |
| COSTS AND EXPENSES:                                                                                         |   |                   |    |                       |   |   |   |   |   |
| Cost of Sales, Enterprise Solutions                                                                         |   | 2,606                  |    | 3,688                      |   | 7,675 |   | 7,905 |   |
| Operating Expenses, excluding Depreciation  and Amortization                                                |   | 11,475                 |    | 12,557                     |   | 35,242 |   | 35,651 |   |
| Depreciation                                                                                                |   | 3,780                  |    | 3,448                      |   | 11,013 |   | 10,085 |   |
| Amortization of Intangibles                                                                                 |   | 236                    |    | 336                        |   | 761 |   | 989 |   |
| TOTAL COSTS AND EXPENSES                                                                                    |   | 18,097                 |    | 20,029                     |   | 54,691 |   | 54,630 |   |
| OPERATING INCOME                                                                                            |   | 4,980                  |    | 4,309                      |   | 14,835 |   | 12,946 |   |
| OTHER INCOME (EXPENSE):                                                                                     |   |                   |    |                       |   |   |   |   |   |
| Equity in Net Income/(Loss) of Investees                                                                    |   | 1                      |    | (29                        | )      | (4 | ) | (27 | ) |
| Interest and Other Income                                                                                   |   | 10                     |    | 66                         |   | 35 |   | 138 |   |
| Interest Expense                                                                                            |   | (1,579                 | )       | (1,752                     | )      | (4,624 | ) | (5,566 | ) |
| TOTAL OTHER INCOME (EXPENSE)                                                                                |   | (1,568                 | )       | (1,715                     | )      | (4,593 | ) | (5,455 | ) |
|                                                                                                        |   |                   |    |                       |   |   |   |   |   |
| INCOME BEFORE INCOME TAXES                                                                                  |   | 3,412                  |    | 2,594                      |   | 10,242 |   | 7,491 |   |
| INCOME TAXES                                                                                                |   | 1,395                  |    | 1,060                      |   | 4,186 |   | 3,061 |   |
| INCOME FROM CONTINUING OPERATIONS                                                                           |   | 2,017                  |    | 1,534                      |   | 6,056 |   | 4,430 |   |
| DISCONTINUED OPERATIONS (Note 4)                                                                            |   |                   |    |                       |   |   |   |   |   |
| Income (Loss) from operations of discont.  component, including loss of the disposal of $25,345,000 in 2003 |   | (24,873                | )       | 949                        |   | (23,487 | ) | 2,637 |   |
| Income Taxes (Benefit)                                                                                      |   | (2,783                 | )       | 389                        |   | (2,215 | ) | 1,081 |   |
| INCOME (LOSS) ON DISCONT. OPERATIONS                                                                        |   | (22,090                | )       | 560                        |   | (21,272 | ) | 1,556 |   |
| NET INCOME (LOSS)                                                                                           |   | $                      | (20,073 | )                          | $      | 2,094 |   | $ | (15,216 | ) | $ | 5,986 |   |
|                                                                                                        |   |                   |    |                       |   |   |   |   |   |
| Basic Earnings Per Share - Continuing  Operations                                                           |   | $                      | 0.14    |                       | $      | 0.11 |   | $ | 0.43 |   | $ | 0.32 |   |
| Basic Earnings Per Share - Discontinued  Operations                                                         |   | (1.58                  | )       | 0.04                       |   | (1.52 | ) | 0.11 |   |
|                                                                                                        |   | $                      | (1.44   | )                          | $      | 0.15 |   | $ | (1.09 | ) | $ | 0.43 |   |
| Dividends Per Share                                                                                         |   | $                      | 0.11    |                       | $      | 0.11 |   | $ | 0.33 |   | $ | 0.33 |   |
| Weighted Average Common Shares Outstanding                                                                  |   | 13,974                 |    | 14,059                     |   | 13,973 |   | 14,009 |   |
| Diluted Earnings Per Share - Continuing  Operations                                                         |   | $                      | 0.14    |                       | $      | 0.11 |   | $ | 0.43 |   | $ | 0.32 |   |
| Diluted Earnings Per Share - Discontinued  Operations                                                       |   | (1.58                  | )       | 0.04                       |   | (1.52 | ) | 0.11 |   |
|                                                                                                        |   | $                      | (1.44   | )                          | $      | 0.15 |   | $ | (1.09 | ) | $ | 0.43 |   |
| Weighted Average Common and Equivalent  Shares Outstanding                                                  |   | 14,024                 |    | 14,117                     |   | 14,031 |   | 14,093 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

2

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**HICKORY TECH CORPORATION**

September30, 2003

CONSOLIDATEDBALANCE SHEETS

(UNAUDITED)

 
| **(In Thousands Except Share and  Per Share Amounts)**                    |   | **9/30/2003**         |        | **12/31/2002** |   |
|---------------------------------------------------------------------------|--------|-----------------------|-------------|----------------|--------|
|                                                                      |   | **Restated (Note 1)** |        |           |   |
| ASSETS                                                                    |   |                  |        |           |   |
| CURRENT ASSETS:                                                           |   |                  |        |           |   |
| Cash and Cash Equivalents                                                 |   | **$**                 | **880**     |           | $      | 1,874 |   |
| Receivables, Net of Allowance for Doubtful  Accounts of $1,201 and $1,358 |   | **10,343**            |        | 11,056         |   |
| Income Taxes Receivable                                                   |   | **—**            |        | 3,222          |   |
| Costs in Excess of Billings on Contracts                                  |   | **839**               |        | 2,107          |   |
| Inventories                                                               |   | **4,825**             |        | 5,059          |   |
| Deferred Income Taxes                                                     |   | **951**               |        | 951            |   |
| Other                                                                     |   | **2,534**             |        | 2,840          |   |
| Assets Held for Sale                                                      |   | **2,181**             |        | —         |   |
| TOTAL CURRENT ASSETS                                                      |   | **22,553**            |        | 27,109         |   |
| INVESTMENTS                                                               |   | **6,741**             |        | 10,517         |   |
| PROPERTY, PLANT AND EQUIPMENT                                             |   | **224,482**           |        | 247,375        |   |
| Less ACCUMULATED DEPRECIATION                                             |   | **112,807**           |        | 111,101        |   |
| PROPERTY, PLANT AND EQUIPMENT, NET                                        |   | **111,675**           |        | 136,274        |   |
| OTHER ASSETS:                                                             |   |                  |        |           |   |
| Goodwill                                                                  |   | **25,086**            |        | 25,086         |   |
| Intangible Assets, Net                                                    |   | **507**               |        | 34,669         |   |
| Financial Derivative Instrument                                           |   | **1,961**             |        | —         |   |
| Deferred Costs and Other                                                  |   | **4,945**             |        | 6,556          |   |
| Assets Held for Sale                                                      |   | **27,481**            |        | —         |   |
| TOTAL OTHER ASSETS                                                        |   | **59,980**            |        | 66,311         |   |
| TOTAL ASSETS                                                              |   | **$**                 | **200,949** |           | $      | 240,211 |   |
| LIABILITIES & SHAREHOLDERS’ EQUITY                               |   |                  |        |           |   |
| CURRENT LIABILITIES:                                                      |   |                  |        |           |   |
| Accounts Payable                                                          |   | **$**                 | **2,608**   |           | $      | 4,543 |   |
| Accrued Expenses                                                          |   | **2,495**             |        | 3,719          |   |
| Accrued Interest                                                          |   | **60**                |        | 512            |   |
| Accrued Income Taxes                                                      |   | **1,576**             |        | —         |   |
| Billings in Excess of Costs on Contracts                                  |   | **275**               |        | 80             |   |
| Advanced Billings and Deposits                                            |   | **2,846**             |        | 3,741          |   |
| Liabilities Held for Sale                                                 |   | **1,568**             |        | —         |   |
| Current Maturities of Long-Term Obligations                               |   | **1,482**             |        | 1,441          |   |
| TOTAL CURRENT LIABILITIES                                                 |   | **12,910**            |        | 14,036         |   |
| LONG-TERM OBLIGATIONS, Net of Current  Maturities                         |   | **140,096**           |        | 157,599        |   |
| LONG-TERM LIABILITIES HELD FOR SALE                                       |   | **31**                |        | —         |   |
| DEFERRED INCOME TAXES                                                     |   | **2,204**             |        | 4,377          |   |
| DEFERRED REVENUE AND BENEFITS                                             |   | **5,766**             |        | 5,604          |   |
| TOTAL LIABILITIES                                                         |   | **161,007**           |        | 181,616        |   |
| COMMITMENTS AND CONTINGENCIES (Note 9)                                    |   | **—**            |        | —         |   |
| SHAREHOLDERS’ EQUITY:                                                |   |                  |        |           |   |
| Common Stock, no par value, $.10 stated value                             |   |                  |        |           |   |
| Shares authorized: 100,000,000                                            |   |                  |        |           |   |
| Shares outstanding: 13,997,543 in 2003 and  13,983,929 in 2002            |   | **1,400**             |        | 1,398          |   |
| Additional Paid-In Capital                                                |   | **8,519**             |        | 7,885          |   |
| Retained Earnings                                                         |   | **28,866**            |        | 49,312         |   |
| Accumulated Other Comprehensive Income                                    |   | **1,157**             |        | —         |   |
| TOTAL SHAREHOLDERS’ EQUITY                                           |   | **39,942**            |        | 58,595         |   |
| TOTAL LIABILITIES & SHAREHOLDERS’  EQUITY                        |   | **$**                 | **200,949** |           | $      | 240,211 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

3

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**HICKORY TECH CORPORATION**

September 30, 2003

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 
|                                                                                      |   | **For Nine  Months Ended** |        |
|-------------------------------------------------------------------------------------------|--------|----------------------------|-------------|
| **(Dollars In Thousands)**                                                                |   | **9/30/2003**              |        | **9/30/2002** |   |
|                                                                                      |   | **Restated (Note 1)**      |        |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |                       | ** **  |   |   |
| Net Income (Loss)                                                                         |   | **$**                      | **(15,216** | **)** | $ | 5,986 |   |
| Adjustments to Reconcile Net Income (Loss)  to Net Cash Provided by Operating Activities: |   |                       | ** **  |   |   |
| Depreciation and Amortization                                                             |   | **13,545**                 | ** **  | 12,918 |   |
| Intangible Asset Impairment                                                               |   | **21,000**                 | ** **  | — |   |
| Long-Lived Asset Impairment                                                               |   | **4,345**                  | ** **  | — |   |
| (Gain) on Sale of Assets                                                                  |   | **(2**                     | **)**       | — |   |
| Loss on Disposal of Assets                                                                |   | **632**                    | ** **  | — |   |
| Deferred Income Taxes                                                                     |   | **(2,976**                 | **)**       | — |   |
| Stock-Based Compensation                                                                  |   | **234**                    | ** **  | 701 |   |
| Employee Retirement Benefits and Deferred  Compensation                                   |   | **242**                    | ** **  | 460 |   |
| Accrued Patronage Refunds                                                                 |   | **(443**                   | **)**       | (589 | ) |
| Equity in Net (Income) Loss of Investees                                                  |   | **4**                      | ** **  | 27 |   |
| Provision for Losses on Accounts Receivable                                               |   | **601**                    | ** **  | 2,218 |   |
| Changes in Operating Assets and  Liabilities:                                             |   |                       | ** **  |   |   |
| Receivables                                                                               |   | **3,180**                  | ** **  | 1,365 |   |
| Inventories                                                                               |   | **(69**                    | **)**       | (124 | ) |
| Billings and Costs on Contracts                                                           |   | **1,462**                  | ** **  | (53 | ) |
| Accounts Payable and Accrued Expenses                                                     |   | **(2,787**                 | **)**       | (116 | ) |
| Advance Billings and Deposits                                                             |   | **(152**                   | **)**       | 230 |   |
| Deferred Revenue and Benefits                                                             |   | **(49**                    | **)**       | 28 |   |
| Other                                                                                     |   | **1,253**                  | ** **  | (226 | ) |
| Net Cash Provided By Operating Activities                                                 |   | **24,804**                 | ** **  | 22,825 |   |
|                                                                                      |   |                       | ** **  |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |                       | ** **  |   |   |
| Additions to Property, Plant and Equipment                                                |   | **(7,532**                 | **)**       | (12,222 | ) |
| Redemption of Investments                                                                 |   | **4,100**                  | ** **  | 100 |   |
| Proceeds from Sale of Assets                                                              |   | **97**                     | ** **  | 243 |   |
| Net Cash Used In Investing Activities                                                     |   | **(3,335**                 | **)**       | (11,879 | ) |
|                                                                                      |   |                       | ** **  |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |                       | ** **  |   |   |
| Payments of Capital Lease Obligations                                                     |   | **(385**                   | **)**       | (329 | ) |
| Repayments on Credit Facility                                                             |   | **(18,500**                | **)**       | (10,950 | ) |
| Borrowings on Credit Facility                                                             |   | **1,250**                  | ** **  | 2,200 |   |
| Proceeds from Issuance of Common Stock                                                    |   | **628**                    | ** **  | 952 |   |
| Dividends Paid                                                                            |   | **(4,610**                 | **)**       | (4,438 | ) |
| Stock Repurchase                                                                          |   | **(846**                   | **)**       | — |   |
| Net Cash Used In Financing Activities                                                     |   | **(22,463**                | **)**       | (12,565 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |   | **(994**                   | **)**       | (1,619 | ) |
|                                                                                      |   |                       | ** **  |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                         |   | **1,874**                  | ** **  | 2,008 |   |
|                                                                                      |   |                       | ** **  |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |   | **$**                      | **880**     | ** ** | $ | 389 |   |
|                                                                                      |   |                       | ** **  |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                        |   |                       | ** **  |   |   |
| Cash Paid for Interest                                                                    |   | **$**                      | **5,355**   | ** ** | $ | 5,845 |   |
| Cash Paid for Income Taxes, Net of Tax  Refunds of $1,600 and $307                        |   | **$**                      | **150**     | ** ** | $ | (47 | ) |
| NON-CASH INVESTING ACTIVITIES:                                                            |   |                       | ** **  |   |   |
| Property, Plant and Equipment Acquired with  Capital Leases                               |   | **$**                      | **173**     | ** ** | $ | 492 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

4

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**HICKORY TECH CORPORATION**

**SEPTEMBER 30, 2003**

**PART 1. FINANCIAL INFORMATION**

 

 

**ITEM 1.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

NOTE 1. BASIS OF PRESENTATION

 

Basis of Presentation:

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation necessary for a fair presentation of results of operations,financial position, and cash flows in conformity with accounting principlesgenerally accepted in the United States of America. In the opinion ofmanagement, the condensed consolidated financial statements reflect alladjustments (consisting only of normal recurring adjustments) considerednecessary for a fair presentation of Hickory Tech Corporation’s (HickoryTech)results for the periods presented. Operating results for interim periods arenot necessarily indicative of results that may be expected for the fiscal yearas a whole. The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues, expenses, and related disclosures atthe date of the financial statements and during the reporting period. Actualresults could differ from these estimates. These unaudited interim condensedconsolidated financial statements should be read in conjunction withHickoryTech’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

Theconsolidated financial statements of HickoryTech include Hickory TechCorporation and its subsidiaries in the following three business segments: (i)Telecom Sector, (ii) Information Solutions Sector and (iii) EnterpriseSolutions Sector. An investment in an unconsolidated partnership for theInformation Solutions Sector is accounted for using the equity method. Theoperations of this partnership ended during the second quarter of 2003 withdissolution to follow later in 2003. No material wind-down costs areanticipated. All inter-company transactions have been eliminated from theconsolidated financial statements. 

 

Reclassifications:

 

Certainreclassifications were made to the financial statements as of and for the threeand nine months ended September 30, 2002 to conform to the 2003 presentation.These reclassifications did not change previously reported net income (loss),shareholders’ equity or cash flows.

 

Operating Expenses:

 

Operatingexpenses include all costs related to delivery of HickoryTech’s communicationsservices and products. These costs include all selling, general andadministrative costs and all costs of performing services and providing relatedproducts, except for costs associated with the depreciation and amortization ofproperty, plant and equipment and intangible assets, and cost of sales for theEnterprise Solutions Sector.

 

Discontinued Operations:

 

On September18, 2003, HickoryTech executed a definitive agreement to sell the stock of itswireless business, Minnesota Southern Wireless Company (MSWC), to WesternWireless Corporation (WWC). The wireless operations are reported as part of theTelecom Sector. The results of operations of the wireless business are reportedas discontinued operations for all periods presented (see Note 4).

 

5

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Restatement of Loss from DiscontinuedOperations:

 

Hickory Tech has restated itsunaudited consolidated financial statements to reflect a $7,415,000 reductionin the amount of the deferred income tax benefit related to the loss ondisposal previously reported in the third quarter of fiscal 2003 (see Note 4).This revision increased the previously reported third quarter loss fromdiscontinued operations by $7,415,000, and correspondingly reduced long-termdeferred income tax assets by $5,211,000 and increased long-term deferredincome tax liabilities by $2,204,000, both at September 30, 2003.Therevision increased each of the previously reported basic and diluted loss pershare amounts from discontinued operations for the three and nine months endedSeptember 30, 2003 by $0.53 and the net income per share amounts for the threeand nine month periods by $0.53. However, the revision had no effect on theCompany's previously reported revenue, operating income, income from continuingoperations (and related per share amounts), or cash flows. TheCompany has made the appropriate modifications to the balance sheet atSeptember 30, 2003 and the statements of operations and cash flows for thethree and nine month periods ended September 30, 2003 to give effect to theserevisions. The table below summarizes the effect of the revisions. 

 
|                                                  |   | **For  Quarter Ended** |        | **For Nine  Months Ended** |   |
|-------------------------------------------------------|--------|------------------------|-------------|----------------------------|--------|
| **(In  Thousands except per Share Amounts)**          |   | **9/30/2003**          |        | **9/30/2003**              |   | **9/30/2003** |   | **9/30/2003** |   |
|                                                  |   | **As  Reported**       |        | **As  Restated**           |   | **As  Reported** |   | **As  Reported** |   |
| Discontinued Operations                               |   |                   |        |                       |   |   |   |   |   |
| Income(Loss) from Discontinued Operations             |   | $                      | (24,873     | )                          | $      | (24,873 | ) | $ | (23,487 | ) | $ | (23,487 | ) |
| Income Tax (Benefit)                                  |   | (10,198                | )           | (2,783                     | )      | (9,630 | ) | (2,215 | ) |
| Income (Loss) from Discontinued Operations            |   | (14,675                | )           | (22,090                    | )      | (13,857 | ) | (21,272 | ) |
|                                                  |   |                   |        |                       |   |   |   |   |   |
| Net Income (Loss)                                     |   | $                      | (12,658     | )                          | $      | (20,073 | ) | $ | (7,801 | ) | $ | (15,216 | ) |
|                                                  |   |                   |        |                       |   |   |   |   |   |
| Basic Earnings Per Share - Continuing  Operations     |   | $                      | 0.14        |                       | $      | 0.14 |   | $ | 0.43 |   | $ | 0.43 |   |
| Basic Earnings Per Share - Discontinued  Operations   |   | (1.05                  | )           | (1.58                      | )      | (0.99 | ) | (1.52 | ) |
|                                                  |   | $                      |  (0.91 | )                          | $      |  (1.44 | ) | $ |  (0.56 | ) | $ |  (1.09 | ) |
|                                                  |   |                   |        |                       |   |   |   |   |   |
| Diluted Earnings Per Share - Continuing  Operations   |   | $                      | 0.14        |                       | $      | 0.14 |   | $ | 0.43 |   | $ | 0.43 |   |
| Diluted Earnings Per Share - Discontinued  Operations |   | (1.05                  | )           | (1.58                      | )      | (0.99 | ) | (1.52 | ) |
|                                                  |   | $                      | (0.91       | )                          | $      | (1.44 | ) | $ | (0.56 | ) | $ | (1.09 | ) |
|                                                       |        |                        |             |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

|                                       |   | **9/30/2003**    |    |
|--------------------------------------------|--------|------------------|---------|
|                                       |   | **As  Reported** |    | **As  Restated** |   |
|                                       |   |             |    |   |   |
| ASSETS                                     |   |             |    |   |   |
| Deferred Income Taxes                      |   | $                | 5,211   |   | $ | — |   |
| Total Other Assets                         |   | $                | 65,191  |   | $ | 59,980 |   |
| Total Assets                               |   | $                | 206,160 |   | $ | 200,949 |   |
|                                       |   |             |    |   |   |
| LIABILITIES                                |   |             |    |   |   |
| Deferred Income Taxes                      |   | $                | —  |   | $ | 2,204 |   |
| Total Liabilities                          |   | $                | 158,803 |   | $ | 161,007 |   |
|                                       |   |             |    |   |   |
| STOCKHOLDERS' EQUITY                       |   |             |    |   |   |
| Retained Earnings                          |   | $                | 36,281  |   | $ | 28,866 |   |
| Total Shareholders' Equity                 |   | $                | 47,357  |   | $ | 39,942 |   |
| Total Liabilities and Shareholders' Equity |   | $                | 206,160 |   | $ | 200,949 |   |

 

6

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NOTE 2. EARNINGS AND CASH DIVIDENDS PERCOMMON SHARE

 

Basic earnings per share is computed bydividing net income by the weighted average number of shares of common stockoutstanding during the applicable period. Shares used in the earnings per shareassuming dilution calculation are based on the weighted average number ofshares of common stock outstanding during the quarter increased by potentiallydilutive common shares. Potentially dilutive common shares include stockoptions and stock subscribed under the employee stock purchase plan (ESPP).

 

|                                         |   | **For Three  Months Ended** |   | **For Nine  Months Ended** |   |
|----------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                                         |   | **9/30/2003**               |   | **9/30/2002**              |   | **9/30/2003** |   | **9/30/2002** |   |
| Weighted Average Shares Outstanding          |   | 13,973,920                  |   | 14,058,750                 |   | 13,972,741 |   | 14,008,985 |   |
| Stock Options (dilutive only)                |   | 32,952                      |   | 42,885                     |   | 41,236 |   | 68,996 |   |
| Weighted Average Stock Subscribed (ESPP)     |   | 17,347                      |   | 15,692                     |   | 16,885 |   | 14,951 |   |
| Weighted Average Dilutive Shares Outstanding |   | 14,024,219                  |   | 14,117,327                 |   | 14,030,862 |   | 14,092,932 |   |

 

Options to purchase 408,883 and 117,150shares for the three months ended September 30, 2003 and 2002, respectively and112,950 and 76,650 shares for the nine months ended September 30, 2003 and2002, respectively, were not included in the computation of earnings per shareassuming dilution calculation because their effect on earnings per share wouldhave been antidilutive.

 

Cash dividendsare based on the number of common shares outstanding at the respective recorddates. Listed below is the number of shares outstanding as of the record datefor the first three quarters of 2003 and 2002.

 

| **Shares Outstanding on Record Date** |   | **2003**   |   | **2002**   |   |
|---------------------------------------|--------|------------|--------|------------|--------|
| First Quarter (Feb. 15)               |   | 14,003,335 |   | 13,971,484 |   |
| Second Quarter (May 15)               |   | 13,942,662 |   | 14,007,250 |   |
| Third Quarter (August 15)             |   | 13,962,261 |   | 14,049,776 |   |

 

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

 

During the first nine months of 2003 and 2002, shareholders haveelected to reinvest $202,000 and $185,000, respectively, of dividends intoHickoryTech common stock pursuant to the HickoryTech Dividend ReinvestmentPlan.

 

NOTE 3. COMPREHENSIVE INCOME - RESTATED (NOTE1)

 

HickoryTech follows the provisions of SFAS No. 130, “ReportingComprehensive Income.” This statement established rules for the reporting ofcomprehensive income and its components. In addition to net income (loss),HickoryTech’s comprehensive income includes changes in unrealized gains and losseson derivative instruments qualifying and designated as cash flow hedges.Comprehensive income (loss) for the three months ended September 30, 2003 andSeptember 30, 2002 was ($19,497,000) and $2,094,000, respectively.Comprehensive income (loss) for the nine months ended September 30, 2003 andSeptember 30, 2002 was ($14,059,000) and $5,986,000, respectively.

 

7

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NOTE 4. DISCONTINUED OPERATIONS - RESTATED(NOTE 1)

 

On September 18, 2003,HickoryTech executed a definitive agreement to sell the stock of its wirelessbusiness, Minnesota Southern Wireless Company (MSWC), to Western WirelessCorporation (WWC), for $25,000,000, subject to working capital and constructionin progress adjustments to be determined at closing. The selling price iscomprised of approximately one million shares of HickoryTech common stock to bereturned to HickoryTech by WWC, and $12,800,000 in cash. The market value of these shares was approximately$12,200,000 as of September 30, 2003. The final fair market value of this stock consideration will be measuredby the Company on the closing date of the sale.  HickoryTech will retire the shares of HickoryTech stock currentlyowned by WWC. The transaction is expected to close in the fourth quarter of2003, subject to approval of the Federal Communications Commission andsatisfaction of various other closing conditions. The wireless operations arereported as part of the Telecom Sector. The condensed consolidated statementsof operations for all periods presented have been restated to reflect wirelessoperations as discontinued operations.

 

In connection with thedetermination by management in the third quarter of 2003 that it would pursuethe sale of its wireless operations and that the purchase price would likely beless than the current carrying value of the wireless net assets, the Companycompleted an impairment test in the third quarter of 2003 for the FCC licensespursuant to the requirements of SFAS No. 142, “Goodwill and Other IntangibleAssets.” Management estimated the fair value of the FCC licenses using adiscounted cash flow technique consistent with the method used by the Companyin performing its most recent impairment analysis at December 31, 2002. As aresult of this assessment, management determined that the FCC licenses wereimpaired and recorded an impairment charge of approximately $21 million($18,638,000 after-tax), in the third quarter of 2003. This impairment chargeis recorded as a component of the loss on discontinued operations onHickoryTech’s condensed consolidated statement of operations for the quarterended September 30, 2003. HickoryTech believes that the decline in the fairvalue of its FCC licenses is due principally to the rapid pace of technologicalchange being undertaken by the major wireless service providers to adopt newprotocols (i.e. GSM or CDMA) and potentially move away from HickoryTech’scurrent primary protocol called TDMA, which has greatly hindered HickoryTech’sposition in finding a future roaming partner. Other factors include decliningroaming revenues, increasing price competition, and the protracted downturn inthe telecommunications market. The FCC licenses were tested for impairment onan aggregate basis, which is consistent with HickoryTech’s management of thewireless business.

 

As a result of the Company’scommitment to sell the wireless business, the Company made a determinationduring the third quarter of 2003 that the remaining assets of the wirelessoperations should be considered “held for sale” pursuant to SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144).Pursuant to SFAS No. 144 the Company recorded an impairment charge during thethird quarter of 2003 related to the other long-lived assets of the wirelessbusiness of $4,345,000 ($3,856,000 after tax). This charge is also recorded asa component of the loss on discontinued operations on HickoryTech’s condensedconsolidated statement of operations for the quarter ended September 30, 2003.As of September 30, 2003, the carrying value of the remaining net assets of thewireless business is equal to its estimated selling price less the costs tosell it. The carrying value of the wireless assets and the related loss ondiscontinued operations is subject to adjustment to the extent that the fairmarket value of the HickoryTech shares to be received upon closing of the saleis higher or lower than the September 30, 2003 fair market value of the shares,or to the extent that actual costs to sell the wireless business are higher orlower than estimated.  

 

Wireless business revenue andincome before income taxes included in discontinued operations are as follows:

 
| **(Dollars  in Thousands)**       |   | **For Three  Months Ended** |    | **For Nine  Months Ended** |   |
|-----------------------------------|--------|-----------------------------|---------|----------------------------|--------|
|                              |   | **9/30/2003**               |    | **9/30/2002**              |   | **9/30/2003** |   | **9/30/2002** |   |
| Revenues                          |   | $                           | 4,009   |                       | $      | 4,374 |   | $ | 11,370 |   | $ | 11,739 |   |
|                              |   |                        |    |                       |   |   |   |   |   |
| Income (Loss) Before Income Taxes |   | $                           | (24,873 | )                          | $      | 949 |   | $ | (23,487 | ) | $ | 2,637 |   |

 

8

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The carrying amounts and majorclasses of the assets and liabilities, which are presented as assets andliabilities held for sale in the accompanying balance sheet as of September 30,2003 are as follow:

 

| **(Dollars  in Thousands)**          |   |   |   |
|--------------------------------------|--------|--------|--------|
| Current Assets Held for Sale:        |   |   |   |
| Accounts Receivable                  |   | $      | 1,729  |   |
| Inventories                          |   | 304    |   |
| Other                                |   | 148    |   |
| Total                                |   | $      | 2,181  |   |
| Long-Term Assets Held for Sale:      |   |   |   |
| Property, Plant and Equipment        |   | $      | 14,449 |   |
| Intangible Assets                    |   |   |   |
| FCC Licenses, (Net)                  |   | 13,000 |   |
| Other                                |   | 32     |   |
| Total                                |   | $      | 27,481 |   |
| Current Liabilities Held for Sale:   |   |   |   |
| Accounts Payable                     |   | $      | 615    |   |
| Accrued Expenses                     |   | 209    |   |
| Other                                |   | 744    |   |
| Total                                |   | $      | 1,568  |   |
| Long-Term Liabilities Held for Sale: |   |   |   |
| Deferred Revenue                     |   | $      | 31     |   |

 

NOTE 5. INVENTORIES

 

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

 

NOTE 6. INTANGIBLE ASSETS

 

EffectiveJanuary 1, 2002, HickoryTech adopted SFAS No. 142, “Goodwill and OtherIntangible Assets.” SFAS No. 142 established new standards related to howacquired goodwill and other intangible assets are to be recorded upon theiracquisition as well as how they are to be accounted for after they have beeninitially recognized in the financial statements. 

 

Effective withthe adoption of this standard, HickoryTech is no longer amortizing acquiredgoodwill. Instead, SFAS No. 142 requires acquired goodwill to be evaluated forimpairment using a two-step test based upon a fair value approach. The firststep is used to identify potential impairment, while the second step calculatesthe amount of impairment, if any. Upon adoption of this standard, HickoryTechcompleted a transitional impairment test for its acquired goodwill, determiningthe fair value using primarily a discounted cash flow model. The determinedfair value was sufficient to pass the first step impairment test, and thereforeno impairment was recorded. On a prospective basis, HickoryTech is 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. 

 

Additionally,upon adoption of SFAS No. 142, HickoryTech was required to reassess theuseful lives of its other intangible assets. HickoryTech’s other intangibleassets primarily consist of wireless FCC licenses (FCC licenses). The renewalof FCC licenses is a routine matter involving a nominal fee and HickoryTech hasdetermined that no legal, regulatory, contractual, competitive, economic orother factors currently exist that limit the useful life of its FCC licenses.As such, effective with the adoption of SFAS No. 142, HickoryTech is nolonger amortizing FCC licenses as they are deemed to be intangible assets thathave indefinite lives. SFAS No. 142 requires that indefinite livedintangible assets be tested for impairment by comparing the fair value of theassets to their carrying amount. Due to the pending sale of Minnesota SouthernWireless Company, HickoryTech completed an impairment test in the third quarterof 2003 for the FCC licenses, as discussed in Note 4. 

 

9

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The carryingvalue of HickoryTech’s goodwill is $25,086,000 as of September 30, 2003 andDecember 31, 2002.

 

The components of HickoryTech’s otherintangible assets are shown in the following table:

 
|                               |   | **As of  September 30, 2003** |   | **As of  December 31, 2002**  |   |
|------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
| **(Dollars in Thousands)**         |   | **Gross  Carrying  Amount**   |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                               |   |                          |   |                          |   |   |   |   |   |
| Definite-Lived Intangible Assets   |   |                          |   |                          |   |   |   |   |   |
| Customers                          |   | $                             | 821    |                          | $      | 314 |   | $ | 821 |   | $ | 237 |   |
| Other Intangibles                  |   | 100                           |   | 100                           |   | 185 |   | 100 |   |
| Total                              |   | $                             | 921    |                          | $      | 414 |   | $ | 1,006 |   | $ | 337 |   |
|                               |   |                          |   |                          |   |   |   |   |   |
| Indefinite-Lived Intangible Assets |   |                          |   |                          |   |   |   |   |   |
| FCC Licenses                       |   | $                             | 13,000 |                          |   |   | $ | 34,000 |   |   |   |

 

Amortization expense related to thedefinite-lived intangible assets for the three months ended September 30, 2003and 2002 was $26,000 and $124,000, respectively. Amortization expense relatedto the definite-lived intangible assets for the nine months ended September 30,2003 and 2002 was $77,000 and $351,000, respectively. Total estimatedamortization expense for the remaining three months of 2003 and the five yearssubsequent to 2003 is as follows: 2003 (October 1 through December 31) -$25,000; 2004 - $102,000; 2005 - $102,000; 2006 - $102,000; 2007 - $102,000 and2008 - $74,000.

 

The FCC licenses are included in assets held for sale as of September30, 2003.

 

NOTE 7. RECENT ACCOUNTING DEVELOPMENTS

 

In June 2001, the FASB issuedSFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No.143 requires entities to record the fair value of the liability for legalobligations associated with an asset retirement in the period in which theobligation is incurred. When the liability is initially recorded, the entitycapitalizes the cost of the asset retirement obligation by increasing thecarrying amount of the related long-lived asset. Over time, the liability isaccreted to its present value each period, and the capitalized cost isdepreciated over the useful life of the related asset. 

 

HickoryTech’sincumbent local exchange carrier companies (ILECs) follow the provisions ofSFAS No. 71, and therefore conform to the accounting principles as prescribedby the respective state public utilities commissions and other federal agenciesand, where applicable, accounting principles generally accepted in the UnitedStates of America. On December 20, 2002, the Federal Communications Commission(FCC) notified carriers that they would not adopt SFAS No. 143 for regulatoryaccounting purposes. At January 1, 2003, HickoryTech determined the amount ofasset retirement obligations required to be recorded for its ILEC companiesunder the provisions of SFAS No. 143 were not significant, and therefore theimplementation of SFAS No. 143 on January 1, 2003 did not impact HickoryTech’sfinancial position or results of operations.

 

HickoryTech’scompetitive local telephone companies (CLEC), Enterprise Solutions, andInformation Solutions, also adopted SFAS No. 143 effective January 1, 2003.HickoryTech has determined that its competitive local telephone companies alongwith Enterprise Solutions and Information Solutions do not have a materiallegal obligation to remove long-lived assets as described by SFAS No. 143, andaccordingly, adoption of SFAS No. 143 did not impact HickoryTech’s financialposition or results of operations.

 

10

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HickoryTechalso adopted the provisions of SFAS No. 143 for its wireless operations as ofJanuary 1, 2003. HickoryTech performed an analysis to identify all potentialAsset Retirement Obligations. The legal obligations identified consist of obligationsto remediate leased property where cell sites are located. However, based uponHickoryTech's experience and expectations, there is significant uncertainty asto whether third parties that own these leased properties would enforce theirremediation rights related to the sites. Furthermore, HickoryTech determinedthe amount of asset retirement obligations, if any, related to its wirelessoperations under the provisions of SFAS No. 143 were not significant, andtherefore the implementation of SFAS No. 143 on January 1, 2003 did not impactHickoryTech’s financial position or results of operations. In addition, due tothe pending sale of the wireless operations (see Note 4), HickoryTech does notexpect to incur any asset retirement obligations related to its wirelessoperations.

 

In April 2002,the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishmentof Debt,” and an amendment of that Statement, FASB Statement No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No.145 also rescinds FASB Statement No. 44, “Accounting for Intangible Assets ofMotor Carriers,” and amends FASB Statement No. 13, “Accounting for Leases.”HickoryTech adopted the provisions of SFAS No. 145 on January 1, 2003. Adoptionof this standard had no impact on the financial statements presented in thisForm 10-Q/A. 

 

In June 2002,the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities,” which replaces Emerging Issues Task Force (EITF) IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).” SFAS No. 146 requires companies to recognize costs associatedwith exit or disposal activities when they are incurred rather than at the dateof a commitment to an exit or disposal plan. HickoryTech has engaged in no activities in the three or nine monthsended September 30, 2003 that are subject to the provisions of SFAS No. 146.Accordingly, the adoption of SFAS No. 146 did not impact HickoryTech’sfinancial position or results of operations.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation –Transition Disclosure – an amendment of SFAS No. 123” (SFAS No. 148). ThisStatement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. The provisions of SFAS No. 148are effective for financial statements for fiscal years ending after December15, 2002, and disclosure requirements shall be effective for interim periodsbeginning after December 15, 2002. The Company will continue to account forstock-based compensation to its employees and directors using the intrinsicvalue method prescribed by APB Opinion No. 25, and related interpretations. TheCompany adopted the provisions of SFAS No. 148 and has made certain disclosuresrequired by SFAS No. 148 in the consolidated financial statements presented inthis report. The adoption of SFAS No. 148 did not impact HickoryTech’sfinancial position or results of operations.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” This interpretation elaborates on thedisclosures required in financial statements concerning obligations undercertain guarantees. It also clarifies the requirements related to therecognition of liabilities by a guarantor at the inception of certainguarantees. The disclosure requirements of this interpretation were effectivefor HickoryTech on December 31, 2002 but did not require any additionaldisclosures. The recognition provisions of the interpretation are effective forHickoryTech in 2003 and are applicable only to guarantees issued or modifiedafter December 31, 2002. The adoption of Interpretation No. 45 did not impactthe financial position, results of operations, or cash flows ofHickoryTech.  

 

11

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In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”This statement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.” SFAS No. 149 is effective forcertain contracts entered into or modified after June 30, 2003. This standarddid not change the accounting for HickoryTech’s interest rate swap contract andtherefore had no impact on HickoryTech’s consolidated financial position,results of operations or cash flows (see Note 11).

 

12

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NOTE 8. QUARTERLY SECTORFINANCIAL SUMMARY

 

Business segment information for the firstthree quarters of 2003 and 2002 is as follows. Certain amounts in 2002 havebeen reclassified to conform to the 2003 presentation.

 
| **(In Thousands)**                                                                        |   | **Telecom** |   | **Information  Solutions** |   | **Enterprise  Solutions** |   | **Corporate  and  Eliminations** |   | **HickoryTech  Consolidated** |   |
|-------------------------------------------------------------------------------------------|--------|-------------|--------|----------------------------|--------|---------------------------|--------|----------------------------------|--------|-------------------------------|--------|
| **Three Months Ended 9/30/03**                                                            |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Operating Revenue from Unaffiliated  Customers                                            |   | $           | 18,810 |                       | $      | 702                       |   | $                                | 3,565  |                          | $      | — |   | $ | 23,077 |   |
| Intersegment Revenues                                                                     |   | 69          |   | 848                        |   | —                    |   | (917                             | )      | —                        |   |
| Total                                                                                     |   | 18,879      |   | 1,550                      |   | 3,565                     |   | (917                             | )      | 23,077                        |   |
|                                                                                      |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Depreciation and Amortization                                                             |   | 3,319       |   | 618                        |   | 61                        |   | 18                               |   | 4,016                         |   |
| Operating Income (Loss)                                                                   |   | 5,803       |   | (826                       | )      | (369                      | )      | 372                              |   | 4,980                         |   |
| Interest Expense                                                                          |   | 3           |   | 15                         |   | —                    |   | 1,561                            |   | 1,579                         |   |
| Income Taxes (Benefit)                                                                    |   | 2,409       |   | (376                       | )      | (154                      | )      | (484                             | )      | 1,395                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Income (Loss) from Continuing Operations                                                  |   | 3,475       |   | (540                       | )      | (221                      | )      | (697                             | )      | 2,017                         |   |
| Income (Loss) from Discont. Operations  Including Intersegment Revenues Restated - Note 1 |   | (22,286     | )      | 139                        |   | —                    |   | 57                               |   | (22,090                       | )      |
| Net Income (Loss)Restated - Note 1                                                        |   | (18,811     | )      | (401                       | )      | (221                      | )      | (640                             | )      | (20,073                       | )      |
| Identifiable Assets                                                                       |   | 143,121     |   | 7,346                      |   | 9,627                     |   | 11,193                           |   | 171,287                       |   |
| Property, Plant and Equip., Net                                                           |   | 105,722     |   | 5,219                      |   | 524                       |   | 210                              |   | 111,675                       |   |
| Capital Expenditures                                                                      |   | 1,935       |   | 7                          |   | 12                        |   | 3                                |   | 1,957                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                             |   |                          |   |
| **Three Months Ended 9/30/02**                                                            |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Operating Revenue from Unaffiliated  Customers                                            |   | $           | 18,100 |                       | $      | 981                       |   | $                                | 5,257  |                          | $      | — |   | $ | 24,338 |   |
| Intersegment Revenues                                                                     |   | 68          |   | 841                        |   | —                    |   | (909                             | )      | —                        |   |
| Total                                                                                     |   | 18,168      |   | 1,822                      |   | 5,257                     |   | (909                             | )      | 24,338                        |   |
|                                                                                      |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Depreciation and Amortization                                                             |   | 3,144       |   | 519                        |   | 65                        |   | 56                               |   | 3,784                         |   |
| Operating Income (Loss)                                                                   |   | 5,757       |   | (821                       | )      | 282                       |   | (909                             | )      | 4,309                         |   |
| Interest Expense                                                                          |   | 9           |   | 14                         |   | —                    |   | 1,729                            |   | 1,752                         |   |
| Income Taxes (Benefit)                                                                    |   | 2,386       |   | (383                       | )      | 109                       |   | (1,052                           | )      | 1,060                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Income (Loss) from Continuing Operations                                                  |   | 3,446       |   | (552                       | )      | 157                       |   | (1,517                           | )      | 1,534                         |   |
| Income (Loss) from Discont. Operations  Including Intersegment Revenues                   |   | 371         |   | 131                        |   | —                    |   | 58                               |   | 560                           |   |
| Net Income (Loss)                                                                         |   | 3,817       |   | (421                       | )      | 157                       |   | (1,459                           | )      | 2,094                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                             |   |                          |   |
| Identifiable Assets                                                                       |   | 152,953     |   | 7,086                      |   | 9,603                     |   | 12,877                           |   | 182,519                       |   |
| Property, Plant and Equip., Net                                                           |   | 112,266     |   | 5,820                      |   | 527                       |   | 180                              |   | 118,793                       |   |
| Capital Expenditures                                                                      |   | 1,110       |   | 658                        |   | —                    |   | 72                               |   | 1,840                         |   |

 

13

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| **(In Thousands)**                                                                        |   | **Telecom** |   | **Information  Solutions** |   | **Enterprise  Solutions** |   | **Corporate and  Eliminations** |   | **HickoryTech  Consolidated** |   |
|-------------------------------------------------------------------------------------------|--------|-------------|--------|----------------------------|--------|---------------------------|--------|---------------------------------|--------|-------------------------------|--------|
| **Nine Months Ended 9/30/03**                                                             |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Operating Revenue from Unaffiliated  Customers                                            |   | $           | 56,058 |                       | $      | 2,609                     |   | $                               | 10,859 |                          | $      | — |   | $ | 69,526 |   |
| Intersegment Revenues                                                                     |   | 206         |   | 2,379                      |   | —                    |   | (2,585                          | )      | —                        |   |
| Total                                                                                     |   | 56,264      |   | 4,988                      |   | 10,859                    |   | (2,585                          | )      | 69,526                        |   |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Depreciation and Amortization                                                             |   | 9,779       |   | 1,743                      |   | 182                       |   | 70                              |   | 11,774                        |   |
| Operating Income (Loss)                                                                   |   | 18,654      |   | (2,510                     | )      | (853                      | )      | (456                            | )      | 14,835                        |   |
| Interest Expense                                                                          |   | 10          |   | 53                         |   | —                    |   | 4,561                           |   | 4,624                         |   |
| Income Taxes (Benefit)                                                                    |   | 7,675       |   | (1,142                     | )      | (359                      | )      | (1,988                          | )      | 4,186                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Income (Loss) from Continuing Operations                                                  |   | 11,076      |   | (1,643                     | )      | (516                      | )      | (2,861                          | )      | 6,056                         |   |
| Income (Loss) from Discont. Operations  Including Intersegment Revenues Restated - Note 1 |   | (21,802     | )      | 386                        |   | —                    |   | 144                             |   | (21,272                       | )      |
| Net Income (Loss)Restated - Note 1                                                        |   | (10,726     | )      | (1,257                     | )      | (516                      | )      | (2,717                          | )      | (15,216                       | )      |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Identifiable Assets                                                                       |   | 143,121     |   | 7,346                      |   | 9,627                     |   | 11,193                          |   | 171,287                       |   |
| Property, Plant and Equip., Net                                                           |   | 105,722     |   | 5,219                      |   | 524                       |   | 210                             |   | 111,675                       |   |
| Capital Expenditures                                                                      |   | 5,091       |   | 151                        |   | 201                       |   | 156                             |   | 5,599                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| **Nine Months Ended 9/30/02**                                                             |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Operating Revenue from Unaffiliated  Customers                                            |   | $           | 52,857 |                       | $      | 3,064                     |   | $                               | 11,655 |                          | $      | — |   | $ | 67,576 |   |
| Intersegment Revenues                                                                     |   | 205         |   | 2,325                      |   | —                    |   | (2,530                          | )      | —                        |   |
| Total                                                                                     |   | 53,062      |   | 5,389                      |   | 11,655                    |   | (2,530                          | )      | 67,576                        |   |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Depreciation and Amortization                                                             |   | 9,156       |   | 1,548                      |   | 201                       |   | 169                             |   | 11,074                        |   |
| Operating Income (Loss)                                                                   |   | 17,027      |   | (2,289                     | )      | (169                      | )      | (1,623                          | )      | 12,946                        |   |
| Interest Expense                                                                          |   | 18          |   | 44                         |   | —                    |   | 5,504                           |   | 5,566                         |   |
| Income Taxes (Benefit)                                                                    |   | 7,008       |   | (1,038                     | )      | (90                       | )      | (2,819                          | )      | 3,061                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Income (Loss) from Continuing Operations                                                  |   | 10,111      |   | (1,495                     | )      | (129                      | )      | (4,057                          | )      | 4,430                         |   |
| Income (Loss) from Discont. Operations  Including Intersegment Revenues                   |   | 1,060       |   | 352                        |   | —                    |   | 144                             |   | 1,556                         |   |
| Net Income (Loss)                                                                         |   | 11,171      |   | (1,143                     | )      | (129                      | )      | (3,913                          | )      | 5,986                         |   |
|                                                                                      |   |        |   |                       |   |                      |   |                            |   |                          |   |
| Identifiable Assets                                                                       |   | 152,953     |   | 7,086                      |   | 9,603                     |   | 12,877                          |   | 182,519                       |   |
| Property, Plant and Equip., Net                                                           |   | 112,266     |   | 5,820                      |   | 527                       |   | 180                             |   | 118,793                       |   |
| Capital Expenditures                                                                      |   | 6,462       |   | 1,866                      |   | 55                        |   | 211                             |   | 8,594                         |   |

 

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The Telecom Segment Identifiable Assets,Property Plant and Equipment and Capital Expenditures presented above, excludethe following amounts related to the wireless business which is reported as adiscontinued operation:

 
| **(Dollars in Thousands)**      |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|---------------------------------|--------|-------------------------|--------|------------------------|--------|
|                            |   | **9/30/2003**           |   | **9/30/2002**          |   | **9/30/2003** |   | **9/30/2002** |   |
| Identifiable Assets             |   | $                       | 29,662 |                   | $      | 95,887 |   | $ | 29,662 |   | $ | 95,887 |   |
| Property, Plant and Equip., Net |   | 14,449                  |   | 17,526                 |   | 14,449 |   | 17,526 |   |
| Capital Expenditures            |   | 1,116                   |   | 1,057                  |   | 1,934 |   | 3,628 |   |
|                                 |        |                         |        |                        |        |  |  |  |  |  |  |  |  |

 

 

NOTE 9. CONTINGENCIES

 

HickoryTech is involved in certaincontractual disputes in the ordinary course of business. HickoryTech does notbelieve the ultimate resolution of any of these existing matters will have amaterial adverse effect on its financial position, results of operations orcash flows.

 

NOTE 10. STOCK COMPENSATION

 

At September 30, 2003, HickoryTech has fourstock-based employee and director compensation plans, which are described morefully in the HickoryTech Annual Report on Form 10-K for the year ended December31, 2002. HickoryTech has elected to account for these employee and directorstock compensation plans using the intrinsic value method as permitted byAccounting Principles Board Opinion No. 25 and related interpretations.

 

In 2002, HickoryTech’s Board of Directorsmodified the terms of the stock options of a retiring officer. The modificationextended the period after retirement during which the officer can exercise hisvested options. This modification resulted in HickoryTech recognizing $173,000of compensation expense during the first quarter of 2003. During the thirdquarter of 2003, the Board of Directors extended the period during which thisoption holder can exercise his vested options to December 31, 2004. Thisextension will not result in any additional compensation charges.

 

If HickoryTech had elected to recognizecompensation cost based on the fair value of the options and other stockcompensation as prescribed by SFAS No. 123, the following operating resultswould have occurred using the Black-Scholes option-pricing model to determinethe fair value of the options:

 
|                                                                                                             |   | **For Three  Months Ended** |        | **For Nine  Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|----------------------------|--------|
| **(Dollars in Thousands)**                                                                                       |   | **9/30/2003**               |        | **9/30/2002**              |   | **9/30/2003** |   | **9/30/2002** |   |
|                                                                                                             |   | **Restated  (Note 1)**      |        |                       |   | **Restated  (Note 1)** |   |   |   |
|                                                                                                             |   |                        |        |                       |   |   |   |   |   |
| Reported Net Income (Loss)                                                                                       |   | $                           | **(20,073** | )                          | $      | 2,094 |   | $ | **(15,216** | ) | $ | 5,986 |   |
| Add: Stock-based employee compensation  expense included in reported net income (loss)                           |   | **(168**                    | )           | 358                        |   | **234** |   | 701 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |   | **72**                      |        | (451                       | )      | **(531** | ) | (1,035 | ) |
|                                                                                                             |   |                        |        |                       |   |   |   |   |   |
| Pro Forma Net Income (Loss)                                                                                      |   | $                           | **(20,169** | )                          | $      | 2,001 |   | $ | **(15,513** | ) | $ | 5,652 |   |
|                                                                                                             |   |                        |        |                       |   |   |   |   |   |
| Earnings (Loss) per share:                                                                                       |   |                        |        |                       |   |   |   |   |   |
| Basic - as reported                                                                                              |   | $                           | **(1.44**   | )                          | $      | 0.15 |   | $ | **(1.09** | ) | $ | 0.43 |   |
| Basic - pro forma                                                                                                |   | $                           | **(1.44**   | )                          | $      | 0.14 |   | $ | **(1.11** | ) | $ | 0.40 |   |
|                                                                                                             |   |                        |        |                       |   |   |   |   |   |
| Diluted - as reported                                                                                            |   | $                           | **(1.44**   | )                          | $      | 0.15 |   | $ | **(1.09** | ) | $ | 0.43 |   |
| Diluted - pro forma                                                                                              |   | $                           | **(1.44**   | )                          | $      | 0.14 |   | $ | **(1.11** | ) | $ | 0.40 |   |

 

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NOTE 11. FINANCIAL DERIVATIVEINSTRUMENTS

 

HickoryTech accounts for derivativeinstruments in accordance with SFAS No. 133, as amended by SFAS No. 149,“Accounting for Derivative Instruments and Hedging Activities,” which requiresderivative instruments to be recorded on the balance sheet at fair value.Changes in fair value of derivative instruments must be recognized in earningsunless specific hedge accounting criteria are met, in which case the gains andlosses are included in other comprehensive income rather than in earnings.

 

 
| **(Dollars in Thousands)**                                             |   | **Interest  Rate  Swap Agreement** |   |
|------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                   |   |                               |   |
| Accumulated other comprehensive income  balance at December 31, 2002.  |   | $                                  | — |   |
| Market value increase on interest rate swap  agreement                 |   | 1,157                              |   |
| Accumulated other comprehensive income  balance at September 30, 2003. |   | $                                  | 1,157  |   |

 

 

HickoryTech has variable rate debtinstruments, which subject the company to interest rate risk. Beginning in thesecond quarter of 2003, HickoryTech entered into interest rate swap agreements,with remaining maturities of nine months to fifty-seven months, to manage itsexposure to interest rate movements on a portion of its variable rate debtobligations. The market value of the cumulative gain or loss on thesederivative instruments is reported as a component of accumulated othercomprehensive income in shareholders’ equity and is recognized in earnings whenthe term of the swap agreement is concluded.

 

The fair value of the HickoryTech’sderivatives at September 30, 2003 is a net asset of $1,961,000, which isincluded in other assets in the accompanying condensed consolidated balancesheet.

 

NOTE 12.  ABANDONED INITIATIVE

 

In September of 2003 HickoryTech abandoned aCLEC initiative. As a result, HickoryTech wrote off property, plant andequipment with a carrying value of $632,000. This $632,000 charge is includedin the operating expenses of the Telecom Sector in the condensed consolidatedstatement of operations.

 

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIALCONDITION.

 

**FORWARD-LOOKINGSTATEMENTS**

 

Statements in this Form 10-Q/Athat are not historical fact are forward-looking statements that are based onmanagement’s current expectations, estimates and projections about the industryin which HickoryTech operates and management’s beliefs and assumptions. Suchforward-looking statements are subject to important risks and uncertaintiesthat could cause HickoryTech’s future actual results to differ materially fromsuch statements. These statements are not guarantees of future performance andinvolve certain risks, uncertainties and probabilities, which are difficult topredict. Therefore, actual outcomes and results may differ materially from whatis expressed or forecasted in such forward-looking statements, whether as aresult of new information, future events or otherwise. Factors that might causesuch a difference include, but are not limited to, those contained in this“Management’s Discussion and Analysis” (Item 2) and Exhibit 99 (CautionaryStatement for Purposes of the “Safe Harbor” Provision of the Private SecuritiesLitigation Reform Act of 1995) to HickoryTech’s Annual Report on Form 10-K forthe year ended December 31, 2002, which is incorporated herein by reference. Youare cautioned not to place undue reliance on these forward looking statements,which speak only as of the date on which they were made. Except as otherwiserequired by federal securities law, HickoryTech undertakes no obligation toupdate any of its forward-looking statements for any reason.

 

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**BUSINESSES**

 

HickoryTech operates in three businesssegments: the Telecom, Information Solutions and Enterprise Solutions Sectors.Its largest and oldest business (since 1898) has been the operation ofincumbent local exchange carriers (ILECs) or traditional wireline telephoneservice. The ILEC business is in HickoryTech’s Telecom Sector. In 1998,HickoryTech began its competitive local exchange carrier (CLEC) line ofbusiness, competing for the telephone dial tone, data and long distance callingbusiness in other ILECs’ territories. The CLEC business is in HickoryTech’sTelecom Sector. Since 1964, HickoryTech’s Information Solutions Sector hasprovided computer data processing and software, predominantly for HickoryTech’sTelecom Sector operations and also to other telecommunications companies.  HickoryTech acquired its EnterpriseSolutions Sector in 1990 and it has operated as a leading telecommunicationsand data equipment distributor from a base in Minneapolis/St. Paul, Minnesota.HickoryTech also began its wireless operations in 1998 by acquiring its firstwholly owned wireless service license, an additional wireless service licensein 1999 and two PCS licenses in 2001. In the third quarter of 2003, HickoryTechentered into a definitive agreement to sell its wireless operations.  Management expects to complete the sale ofits wireless business in the fourth quarter of 2003, subject to the approval ofthe Federal Communications Commission. The wireless operations are reported aspart of the Telecom Sector. All financial statements and schedules have beenrestated to reflect wireless operations as discontinued operations.

 

**THE COMPANY**

 

The eight subsidiaries of HickoryTech, all ofwhich publicly operate and conduct business as HickoryTech, and the businesssegments in which they operate are:

 

**TELECOMSECTOR**

Mankato Citizens Telephone Company (MCTC)

Mid-Communications, Inc. (Mid-Comm)

Heartland Telecommunications Company of Iowa, Inc. (Heartland)

Cable Network, Inc. (CNI)

Crystal Communications, Inc. (Crystal)

Minnesota Southern Wireless Company (MSWC) – Discontinued Operation

**INFORMATIONSOLUTIONS SECTOR**

National Independent Billing, Inc. (NIBI)

**ENTERPRISESOLUTIONS SECTOR**

Collins Communications Systems Co. (Collins)

 

HickoryTech and its subsidiaries are engagedin businesses that provide services to their customers for a fee. Many of theseservices are repetitive and recurring, and, as a result, backlog orders andseasonality are not significant factors. Working capital requirements primarilyinvolve the funding of the construction and maintenance of fixed assets, thepayroll costs of highly skilled labor and the inventory to service itstelephone equipment customers.

 

The materials and supplies that are necessaryfor the operation of the businesses of HickoryTech and its subsidiaries areavailable from a variety of sources, and no future supply problems areanticipated. All of HickoryTech’s central office switches, as well as amajority of HickoryTech’s equipment sold in its Enterprise Solutions Sector,are supplied by Nortel. Nortel is a leading supplier of communicationsequipment, and HickoryTech’s dependence on this brand is not viewed as asignificant risk. An additional layer of network infrastructure equipment forbroadband services is provided by Nextlevel. Nextlevel is a newer supplier ofcommunications equipment and the Company is monitoring the risk level ofmaintaining Nextlevel as a supplier in light of its status as a wholly ownedsubsidiary of Motorola.

 

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**INDUSTRY SEGMENTS**

 

*TELECOM SECTOR*

 

HickoryTech’s Telecom Sector provides localexchange wireline telephone service, long distance, dial-up Internet access andowns and operates fiber optic cable facilities. This sector includes threeincumbent local exchange carriers (ILECs): MCTC, Mid-Comm and Heartland. MCTCand Mid-Comm provide telephone service in south central Minnesota, specificallyMankato (a regional hub) and eleven rural communities surrounding Mankato. Thethird ILEC, Heartland, provides telephone service for eleven rural communitiesin northwest Iowa.

 

The Telecom Sector also includes Crystal, acompetitive local exchange carrier (CLEC). Crystal provides local telephoneservice, long distance and dial-up Internet access on a competitive basis.Crystal has customers in eight rural communities in Minnesota and twocommunities in Iowa that are not in HickoryTech’s ILEC service areas.

 

HickoryTech also owns and operates fiberoptic cable facilities (CNI) in Minnesota, which are used to transportinterexchange communications as a service to telephone industry customers.HickoryTech’s Minnesota ILECs and its CLEC are the primary users of the fiberoptic cable facilities.

 

MCTC derives its principal revenues andincome from local services charged to subscribers in its service area, accessservices charged to interexchange carriers and the operation of a toll tandemswitching center in Mankato, Minnesota. Revenues and income for Mid-Comm arealso derived from local service charges in its area of operation and byproviding access to long distance services for its subscribers through the tollcenter in Mankato. Local and interexchange telephone access for the twocompanies is provided on an integrated basis. The local and interexchangetelephone access for both telephone companies utilize the same facilities andequipment and is managed and maintained by a common work force. Heartlandderives its principal revenues and income from local services charged tosubscribers in its service area in Iowa, as well as from providinginterexchange access for its subscribers. Interexchange telephone access isprovided by all three of HickoryTech’s telephone subsidiaries by connecting thecommunications networks of interexchange and wireless carriers with theequipment and facilities of end users through its switched networks or privatelines.

 

MCTC and Mid-Comm are Minnesota publicutilities operating pursuant to indeterminate permits issued by the MinnesotaPublic Utilities Commission. Heartland is also a public utility, which operatespursuant to a certificate of public convenience and necessity issued by theIowa Utilities Board. These state agencies regulate the services provided byMCTC, Mid-Comm and Heartland. CNI’s operations are not subject to regulation bythe state regulatory authority.  Neitherthe Minnesota Public Utilities Commission nor the Iowa Utilities Boardregulates the rate of return or profits of each of HickoryTech’s ILECoperations due to the size of these companies relative to state regulation. InMinnesota, MCTC and Mid-Comm’s price and service levels are monitored byregulators. MCTC’s and Mid-Comm’s local service rates are below those of mostMinnesota ILECs. Regardless of whether a particular rate is subject toregulatory review, the ability of HickoryTech and its subsidiaries to changerates will be determined by various factors, including economic and competitivecircumstances.

 

As local exchange telephone companies, MCTC,Mid-Comm and Heartland provide end office switching and dedicated circuits tolong distance interexchange carriers. These relationships allow HickoryTech’stelephone subscribers to place long distance telephone calls and gain access tothe telephone network. HickoryTech provides long distance access for all of theindividual customers who select an alternative long distance carrier. The longdistance interexchange carriers are significant customers of HickoryTech, butno carrier represents more than ten percent of HickoryTech’s consolidatedrevenues.

 

Alternatives to HickoryTech service includecustomers leasing private line switched voice and data services in or adjacentto the territories served by HickoryTech, which permits the bypassing of localtelephone switching facilities. In addition, microwave transmission services,wireless communications, fiber optic and coaxial cable deployment and otherservices provided by other companies permit bypass of the local exchangenetwork. These alternatives to local exchange service represent a potentialthreat to HickoryTech’s long-term ability to provide local exchange service ateconomical rates.

 

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Competition in HickoryTech’s ILEC service areaexists in one of Heartland’s exchanges. In the city of Hawarden, Iowa, themunicipal city government overbuilt the city’s telephone service infrastructureand is providing an alternative to HickoryTech’s telephone service. TheHawarden CLEC has acquired approximately 1,000 access lines, or approximately60%, of that community’s telephone business from HickoryTech. HickoryTechmanagement does not believe there will be significant further impact fromcompetition in Hawarden. HickoryTech responds to competitive changes withactive programs to market products and to engineer its infrastructure forhigher customer satisfaction.

 

Competition also exists for some of theservices provided to interexchange carriers, such as customer billing services,dedicated private lines, network switching and network routing. Thiscompetition comes primarily from the interexchange carriers themselves. Theprovision of these services is either of a contractual nature or ismonth-to-month service out of a general tariff, but in either case is primarilycontrolled by the interexchange carriers. As interexchange carriers make theseservice decisions, changes have the potential of changing the Company’s revenuein the Telecom Sector. Other services, such as directory advertising and wirelesscommunications, are open to competition. Competition is based primarily onservice and experience.

 

In September 2003, a potential competitor filed a request to negotiateinterconnection arrangements with HickoryTech’s Minnesota ILECS, MCTC &Mid-Comm. This potential competitor is an experienced company with the abilityto offer bundled services. MCTC and Mid-Comm have made a filing with theMinnesota Public Utilities commission exerting their rural exemption fromcertain components of this request. The potential competitor has not, as yet,followed through with its competitive filings in any other jurisdiction. Atthis time, HickoryTech is unable to predict the outcome of this proceeding.

 

The passage of the 1996 TelecommunicationsAct created the opportunity for HickoryTech to offer communications service interritories served by other telephone companies, and Crystal began operationsin January 1998 as a new competitive local exchange carrier (CLEC). Crystaloffers local service, long distance and dial-up Internet access services on acompetitive basis to customers in southern Minnesota and Iowa, which are notserved by HickoryTech’s Telecom Sector service area. These service offeringsprovide customers alternatives to the incumbent telephone carrier in variouscommunities and are offered under the brand name HickoryTech wireline service.These services are currently offered to customers in eight rural communities inMinnesota, as well as two communities in Iowa. Crystal’s primary strategy is toprovide service by overbuilding with new telecommunications switching networksand telephone lines. Crystal also provides the long distance service anddial-up Internet access services to HickoryTech’s subscribers in both ILEC andCLEC markets.

 

CLEC activities require Crystal to file forauthority to operate with the appropriate public utilities commission in eachstate it serves. Crystal competes directly against existing ILECs in the areasin which Crystal operates. Crystal is not dependent upon any single customer orsmall group of customers. No single customer in Crystal accounts for tenpercent or more of HickoryTech’s consolidated revenues.

 

On September 18, 2003, HickoryTech executed adefinitive agreement to sell the stock of its wireless business, MinnesotaSouthern Wireless Company (MSWC), to Western Wireless Corporation (WWC), for$25,000,000, subject to working capital and construction in progressadjustments to be determined at closing. The selling price is comprised ofapproximately one million shares of HickoryTech common stock to be returned toHickoryTech by WWC, and  $12,800,000 incash. The market value of these shares was approximately $12,200,000 as ofSeptember 30, 2003.  The final fairmarket value of this stock consideration will be measured by the Company on theclosing date of the sale.  HickoryTechwill retire the shares of HickoryTech stock currently owned by WWC. Thetransaction is expected to close in the fourth quarter of 2003, subject to approvalof the Federal Communications Commission and satisfaction of various otherclosing conditions. The wireless operations are reported as part of the TelecomSector. All statements of operations data and schedules included herein havebeen restated to reflect wireless operations as discontinued operations.

 

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In connection with the determination bymanagement in the third quarter of 2003 that it would pursue the sale of itswireless operations and that the purchase price would likely be less than thecurrent carrying value of the wireless net assets, the Company completed animpairment test in the third quarter of 2003 for the FCC licenses pursuant tothe requirements of SFAS No. 142, “Goodwill and Other Intangible Assets.”Management estimated the fair value of the FCC licenses using a discounted cashflow technique consistent with the method used by the Company in performing itsmost recent impairment analysis at December 31, 2002. As a result of thisassessment, management determined that the FCC licenses were impaired andrecorded an impairment charge of approximately $21 million ($18,638,000after-tax), in the third quarter of 2003. This impairment charge is recorded asa component of the loss on discontinued operations on HickoryTech’s condensedconsolidated statement of operations for the quarter ended September 30, 2003.HickoryTech believes that the decline in the fair value of its FCC licenses isdue principally to the rapid pace of technological change being undertaken bythe major wireless service providers to adopt new protocols (i.e. GSM or CDMA)and potentially move away from HickoryTech’s current primary protocol calledTDMA, which has greatly hindered HickoryTech’s position in finding a futureroaming partner. Other factors include declining roaming revenues, increasingprice competition, and the protracted downturn in the telecommunicationsmarket. The FCC licenses were tested for impairment on an aggregate basis,which is consistent with HickoryTech’s management of the wireless business.

 

As a result of the Company’s commitment tosell the wireless business, the Company made a determination during the thirdquarter of 2003 that the remaining assets of the wireless operations should beconsidered “held for sale” pursuant to SFAS No. 144, “Accounting for Impairmentor Disposal of Long-Lived Assets,” (SFAS No. 144). Pursuant to SFAS No. 144 theCompany recorded an impairment charge during the third quarter of 2003 relatedto the other long-lived assets of the wireless business of $4,345,000($3,856,000 after tax). This charge is also recorded as a component of the losson discontinued operations on HickoryTech’s condensed consolidated statement ofoperations for the quarter ended September 30, 2003. As of September 30, 2003,the carrying value of the remaining net assets of the wireless business isequal to its estimated selling price less the costs to sell it. This carryingvalue of the wireless assets and the related loss on discontinued operations issubject to adjustment to the extent that the fair market value of theHickoryTech shares to be received upon closing of the sale is higher or lowerthan the September 30, 2003 fair market value of the shares, or to the extentthat actual costs to sell the wireless business are higher or lower thanestimated.

 

The wireless telephone business consists ofthe “A-side” FCC wireless license to operate in Minnesota’s Rural Service Area10 (RSA 10), the Minneapolis/St. Paul Metro A-2 (Metro A-2) wireless licenseand two digital personal communications services (PCS) licenses covering theMinnesota Basic Trading Areas (BTAs) of Mankato-Fairmont andRochester-Austin-Albert Lea.

 

In south central Minnesota, MSWC provideswireless service for Minnesota’s Rural Service Area 10 (RSA 10), under thebrand name of HickoryTech Wireless. MSWC owns 100% of the  “A-side” FCC wireless license to operate inseven counties in south central Minnesota. The area overlaps and is larger thanHickoryTech’s Minnesota ILEC and CLEC service areas and serves a population ofapproximately 240,000. This business also owns the Minneapolis/St. Paul MetroA-2 (Metro A-2) wireless license, which was acquired on June 1, 1999. The MetroA-2 property surrounds the metropolitan Minneapolis/St. Paul area and islocated in five Minnesota counties and in one Wisconsin county. Metro A-2provides service to an area with a population of approximately 185,000. Inaddition, this business also owns the PCS licenses for the Minnesota BTAs ofMankato-Fairmont and Rochester-Austin-Albert Lea. The two BTAs are located in16 Minnesota counties and one Iowa county and provide service to an area with apopulation of approximately 500,000, some of which coincide with the previouslymentioned wireless RSA 10 population of 240,000.

 

MSWC, which owns all four of the Company’sFCC wireless licenses, derives its principal revenues and income from providingwireless telephone service to the retail customers in seven counties in southcentral Minnesota and from wireless roaming traffic. MSWC also derives roaming revenuefrom the six counties surrounding the metropolitan Minneapolis/St. Paul MetroA-2 area and roaming revenues from the PCS service territory that is comprisedof 17 counties. MSWC directly competes against local wireless and PCS companiesin southern Minnesota.

 

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REGULATED INDUSTRY

 

ILEC Minnesota -HickoryTech’s two Minnesota ILEC subsidiaries continue to operate under analternative form of regulation as defined in Minnesota Chapter 237, whereby companieswith less than 50,000 customers are regulated on price and service level ratherthan profit. The Minnesota PUC has been considering intrastate access reformfor several years. While no formal action has been concluded, the Minnesota PUCrecently issued a Statement of Proposed Inquiry regarding state Access Reformand state Universal Service. Minnesota process in matters such as these,usually involve outcomes that may not by realized until the end of 2004.HickoryTech cannot estimate the impact, if any, of future potential stateaccess revenue changes.

 

ILEC Iowa - In Iowa,companies with fewer than 15,000 access lines remain unregulated. HickoryTech’sIowa ILEC subsidiary falls below this regulation threshold.

 

CLEC - HickoryTech’sCLEC companies operate in Minnesota and Iowa with less regulatory oversightthan the HickoryTech ILEC companies.

 

Wireline InterState-The HickoryTech ILEC companies do not participate in the NECA trafficsensitive pool and set access rates according to a nationwide average cost ofproviding access. This biannual rate process was recently completed andestablished traffic sensitive interstate rates for the period from July 1, 2003through June 30, 2005. HickoryTech ILEC companies participate in the NECAcommon line pool. In July of 2003, common line rates charged to interexchangecarriers were reduced (to zero), and common line charges to end users wereincreased in accordance with an FCC October 2001 order (a/k/a MAG Plan). Fundscollected are pooled, and HickoryTech revenues are based on settlementsdistributed from the pool. Pool settlements are adjusted from time to time.HickoryTech’s CLEC access rates are established in accordance with the FCC’sApril 2001 order and no further changes are known at the present time.

 

Wireless –HickoryTech’s wireless business is subject to regulation by the FCC includingrules governing the construction and operation of wireless communicationsystems and licensing and technical standards for provision of wirelesscommunication services. The FCC has refrained from rate regulation of wirelesscommunications services, but retains its statutory authority to impose suchregulation. The FCC ordered wireless carriers to be able to pool telephonenumbers by November 2002. Further, the FCC has ordered that wireless carriersimplement Local Number Portability (LNP) by November 24, 2003. HickoryTechexpects to comply with the FCC's wireless LNP mandate. The Company expects thecost of implementing wireless LNP to be approximately $50,000 for system implementationcosts and approximately $2,500 per month for ongoing maintenance.

 

*INFORMATION SOLUTIONS SECTOR*

 

Through NIBI, HickoryTech’s InformationSolutions Sector provides data processing and related services, principally forHickoryTech, other local exchange telephone companies, CLECs, interexchangenetwork carriers, wireless companies, municipalities and utilities. TheInformation Solutions Sector’s principal activity is the provision of monthlybatch processing of computerized data for HickoryTech as well as non-affiliatedcompanies. Services for telephone company customers include the processing oflong distance telephone calls from data sources and telephone switches, thepreparation of the subscriber telephone bills, customer record keeping, carrieraccess bills and general accounting and payroll services. NIBI, under the brandname HickoryTech Information Solutions, also provides certain billingclearinghouse functions for interexchange carriers.

 

There are a number of companies engaged insupplying data processing services comparable to those furnished by theInformation Solutions Sector. Competition is based primarily on price andservice. HickoryTech’s Information Solutions Sector has developed an integratedbilling and management system called SuiteSolution. SuiteSolution can providewireline and wireless carriers the individual benefits of a billing platform ora total system solution. Management is unable to quantify what effect, if any,the pending sale of the wireless business may have on the marketplace for thisproduct.

 

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*ENTERPRISE SOLUTIONS SECTOR*

 

Through Collins, HickoryTech’s EnterpriseSolutions Sector provides telephone and data equipment sales and services aswell as the sale, installation and service of voice over Internet Protocolbusiness systems to companies primarily based in metropolitan Minneapolis/St.Paul, Minnesota. This sector also supports the business telephone systemservice for HickoryTech ILEC and CLEC operations in southern Minnesota andIowa. The customers in the Enterprise Solutions Sector’s market are theindividual business end users of telecommunications service with ongoingservice requirement offerings. Products consist of telecommunication platformssuch as Nortel on the voice side of the Enterprise Solutions’ business, andCisco and Bay Networks (Nortel) equipment on the data side of its business.Enterprise Solutions specializes in the quality custom installation andmaintenance of data wide area networking solutions.

 

Revenues are primarily earned by the sales,installation and service of business telephone systems. Enterprise Solutionscontinues its commitment to service and support of its core product, Nortel,while identifying new opportunities such as call centers, computer telephoneintegration voice mail and interactive voice response systems.

 

HickoryTech’s Enterprise Solutions Sector isnot dependent upon any single customer or small group of customers. No singlecustomer in the Enterprise Solutions Sector accounts for ten percent or more ofHickoryTech’s consolidated revenues.

 

Companies compete in equipment sales andservice and voice over Internet Protocol communications products market inwhich Enterprise Solutions operates. Competition is based primarily on priceand service. No one company is dominant in this field. Enterprise Solutionsoffers customer premises telephone and data equipment through well-trained andexperienced market representatives with long-term customer relationships. TheEnterprise Solutions Sector’s activities are focused on the sale, installationand service of business telephone systems and data communications equipment tocompanies based in metropolitan Minneapolis/St. Paul, Minnesota. This sectoralso supports the business telephone system service for HickoryTech’s ILEC andCLEC operations in Minnesota and Iowa.

 

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**RESULTS OF OPERATIONS**

 

Restatement of loss from discontinued operations:

Hickory Tech has restated its unauditedconsolidated financial statements to reflect a $7,415,000 reduction in theamount of thedeferred income tax benefit related to the loss on disposal previously reportedin the third quarter of fiscal 2003. This revision increased the previouslyreported third quarter loss from discontinued operations by $7,415,000, andcorrespondingly reduced long-term deferred income tax assets by $5,211,000 andincreased long-term deferred income tax liabilities by $2,204,000, both atSeptember 30, 2003. The revisionincreased each of the previously reported basic and diluted loss per shareamounts from discontinued operations for the three and nine months endedSeptember 30, 2003 by $0.53 and the net income per share amounts for the threeand nine month periods by $0.53. However, the revision had no effect on theCompany's previously reported revenue, operating income, income from continuingoperations (and related per share amounts), or cash flows. See Note 1 ofthe accompanying notes to the consolidated financial statements for the effectsof this revision on the unaudited consolidated financial statements.

 

CONSOLIDATED OPERATING RESULTS FROM CONTINUING OPERATIONS

The following is a summarized discussion ofconsolidated results of operations from continuing operations. More detaileddiscussion of operating results by segment follows this discussion.

 

OPERATING REVENUES FROM CONTINUING OPERATIONS- Consolidated operating revenues from continuing operations were $23,077,000,which is $1,261,000 or 5.2% lower in the three months ended September 30, 2003compared to the three months ended September 30, 2002. Consolidated operatingrevenues from continuing operations were $69,526,000, which is $1,950,000 or2.9% higher in the nine months ended September 30, 2003 compared to the ninemonths ended September 30, 2002. The decrease in revenues from continuingoperations in the three months ended September 30, 2003 compared to the threemonths ended September 30, 2002 can be primarily attributed to a decrease inrevenue in the Information Solutions Sector and a lower volume of business inthe Enterprise Solutions Sector. The decrease in revenues in the InformationSolutions sector can be largely attributed to a few customers who haveexperienced a significant decrease in volumes processed. In the third quarterof 2002, the Enterprise Solutions sector experienced an increase ininstallation revenues due to revenues related to a significant voice overInternet Protocol network HickoryTech was installing in the corporate officesof a large specialty retailer. This project was substantially completed by thethird quarter of 2003, which resulted in the revenue decline between quarters.The increase in revenues from continuing operations in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30, 2002 waslargely due to increases in revenues in the Telecom Sector resulting fromincreases in network access revenues, the CLEC customer base and increasedbroadband data service lines installed. This increase was partially offset bydecreases in revenues in the Information Solutions Sector and the EnterpriseSolutions Sector. The decrease in revenues in the Information Solutions sectorcan be largely attributed to a few customers who have experienced a significantdecrease in volumes processed. In the third quarter of 2002, the EnterpriseSolutions sector experienced an increase in installation revenues due torevenues related to a significant voice over Internet Protocol networkHickoryTech was installing in the corporate offices of a large specialtyretailer. This project has been substantially completed by the third quarter of2003, which resulted in the revenue decline between quarters.

 

COST OF SALES, ENTERPRISE SOLUTIONS -Cost of sales, which is related to the Enterprise Solutions Sector was$2,606,000 which is $1,082,000 or 29.3% lower in the three months endedSeptember 30, 2003 compared to the three months ended September 30, 2002. Costof sales was $7,675,000, which is $230,000 or 2.9% lower in the nine monthsended September 30, 2003 compared to the nine months ended September 30, 2002.Gross profit margin for this sector in the three and nine months endedSeptember 30, 2003 was 26.9% and 29.3%, respectively, compared to 29.8% and32.2% for the three and nine months ended September 30, 2002, respectively. Thedecrease in the cost of sales is the result of lower costs associated withvolume of business in the Enterprise Solutions Sector and the decrease in thegross profit margin is the result of lower margins associated with a couplelarge system installations, which Enterprise Solutions performed in 2003.

 

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OPERATING EXPENSES FROM CONTINUING OPERATIONS (excluding Depreciationand Amortization) - Operating expenses from continuingoperations excluding depreciation and amortization was $11,475,000, which is$1,082,000 or 8.6% lower in the three months ended September 30, 2003compared to the three months ended September 30, 2002. Operating expenses fromcontinuing operations excluding depreciation and amortization was $35,242,000,which is $409,000 or 1.1 % lower in the nine months ended September 30,2003 compared to the nine months ended September 30, 2002. InSeptember of 2003, HickoryTech abandoned a CLEC initiative in a specificmarket. As a result of this operating decision, HickoryTech abandonedapproximately $632,000 of property, plant and equipment which was written downto a carrying value of zero in the third quarter of 2003. The remainingdecrease in operating expenses from continuing operations is primarily due tolower bad debt expense in the Telecom Sector of $499,000 for the three monthsended September 30, 2003 compared to three months ended September 30,2002. The higher bad debt expense in 2002 was due in large part to bankruptciesof interexchange carriers in the telecommunications industry. Another factorcontributing to the decrease in expenses in the third quarter of 2003 comparedto the third quarter of 2002 was a $859,000 reduction in compensation accrualsassociated with management incentives, which are tied to financial metrics andare not expected to be achieved as a result of the loss from discontinuedoperations recorded in the third quarter of 2003. The decrease in bad debtexpense and the incentive compensation in 2003 were partially offset byincreased expenses in the Telecom Sector related to the growth in CLECcustomers. The Company’s initiative to maintain low operating expenses havealso contributed to keeping labor and network expenses from risingsignificantly in 2003. Without the CLEC initiative write-off, operatingexpenses excluding depreciation and amortization would have been $34,610,000,which is $1,041,000 or 2.9% lower in the nine months ended September 30,2003 compared to nine months ended September 30, 2002. The decrease in baddebt expense in 2003 was partially offset by increased expenses in the TelecomSector related to the growth in CLEC customers. The Company’s initiative tomaintain low operating expenses have also contributed to keeping labor andnetwork expenses from rising significantly in 2003.

 

DEPRECIATION AND AMORTIZATION FROM CONTINUING OPERATIONS- Depreciation expense from continuing operations was $3,780,000, which is$332,000 or 9.6% higher in the three months ended September 30, 2003compared to the three months ended September 30, 2002. Depreciationexpense from continuing operations was $11,013,000, which is $928,000 or 9.2%higher in the nine months ended September 30, 2003 compared to the ninemonths ended September 30, 2002. Increases in the Telecom Sector’s networkassets, specifically the assets associated with the CLEC business, andamortization of new billing software primarily account for the increase indepreciation expense from continuing operations. Amortization expense fromcontinuing operations was $236,000, which is $100,000 or 29.8% lower in thethree months ended September 30, 2003 compared to the three months endedSeptember 30, 2002. Amortization expense from continuing operations was $761,000,which is $228,000 or 23.1% lower in the nine months ended September 30,2003 compared to the nine months ended September 30, 2002. The decrease inamortization expense from continuing operations was largely due to anintangible asset in the Information Solutions Sector becoming fully amortizedin the second quarter of 2003 and no amortization expense recorded for an intangible asset that waswritten off at the end of 2002.

 

OPERATING INCOME FROM CONTINUING OPERATIONS -Operating income from continuing operations was $4,980,000, which is $671,000or 15.6% higher in the three months ended September 30, 2003 compared tothe three months ended September 30, 2002. Operating income fromcontinuing operations was $14,835,000, which is $1,889,000 or 14.6% higher inthe nine months ended September 30, 2003 compared to the nine months endedSeptember 30, 2002. The increase in operating income from continuingoperations for the three and nine months ended September 30, 2003 waslargely due to increased network access revenues, increased CLEC revenues,decreased bad debts in the Telecom Sector and the incentive compensationreversal, which were partially offset by the increase in operating expenses inthe Telecom Sector and the decrease in the Information Solutions and EnterpriseSolutions Sectors’ revenues, all of which are described above.

 

INTEREST EXPENSE FROM CONTINUING OPERATIONS -Interest expense from continuing operations decreased $173,000 or 9.9% to$1,579,000 in the three months ended September 30, 2003 compared to thethree months ended September 30, 2002. Interest expense from continuingoperations decreased $942,000 or 16.9% to $4,624,000 in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. The decrease in interest expense from continuing operations for theperiod was primarily due to a decrease in total debt outstanding. Theoutstanding balance of the revolving credit facility was $140,750,000 atSeptember 30, 2003 and $161,250,000 at September 30, 2002.

 

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INCOME TAXES – The effective income tax rateof approximately 41% in all periods presented exceeds the federal statutoryrate primarily due to state income taxes.

 

INCOME FROM CONTINUING OPERATIONS -Consolidated income from continuing operations was $2,017,000, which is$483,000 or 31.5% higher in the three months ended September 30, 2003compared to the three months ended September 30, 2002. Consolidated incomefrom continuing operations was $6,056,000, which is $1,626,000 or 36.7% higherin the nine months ended September 30, 2003 compared to the nine monthsended September 30, 2002. The increase in operating income from continuingoperations was largely due to increased network access revenues, increased CLECrevenues, and decreased bad debts in the Telecom Sector, which were partiallyoffset by the increase in operating expenses in the Telecom Sector and thedecrease in the Information Solutions and Enterprise Solutions Sectors’revenues, as described above.****

 

SECTOR RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS

 

TELECOM – The following table provides abreakdown of the Telecom Sector operating results.

 

**TELECOM SECTOR**

 
|                                                     |   | **For Three  Months Ended** |        | **For Nine  Months Ended** |       |
|----------------------------------------------------------|--------|-----------------------------|-------------|----------------------------|------------|
| **(Dollars in Thousands)**                               |   | **9/30/2003**               |        | **9/30/2002**              |       | **9/30/2003** |   | **9/30/2002** |   |
|                                                     |   | **Restated (Note 1)**       |        |                       |       | **Restated (Note 1)** |   |   |   |
| Revenues  Before Intersegment Eliminations               |   |                        |        |                       |       |   |   |   |   |
| ILEC                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Local Service                                            |   | **$**                       | **3,780**   | ** **                 | $          | 3,760 | ** ** | **$** | **11,349** | ** ** | $ | 11,319 |   |
| Network Access                                           |   | **8,370**                   | ** **  | 8,096                      | ** ** | **25,101** | ** ** | 24,154 |   |
| Intersegment                                             |   | **69**                      | ** **  | 68                         | ** ** | **206** | ** ** | 205 |   |
| Other                                                    |   | **2,355**                   | ** **  | 2,231                      | ** ** | **6,745** | ** ** | 6,889 |   |
| Total ILEC                                               |   | **14,574**                  | ** **  | 14,155                     | ** ** | **43,401** | ** ** | 42,567 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| CLEC                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Local Service                                            |   | **926**                     | ** **  | 820                        | ** ** | **2,762** | ** ** | 2,216 |   |
| Other                                                    |   | **1,440**                   | ** **  | 1,247                      | ** ** | **4,242** | ** ** | 2,703 |   |
| Total CLEC                                               |   | **2,366**                   | ** **  | 2,067                      | ** ** | **7,004** | ** ** | 4,919 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Long Distance                                            |   | **995**                     | ** **  | 1,028                      | ** ** | **3,024** | ** ** | 2,928 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Internet                                                 |   | **944**                     | ** **  | 918                        | ** ** | **2,835** | ** ** | 2,648 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Total Telecom Revenues                                   |   | **$**                       | **18,879**  | ** **                 | $          | 18,168 | ** ** | **$** | **56,264** | ** ** | $ | 53,062 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Total Telecom Revenues Before Intersegment  Eliminations |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Unaffiliated Customers                                   |   | **$**                       | **18,810**  | ** **                 | $          | 18,100 | ** ** | **$** | **56,058** | ** ** | $ | 52,857 |   |
| Intersegment                                             |   | **69**                      | ** **  | 68                         | ** ** | **206** | ** ** | 205 |   |
|                                                     |   | **18,879**                  |        | 18,168                     | ** ** | **56,264** | ** ** | 53,062 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Operating Expenses, excluding Depr. and  Amort.          |   | **9,757**                   | ** **  | 9,267                      | ** ** | **27,831** | ** ** | 26,879 |   |
| Depreciation and Amortization                            |   | **3,319**                   | ** **  | 3,144                      | ** ** | **9,779** | ** ** | 9,156 |   |
| Operating Income                                         |   | **$**                       | **5,803**   | ** **                 | $          | 5,757 | ** ** | **$** | **18,654** | ** ** | $ | 17,027 |   |
|                                                     |   |                        | ** **  |                       |       |   | ** ** |   |   |
| Income from Continuing Operations                        |   | **$**                       | **3,475**   | ** **                 | $          | 3,446 | ** ** | **$** | **11,076** | ** ** | $ | 10,111 |   |
| Income (Loss) from Discontinued Operations               |   | **(22,286**                 | **)**       | 371                        | ** ** | **(21,802** | **)** | 1,060 |   |
| Net Income (Loss)                                        |   | **$**                       | **(18,811** | **)**                      | $          | 3,817 | ** ** | **$** | **(10,726** | **)** | $ | 11,171 |   |

 

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|                                                               |   | **For Three  Months Ended** |      | **For Nine  Months Ended** |   |
|--------------------------------------------------------------------|--------|-----------------------------|-----------|----------------------------|--------|
| **(Dollars in Thousands)**                                         |   | **9/30/2003**               |      | **9/30/2002**              |   | **9/30/2003** |   | **9/30/2002** |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| Capital  Expenditures, excluding discontinued wireless business    |   | **$**                       | **1,935** |                       | $      | 1,110 | ** ** | **$** | **5,091** |   | $ | 6,462 |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| ILEC Access Lines                                                  |   | **63,421**                  |      | 65,360                     |   |   |   |   |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| CLEC Access Lines                                                  |   |                        |      |                       |   |   |   |   |   |
| Overbuild                                                          |   | **9,607**                   |      | 7,385                      |   |   |   |   |   |
| Unbundled Network Element (UNE)                                    |   | **1,492**                   |      | 1,311                      |   |   |   |   |   |
| Total Service Resale (TSR)                                         |   | **2,938**                   |      | 4,736                      |   |   |   |   |   |
| Total                                                              |   | **14,037**                  |      | 13,432                     |   |   |   |   |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| Long Distance Customers                                            |   | **39,663**                  |      | 33,746                     |   |   |   |   |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| Internet Customers                                                 |   | **15,901**                  |      | 13,936                     |   |   |   |   |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| Total Telecom Customers, excluding  discontinued wireless business |   | **133,022**                 |      | 126,474                    |   |   |   |   |   |
|                                                               |   |                        |      |                       |   |   |   |   |   |
| DSL Customers                                                      |   | **6,694**                   |      | 3,162                      |   |   |   |   |   |
|                                                                    |        |                             |           |                            |        |  |  |  |  |  |  |  |  |

 

Telecom Sector operating revenues before intersegment eliminations were$18,879,000, which is $711,000 or 3.9% higher in the three months endedSeptember 30, 2003 compared to the three months ended September 30,2002. Telecom Sector operating revenues before intersegment eliminations were$56,264,000, which is $3,202,000 or 6.0% higher in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. The increases in 2003 compared to 2002 were primarily due to increasedILEC network access, growth in the CLEC and Internet service revenues.

 

ILEC network access revenue was $8,370,000, which is $274,000 or 3.4%higher in the three months ended September 30, 2003 compared to the threemonths ended September 30, 2002. ILEC network access revenue was$25,101,000, which is $947,000 or 3.9% higher in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. The increase in network access revenue in 2003 compared to 2002 wasdriven by higher demand for dedicated lines and high-speed circuits.HickoryTech does not belong to any NECA traffic sensitive access revenuereimbursement pools, but instead, establishes access rates bi-annuallyfollowing nationwide averages of providing access. HickoryTech’s interstateaccess rates were adjusted as of July 2003 and HickoryTech expects anadditional revenue increase associated with transport components of accesssomewhere in a range of $375,000 to $500,000 for the three months endingDecember 31, 2003. Long-term continuation of these revenues is uncertain,however, as changes in the industry occur.

 

CLEC local service revenue was $926,000, which is $106,000 or 12.9%higher in the three months ended September 30, 2003 compared to the threemonths ended September 30, 2002. CLEC local service revenue was$2,762,000, which is $546,000 or 24.6% higher in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. CLEC access lines increased by 605 lines or 4.5%, between September 30,2002 and September 30, 2003, which was the primary reason for theincrease. In addition, HickoryTech saw an increase in revenue of approximately$134,000 generated by optional calling plans in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. In the second quarter of 2003, HickoryTech decided to exit severalexchanges in its Iowa territories, which utilized a resale of servicesapproach. As of September 30, 2003, HickoryTech has stopped providingservice for 734 customers. As a result, revenues have decreased approximately$47,000 in the third quarter of 2003 compared to the second quarter of 2003. Inaddition, HickoryTech expects revenues to decrease approximately $131,000 inthe fourth quarter of 2003 compared to the third quarter of 2003 due to thisaction of exiting CLEC resale in Iowa.

 

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Other CLEC revenue was $1,440,000, which is $193,000 or 15.5% higher inthe three months ended September 30, 2003 compared to the three monthsended September 30, 2002. Other CLEC revenue was $4,242,000, which is$1,539,000 or 56.9% higher in the nine months ended September 30, 2003compared to the nine months ended September 30, 2002. Other revenueincluded network access, high-speed data revenues and digital TV, whichgenerally grew along with the increase in access lines in 2003 compared to2002. The increase in other CLEC revenue for the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002 was the additional $705,000 of revenue recognized as a result of servicesprovided under terms of a multi-year contract awarded to HickoryTech effectiveJuly 1, 2002 to provide Internet access and video conferencing to schoolsand libraries in south central Minnesota served by the Project SOCRATESdistance-learning network.

 

Long distance revenue was $995,000, which is $33,000 or 3.2 % lower inthe three months ended September 30, 2003 compared to the three monthsended September 30, 2002. Long distance revenue was $3,024,000, which is$96,000 or 3.3% higher in the nine months ended September 30, 2003compared to the nine months ended September 30, 2002. HickoryTechexperienced a 5,917 or 17.5% increase in its long distance customer basebetween September 30, 2002 and September 30, 2003. Although thecustomer base is increasing, revenue per customer is decreasing. The decreasein revenue per customer is primarily the result of optional long distanceservices available to customers, the increased use of Internet services andother alternatives to long distance services. Also, a competitor of HickoryTechrecently received approval from the state of Minnesota to offer long-distanceservices in all HickoryTech territories. This competitor already offers localtelephone service in HickoryTech’s CLEC territories and with this approval, hasthe potential to create stronger competition with HickoryTech in these markets,which could result in a reduction in long distance revenue in future periods.

 

Internet revenue was $944,000, which is $26,000 or 2.8% higher in thethree months ended September 30, 2003 compared to the three months endedSeptember 30, 2002. Internet revenue was $2,835,000, which is $187,000 or7.1% higher in the nine months ended September 30, 2003 compared to thenine months ended September 30, 2002. The increase in revenue was causedprimarily by an increase in Internet customers of 1,965 or 14.1% betweenSeptember 30, 2002 and September 30, 2003.

 

Operating expenses excluding depreciation and amortization were$9,757,000, which is $490,000 or 5.3% higher in the three months endedSeptember 30, 2003 compared to the three months ended September 30,2002. Operating expenses excluding depreciation and amortization were$27,831,000, which is $952,000 or 3.5% higher in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. In September of 2003, HickoryTech abandoned a CLEC initiative in aspecific market. As a result of this operating decision, HickoryTech abandonedapproximately $632,000 of property, plant and equipment which was written downto a carrying value of zero in the third quarter of 2003. This charge isincluded in the operating expenses of the Telecom Sector on the condensedconsolidated statement of operations. The remaining decrease in expenses isprimarily due to lower bad debt expense of $499,000 and $1,507,000 recorded inthe three and nine months ended September 30, 2003 compared to the threeand nine months ended September 30, 2002. The higher bad debt expense in2002 was due in large part to bankruptcies of interexchange carriers in thetelecommunications industry. Another factor contributing to the decrease inexpenses in the third quarter of 2003 compared to the third quarter of 2002 wasa $104,000 reduction in compensation accruals associated with managementincentives, which are tied to financial metrics and are not expected to beachieved as a result of the loss from discontinued operations recorded in thethird quarter of 2003. The decrease in bad debt expense and incentivecompensation were partially offset by increased expenses related to customeroperations in the growing CLEC business. Without the CLEC initiative write-off,operating expenses excluding depreciation and amortization would have been$27,199,000, which is $320,000 or 1.2% higher in the nine months endedSeptember 30, 2003 compared to nine months ended September 30, 2002.The increase in operating expenses was due primarily to the costs associatedwith the growth in CLEC customers partially offset by the decrease in bad debtexpense mentioned above. In the second quarter of 2003 and in order to alignitself with the company strategy of being a facilities-based telecommunicationsprovider, HickoryTech decided to exit several exchanges in its Iowaterritories, which utilized a resale of services approach. As ofSeptember 30, 2003, HickoryTech has stopped providing service for 734customers. Expenses have decreased approximately $91,000 in the third quarterof 2003 compared to the second quarter of 2003. In addition, HickoryTechexpects expenses to decrease approximately $70,000 in the fourth quarter of2003 compared to the third quarter of 2003, due to this action of exiting CLECresale in Iowa.

 

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Depreciation andamortization were $3,319,000, which is $175,000 or 5.6% higher in the threemonths ended September 30, 2003 and $9,779,000, which is $623,000 or 6.8%higher in the nine months ended September 30, 2003 compared to the sameperiods in 2002. Depreciation expense was $3,293,000, which is $191,000 or 6.2%higher in the three months ended September 30, 2003 and $9,728,000, whichis $677,000 or 7.5% higher in the nine months ended September 30, 2003compared to the same periods in 2002. The increase in depreciation expense canbe largely attributed to increased network infrastructure. Amortization expensewas $26,000, which is $16,000 or 38.1% lower in the three months endedSeptember 30, 2003 compared to the three months ended September 30,2002. Amortization expense was $51,000, which is $54,000 or 51.4% lower in thenine months ended September 30, 2003 compared to the nine months endedSeptember 30, 2002. The decrease in amortization expense was largely dueto no amortization expense recorded for an intangible asset that was written off at the end of2002.

 

Total operating expenses were $13,076,000, which is $665,000 or 5.4%higher in the three months ended September 30, 2003 compared to the threemonths ended September 30, 2002. Total operating expenses were$37,610,000, which is $1,575,000 or 4.4% higher in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. These expenses increased for the reasons described in the preceding twoparagraphs.

 

Operating income was $5,803,000, which is $46,000 or 0.8% higher in thethree months ended September 30, 2003 compared to the three months endedSeptember 30, 2002. Operating income was $18,654,000, which is $1,627,000or 9.6% higher in the nine months ended September 30, 2003 compared to thenine months ended September 30, 2002. Net income was $3,475,000, which is$29,000 or 0.8% higher in the three months ended September 30, 2003compared to the three months ended September 30, 2002. Net income was$11,076,000, which is $965,000 or 9.5% higher in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. These increases were for the reasons described above.

 

On September 18,2003, HickoryTech executed a definitive agreement to sell the stock of itswireless business, Minnesota Southern Wireless Company (MSWC), to WesternWireless Corporation (WWC), for $25,000,000, subject to working capital andconstruction in progress adjustments to be determined at closing. The selling priceis comprised of approximately one million shares of HickoryTech common stock tobe returned to HickoryTech by WWC, and $12,800,000 in cash. The market value of these shares was approximately$12,200,000 as of September 30, 2003. The final fair market value of this stock consideration will be measuredby the Company on the closing date of the sale.  HickoryTech will retire the shares of HickoryTech stock currentlyowned by WWC.  The transaction isexpected to close in the fourth quarter of 2003, subject to approval of theFederal Communications Commission and satisfaction of various other closingconditions. The wireless operations are reported as part of the Telecom Sector.All statements of operations data included herein has been restated to reflectwireless operations as discontinued operations.

 

In connection with thedetermination by management in the third quarter of 2003 that it would pursuethe sale of its wireless operations and that the purchase price would likely beless than the current carrying value of the wireless net assets, the Companycompleted an impairment test in the third quarter of 2003 for the FCC licensespursuant to the requirements of SFAS No. 142, “Goodwill and Other IntangibleAssets.” Management estimated the fair value of the FCC licenses using adiscounted cash flow technique consistent with the method used by the Companyin performing its most recent impairment analysis at December 31, 2002. Asa result of this assessment, management determined that the FCC licenses wereimpaired and recorded an impairment charge of approximately $21 million($18,638,000 after-tax), in the third quarter of 2003. This impairment chargeis recorded as a component of the loss on discontinued operations onHickoryTech’s condensed consolidated statement of operations for the quarterended September 30, 2003. HickoryTech believes that the decline in thefair value of its FCC licenses is due principally to the rapid pace oftechnological change being undertaken by the major wireless service providersto adopt new protocols (i.e. GSM or CDMA) and potentially move away fromHickoryTech’s current primary protocol called TDMA, which has greatly hinderedHickoryTech’s position in finding a future roaming partner. Other factorsinclude declining roaming revenues, increasing price competition, and theprotracted downturn in the telecommunications market. The FCC licenses weretested for impairment on an aggregate basis, which is consistent withHickoryTech’s management of the wireless business.

 

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As a result of theCompany’s commitment to sell the wireless business, the Company made adetermination during the third quarter of 2003 that the remaining assets of thewireless operations should be considered “held for sale” pursuant to SFAS No.144, “Accounting for Impairment or Disposal of Long-Lived Assets,” (SFAS No.144). Pursuant to SFAS No. 144 the Company recorded an impairment charge duringthe third quarter of 2003 related to the other long-lived assets of thewireless business of $4,345,000 ($3,856,000 after tax). This charge is alsorecorded as a component of the loss on discontinued operations on HickoryTech’scondensed consolidated statement of operations for the quarter endedSeptember 30, 2003. As of September 30, 2003, the carrying value ofthe remaining net assets of the wireless business is equal to its estimatedselling price less the costs to sell it. This carrying value of the wirelessassets and the related loss on discontinued operations is subject to adjustmentto the extent that the fair market value of the HickoryTech shares to bereceived upon closing of the sale is higher or lower than theSeptember 30, 2003 fair market value of the shares, or to the extent thatactual costs to sell the wireless business are higher or lower than estimated.

 

Revenue from wirelessdiscontinued operations was $4,009,000 for the three months endedSeptember 30, 2003, which is $365,000 or 8.3% lower than the three monthsended September 30, 2002. Revenue from wireless discontinued operationswas$11,370,000 for the nine months ended September 30, 2003, which is$369,000 or 3.1% lower than the nine months ended September 30, 2002. Thedecrease in revenue from wireless discontinued operations for the three monthsended September 30, 2003, compared to the three months endedSeptember 30, 2002 was the result of a decrease in roaming revenues.  The decrease in revenue from wirelessdiscontinued operations for the nine months ended September 30, 2003compared to the nine months ended September 30, 2002 was the result of adecrease in roaming revenues, partially offset by an increase in equipmentsales.

 

The loss before taxesfrom wireless discontinued operations was $24,873,000 for the three monthsended September 30, 2003, compared to income of $949,000 for the threemonths ended September 30, 2002. The loss before taxes from wirelessdiscontinued operations was $23,487,000 for the nine months endedSeptember 30, 2003 compared to income of $2,637,000 for the nine monthsended September 30, 2002. The decrease for the three and nine months endedSeptember 30, 2003 compared to the three and nine months endedSeptember 30, 2002 is mainly due to the $21,000,000 intangible assetimpairment and the $4,345,000 long-lived asset impairment that was recorded inthe third quarter of 2003, which are described above.

 

INFORMATION SOLUTIONS – The following tableprovides a breakdown of the Information Solutions Sector operating results.

 

**INFORMATION SOLUTIONS SECTOR**

 
|                                            |   | **For Three  Months Ended** |     | **For Nine  Months Ended** |   |
|-------------------------------------------------|--------|-----------------------------|----------|----------------------------|--------|
| **(Dollars in Thousands)**                      |   | **9/30/2003**               |     | **9/30/2002**              |   | **9/30/2003** |   | **9/30/2002** |   |
| Revenues Before Eliminations                    |   |                        |     |                       |   |   |   |   |   |
| Unaffiliated Customers                          |   | $                           | **702**  |                       | $      | 981 |   | $ | **2,609** |   | $ | 3,064 |   |
| Intersegment                                    |   | **848**                     |     | 841                        |   | **2,379** |   | 2,325 |   |
|                                            |   | **1,550**                   |     | 1,822                      |   | **4,988** |   | 5,389 |   |
| Operating Expenses, excluding Depr. and  Amort. |   | **1,758**                   |     | 2,124                      |   | **5,755** |   | 6,130 |   |
| Depreciation and Amortization                   |   | **618**                     |     | 519                        |   | **1,743** |   | 1,548 |   |
|                                            |   |                        |     |                       |   |   |   |   |   |
| Operating Loss                                  |   | $                           | **(826** | )                          | $      | (821 | ) | $ | **(2,510** | ) | $ | (2,289 | ) |
| Net Loss                                        |   | $                           | **(540** | )                          | $      | (552 | ) | $ | **(1,643** | ) | $ | (1,495 | ) |
|                                            |   |                        |     |                       |   |   |   |   |   |
| Capital Expenditures                            |   | $                           | **7**    |                       | $      | 658 |   | $ | **151** |   | $ | 1,866 |   |

 

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Operating revenues from unaffiliated customers decreased $279,000 or28.4% to $702,000 in the three months ended September 30, 2003 compared tothe three months ended September 30, 2002. Operating revenues fromunaffiliated customers decreased $455,000 or 14.8% to $2,609,000 in the ninemonths ended September 30, 2003 compared to the nine months ended September 30,2002. The decrease in operating revenues in the three and nine months endedSeptember 30, 2003 compared to the three and nine months endedSeptember 30, 2002 can be largely attributed to the loss of a couplecustomers in 2003.

 

Operating expenses excluding depreciation and amortization decreased$366,000 or 17.2% to $1,758,000 in the three months ended September 30,2003 compared to the three months ended September 30, 2002. Operatingexpenses excluding depreciation and amortization decreased $375,000 or 6.1% to$5,755,000 in the nine months ended September 30, 2003 compared to thenine months ended September 30, 2002. The decreases in operating expensesprimarily reflect cost control measures initiated by management. In addition, shippingand other pass-through costs have declined due to the loss of a couplecustomers in 2003.

 

Depreciation and amortization expense increased $99,000 or 19.1% to$618,000 in the three months ended September 30, 2003 compared to thethree months ended September 30, 2002. Depreciation and amortizationexpense increased $195,000 or 12.6% to $1,743,000 in the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002. These net increases primarily relate to amortization of costs of new billingsoftware developed during 2002.

 

Total operating expenses decreased $267,000 to $2,376,000 in the threemonths ended September 30, 2003 compared to the three months endedSeptember 30, 2002 and decreased $180,000 to $7,498,000 in the nine monthsended September 30, 2003 compared to the nine months endedSeptember 30, 2002. These decreases were for the reasons described in thepreceding two paragraphs.

 

Operating loss increased $5,000 or 0.6% in the three months endedSeptember 30, 2003 compared to the three months ended September 30,2002 and increased $221,000 or 9.7% in the nine months ended September 30,2003 compared to the nine months ended September 30, 2002. Net lossdecreased $12,000 or 2.2% in the three months ended September 30, 2003compared to the three months ended September 30, 2002 and increased$148,000 or 9.9% in the nine months ended September 30, 2003 compared tothe nine months ended September 30, 2002. The decrease in operating lossand net loss for the three months ended September 30, 2003 compared to thethree months ended September 30, 2002 was due to the decrease in operatingexpenses. The increase in operating loss and net loss for the nine months endedSeptember 30, 2003 compared to the nine months ended September 30,2002 was primarily attributable to the decline in revenues combined with theincrease in depreciation and amortization discussed above.

 

ENTERPRISE SOLUTIONS – The following tableprovides a breakdown of the Enterprise Solutions Sector operating results.

 

**ENTERPRISE SOLUTIONS SECTOR**

 
|                                            |   | **For Three  Months Ended** |       | **For Nine  Months Ended** |       |
|-------------------------------------------------|--------|-----------------------------|------------|----------------------------|------------|
| **(Dollars in Thousands)**                      |   | **9/30/2003**               |       | **9/30/2002**              |       | **9/30/2003** |   | **9/30/2002** |   |
|                                            |   |                        |       |                       |       |   |   |   |   |
| Revenues Before Intersegment Eliminations       |   |                        | ** ** |                       |       |   | ** ** |   |   |
| Installation                                    |   | **$**                       | **1,698**  | ** **                 | $          | 3,352 | ** ** | **$** | **5,333** | ** ** | $ | 6,008 |   |
| Service                                         |   | **1,867**                   | ** ** | 1,905                      | ** ** | **5,526** | ** ** | 5,647 |   |
|                                            |   | **3,565**                   |       | 5,257                      | ** ** | **10,859** | ** ** | 11,655 |   |
| Cost of Sales                                   |   | **2,606**                   | ** ** | 3,688                      | ** ** | **7,675** | ** ** | 7,905 |   |
| Operating Expenses, excluding Depr. and  Amort. |   | **1,267**                   | ** ** | 1,222                      | ** ** | **3,855** | ** ** | 3,718 |   |
| Depreciation and Amortization                   |   | **61**                      | ** ** | 65                         | ** ** | **182** | ** ** | 201 |   |
|                                            |   |                        | ** ** |                       |       |   | ** ** |   |   |
| Operating Income/(Loss)                         |   | **$**                       | **(369**   | **)**                      | $          | 282 | ** ** | **$** | **(853** | **)** | $ | (169 | ) |
| Net Income/(Loss)                               |   | **$**                       | **(221**   | **)**                      | $          | 157 | ** ** | **$** | **(516** | **)** | $ | (129 | ) |
|                                            |   |                        | ** ** |                       |       |   | ** ** |   |   |
| Capital Expenditures                            |   | **$**                       | **12**     | ** **                 | $          | — | ** ** | **$** | **201** | ** ** | $ | 55 |   |

 

30

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Operating revenues decreased $1,692,000 or 32.2% to $3,565,000 in thethree months ended September 30, 2003 compared to the three months endedSeptember 30, 2002 and decreased $796,000 or 6.8% to $10,859,000 in thenine months ended September 30, 2003 compared to the nine months endedSeptember 30, 2002. Installation revenue was $1,654,000 or 49.3% lower inthe three months ended September 30, 2003 compared to the three monthsended September 30, 2002 and $675,000 or 11.2% lower in the nine monthsended September 30, 2003 compared the nine months ended September 30,2002. The decrease in installation revenues in the three months endedSeptember 30, 2003 was****primarilya result of a decrease in sales and installations of PBX systems of $1,904,000while the decrease in installation revenues in the nine months endedSeptember 30, 2003 was also primarily a result of a decrease in sales andinstallations of PBX systems of $1,162,000. Installation of a voice overInternet Protocol network was being performed in a corporate office during thethree months ended September 30, 2002 and was substantially complete bythe three months ended September 30, 2003, thus the PBX sales andinstallations are lower in that timeframe. Service revenue decreased****$38,000 or 2.0% to $1,867,000 in the threemonths ended September 30, 2003 compared to the three months endedSeptember 30, 2002 and $121,000 or 2.1% to $5,526,000 in the nine monthsended September 30, 2003 compared to the nine months ended September 30,2002.

 

Cost of sales decreased $1,082,000 or 29.3% to $2,606,000 in the threemonths ended September 30, 2003 compared to the three months endedSeptember 30, 2002 and decreased $230,000 or 2.9% to $7,675,000 in thenine months ended September 30, 2003 compared to the nine months endedSeptember 30, 2002. Gross profit margin for this sector in the three andnine months ended September 30, 2003 was 26.9% and 29.3%, respectivelycompared to 29.8% and 32.2% for the three and nine months endedSeptember 30, 2002, respectively. The decrease in cost of sales was theresult of the decreased installation work described above and the decrease inthe gross profit margin is the result of lower margins associated with a couplelarge system installations performed in 2003.

 

Operating expenses excluding depreciation and amortization increased$45,000 or 3.7% to $1,267,000 in the three months ended September 30, 2003compared to the three months ended September 30, 2002 and increased$137,000 or 3.7% to $3,855,000 in the nine months ended September 30, 2003compared to the nine months ended September 30, 2002. Depreciation andamortization decreased $4,000 or 6.2% in the three months endedSeptember 30, 2003 compared to the three months ended September 30,2003 and decreased $19,000 or 9.5% in the nine months ended September 30,2003 compared to the nine months ended September 30, 2002.

 

Total operating expenses increased $41,000 to $1,328,000 in the threemonths ended September 30, 2003 compared to the three months endedSeptember 30, 2002 and increased $118,000 to $4,037,000 in the nine monthsended September 30, 2003 compared to the nine months endedSeptember 30, 2002. The increases were for the reasons described in thepreceding two paragraphs.

 

Operating loss was $369,000 in the three months endedSeptember 30, 2003 compared to operating income of $282,000 in the threemonths ended September 30, 2002.****Operatingloss was $853,000 in the nine months ended September 30, 2003 compared toan operating loss of $169,000 in the nine months ended September 30, 2002.Net loss in the three months ended September 30, 2003 was $221,000compared to net income of $157,000 in the three months ended September 30,2002. Net loss in the nine months ended September 30, 2003 was $516,000 comparedto a net loss of $129,000 in the nine months ended September 30, 2002. Theoperating and net losses generated in the three and nine months endedSeptember 30, 2003 compared to the three and nine months endedSeptember 30, 2002 occurred for the reasons described above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

CASH FLOWS – Cash provided by operations was$24,804,000 in the first nine months of 2003 compared to $22,825,000 in thefirst nine months of 2002. Cash flows from operations in the first nine monthsof 2003 were primarily attributable to net income plus non-cash expenses forasset impairment, depreciation and amortization, partially offset by anincrease in deferred income taxes receivable and the impact of the discontinuedoperations.  Cash flows from operationsin the first nine months of 2002 were primarily attributable to net income plusnon-cash expenses for asset impairment, depreciation and amortization and theprovision for losses in accounts receivable.

 

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Cash flows used in investing activities were $3,335,000 in the firstnine months of 2003 compared to cash flows used of $11,879,000 for the sameperiod in 2002. Capital expenditures relating to ongoing businesses were$7,532,000 during the first nine months of 2003 as compared to $12,222,000 forthe same period in 2002. In 2002, capital expenditures were incurred primarilyto construct additional network facilities to provide CLEC services andcontinued buildout of the PCS network in the Telecom Sector. Management expectscapital expenditures in the fourth quarter of 2003 to be approximately$6,500,000. There were $4,100,000 redemptions of investments in the first ninemonths of 2003, compared to $100,000 in the first nine months of 2002. Thefirst nine months of 2003 redemption reflects the amount by which HickoryTechwas permitted to reduce its equity investment in one of its lenders, throughconditions of its debt agreements.

 

Cash flows used in financing activities were $22,463,000 for the firstnine months of 2003 compared to $12,565,000 for the first nine months of 2002.Included in cash flows used in financing activities are debt repayments anddividend payments. HickoryTech made payments on its revolving credit facilityof $18,500,000 during the first nine months of 2003, and $10,950,000 during thefirst nine months of 2002. HickoryTech borrowed $1,250,000 on its revolvingcredit facility during the first nine months of 2003, and $2,200,000 during thefirst nine months of 2002. Dividend payments for the first nine months of 2003were $4,610,000 compared to $4,438,000 for the same period in 2002. During thefirst nine months of 2003, HickoryTech also repurchased 66,600 common sharesfor $661,000. In addition, HickoryTech used $185,000 of cash in connection of theretirement of 18,370 common shares from a stock compensation plan in the secondquarter of 2003.

 

WORKING CAPITAL – Working capital (i.e.current assets minus current liabilities) was $9,643,000 as of September 30,2003, compared to working capital of $13,073,000 as of December 31, 2002. Theratio of current assets to current liabilities was 1.7:1.0 as of September 30,2003 and 1.9:1.0 as of December 31, 2002. Management believes adequate internaland external resources are available to finance ongoing operating requirements,including capital expenditures, business development, debt service and thepayment of dividends for at least the next twelve months.

 

LONG-TERM CONTRACTS, COMMITMENTS AND OFF-BALANCE SHEET OBLIGATIONS- HickoryTech’s long-term obligations as of September 30, 2003 were$140,096,000, excluding current maturities of $1,482,000. As of September 30,2003, HickoryTech had a $182,250,000 credit facility with a syndicate of banks.The credit facility is comprised of a $125,000,000 revolving credit componentand a $57,250,000 term loan component. The available line of credit on the$125,000,000 revolving credit component decreases in increments beginning inMarch 2004 with a final maturity date in September 2008. The term loancomponent requires equal quarterly principal payments of $250,000 during theperiod of March 2001 to December 2008, and $23,000,000 of principal paymentsper quarter for the first two quarters in 2009 and $6,000,000 in the thirdquarter of 2009. The weighted average interest rate associated with this creditfacility and related instruments, varies with LIBOR and certain other rates andwas 4.5% at September 30, 2003. HickoryTech has implemented fixed interestterms on various portions of the overall debt outstanding for varying terms.The longest fixed interest term, on $60,000,000 of the debt, is fixed untilJune 2008. As of September 30, 2003, HickoryTech had drawn $140,750,000 on thiscredit facility and had $41,500,000 of available credit. Management believesthe remaining available credit is sufficient to cover future cash requirements.

 

HickoryTech’s Information Solutions Sector leases certain computerequipment under capital lease arrangements. During the first three quarters of2003, this sector recorded additions to property, plant and equipment of$173,000 related to these capital lease arrangements.

 

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The following table sets forth HickoryTech’s contractual obligations,along with the cash payments due each period. Interest on Long-term Debt isestimated using the interest rate as of September 30, 2003.

 
|                                |   | **Payments Due by Year****(Dollars in Thousands)** |    |
|-------------------------------------|--------|----------------------------------------------------|---------|
|                                |   | **Total**                                          |    | **Remainder  of 2003** |   | **2004 to  2006** |   | **2007 to  2008** |   | **2009 and  after** |   |
| Contractual Obligations             |   |                                               |    |   |   |   |   |   |   |   |   |
| Long-term Debt                      |   | $                                                  | 140,750 |   | $ | 250 |   | $ | 25,563 |   | $ | 62,937 |   | $ | 52,000 |   |
| Interest on Long-term Debt          |   | 31,653                                             |    | 1,631 |   | 19,042 |   | 9,749 |   | 1,231 |   |
| Capital Lease Obligations           |   | 828                                                |    | 115 |   | 713 |   | — |   | — |   |
| Interest on Capital Leases          |   | 50                                                 |    | 11 |   | 39 |   | — |   | — |   |
| Operating Leases                    |   | 1,220                                              |    | 364 |   | 511 |   | 45 |   | 300 |   |
| Total Contractual Cash  Obligations |   | $                                                  | 174,501 |   | $ | 2,371 |   | $ | 45,868 |   | $ | 72,731 |   | $ | 53,531 |   |

 

The operating lease obligations for the remainder of 2003 include$103,000 of lease obligations related to the wireless operations.

 

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

 
|                       |   | **Amount of Commitment Expiration per Year** |    |
|----------------------------|--------|----------------------------------------------|---------|
| **(Dollars in Thousands)** |   | **Total**                                    |    | **Remainder  of 2003** |   | **2004 to  2006** |   | **2007 to  2008** |   | **2009 and  after** |   |
| Revolving Credit Component |   | $                                            | 125,000 |   | $ | — |   | $ | 64,063 |   | $ | 60,937 |   | $ | — |   |
|                            |        |                                              |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

HickoryTech has variable rate debt instruments, which subject thecompany to interest rate risk. Beginning in the second quarter of 2003,HickoryTech entered into interest rate swap agreements, with remainingmaturities of nine months to fifty-seven months, to manage its exposure tointerest rate movements on a portion of its variable rate debt obligations. Themarket value of the cumulative gain or loss on these derivative instruments isreported as a component of accumulated other comprehensive income inshareholders’ equity and is recognized in earnings when the term of the swapagreement is concluded.

 

HickoryTech accounts for derivative instruments in accordance with SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities,” asamended by SFAS No. 149, which requires derivative instruments to be recordedon the balance sheet at fair value. Changes in fair value of derivativeinstruments must be recognized in earnings unless specific hedge accountingcriteria are met. HickoryTech has met those criteria with its cash flow hedgeand SFAS. No. 133 states that they must recognize gains and losses in othercomprehensive income rather than in earnings. These interest rate swap contractsresulted in a reduction in income of $217,000, and $234,000, reported asinterest expense for the three and nine months ended September 30, 2003,respectively. These interest rate swaps also resulted in an increase in othercomprehensive income of approximately $576,000, and $1,157,000, net of tax, forthe three and nine months ended September 30, 2003, respectively.

 

HickoryTech still has some variable interest rate debt as of September30, 2003. HickoryTech continually monitors the interest rates on its bank loansand has implemented fixed interest terms on various portions of the overalldebt outstanding for varying terms. A lower level of interest expense is likelyto occur because of a trend of declining levels of debt.

 

OTHER - HickoryTech operates with originalequity capital, retained earnings and recent additions to indebtedness in theform of bank term and revolving lines of credit. HickoryTech believes itscurrent level of debt to total capital is acceptable for ongoing operations.

 

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In November 2002, HickoryTech began repurchasing its stock inover-the-counter trading under a previously announced repurchase plan.HickoryTech funds the repurchase of its stock from cash flows from operations.During the three months ended September 30, 2003, HickoryTech purchased 13,300common shares for $142,000. During the nine months ended September 30, 2003,HickoryTech purchased 66,600 common shares for $661,000.

 

CRITICAL ACCOUNTING POLICIES

 

This Form 10-Q/A is based upon HickoryTech’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (see Note 1 of the notes tothe financial statements included in this Form 10-Q/A) and, where applicable,conform to the accounting principles as prescribed by federal and statetelephone utility regulatory authorities. A description of the criticalaccounting policies adhered to by HickoryTech is contained in the Management’sDiscussion and Analysis of Financial Condition and Results of Operations inHickoryTech’s Annual Report on Form 10-K for the year ended December 31, 2002.There were no significant changes to these critical accounting policies duringthe quarter ended September 30, 2003. During 2003, HickoryTech purchased aninterest rate swap contract, which is accounted for pursuant to the provisionsof SFAS No. 133 as described in Note 11 of the notes to the accompanyingfinancial statements.

 

RECENT ACCOUNTING DEVELOPMENTS

 

In June 2001, the FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No.143 requires entities to record the fair value of the liability for legalobligations associated with an asset retirement in the period in which theobligation is incurred. When the liability is initially recorded, the entitycapitalizes the cost of the asset retirement obligation by increasing thecarrying amount of the related long-lived asset. Over time, the liability isaccreted to its present value each period, and the capitalized cost isdepreciated over the useful life of the related asset.

 

HickoryTech’s incumbent local exchange carrier companies (ILECs) followthe provisions of SFAS No. 71, and therefore conform to the accountingprinciples as prescribed by the respective state public utilities commissionsand other federal agencies and, where applicable, accounting principlesgenerally accepted in the United States of America. On December 20, 2002, theFederal Communications Commission (FCC) notified carriers that they would notadopt SFAS No. 143 for regulatory accounting purposes. At January 1, 2003,HickoryTech determined the amount of asset retirement obligations required tobe recorded for its ILEC companies under the provisions of SFAS No. 143 werenot significant, and therefore the implementation of SFAS No. 143 on January 1,2003 did not impact HickoryTech’s financial position or results of operations.

 

HickoryTech’s competitive local telephone companies (CLEC), EnterpriseSolutions, and Information Solutions also adopted SFAS No. 143 effectiveJanuary 1, 2003. HickoryTech has determined that these companies do not have amaterial legal obligation to remove long-lived assets as described by SFAS No.143, and accordingly, adoption of SFAS No. 143 did not impact HickoryTech’sfinancial position or results of operations.

 

HickoryTech also adoptedthe provisions of SFAS No. 143 for its wireless operations as of January 1,2003. HickoryTech performed an analysis to identify all potential Asset RetirementObligations. The legal obligations identified consist of obligations toremediate leased property where cell sites are located. However, based uponHickoryTech’s experience and expectations, there is significant uncertainty asto whether third parties that own these leased properties would enforce theirremediation rights related to the sites. Furthermore, HickoryTech determinedthe amount of asset retirement obligations, if any, related to its wirelessoperations under the provisions of SFAS No. 143 were not significant, andtherefore the implementation of SFAS No. 143 on January 1, 2003 did not impactHickoryTech’s financial position or results of operations. In addition, due tothe pending sale of the wireless operations (see Note 4), HickoryTech does notexpect to incur any asset retirement obligations related to its wirelessoperations.

 

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In April 2002, the FASBissued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishmentof Debt,” and an amendment of that Statement, FASB Statement No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No.145 also rescinds FASB Statement No. 44, “Accounting for Intangible Assets ofMotor Carriers,” and amends FASB Statement No. 13, “Accounting for Leases.”HickoryTech adopted the provisions of SFAS No. 145 on January 1, 2003. Adoptionof this standard had no impact on the financial statements presented in thisForm 10-Q/A.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” whichreplaces Emerging Issues Task Force (EITF) Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” SFAS No.146 requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.  HickoryTech hasengaged in no activities in the three or nine months ended September 30, 2003that are subject to the provisions of SFAS No. 146. Accordingly, the adoptionof SFAS No. 146 did not impact HickoryTech’s financial position or results ofoperations.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition Disclosure – an amendment of SFAS No. 123”(SFAS No. 148). This Statement amends SFAS No. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Theprovisions of SFAS No. 148 are effective for financial statements for fiscalyears ending after December 15, 2002, and disclosure requirements shall beeffective for interim periods beginning after December 15, 2002. The Companywill continue to account for stock-based compensation to its employees anddirectors using the intrinsic value method prescribed by APB Opinion No. 25,and related interpretations. The Company adopted the provisions of SFAS No. 148and has made certain disclosures required by SFAS No. 148 in the consolidatedfinancial statements presented in this report. The adoption of SFAS No. 148 didnot impact HickoryTech’s financial position or results of operations.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” This interpretation elaborates on thedisclosures required in financial statements concerning obligations undercertain guarantees. It also clarifies the requirements related to therecognition of liabilities by a guarantor at the inception of certainguarantees. The disclosure requirements of this interpretation were effectivefor HickoryTech on December 31, 2002 but did not require any additionaldisclosures. The recognition provisions of the interpretation are effective forHickoryTech in 2003 and are applicable only to guarantees issued or modifiedafter December 31, 2002. The adoption of Interpretation No. 45 did not impactthe financial position, results of operations or cash flows of HickoryTech.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.” This statement amendsand clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts and forhedging activities under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.” SFAS No. 149 is effective for certain contractsentered into or modified after June 30, 2003. This standard did not change theaccounting for HickoryTech’s interest rate swap contract and therefore had noimpact on HickoryTech’s consolidated financial position, results of operations orcash flows (see Note 11).

 

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| Item 6. | Exhibits and Reports of Form 8-K. |
|---------|-----------------------------------|
|    |                              |   |
|    | (a)                               | Exhibits |
|    |                              | Exhibit 31(a) Certification pursuant to rule 13a-14(a) under the  Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|    |                              | Exhibit 31(b) Certification pursuant to rule 13a-14(a) under the  Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|    |                              | Exhibit 32(a) Certification pursuant to 18 U.S.C. 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|    |                              | Exhibit 32(b) Certification pursuant to 18 U.S.C. 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|    |                              |   |
|    | (b)                               | HickoryTech furnished a Form 8-K on July 28, 2003 containing a press  release announcing its second quarter consolidated operating results. |
|    |                              |   |
|    |                              | HickoryTech filed a Form 8-K on September 18, 2003 announcing that it  signed a definitive agreement to sell all of its wireless business to Western  Wireless Corporation. |

 

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SIGNATURES

 

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

 
| Dated: | March 3, 2004 |                                          | HICKORY TECH CORPORATION |
|--------|---------------|-----------------------------------------------|--------------------------|
|   |          |                                          |
|   |          |                                          |
|   | By:           |  /s/ John E. Duffy.                      |                     |
|   |          | John E. Duffy, Chief Executive Officer        |
|   |          |                                          |
|   |          |                                          |
|   | By:           |  /s/ David A. Christensen                |                     |
|   |          | David A. Christensen, Chief Financial Officer |
|        |               |                                               |                          |  |  |  |

 

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