**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

** **

**(Mark One)**

| **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                     |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                 |
| ** ** | **For the quarterly period ended  March 31, 2008**                                                                                                                                    |
| ** ** | ** **                                                                                                                                                                                 |
| **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 |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**221 East Hickory Street**

**Mankato, Minnesota 56002-3248**

(Address of principal executive offices and zip code)

 

**(800) 326-5789**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe 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 tosuch filing requirements for the past 90 days.  Yes   x   No   o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definition of “large accelerated filer, accelerated filer, anon-accelerated filer or smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):  Largeaccelerated filer  o     Acceleratedfiler   x     Non-acceleratedfiler    ̈     Smaller reporting company    ̈

 

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

 

The total number of shares of the Registrant’scommon stock outstanding as of April 25, 2008: 13,319,368.

 

** **

----

** **

**TABLE OF CONTENTS**

 
|     | **PART I**                                                                                             |   |
|----------|-------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                        |   |
| Item  1. | Financial  Statements                                                                                       | 3      |
|     |                                                                                                        |   |
|     | Consolidated  Statements of Operations (unaudited) for the Three Months Ended March 31,  2008 and 2007 | 3      |
|     |                                                                                                        |   |
|     | Consolidated  Balance Sheets (unaudited) as of March 31, 2008 and December 31,  2007              | 4      |
|     |                                                                                                        |   |
|     | Consolidated  Statements of Cash Flows (unaudited) for the Three Months Ended March 31,  2008 and 2007 | 5      |
|     |                                                                                                        |   |
|     | Condensed  Notes to Consolidated Financial Statements (unaudited)                                           | 6      |
|     |                                                                                                        |   |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 | 14     |
|     |                                                                                                        |   |
| Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk                                                 | 24     |
|     |                                                                                                        |   |
| Item 4.  | Controls and  Procedures                                                                                    | 25     |
|     |                                                                                                        |   |
|     | **PART II**                                                                                            |   |
|     |                                                                                                        |   |
| Item 1.  | Legal Proceedings                                                                                           | 25     |
|     |                                                                                                        |   |
| Item 1A. | Risk Factors                                                                                                | 25     |
|     |                                                                                                        |   |
| Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                | 25     |
|     |                                                                                                        |   |
| Item 3.  | Defaults  Upon Senior Securities                                                                            | 25     |
|     |                                                                                                        |   |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                                        | 25     |
|     |                                                                                                        |   |
| Item 5.  | Other Information                                                                                           | 26     |
|     |                                                                                                        |   |
| Item 6.  | Exhibits Listing                                                                                            | 26     |
|     |                                                                                                        |   |
|     | Signatures                                                                                                  | 27     |
|     |                                                                                                        |   |
|     | Exhibits                                                                                                    |   |

 

2

----

 

# **Item 1.   Financial Statements**

 

**HICKORY TECH CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

 
| ** **                                                                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **March 31**                | ** ** |
| **(Dollars in thousands, except share and per share amounts)** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Operating  revenue:                                                                                    |       |                             |       |   |   |
| Telecom Sector                                                                                         | ** ** | **$**                            | **18,294** |   | $ | 19,037 |   |
| Enventis Sector                                                                                        |       |                             |       |   |   |
| Equipment  revenue                                                                                     | ** ** | **10,168**                       |       | 11,434 |   |
| Services revenue                                                                                       | ** ** | **7,438**                        |       | 6,456 |   |
| Total Enventis  Sector                                                                                 | ** ** | **17,606**                       |       | 17,890 |   |
|                                                                                                   |       |                             |       |   |   |
| Total operating  revenue                                                                               | ** ** | **35,900**                       |       | 36,927 |   |
|                                                                                                   |       |                             |       |   |   |
| Costs and  expenses:                                                                                   |       |                             |       |   |   |
| Cost of sales,  equipment, excluding depreciation and amortization                                     |       | **8,697**                        |       | 10,314 |   |
| Cost  of services, excluding depreciation and amortization                                             |       | **11,690**                       |       | 10,917 |   |
| Selling, general  and administrative expenses                                                          | ** ** | **5,686**                        |       | 5,836 |   |
| Depreciation                                                                                           | ** ** | **4,669**                        |       | 4,504 |   |
| Amortization of  intangibles                                                                           | ** ** | **289**                          |       | 289 |   |
|                                                                                                   |       |                             |       |   |   |
| Total costs and  expenses                                                                              | ** ** | **31,031**                       |       | 31,860 |   |
|                                                                                                   |       |                             |       |   |   |
| Operating income                                                                                       | ** ** | **4,869**                        |       | 5,067 |   |
|                                                                                                   |       |                             |       |   |   |
| Other income and  expense:                                                                             |       |                             |       |   |   |
| Interest and  other income                                                                             | ** ** | **27**                           |       | 84 |   |
| Interest expense                                                                                       | ** ** | **(1,697**                       | **)**      | (2,182 | ) |
|                                                                                                   |       |                             |       |   |   |
| Total other  (expense)                                                                                 | ** ** | **(1,670**                       | **)**      | (2,098 | ) |
|                                                                                                   |       |                             |       |   |   |
| Income from continuing operations before income  taxes                                                 | ** ** | **3,199**                        |       | 2,969 |   |
| Income tax  provision                                                                                  | ** ** | **1,418**                        |       | 1,201 |   |
| Income from  continuing operations                                                                     | ** ** | **1,781**                        |       | 1,768 |   |
| Discontinued  operations:                                                                              |       |                             |       |   |   |
| Loss from  operations of discontinued component                                                        | ** ** | **—**                       |       | (2) |   |
| Income tax  benefit                                                                                    | ** ** | **—**                       |       | (1) |   |
| Loss on  discontinued operations                                                                       | ** ** | **—**                       |       | (1) |   |
|                                                                                                   |       |                             |       |   |   |
| Net income                                                                                             | ** ** | **$**                            | **1,781**  |   | $ | 1,767 |   |
|                                                                                                   |       |                             |       |   |   |
| Basic earnings  per share - continuing operations:                                                     | ** ** | **$**                            | **0.13**   |   | $ | 0.13 |   |
| Basic loss per  share - discontinued operations:                                                       | ** ** | **—**                       |       | — |   |
| ** **                                                                                             |       | **$**                            | **0.13**   |   | $ | 0.13 |   |
| Weighted average  common shares outstanding                                                            | ** ** | **13,301,409**                   |       | 13,240,434 |   |
|                                                                                                   |       |                             |       |   |   |
| Diluted earnings  per share - continuing operations:                                                   | ** ** | **$**                            | **0.13**   |   | $ | 0.13 |   |
| Diluted loss per  share - discontinued operations:                                                     | ** ** | **—**                       |       | — |   |
| ** **                                                                                             |       | **$**                            | **0.13**   |   | $ | 0.13 |   |
| Weighted average  common and equivalent shares outstanding                                             | ** ** | **13,306,910**                   |       | 13,241,010 |   |
| Dividends per  share                                                                                   | ** ** | **$**                            | **0.12**   |   | $ | 0.12 |   |

 

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

 

3

----

 

**HICKORYTECH CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                            | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| **(Dollars in thousands except share and per share amounts)** | ** ** | **2008**           | ** **  | **2007**              | ** ** |
|                                                                                                  |       |               |        |                  |       |
| **ASSETS**                                                                                            |       |               |        |                  |       |
| Current assets:                                                                                       |       |               |        |                  |       |
| Cash and cash  equivalents                                                                            | ** ** | **$**              | **1,492**   |                  | $          | 171 |   |
| Receivables, net  of allowance for doubtful accounts of $987 and $1,184                               | ** ** | **21,384**         |        | 28,357                |       |
| Inventories                                                                                           | ** ** | **7,749**          |        | 7,054                 |       |
| Income taxes receivable                                                                               | ** ** | **—**         |        | 1,013                 |       |
| Deferred income  taxes, net                                                                           | ** ** | **1,334**          |        | 1,334                 |       |
| Prepaid expenses                                                                                      | ** ** | **1,989**          |        | 1,713                 |       |
| Other                                                                                                 | ** ** | **740**            |        | 1,196                 |       |
| Total current  assets                                                                                 |       | **34,688**         | ** **  | 40,838                |       |
|                                                                                                  |       |               |        |                  |       |
| Investments                                                                                           | ** ** | **4,066**          |        | 3,830                 |       |
|                                                                                                  |       |               |        |                  |       |
| Property, plant  and equipment                                                                        | ** ** | **325,359**        |        | 322,249               |       |
| Less accumulated  depreciation                                                                        | ** ** | **173,497**        |        | 169,318               |       |
| Property, plant  and equipment, net                                                                   | ** ** | **151,862**        |        | 152,931               |       |
|                                                                                                  |       |               |        |                  |       |
| Other assets:                                                                                         |       |               |        |                  |       |
| Goodwill                                                                                              | ** ** | **25,239**         |        | 25,239                |       |
| Intangible  assets, net                                                                               | ** ** | **1,694**          |        | 1,983                 |       |
| Deferred costs  and other                                                                             | ** ** | **2,573**          |        | 2,674                 |       |
| Total other  assets                                                                                   | ** ** | **29,506**         |        | 29,896                |       |
| Total assets                                                                                          | ** ** | **$**              | **220,122** |                  | $          | 227,495 |   |
|                                                                                                  |       |               |        |                  |       |
| **LIABILITIES & SHAREHOLDERS’ EQUITY**                                                  |       |               |        |                  |       |
| Current  liabilities:                                                                                 |       |               |        |                  |       |
| Extended term  payable                                                                                | ** ** | **$**              | **7,505**   |                  | $          | 14,443 |   |
| Accounts payable                                                                                      | ** ** | **2,779**          |        | 4,538                 |       |
| Accrued expenses                                                                                      | ** ** | **6,717**          |        | 7,740                 |       |
| Accrued income  taxes                                                                                 | ** ** | **275**            |        | —                |       |
| Advanced  billings and deposits                                                                       | ** ** | **5,075**          |        | 5,158                 |       |
| Current  maturities of long-term obligations                                                          | ** ** | **1,035**          |        | 731                   |       |
| Total current  liabilities                                                                            |       | **23,386**         | ** **  | 32,610                |       |
|                                                                                                  |       |               |        |                  |       |
| Long-term  liabilities:                                                                               |       |               |        |                  |       |
| Debt  obligations, net of current maturities                                                          | ** ** | **130,214**        |        | 128,475               |       |
| Financial  derivative instruments                                                                     | ** ** | **3,099**          |        | 1,451                 |       |
| Accrued income  taxes                                                                                 | ** ** | **7,837**          |        | 7,747                 |       |
| Deferred income  taxes                                                                                | ** ** | **14,250**         |        | 14,901                |       |
| Deferred revenue                                                                                      | ** ** | **1,499**          |        | 1,527                 |       |
| Accrued employee  benefits and deferred compensation                                                  | ** ** | **8,769**          |        | 8,852                 |       |
| Total long-term  liabilities                                                                          | ** ** | **165,668**        |        | 162,953               |       |
|                                                                                                  |       |               |        |                  |       |
| Total  liabilities                                                                                    | ** ** | **189,054**        |        | 195,563               |       |
|                                                                                                  |       |               |        |                  |       |
| Commitments and  contingencies (Note 8)                                                               | ** ** | **—**         |        | —                |       |
|                                                                                                  |       |               |        |                  |       |
| Shareholders’  equity:                                                                           |       |               |        |                  |       |
| Common stock, no  par value, $.10 stated value                                                        |       |               |        |                  |       |
| Shares  authorized: 100,000,000                                                                       |       |               |        |                  |       |
| Shares issued  and outstanding: 13,319,068 in 2008 and 13,284,903 in 2007                             | ** ** | **1,332**          |        | 1,329                 |       |
| Additional  paid-in capital                                                                           | ** ** | **11,289**         |        | 11,031                |       |
| Retained  earnings                                                                                    | ** ** | **20,825**         |        | 20,639                |       |
| Accumulated  other comprehensive (loss)                                                               | ** ** | **(2,378**         | **)**       | (1,067                | )          |
| Total  shareholders’ equity                                                                      | ** ** | **31,068**         |        | 31,932                |       |
| Total  liabilities and shareholders’ equity                                                      | ** ** | **$**              | **220,122** |                  | $          | 227,495 |   |

 

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

 

4

----

 

**HICKORY TECH CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31**                | ** ** |
| **(Dollars in thousands)**                                               |       | **2008**                         |       | **2007** |   |
| OPERATING  ACTIVITIES:                                                             |       |                             |       |   |   |
| Net income                                                                         | ** ** | **$**                            | **1,781**  | ** ** | $ | 1,767 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             | ** ** |   |   |
| Loss from  discontinued operations                                                 | ** ** | **—**                       | ** ** | 1 |   |
| Depreciation and  amortization                                                     | ** ** | **4,958**                        | ** ** | 4,793 |   |
| Amortization of  gain on sale of financial derivative instrument                   | ** ** | **(332**                         | **)**      | (277 | ) |
| Deferred income  tax provision (benefit)                                           | ** ** | **8**                            | ** ** | (20 | ) |
| Accrued  patronage refunds                                                         | ** ** | **(161**                         | **)**      | 221 |   |
| Other                                                                              | ** ** | **57**                           | ** ** | 263 |   |
| Changes in  operating assets and liabilities net of effects of dispositions:       |       |                             | ** ** |   |   |
| Receivables                                                                        | ** ** | **7,032**                        | ** ** | (2,260 | ) |
| Prepaids                                                                           | ** ** | **(276**                         | **)**      | (103 | ) |
| Inventories                                                                        | ** ** | **(695**                         | **)**      | 2,848 |   |
| Accounts payable  and accrued expenses                                             | ** ** | **(2,772**                       | **)**      | (735 | ) |
| Deferred  revenue, billings and deposits                                           | ** ** | **(111**                         | **)**      | (303 | ) |
| Income taxes                                                                       | ** ** | **1,376**                        | ** ** | 1,203 |   |
| Other                                                                              | ** ** | **481**                          | ** ** | 470 |   |
| Net cash  provided by operating activities                                         | ** ** | **11,346**                       | ** ** | 7,868 |   |
|                                                                               |       |                             | ** ** |   |   |
| INVESTING  ACTIVITIES:                                                             |       |                             | ** ** |   |   |
| Additions to  property, plant and equipment                                        | ** ** | **(3,413**                       | **)**      | (2,730 | ) |
| Other                                                                              | ** ** | **—**                       | ** ** | 44 |   |
| Net cash (used  in) investing activities                                           | ** ** | **(3,413**                       | **)**      | (2,686 | ) |
|                                                                               |       |                             | ** ** |   |   |
| FINANCING  ACTIVITIES:                                                             |       |                             | ** ** |   |   |
| Net change in  extended term payables arrangement                                  | ** ** | **(6,938**                       | **)**      | 2,024 |   |
| Change in cash  overdraft                                                          | ** ** | **—**                       | ** ** | (1,475 | ) |
| Payments of  capital lease obligations                                             | ** ** | **(88**                          | **)**      | (110 | ) |
| Borrowings on  credit facility                                                     | ** ** | **8,500**                        | ** ** | 2,000 |   |
| Repayments on  credit facility                                                     | ** ** | **(6,550**                       | **)**      | (6,325 | ) |
| Proceeds from  the sale of financial derivative instrument                         | ** ** | **—**                       | ** ** | 1,936 |   |
| Proceeds from  issuance of common stock                                            | ** ** | **59**                           | ** ** | 60 |   |
| Dividends paid                                                                     | ** ** | **(1,595**                       | **)**      | (1,585 | ) |
| Net cash (used  in) financing activities                                           | ** ** | **(6,612**                       | **)**      | (3,475 | ) |
|                                                                               |       |                             | ** ** |   |   |
| Net increase in  cash and cash equivalents                                         | ** ** | **1,321**                        | ** ** | 1,707 |   |
| Cash and cash  equivalents at beginning of the year                                | ** ** | **171**                          | ** ** | 84 |   |
| Cash and cash  equivalents at the end of the year                                  | ** ** | **$**                            | **1,492**  | ** ** | $ | 1,791 |   |
|                                                                               |       |                             | ** ** |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                             | ** ** |   |   |
| Cash paid for  interest                                                            | ** ** | **$**                            | **2,107**  | ** ** | $ | 2,177 |   |
| Net cash paid  for income taxes                                                    | ** ** | **$**                            | **42**     | ** ** | $ | 6 |   |
| Non-cash  investing activities:                                                    |       |                             | ** ** |   |   |
| Property, plant  and equipment acquired with capital leases                        | ** ** | **$**                            | **182**    | ** ** | $ | 455 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

5

----

 

**HICKORY TECH CORPORATION, INC.**

**MARCH 31, 2008**

**PART 1. FINANCIALINFORMATION**

 

**Item 1.   Condensed Notes to ConsolidatedFinancial Statements (Unaudited)**

 

**Note 1.   Basis of Presentation and Consolidation**

 

The accompanying unaudited condensed consolidatedfinancial statements of Hickory Tech Corporation (HickoryTech or the Company)have been prepared in accordance with accounting principles generally acceptedin the United States (GAAP) for interim financial information and with the rules andregulations of the Securities and Exchange Commission (SEC). Certaininformation and disclosures normally included in annual financial statementsprepared in accordance with GAAP have been omitted or condensed pursuant to suchrules and regulations. In the opinion of the Company’s management, theunaudited condensed consolidated financial statements reflect all adjustments(consisting only of normal and recurring accruals) considered necessary for thefair presentation of the Company’s financial statements and present fairly theresults of operations, financial position and cash flows of the Company for theinterim periods presented as required by Regulation S-X, Rule 10-01. Theseunaudited interim condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto,together with the Company’s audited consolidated financial statements and notesthereto contained in the Company’s Annual Report on Form 10-K for the yearended December 31, 2007.

 

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues, expenses and relateddisclosures at the date of the financial statements and during the reportingperiod. Actual results could differ from these estimates. The results ofoperations for the interim periods presented are not necessarily indicative ofthe results that may be expected for the fiscal year as a whole or any otherinterim period.

 

Our consolidated financial statements include HickoryTech Corporationand its subsidiaries in the following two business segments: the Telecom Sectorand the Enventis Sector. All inter-company transactions have been eliminatedfrom the consolidated financial statements.

 

Costof Sales - equipment (excluding depreciation and amortization)

 

Cost of sales for the Enventis Sector includes costs associated withthe installation of products for customers. These costs are primarilyfor equipment and materials. Labor associated with installation work is notincluded in this category, but is included in cost of services (excludingdepreciation and amortization) described below.

 

Costof Services (excluding depreciation and amortization)

 

Cost of services includes all costs related to delivery ofcommunication services and products for all sectors. These operating costsinclude all costs of performing services and providing related productsincluding engineering, customer service, billing and collections, networkmonitoring and transport costs.

 

Selling,General, and Administrative Expenses

 

Selling, general and administrative expenses include direct andindirect selling expenses, advertising and all other general and administrativecosts associated with the operations of the business.

 

6

----

 

***Recent Accounting Developments***

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”),which establishes principles and requirements for how an acquirer recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any non-controlling interest in the acquired companyand the goodwill acquired. SFAS No. 141(R) also establishesdisclosure requirements to enable the evaluation of the nature and financialeffects of the business combination. SFAS No. 141(R) is effective asof the beginning of an entity’s fiscal year that begins after December 15,2008, and will be adopted by us in the first quarter of 2009. SFAS No. 141(R) iscurrently not expected to have a material effect on our consolidated financialstatements.

 

In December 2007,the FASB issued SFAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements – an amendment of Accounting Research Bulletin No. 51”(“SFAS No. 160”). SFAS No. 160 will change the accounting andreporting for minority interests, which will be re-characterized asnon-controlling interests and classified as a component of equity. This newconsolidation method will significantly change the accounting for transactionswith minority interest holders. SFAS No. 160 is effective for fiscal yearsbeginning after December 15, 2008 and we will adopt it in the first quarter2009. We do not expect adoption of SFAS No. 160 to have a material effecton our consolidated financial statements.

 

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

 

**Note 2.  Earnings and Cash Dividends per Common Share**

 

Basic earnings pershare (EPS) are computed by dividing net income by the weighted average numberof shares of common stock outstanding during the applicable period. Shares usedin the EPS dilution calculation are based on the weighted average number ofshares of common stock outstanding during the period increased by potentiallydilutive common shares. Potentially dilutive common shares include stock optionsand stock subscribed under the HickoryTech Corporation Amended and RestatedEmployee Stock Purchase Plan (ESPP). Dilution is determined using the treasurystock method.

 
| ** **                                                                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **March 31**                | ** ** |
| **(Dollars in thousands, except share and per share amounts)** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                                                   |       |                             |       |   |   |
| Income from  continuing operations                                                                     |       | $                                | 1,781      |   | $ | 1,768 |   |
| Loss from  discontinued operations                                                                     |       | —                           |       | (1 | ) |
| Net Income                                                                                             |       | $                                | 1,781      |   | $ | 1,767 |   |
|                                                                                                   |       |                             |       |   |   |
| Weighted average  shares outstanding                                                                   |       | 13,301,409                       |       | 13,240,434 |   |
| Stock options  (dilutive only)                                                                         |       | 3,848                            |       | — |   |
| Stock subscribed  (ESPP)                                                                               |       | 1,653                            |       | 576 |   |
| Total dilutive  shares outstanding                                                                     |       | 13,306,910                       |       | 13,241,010 |   |
|                                                                                                   |       |                             |       |   |   |
| Earnings per  share:                                                                                   |       |                             |       |   |   |
| Basic -  continuing operations                                                                         |       | $                                | 0.13       |   | $ | 0.13 |   |
| Basic -  discontinued operations                                                                       |       | $                                | —     |   | $ | — |   |
|                                                                                                   |       |                             |       |   |   |
| Diluted -  continuing operations                                                                       |       | $                                | 0.13       |   | $ | 0.13 |   |
| Diluted -  discontinued operations                                                                     |       | $                                | —     |   | $ | — |   |

 

7

----

 

Options to purchase 441,000shares and 490,550 shares for the three months ended March 31, 2008 and2007, respectively, were not included in the computation of diluted EPS,because their effect on diluted EPS would have been anti-dilutive.

 

Cash dividends are based onthe number of common shares outstanding at their respective record dates.Listed below is the number of shares outstanding as of the record date for thefirst quarter of 2008 and 2007, respectively.

 
| **Shares outstanding on record date** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|
| First quarter  (Feb. 15)                             |       | 13,292,419 |       | 13,207,970 |       |

 

Dividends per share are based on the quarterly dividend per share asdeclared by the HickoryTech Board of Directors. HickoryTech paid dividends of$0.12 per share for both the first quarter of 2008 and 2007.

 

During the first three months of 2008 and 2007, shareholders haveelected to reinvest $59,000 and $60,000, respectively, of dividends intoHickoryTech common stock pursuant to the HickoryTech Corporation DividendReinvestment Plan.

 

**Note 3.  Accumulated Other Comprehensive Income/(Loss)**

 

Comprehensive income includes changes in unrealized gains and losses onderivative instruments qualifying and designated as cash flow hedges andrecognized Net Periodic Benefit Cost related to our Post-Retirement BenefitPlans. Comprehensive income for the three months ended March 31, 2008 and 2007was $470,000 and $1,909,000, respectively.

 

In March 2007, we terminated our two outstanding interest-rateswap agreements with original maturities in June 2008, in exchange for$1,936,000 in proceeds. Immediately following the termination of these twoagreements, we executed a new interest-rate swap agreement, effectively lockingin the interest rate on $60,000,000 of variable-interest rate debt through March 2010.On March 28, 2008, we entered into a second interest-rate swapagreement, effectively locking in the interest rate on an additional$40,000,000 of variable interest rate debt through February 2010.

 

The market value of the cumulative gain or (loss) on financialderivative instruments is reported as a component of accumulated othercomprehensive income (loss) in shareholders’ equity and will be recognized inearnings over the term of the original swap agreement.

 

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

 
| ** **                           | ** ** | ** **             | ** ** | ** **              | ** ** | ** **             | ** ** | ** **         | ** ** | **Accumulated**   | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                           | ** ** | **Unrecognized**       | ** ** | **Unrecognized**        | ** ** | **Unrecognized**       | ** ** | **Unrealized**     | ** ** | **Other**         | ** ** |
| ** **                           | ** ** | **Net Actuarial** | ** ** | **Prior Service**  | ** ** | **Transition**         | ** ** | **(Loss) on** | ** ** | **Comprehensive** | ** ** |
| **(Dollars in thousands)** | ** ** | **Loss ****(1)**  | ** ** | **Credit**** (1)** | ** ** | **Asset ****(1)** | ** ** | **Derivatives**    | ** ** | **(Loss)**        | ** ** |
| December 31,  2007              |       | $                      | (954       | )                       | $          | 279                    |       | $                  | (181       | )                 | $          | (211 | ) | $ | (1,067 | ) |
| 2008 Activity                        |       | 12                     |       | (8                      | )          | 9                      |       | (1,324             | )          | (1,311            | )          |
| March 31,  2008                 |       | $                      | (942       | )                       | $          | 271                    |       | $                  | (172       | )                 | $          | (1,535 | ) | $ | (2,378 | ) |

 

----

(1) Amountspertain to our postretirement benefit plans.

 

8

----

 

**Note 4.   Acquisition, Disposition and DiscontinuedOperations**

 

Effective December 31,2006, we sold all of the outstanding capital stock in Collins CommunicationsSystems Company (“Collins”) to Skyview Capital, LLC for an initial price of$100,000, paid by delivery of a promissory note, plus up to $1,650,000 ofearn-out payments. Skyview Capital, LLC paid us $100,000 in February 2007.The remaining selling price is due in contingent payments payable over the nextthree years if financial targets are reached by Skyview Capital, LLC. We havereceived no payments to-date related to this earn-out provision. The $100,000mentioned above has been included in the calculation of the net loss on salementioned below, while the contingent payments have not been included in thenet loss. The agreement contains covenants against competition by the new ownerin south-central Minnesota. We recorded a pre-tax loss on the sale of$3,385,000 ($2,040,000 net of income taxes). The Collins results of operationswere formerly reported in the Enterprise Solutions Sector. The consolidatedstatements of operations for all periods presented have been restated toreflect the Collins operations as discontinued operations.

 

**Note 5.  Inventories**

 

Inventory includesparts, materials and supplies stored in our warehouses to support basic levelsof service and maintenance as well as scheduled capital projects and equipmentawaiting configuration for customers. Inventory also includes parts andequipment shipped directly from vendors to customer locations while in transitand parts and equipment returned from customers which is being returned tovendors for credit, as well as maintenance contracts associated with customersales which have not yet transferred to the customer. The inventory value inthe Telecom Sector, comprised of materials, as of March 31, 2008 and December 31,2007 was $3,989,000 and $3,312,000, respectively. The inventory value in theEnventis Sector, comprised of finished goods, as of March 31, 2008 and December 31,2007 was $3,760,000 and $3,742,000, respectively.

 

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

 

**Note 6.  Intangible Assets**

 

We are required totest acquired goodwill for impairment on an annual basis based upon a fairvalue approach. Additionally, goodwill shall be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of an entity below its carrying value.****The carrying value of our goodwill is $25,239,000as of March 31, 2008 and December 31, 2007.

 

The components of other intangible assets are as follows:

 
|                                 | ** ** | ** **            | ** ** | **As of March 31, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | ** **            | ** ** | **Gross Carrying**                      | ** ** | **Accumulated**                                 | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| **(Dollars in thousands)** | ** ** | **Useful Lives** | ** ** | **Amount**                                   | ** ** | **Amortization**                                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Definite-Lived  Intangible Assets    |       |                  |       |                                         |       |                                            |       |   |   |   |   |
| Customer  relationships              |       | 1 - 8 years           |       | $                                            | 4,229      |                                            | $          | 2,694 |   | $ | 4,229 |   | $ | 2,456 |   |
| Other  intangibles                   |       | 1 - 5 years           |       | 730                                          |       | 571                                             |       | 730 |   | 520 |   |
| Total                                |       |                  |       | $                                            | 4,959      |                                            | $          | 3,265 |   | $ | 4,959 |   | $ | 2,976 |   |

 

As required by SFAS No. 142, we periodically reassessthe carrying value, useful lives and classifications of identifiable assets.Amortization expense related to the definite-lived intangible assets was$289,000 for the three months ended March 31, 2008 and 2007, respectively.Total estimated amortization expense for the remaining nine months of 2008 andthe five years subsequent to 2008 is as follows: 2008 (April 1 – December 31)- $838,000; 2009 - $853,000; 2010 - $3,000; none in 2011, 2012, and 2013.

 

9

----

 

**Note 7.  Quarterly Sector Financial Summary**

** **
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars in thousands)**      | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended March 31, 2008   |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 18,294     |         | $          | 17,606                 |       | $                | —     |   | $ | 35,900 |   |
| Intersegment  revenue                     |       | 130         |       | 138          |       | (268                   | )          | —           |       |
| Total operating  revenue                  |       | 18,424      |       | 17,744       |       | (268                   | )          | 35,900           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 3,926       |       | 1,020        |       | 12                     |       | 4,958            |       |
| Operating  income/(loss)                  |       | 3,547       |       | 1,421        |       | (99                    | )          | 4,869            |       |
| Interest expense                          |       | 23          |       | —       |       | 1,674                  |       | 1,697            |       |
| Income  taxes(benefit)                    |       | 1,456       |       | 587          |       | (625                   | )          | 1,418            |       |
| Income/(loss)  from continuing operations |       | 2,068       |       | 834          |       | (1,121                 | )          | 1,781            |       |
| Identifiable  assets                      |       | 152,000     |       | 60,645       |       | 7,477                  |       | 220,122          |       |
| Property, plant  and equipment, net       |       | 115,786     |       | 35,936       |       | 140                    |       | 151,862          |       |
| Capital  expenditures                     |       | 2,420       |       | 993          |       | —                 |       | 3,413            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 
|                                      |   | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       |   |
|-------------------------------------------|--------|-------------|------------|--------------|------------|-------------------|------------|------------------|--------|
|                                      |   | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** |   |
| Three Months  Ended March 31, 2007   |   | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **       |   |
| Revenue from  unaffiliated customers      |   | $           | 19,037     |         | $          | 17,890            |       | $                | — |   | $ | 36,927 |   |
| Intersegment  revenue                     |   | 107         |       | 62           |       | (169              | )          | —           |   |
| Total operating  revenue                  |   | 19,144      |       | 17,952       |       | (169              | )          | 36,927           |   |
|                                      |   |        |       |         |       |              |       |             |   |
| Depreciation and  amortization            |   | 3,913       |       | 875          |       | 5                 |       | 4,793            |   |
| Operating  income/(loss)                  |   | 4,103       |       | 1,380        |       | (416              | )          | 5,067            |   |
| Interest expense                          |   | 17          |       | —       |       | 2,165             |       | 2,182            |   |
| Income  taxes(benefit)                    |   | 1,657       |       | 558          |       | (1,014            | )          | 1,201            |   |
| Income/(loss)  from continuing operations |   | 2,439       |       | 822          |       | (1,493            | )          | 1,768            |   |
| Identifiable  assets                      |   | 153,978     |       | 61,042       |       | 9,190             |       | 224,210          |   |
| Property, plant  and equipment, net       |   | 118,530     |       | 32,950       |       | 95                |       | 151,575          |   |
| Capital  expenditures                     |   | 1,646       |       | 1,084        |       | —            |       | 2,730            |   |
|                                           |        |             |            |              |            |                   |            |                  |        |  |  |  |  |

 

**Note 8.  Commitments andContingencies**

 

We are involved in certain contractual disputes in the ordinary courseof business. We do not believe the ultimate resolution of any of these existingmatters will have a material adverse effect on our financial position, resultsof operations or cash flows. We did not experience any changes to materialcontractual obligations in the first three months of 2008. Refer to theCompany’s Annual Report on Form 10-K for the year ended December 31,2007 for the discussion relating to commitments and contingencies.

 

**Note 9.  Stock Compensation**

 

Refer to ourAnnual Report on Form 10-K for the year ended December 31, 2007 for acomplete description of all stock-based compensation plans.

 

10

----

 

On January 1, 2006, we adopted SFAS No. 123(R) (revised2004), “Share-Based Payment,” (SFAS No. 123(R)), which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors, including employee stock options andemployee stock purchases related to the ESPP, based on estimated fair values.We adopted SFAS No. 123(R) using the modified prospective transitionmethod, which requires the application of the accounting standard as of January 1,2006.

 

Share-based compensation expense recognized under SFASNo. 123(R) for the three months ended March 31, 2008 and 2007was $14,000 and $27,000, respectively. Share-based compensation expense recognized in our ConsolidatedStatement of Operations for the first three months of 2008 and 2007 includedcompensation expense for share-based payment awards granted prior to, but notyet completely vested as of March 31, 2008 and 2007. Compensation expensefor awards granted prior to 2006 is based on the grant date fair valueestimated in accordance with the fair value provisions of SFAS No. 123.Compensation expense for awards granted in 2006 and subsequent periods isdetermined in accordance with the provisions of SFAS No. 123(R).Historical data is used to estimate pre-vesting forfeitures. SFAS No. 123(R) requiresforfeitures to be estimated at the time of the grant and revised, if necessary,in subsequent periods if actual forfeitures differ from those estimates. Weaccounted for forfeitures as they occurred for the periods prior to 2006. Thecumulative adjustment for the change in accounting principle was immaterial.

 

The fair value of each option award is estimated onthe date of the grant using a Black-Scholes option valuation model. We use aseven-year period to calculate the historical volatility of its stock price foruse in the valuation model. The dividend yield rate is based on our currentdividend payout pattern and current market price. The risk-free rate foroptions is based on a U.S. Treasury rate commensurate with the expected terms.The expected term of options granted is derived from historical experience andrepresents the period of time that options granted are expected to beoutstanding.

 

There were no stock option awards granted during thethree months ended March 31, 2008. Although we have authority to issueoptions under the Stock Award Plan no current compensation programs haveoptions as a component.

 

As of March 31, 2008 there was $9,000 of totalunrecognized compensation costs related to non-vested stock options grantedunder the Company’s Stock Award Plan. This expense is expected to be recognizedover a weighted average period of two years.

 

A summary of stock option activity is as follows:

 
| ** **                           | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|--------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                           | ** ** | **Shares** | ** ** | **Price**                 | ** ** |
| Outstanding at  January 1, 2008 |       | 476,000    |       | $                         | 12.79      |   |
| Granted                              |       | —     |       | —                    |       |
| Exercised                            |       | —     |       | —                    |       |
| Forfeited                            |       | —     |       | —                    |       |
| Expired                              |       | —     |       | —                    |       |
| Outstanding at  March 31, 2008  |       | 476,000    |       | $                         | 12.79      |   |
| Exercisable at  March 31, 2008  |       | 466,000    |       | $                         | 12.92      |   |

 

11

----

 

The following table provides certain information with respect to stockoptions outstanding at March 31, 2008:

 
| ** **                 | ** ** | ** **             | ** ** | **Weighted**            | ** ** | **Weighted**               | ** ** |
|----------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Range of**          | ** ** | **Stock Options** | ** ** | **Average**             | ** ** | **Average Remaining** | ** ** |
| **Exercise Prices**   | ** ** | **Outstanding**        | ** ** | **Exercise Price** | ** ** | **Contractual Life**  | ** ** |
| $6.00 - $8.00              |       | 15,000                 |       | $                       | 6.95       |                       | 8.4 years  |   |
| $8.00 - $12.00             |       | 177,200                |       | 10.26                   |       | 5.2 years                  |       |
| $12.00 - $16.00            |       | 230,050                |       | 13.87                   |       | 2.8 years                  |       |
| $16.00 - $21.00            |       | 53,750                 |       | 18.18                   |       | 3.0 years                  |       |
|                       |       | 476,000                |       | $                       | 12.79      |                       | 3.9 years  |   |
|                       |       |                   |       |                    |       |                       |       |   |
| Aggregate  Intrinsic Value |       |                   |       | $                       | 24,800     |                       |       |   |

 

The following table provides certain information with respect to stockoptions exercisable at March 31, 2008:

 
| ** **                  | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Exercisable**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $6.00 - $8.00               |       | 5,000                  |       | $                         | 6.95       |                      | 8.4 years  |   |
| $8.00 - $12.00              |       | 177,200                |       | 10.26                     |       | 5.2 years                 |       |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 2.8 years                 |       |
| $16.00 - $21.00             |       | 53,750                 |       | 18.18                     |       | 3.0 years                 |       |
|                        |       | 466,000                |       | $                         | 12.92      |                      | 3.8 years  |   |
|                        |       |                   |       |                      |       |                      |       |   |
| Aggregate  intrinsic value: |       |                   |       | $                         | 11,600     |                      |       |   |

 

**Note 10.  Financial Derivative Instruments**

 

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

 

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

 

SFAS 157 defines fairvalue as the price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. SFAS 157 also describes three levels of inputs that may beused to measure fair value:

 

·                  Level 1 – quoted prices in activemarkets for identical assets and liabilities.

·                  Level 2 – observable inputs otherthan quoted prices in active markets for identical assets and liabilities.

·                  Level 3 – unobservable inputs inwhich there is little or no market data available, which require the reportingentity to develop its own assumptions.

 

The fair value of ourinterest rate swap agreements were determined based on Level 2 inputs.

 

12

----

 

Weutilize interest-rate swap agreements that qualify as cash-flow hedges tomanage our exposure to interest rate fluctuations on a portion of ourvariable-interest rate debt. In March 2007, we terminated two outstandinginterest-rate swap agreements, with original maturities of June 2008, inexchange for $1,936,000 in proceeds. Proceeds of $332,000 and $277,000 wererecognized as an offset to interest expense in the first quarter of 2008 and2007, respectively. The remaining proceeds will be recognized as an offset tointerest expense over the remaining original term of the agreements, a periodof three months, ending in June 2008. Immediately following thetermination of the two swap agreements discussed above, we executed a newinterest-rate swap agreement, effectively locking in the interest rate on$60,000,000 of variable-interest rate debt through March, 2010. On March 28,2008, we entered into a second interest-rate swapagreement, effectively locking in the interest rate on an additional$40,000,000 of variable-interest rate debt through February 2010.

 

Themarket value of the cumulative gain or (loss) on financial derivativeinstruments is reported as a component of accumulated other comprehensiveincome (loss) in shareholders’ equity and will be recognized in earnings overthe term of the swap agreement. The fair value of our derivatives at March 31,2008 and December 31, 2007 is a net liability of $3,099,000 and$1,451,000, respectively.

 

**Note 11.  Employee Post-Retirement Benefits**

 

HickoryTech providespost-retirement health care and life insurance benefits for certain employees.HickoryTech accounts for these post-retirement benefits in accordance with SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and132(R).” New employees hired on or after January 1,2007 are not eligible for post-retirement health care and life insurancebenefits.

 
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31**                | ** ** |
| **(Dollars in thousands)**     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Components of net  periodic benefit cost |       |                             |       |   |   |
| Service cost                             |       | $                                | 63         |   | $ | 71 |   |
| Interest cost                            |       | 122                              |       | 114 |   |
| Expected return  on plan assets          |       | —                           |       | — |   |
| Amortization of  transition obligation   |       | 15                               |       | 15 |   |
| Amortization of  prior service cost      |       | (14                              | )          | (3 | ) |
| Recognized net  actuarial loss           |       | 20                               |       | 18 |   |
| Net periodic  benefit cost               |       | $                                | 206        |   | $ | 215 |   |

 
|                                                               |   | **March 31,  2008** |   |
|--------------------------------------------------------------------|--------|--------------------------|--------|
| Employer’s  contributions for current premiums:               |   | ** **               |   |
| Contributions  made for the three months ended March 31, 2008 |   | $                        | 63     |   |
| Expected  contributions for remainder of 2008                      |   | 190                      |   |
| Total estimated  employer contributions for fiscal year 2008       |   | $                        | 253    |   |

 

**Note 12.  Income Taxes**

 

The effective income tax rate from continuingoperations of approximately 44.3% for the first quarter of 2008 and 40.5% forthe first quarter of 2007 exceeds the federal statutory rate primarily due tostate income taxes and accrued interest expense on unrecognized tax benefits.The increase in the effective tax rate from 2007 to 2008 is primarily theresult of interest accrued on uncertain tax positions according to FASBInterpretation No. 48 (FIN No. 48) “Accounting for Uncertainty inIncome Taxes-an interpretation of FASB Statement No. 109.”

 

13

----

 

We adopted the provisions of FIN No. 48 on January 1, 2007.Among other things, FIN No. 48 provides guidance to address uncertainty intax positions and clarifies the accounting for income taxes by prescribing aminimum recognition threshold that income tax positions must achieve beforebeing recognized in the financial statements. As of March 31, 2008, we hadunrecognized tax benefits totaling $7,255,000, excluding interest. The amountof the unrecognized tax benefits, if recognized, that would affect theeffective income tax rates of future periods is $7,237,000. There have been nosignificant changes to these amounts during the three months ended March 31,2008.

 

We recognize interest and penalties related to incometax matters as income tax expense. As of March 31, 2008, we haveaccrued $583,000 (net of tax) for interest related to unrecognized taxbenefits.

 

We fileconsolidated income tax returns in the United States federal jurisdiction andcombined or separate income tax returns in various state jurisdictions. Ingeneral, we are no longer subject to United States federal income taxexaminations for the years prior to 2004 except to the extent of lossesutilized in subsequent years.

 

# **Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

# ** **

*Forward Looking Statements*

 

ThePrivate Securities Litigation Reform Act of 1995 contains certain safe harborprovisions regarding forward-looking statements. This Quarterly Report on Form 10-Qmay include forward-looking statements. These statements may include, without limitation, statements withrespect to anticipated future operating and financial performance, growthopportunities and growth rates, acquisition and divestiture opportunities,business strategies, business and competitive outlook, and other similarforecasts and statements of expectation. Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates,” “targets,” “projects,” “will,”“may,” “continues,” and “should,” and variations of these words and similarexpressions, are intended to identify these forward-looking statements. Suchforward-looking statements are subject to risks and uncertainties that couldcause HickoryTech’s actual results to differ materially from such statements.Factors that might cause such a difference include, but are not limited to,those contained in Item 1A of Part II, “Risk Factors” of this quarterlyreport on Form 10-Q and Item 1A, “Risk Factors” of our Annual Report on Form 10-Kfor the year ended December 31, 2007 which is incorporated herein byreference. The Cautionary Statement in Part 1 of our Annual Report on Form 10-Kprovides a comprehensive list of sources for risks and uncertainties, which mayinfluence forward-looking statements and is incorporated herein by reference.

 

Becauseof these risks, uncertainties, and assumptions and the fact that anyforward-looking statements made by HickoryTech and its management are based onestimates, projections, beliefs, and assumptions of management, they are notguarantees of future performance and you should not place undue reliance onthem. In addition, forward-looking statements speak only as of the date theyare made. With the exception of the requirements set forth in the federalsecurities laws or the rules and regulations of the Securities andExchange Commission, we do not undertake any obligations or update or reviewany forward-looking information, whether as a result of new information, futureevents or otherwise.

 

**Resultsof Operations**

 

Overview-Trends

 

We operate in two businesssegments: the Telecom Sector and the Enventis Sector. The Telecom Sectorincludes our historical rural telephone business operations, including threeincumbent local exchange carriers (“ILECs”), a competitive local exchangecarrier (“CLEC”) and a company providing data processing services for thetelecommunications industry (National Independent Billing, Inc.).

 

14

----

 

Our consolidated revenueexperienced a modest decline of $1,027,000 or 2.8% in the first three months of2008 as compared to the first three months in 2007. This was due to a $743,000decrease in Telecom revenue and a $1,266,000 decrease in equipment salesrevenue in the Enventis Sector, partly offset by a $982,000 increase in servicerevenue of the Enventis Sector. Consolidated operating income for the firstthree months of 2008 was $4,869,000, a decrease of $198,000 or 3.9% compared tothe first three months in 2007. The Telecom operating income decrease of$556,000 was the primary driver for this, and was offset by improvement in corporatecosts and an increase in the profitability of Enventis.

 

Increased competition fromCLECs, cable TV providers, voice over internet protocol, wireless telephone,and other telephone competitors caused reduced customer counts and networkaccess usage in the Telecom Sector. Our network access revenue and Telecommargins were further impacted by a reduction in interstate network access ratesthat went into effect on July 1, 2007, as well as by the competitive voiceservices offered by the primary cable TV provider in Mankato, our largestmarket, beginning in the third quarter of 2007. As a result, network accessrevenue declined 7.3% in the first quarter of 2008 compared to the firstquarter of 2007. While we continue to work to offset declining Telecom Sectorrevenue with new services to our customers, we may be unable to match theprofitability of services we lose with the same profitability in the newservices we provide.

 

The reduction in corporatecosts in the first quarter of 2008 was primarily due to lower interest expense,which declined by $485,000, or 22.2%. This reduction was driven by two factors.The first factor was our focus on debt reduction in 2007 reducing our level ofdebt by $11,840,000 from $143,089,000 as of December 31, 2006 to $131,249,000as of March 31, 2008. The second factor was our ability to lock in furtherfavorable interest rates in the first quarter of 2008. We currently have$100,000,000 of variable-interest rate debt locked in through interest-rateswap agreements which mature in 2010. We also have $19,500,000 of fixedinterest rate debt under Term Loan C that is locked into the current rate untilthe first quarter of 2010. In total we have $119,500,000 of our total$131,249,000 debt on fixed interest rates terms until early 2010. By locking inour long-term debt rates, we will experience lower interest expense for theyear 2008 compared to 2007.

 

We believe that our EnventisSector provides a platform for longer-term growth. The Enventis Sector hadslight increases in operating income and net income even though our EnventisEnterprise Network Service equipment revenue was down $1,266,000 during thefirst quarter of 2008. The Enterprise Network Services product is subject tocyclical highs and lows depending on customer demand. The service revenueportion of the Enterprise Network and Enterprise Transport product linesexperienced increases of 18.5% and 14.0%, respectively. The progress made inthis service element of the Enventis Sector, with its recurring revenue andhigher margin characteristics, is a main focus in our Enventis Sector. Enventisestablished a customer relationship with a large financial services companywhich will add equipment and recurring service revenue beginning in the secondquarter of 2008.

 

15

----

 

**Sector Results of Operations**

 

**Telecom Sector**

 

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

 

**TELECOM SECTOR**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31**                | ** ** |
| **(Dollars in thousands)**                       | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Revenue before  intersegment eliminations                  |       |                             |       |   |   |
|                                                       |       |                             |       |   |   |
| Revenue                                                    |       |                             |       |   |   |
| Local Service                                              | ** ** | **$**                            | **4,131**  |   | $ | 4,448 |   |
| Network Access                                             | ** ** | **6,825**                        |       | 7,359 |   |
| Long Distance                                              | ** ** | **1,190**                        |       | 1,332 |   |
| Data                                                       | ** ** | **1,848**                        |       | 1,676 |   |
| Internet                                                   | ** ** | **1,078**                        |       | 1,126 |   |
| Digital TV                                                 | ** ** | **744**                          |       | 489 |   |
| Directory                                                  | ** ** | **1,000**                        |       | 885 |   |
| Message  Processing & Billing                     | ** ** | **594**                          |       | 689 |   |
| Intersegment                                               | ** ** | **130**                          |       | 107 |   |
| Other                                                      | ** ** | **884**                          |       | 1,033 |   |
| Total Telecom  Revenue                                     | ** ** | **$**                            | **18,424** |   | $ | 19,144 |   |
|                                                       |       |                             |       |   |   |
| Total Telecom  revenue before intersegment eliminations    |       |                             |       |   |   |
| Unaffiliated  customers                                    | ** ** | **$**                            | **18,294** |   | $ | 19,037 |   |
| Intersegment                                               | ** ** | **130**                          |       | 107 |   |
| ** **                                                 |       | **18,424**                       |       | 19,144 |   |
|                                                       | ** ** | ** **                       |       |   |   |
| Cost of  services, excluding depreciation and amortization | ** ** | **7,647**                        |       | 7,855 |   |
| Selling, general  and administrative expenses              | ** ** | **3,304**                        |       | 3,273 |   |
| Depreciation and  amortization                             | ** ** | **3,926**                        |       | 3,913 |   |
| Operating Income                                           | ** ** | **$**                            | **3,547**  |   | $ | 4,103 |   |
| Net income                                                 | ** ** | **$**                            | **2,068**  |   | $ | 2,439 |   |
| Capital  expenditures                                      | ** ** | **$**                            | **2,420**  |   | $ | 1,646 |   |
|                                                       |       |                             |       |   |   |
| Key metrics                                                |       |                             |       |   |   |
| Business access  lines                                     | ** ** | **27,318**                       |       | 27,254 |   |
| Residential  access lines                                  | ** ** | **36,713**                       |       | 40,324 |   |
| Total access  lines                                        | ** ** | **64,031**                       |       | 67,578 |   |
| Long distance  customers                                   | ** ** | **40,837**                       |       | 41,237 |   |
| Digital  Subscriber Line customers                         | ** ** | **18,003**                       |       | 16,313 |   |
| Digital TV  customers                                      | ** ** | **7,107**                        |       | 4,865 |   |

 

**Revenue**

 

Telecom Sector operating revenue before intersegmenteliminations decreased by $720,000 or 3.8% in the three months ended March 31,2008 compared to the three months ended March 31, 2007. This decrease wasprimarily due to decreases in the network access, local service, long distance,and other revenue, offset by increases in digital TV and data revenue, all ofwhich are described below.

 

16

----

 

Localservice revenue decreased by $317,000 or 7.1% in the three months ended March 31,2008 compared to the three months ended March 31, 2007. This decrease wasprimarily due to a 3,547 or 5.2% decrease in access lines from March 31,2007 to March 31, 2008. Also contributing to the decrease in local servicerevenue is a decline in reciprocal compensation received from wireless carriersunder contract using minute-of-use pricing. Many of these contracts and their associated pricing were renegotiatedin 2007. A higher degree of competition from ILECs, CLECs, and cable TVproviders serving in our markets and from wireless substitution, could continueto impact our local service revenue in future periods.

 

Networkaccess revenue decreased by $534,000 or 7.3% in the three months ended March 31,2008 compared to the three months ended March 31, 2007. This decrease wasprimarily due to fewer minutes of use in 2008 compared to 2007 and lowerinterstate network rates that went into effect on July 1, 2007. Inaddition, disputes with an interexchange carrier and with the Universal ServiceAdministrative Company caused $147,000 of the network access revenue decline inthe first quarter of 2008. The combination of changing minutes of use, carriersoptimizing their network costs, and lower demand for dedicated lines mayfurther negatively impact access revenue in the future. Federal or state accessreform may also negatively impact access revenue. Public utilities commissionshave also considered intrastate access reform and universal service for severalyears.

 

Longdistance revenue decreased by $142,000 or 10.7% in the three months ended March 31,2008 compared to the three months ended March 31, 2007. The decrease wasdue to a 1.0% decrease in the customer base at March 31, 2008 compared to March 31,2007, more customers moving to optional calling plans, some of which includeunlimited long distance calling, and to large call-volume business customersundergoing economic slowdowns.

 

Data revenue increased by$172,000 or 10.3% in the three months endedMarch 31, 2008 compared to the three months ended March 31, 2007. Thisincrease was primarily due to an increase in DSL customers of 1,690 or 10.4%between March 31, 2008 and March 31, 2007. Also contributing to theincrease was the continuing strong sales of our Ethernet service product. Webelieve Ethernet service revenue will continue to provide growth opportunitiesfor HickoryTech. Expanded networking opportunities among medium and largebusiness customers are key drivers for this growth.

 

Internet revenue decreased by $48,000 or 4.3% in the three months ended March 31, 2008 comparedto the three months ended March 31, 2007. This decrease wasprimarily due to a $101,000 one-time adjustment completed in the first quarterof 2008.

 

DigitalTV revenue increased by $255,000 or 52.2% in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. This increase was primarily the result of theoffering of digital TV to three additional communities in 2007, which resultedin a 2,242 or 46.1% increase in digital TV customers at March 31, 2008compared to March 31, 2007. Also contributing to the increase in digitalTV revenue was an increase in rates charged to customers of approximately 5.0%,which went into effect in April 2007.

 

Directoryrevenue increased by $115,000 or 13.0% in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. This increase was the result of increased sales ofyellow-page advertising in  ourdirectory, which went into effect in the beginning of the third quarter of2007.

 

NIBImessage processing revenue decreased by $95,000 or 13.8% in the three months endedMarch 31, 2008 compared to the three months ended March 31, 2007.This decrease was primarily due to a $165,000 decrease in product revenue,which is the direct result of non-recurring revenue of $188,000 that wasrealized in the first quarter of 2007. Offsetting this decrease is an increaseof $47,000 in contract service revenue along with a $26,000 increase in messageprocessing revenue.

 

Otherrevenue, consisting primarily of sales of customer premise equipment, circuitprivate lines, maintenance, and adds, moves and changes decreased by $149,000or 14.4% in the three months ended March 31, 2008 compared to the threemonths ended March 31, 2007. This decrease is primarily due to a decreasein customer premise equipment sales of $116,000 and a decrease in pay-stationrevenue of $106,000 due to a one-time adjustment in March of 2007, offsetby an increase in contract services of $85,000.

 

17

----

 

**Cost of Services (excludingDepreciation and Amortization)**

 

TelecomSector cost of services (excluding depreciation and amortization) decreased by$208,000 or 2.7% in the three months ended March 31, 2008 compared to thethree months ended March 31, 2007. This decrease was primarily due to a$392,000 decrease in wages and benefits due to one-time severance payments in2007 and a $139,000 decrease in co-location expenses due to credits receivedfrom a vendor, partially offset by a $161,000 increase in programming expenseto support the increase in digital TV services, a $99,000 increase in directoryexpenses supporting the increase in associated revenues, and a $62,000 increasein access expenses relating to terminating traffic.

 

**Selling, General andAdministrative Expenses**

 

TelecomSector selling, general and administrative expenses increased $31,000 or 1.0%in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. The increase was primarily due to an increase incorporate expenses of $112,000 and higher regulatory fees of $50,000 partiallyoffset by a decrease in professional fees of $46,000 and customer premiseequipment expenses of $39,000.

 

**Depreciation and Amortization**

 

TelecomSector depreciation and amortization increased $13,000 or .3% in the threemonths ended March 31, 2008 compared to the three months ended March 31,2007.Telecom Sector amortization was $27,000 in the three months ended March 31,2008 and 2007, respectively.

 

**Operating Income**

 

TelecomSector operating income decreased $556,000 or 13.6% in the three months ended March 31,2008 compared to the three months ended March 31, 2007. This decrease wasdue to a $720,000 decrease in revenue, a $31,000 increase in selling, general,and administrative expenses, a $13,000 increase in depreciation andamortization expenses offset by a $208,000 decrease in cost of services(excluding depreciation and amortization), all of which are described above.

 

**Income from ContinuingOperations, net of Tax**

 

TelecomSector income from continuing operations, net of tax, decreased $371,000 or 15.2%in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. This decrease was primarily due to lower operatingincome mentioned above, offset by the change in taxes.

 

18

----

 

**Enventis Sector**

 

The following table provides abreakdown of the Enventis Sector operating results.

 

**ENVENTIS SECTOR**

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31**                | ** ** |
| **(Dollars in thousands)**                                | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Revenue before  intersegment eliminations                           |       |                             |       |   |   |
|                                                                |       |                             |       |   |   |
| Revenue                                                             |       |                             |       |   |   |
| ENS equipment  revenue                                              | ** ** | **$**                            | **10,168** |   | $ | 11,434 |   |
| ENS services  revenue                                               | ** ** | **2,065**                        |       | 1,743 |   |
| ETS services  revenue                                               | ** ** | **5,373**                        |       | 4,713 |   |
| Intersegment                                                        | ** ** | **138**                          |       | 62 |   |
| Total Enventis  revenue                                             | ** ** | **$**                            | **17,744** |   | $ | 17,952 |   |
|                                                                |       |                             |       |   |   |
| Total Enventis  revenue before intersegment eliminations            |       |                             |       |   |   |
| Unaffiliated  customers                                             | ** ** | **$**                            | **17,606** |   | $ | 17,890 |   |
| Intersegment                                                        | ** ** | **138**                          |       | 62 |   |
| ** **                                                          |       | **17,744**                       |       | 17,952 |   |
|                                                                |       |                             |       |   |   |
| Cost of sales,  equipment (excluding depreciation and amortization) |       | **8,697**                        |       | 10,314 |   |
| Cost of services  (excluding depreciation and amortization)         |       | **4,279**                        |       | 3,198 |   |
| Selling, general  and administrative expenses                       | ** ** | **2,327**                        |       | 2,185 |   |
| Depreciation and  amortization                                      | ** ** | **1,020**                        |       | 875 |   |
| Operating income                                                    | ** ** | **$**                            | **1,421**  |   | $ | 1,380 |   |
| Net income                                                          | ** ** | **$**                            | **834**    |   | $ | 822 |   |
|                                                                |       |                             |       |   |   |
| Capital  expenditures                                               | ** ** | **$**                            | **993**    |   | $ | 1,084 |   |

 

19

----

 

HickoryTech Corporation acquired Enventis on December 30,2005. We continue to manage and evaluate the Enventis operations in theirentirety. The table below however, provides an illustration of the relativecontributions from each of the Enventis primary product lines. Certainallocations have been made, particularly in the area of selling, general andadministrative expenses, in order to develop these tables.

 

**ENVENTIS PRODUCT LINE REPORTING**

 
| ** **                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **Network Services**                            | ** ** | **Transport Services** | ** ** |
| **(Dollars in thousands)**                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                |       |                                                 |       |   |   |   |   |   |   |
| Revenue before  intersegment eliminations:                          |       |                                                 |       |   |   |   |   |   |   |
| Equipment  revenue                                                  | ** ** | **$**                                                | **10,168** |   | $ | 11,434 | ** ** | **$** | **—** |   | $ | — |   |
| Service revenue                                                     | ** ** | **2,065**                                            |       | 1,743 | ** ** | **5,373** |   | 4,713 |   |
| Intersegment                                                        | ** ** | **—**                                           |       | — | ** ** | **138** |   | 62 |   |
| Total Enventis  revenue                                             | ** ** | **$**                                                | **12,233** |   | $ | 13,177 | ** ** | **$** | **5,511** |   | $ | 4,775 |   |
|                                                                |       |                                                 |       |   |   |   |   |   |   |
| Cost of sales,  equipment (excluding depreciation and amortization) |       | **8,692**                                            |       | 10,310 |   | **5** |   | 4 |   |
| Cost of services  (excluding depreciation and amortization)         |       | **1,832**                                            |       | 927 |   | **2,447** |   | 2,271 |   |
| Selling, general  and administrative expenses                       | ** ** | **1,259**                                            |       | 1,098 | ** ** | **1,068** |   | 1,087 |   |
| Depreciation and  amortization                                      | ** ** | **121**                                              |       | 95 | ** ** | **899** |   | 780 |   |
| Operating income                                                    | ** ** | **$**                                                | **329**    |   | $ | 747 | ** ** | **$** | **1,092** |   | $ | 633 |   |
| Net income                                                          | ** ** | **$**                                                | **193**    |   | $ | 445 | ** ** | **$** | **641** |   | $ | 377 |   |
|                                                                |       |                                                 |       |   |   |   |   |   |   |
| Capital  expenditures                                               | ** ** | **$**                                                | **133**    |   | $ | (32 | ) | **$** | **860** |   | $ | 1,116 |   |

 

**Revenue**

 

EnventisSector operating revenue before intersegment eliminations was $17,744,000,which is $208,000 or 1.2% lower in the three months ended March 31, 2008compared to the three months ended March 31, 2007. This decrease wasprimarily due to the decrease in Enterprise Network Services equipment revenueoffset by increases in the non-equipment Enterprise Network Services andEnterprise Transport Services revenue, all of which are described below.

 

EnterpriseNetwork Services equipment revenue was $10,168,000, which is $1,266,000 or11.1% lower in the three months ended March 31, 2008 compared to the threemonths ended March 31, 2007. The Enventis Enterprise NetworkServices product line is subject to cyclical highs and lows depending oncustomer demand. We established a customer relationship with a largefinancial services company which will add equipment revenues in the second andthird quarters of 2008.

 

EnterpriseNetwork Services revenue was $2,065,000, which is $322,000 or 18.5% higher inthe three months ended March 31, 2008 compared to the three months ended March 31,2007. This increase was primarily due to an increase in contract servicesrevenue of $355,000 associated with an increase in the design, configuration,and installations services related to voice and data equipment, a $141,000increase in support fees revenue which represents the technology support andmonitoring of systems for our customers, partially offset by a $255,000decrease in maintenance contract revenue. We established a customerrelationship with a large financial services company which willadd to the service revenues beginning in the second quarter of 2008.

 

EnterpriseTransport Services revenue was $5,373,000, which is $660,000 or 14.0% higher inthe three months ended March 31, 2008 compared to the three months ended March 31,2007. This increase was primarily due to a $658,000 increase in fiber transportservice revenue due to higher customer demand in the wholesale, business, andmanaged transport service areas.

 

20

----

 

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

 

Enventis Sectorcost of sales (excluding depreciation and amortization) associated withequipment revenue decreased $1,617,000 or 15.7% in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. This decrease was primarily due to the lowerequipment revenue experienced in the Enterprise Network Services product line.Labor associated with installation work is not included in this category, butis included in cost of services (excluding depreciation and amortization)described below.

 

**Cost of Services (excludingDepreciation and Amortization)**

 

Enventis Sector cost of services (excluding depreciation andamortization) increased $1,081,000 or 33.8% in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. This increase was primarily due to thefollowing items: 1) a $718,000 increase in wages and benefits due to increasedstaffing levels, 2) a $269,000 increase in professional fees due to externalproject management consulting and 3) a $132,000 increase in circuit expenses,which supported the increase in off-net revenue. The increased staffing andproject management consulting reflect our investment in the growth of themanaged service business we are planning for the Enventis Sector in the future.

 

**Selling, General andAdministrative Expenses**

 

Enventis Sectorselling, general and administrative expenses increased $142,000 or 6.5% in the three months ended March 31, 2008compared to the three months ended March 31, 2007. This increasewas primarily due to a $145,000 increase in corporate expenses, a $144,000increase in incentive compensation accruals, offset by a $154,000 decrease inprofessional fees and a $73,000 decrease in wages and benefits.

 

**Depreciation and Amortization**

 

Enventis Sector depreciation and amortization increased $145,000 or16.6% in the three months ended March 31, 2008 compared to the threemonths ended March 31, 2007. Enventis Sector depreciation was $145,000 or23.9% higher in the three months ended March 31, 2008 compared to thethree months ended March 31, 2007. This increase was primarily due to theincrease in assets placed in service in 2007 and 2008 to support the growth inour Enventis Transport Services line of business. Enventis Sector amortizationremained constant in 2008 and 2007, respectively, and is attributed tointangible assets related to the Enventis acquisition in 2005.

 

**Operating Income**

 

Enventis Sector operating income increased $41,000 or 3.0% in the three months ended March 31, 2008compared to the three months ended March 31, 2007. The increase wasdue to a decrease in the cost of sales offset by a decrease in revenue andincreases in cost of services (excluding depreciation and amortization),selling, general, and administrative expenses, and depreciation expenses, allof which are described above.

 

**Net Income**

 

Enventis Sectornet income increased $12,000 or 1.5% in thethree months ended March 31, 2008 compared to the three months ended March 31,2007. This increase was primarily due to the increased operating incomementioned above, offset by the change in taxes.

 

21

----

 

**Interest Expense**

 

Consolidated interest expense was $1,697,000 which is $485,000 or 22.2%lower in the three months ended March 31, 2008 compared to thethree months ended March 31, 2007. This decrease is the result of areduction of $7,860,000 in long-term debt between March 31, 2008 and March 31,2007, combined with a lower average effective interest rate in the first threemonths of 2008. The outstanding balance ofthe revolving credit facility was $131,249,000 at March 31, 2008 and$129,206,000 at December 31, 2007.

 

Interest expensewill increase by approximately $330,000 per quarter starting in the thirdquarter of 2008, subject to other normal influences such as debt principalamount and movement in interest rates on un-hedged or unfixed interest ratedebt. Quarterly benefits of $330,000 from interest-rate swap agreements sold ata gain in early 2007 become fully amortized in the second quarter of 2008 andno longer offset a portion of interest expense. The combined effects of lowerinterest rates, interest protection strategies, and lower debt principalindicate that interest expense for the year 2008 will be lower than 2007 inspite of the $330,000 quarterly trend change mentioned above.

 

**Income Taxes**

 

The effectiveincome tax rate from continuing operations of approximately 44.3% for the firstquarter of 2008 and 40.5% for the first quarter of 2007 exceeds the federalstatutory rate primarily due to state income taxes and interest expense accruedon unrecognized tax benefits. The change in the effective tax rate from 2008 to2007 is the result of interest accrued on uncertain tax positions according toFASB Interpretation No. 48 (FIN No. 48), “Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109.”

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

Cash generated from operations was $11,346,000 in the first threemonths of 2008 compared to $7,868,000 in the first three months of 2007. Cashprovided by operations in the first three months of 2008 was primarilyattributable to net income plus non-cash expenses for depreciation andamortization. Collection of trade account receivables balances outstanding at December 31,2007 aided cash flow by $7,032,000 during the first three months of 2008. Cashgenerated from operations in the first three months of 2007 was primarilyattributable to net income plus non-cash expenses for depreciation andamortization. The decrease in inventory of $2,848,000 in the first three monthsof 2007 was primarily due to a decrease in inventory in the Enventis Sector anddirectly correlated to the $2,260,000 increase in outstanding accountsreceivable, which was the result of customer installations in progress evolvinginto the billing stage and normal collection process.

 

Cash used in investing activities was driven by capital expenditureswhich increased $727,000 during the first three months of 2008 compared to thefirst three months of 2007. We are making a concentrated effort to focusspending on revenue generating products, services, and key strategicinitiatives. We anticipate the level of total capital spending in 2008 to beslightly higher than the level of capital spending seen in 2007.

 

Cash used in financing activities in the first three months of 2008 was$6,612,000 compared to $3,475,000 in the first three months of 2007. This wasprimarily due to the decrease in the extended term payable of $6,938,000 whichis used to facilitate Enventis equipment purchases. We experienced an increasein our long term debt position of $1,950,000 during the first three months of2008. In 2008 we anticipate that our growth initiatives will cause us tomaintain our current debt level which is a change from our 2007 efforts toreduce our overall debt. In 2007, we terminated two outstanding interest-rateswap agreements which had original maturities of June 2008 resulting inproceeds of $1,936.000.

 

**Working Capital**

 

Working capital (i.e. current assets minus current liabilities) was$11,302,000 as of March 31, 2008, compared to working capital of$8,228,000 as of December 31, 2007. The ratio of current assets to currentliabilities was 1.5 as of March 31, 2008 and 1.3 as of December 31,2007.

 

22

----

 

**Extended-Term Payable**

 

Enventis has a $20,000,000 wholesale financing agreement with afinancing company to fund inventory purchased from certain approved vendors.Advances under the financing arrangement are collateralized by the accountsreceivable and inventory of Enventis and a guaranty of up to $16,000,000 fromHickoryTech Corporation. The financing agreement provides sixty-day interest-freepayments terms for inventory purchases and can be terminated at any time byeither party. The balance outstanding under the financing arrangement was$7,505,000 and $14,443,000 at March 31, 2008 and December 31, 2007,respectively. These balances are classified as current liabilities in theaccompanying balance sheets and are not considered part of the our debtfinancing.

 

**Long-Term Obligations**

 

Our long-termobligations as of March 31, 2008 were $130,214,000, excluding currentmaturities of $750,000 on debt and $285,000 on current maturities of capitalleases.Long-term obligations as of December 31,2007, were $128,475,000 excluding current maturities of $475,000 on debt and$256,000 of capital leases. On December 30,2005, we entered into a $160,000,000 credit agreement with a syndicate of banks(subsequently reduced to a $155,625,000 facility as of March 31, 2008),which amended our previous credit facility. The credit facility iscomprised of a $30,000,000 revolving credit component that expires on December 30,2011 and a $130,000,000 term loan component (subsequently reduced to$125,625,000 as of March 31, 2008).

 

The term loancomponent is comprised of two components, which are defined as term loan B andterm loan C. The outstanding principal balance of term loan B is$106,075,000 as of March 31, 2008, and is held in varying amounts by threeof the lenders in the syndicate, US Bank, GE Commercial Distribution FinanceCorporation and CoBank. Under the terms of term loan B, we are required to makequarterly principal payments of $275,000 from March 31, 2008 through December 31,2011 with the remainder of the aggregate principal due in two payments on March 31,2012 and June 30, 2012. Due to the aggressive pay down of debt in2007, we are not required to make quarterly principal payments during the firstthree quarters of 2008. The outstanding principal balance of term loan C is$19,550,000 as of March 31, 2008 and is held entirely by the RuralTelephone Finance Cooperative (“RTFC”). Under the terms of term loan C, we arerequired to make quarterly principal payments of $50,000 on the aggregateprincipal amount from March 31, 2008 through December 31, 2012 withthe remainder of the aggregate principal due in two payments on March 31,2013 and June 30, 2013.

 

Under the terms ofthe revolving credit facility, any outstanding principal is payable in full on December 30,2011. The outstanding balance of the revolving credit facility is $5,000,000 asof March 31, 2008. For all components of the total credit facility,interest is payable at an applicable margin in excess of a prevailing pricinglevel. The prevailing price level is based on a Base Rate, LIBOR Rate Loans orRTFC rate table. The prevailing rate for Base Rate Loans is the higher of PrimeRate or the Federal Funds Rate plus 0.5%. The prevailing rate for LIBORRate Loans is publicly available. The RTFC rate tables are established based onRTFC policies, which are not publicly available and change from time to time. The applicable margin for the revolving creditfacility, term loan B and term loan C is determined quarterly based on theleverage ratio of HickoryTech. The credit facility also provides forpayment of a fee on any un-drawn commitment of the revolving credit facilityand is payable quarterly. The credit facility requires us to enter into ormaintain in effect, interest rate protection agreements on at least 50% of thefacility’s outstanding balance in order to manage our exposure to interest ratefluctuations. We continually monitor the interest rates on our bank loans andhave implemented interest rate protection agreements on various portions of theoverall debt outstanding for varying terms. As a result of the new creditagreement, we incurred $1,525,000 of new debt placement costs in 2005, whichwill be amortized over the expected life of the debt facility.

 

Our debt requiresus to comply, on a consolidated basis, with specified financial ratios andtests. These financial ratios and tests include maximum leverage ratio, minimuminterest coverage ratio, and maximum capital expenditures. We were in fullcompliance with these ratios and tests as of March 31, 2008. Ourobligations under the credit facility are secured by a first-priority lien onall property and assets, tangible and intangible of HickoryTech and its currentsubsidiaries, including, but not limited to accounts receivable, inventory,equipment and intellectual property; general intangibles, cash and proceeds ofthe foregoing. HickoryTech has also given a first-priority pledge of the capitalstock of HickoryTech’s current subsidiaries to secure the credit facility.

 

23

----

 

**Commitments and Contingencies**

 

We are involved in certain contractual disputes in the ordinary courseof business. We do not believe the ultimate resolution of any of these existingmatters will have a material adverse effect on our financial position, resultsof operations or cash flows. We did not experience any changes to materialcontractual obligations in the first three months of 2008. Refer to ourAnnual Report on Form 10-K for the year ended December 31, 2007 forthe discussion relating to commitments and contingencies.

 

**Other**

 

We have not conducted a public equity offering andoperate with original equity capital, retained earnings and indebtedness in theform of bank term and revolving lines of credit. By utilizing cash flow fromoperations and current cash balances, we feel it has adequate resources to meetits anticipated operating, capital expenditures and debt service requirements.

 

**Critical Accounting Policies**

 

Management’s discussion and analysis of financial condition and resultsof operations stated in this Quarterly Report on Form 10-Q are based onour consolidated financial statements, which have been prepared in accordancewith GAAP and where applicable, conform to the accounting principles asprescribed by federal and state telephone utility regulatory authorities. Wepresently give accounting recognition to the actions of regulators whereappropriate, as prescribed by SFAS No. 71, “Accounting for the Effects ofCertain Types of Regulation”. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities. We believe that theapplication of the accounting policies, which are important to our financialposition and results of operations, requires significant judgments andestimates on the part of management. A description of the critical accountingpolicies that we adhere to is contained in the Management’s Discussion andAnalysis of Financial Condition and Results of Operations in our Annual Reporton Form 10-K for the year ended December 31, 2007.

 

# **Item3. Quantitative and Qualitative Disclosures about Market Risk**

# ** **

We do not have operations subject to risks of foreign currencyfluctuations. We do, however, use derivative financial instruments to manageexposure to interest rate fluctuations. Our objectives for holding derivativesare to minimize interest rate risks using the most effective methods toeliminate or reduce the impact of these exposures. Variable rate debtinstruments are subject to interest rate risk. In March 2007, we terminatedtwo outstanding interest-rate swap agreements, with original maturities of June 2008,in exchange for $1,936,000 in proceeds. Proceeds of $332,000 and $277,000 wererecognized as an offset to interest expense during the first quarter of 2008and 2007, respectively. The unrecognized portion of the proceeds is recorded asa component of accumulated other comprehensive income (loss) in shareholders’equity and will be recognized as an offset to interest expense over theremaining original term of the agreement (three months ending in June 2008).Immediately following the termination of the two agreements discussed above, weexecuted a new interest-rate swap agreement, effectively locking in theinterest rate on $60,000,000 of variable-rate debt through March of 2010.On March 28, 2008, we entered into a second interest-rate swapagreement, effectively locking in the interest rate on an additional$40,000,000 of variable-interest rate debt through February 2010.

 

The cumulative gain or loss on current derivative instruments isreported as a component of accumulated other comprehensive income (loss) inshareholders’ equity and is recognized in earnings when the term of theprotection agreement is concluded. Our earnings are affected by changes ininterest rates as a portion of our long-term debt has variable interest ratesbased on LIBOR. If interest rates for the portion of our long-term debt basedon variable rates had averaged 10% more for the quarter ended March 31,2008, our interest expense would have increased $76,000.

 

24

----

 

# **Item4.  Controls and Procedures**

# ** **

Evaluation ofDisclosure Controls and Procedures.

 

As of the end ofthe period covered by this Quarterly Report on Form 10-Q (the EvaluationDate), we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, regarding the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgatedunder the Securities and Exchange Act of 1934, as amended). Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded, as of the end of the period covered by this Quarterly Report, thatour disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act are recorded, processed, summarized and reportedwithin the time periods specified in applicable rules and forms and thatsuch information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, in a manner thatallows timely decisions regarding required disclosure.

 

There have been nochanges in our internal control over financial reporting during our mostrecently completed fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**Part II  Other Information**

 

# **Item1.  Legal Proceedings.**

# ** **

Other than routinelitigation incidental to our business, including the items listed below; thereare no pending material legal proceedings to which we are a party or to whichany of our property is subject.

 

We areinvestigating a potential civil dispute being discussed with a municipalityregarding contract payments from us to the municipality in support of our CLECvoice and data services. No formal dispute of claim has been filed to-date.

 

We have receivednotice from a large interexchange carrier that they are disputing approximately$654,000 of interstate and intrastate switched access charges that we billedthem between October 2005 and October 2007. We do not agree with thisdispute and cannot predict the outcome of such proceedings nor their impact, ifany, on the Company.

 

# **Item1A.  Risk Factors.**

# ** **

There have notbeen any material changes to the risk factors previously disclosed in Item 1A, “RiskFactors,” of our Annual Report on Form 10-K for the fiscal year ended December 31,2007.

 

# **Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

# ** **

None.

 

# **Item3.  Defaults Upon Senior Securities.**

# ** **

None.

 

# **Item4.  Submission of Matters to a Vote ofSecurity Holders.**

# ** **

None.

 

25

----

# ** **

# **Item5.  Other Information.**

# ** **

None.

 

# **Item6.  Exhibits Listing.**

# ** **

Exhibit 3.1Bylaws, as amended

 

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

 

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

 

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

 

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

 

26

----

 

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: | May 1,  2008 | ** **                                            | HICKORY  TECH CORPORATION |
|--------|-------------------|-------------------------------------------------------|---------------------------|
|   |              |
|   |              |
|   | By:               | /s/  John W. Finke                                    |
|   |              | John  W. Finke, President and Chief Executive Officer |
|   |              |
|   |              |
|   | By:               | /s/  David A. Christensen                             |
|   |              | David  A. Christensen, Senior Vice President and      |
|   |              | Chief  Financial Officer                              |

 

27

----