**UNITED STATESSECURITIES 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, 2007**                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                |
| **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 StreetMankato, Minnesota 56002-3248**(Address of principal executive offices and zip code)

**(800) 326-5789**(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.     Yes  x   No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seethe definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o.

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

Thetotal number of shares of the registrant’s common stock outstanding as of April30, 2007: 13,243,454.

 

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**TABLE OF CONTENTS**

**PART I.Financial Information**
| Description | ** ** | ** **                                                                                             | ** ** | **Page** |
|-------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------|
|        |       |                                                                                                   |       |     |
| Item 1.     |       | Financial Statements:                                                                                  |       |     |
|        |       |                                                                                                   |       |     |
|        |       | Consolidated  Statements of Operations (unaudited) for the Three Months Ended March 31,  2007 and 2006 |       | 3        |
|        |       |                                                                                                   |       |     |
|        |       | Consolidated  Balance Sheets (unaudited) as of March 31, 2007 and December 31, 2006                    |       | 4        |
|        |       |                                                                                                   |       |     |
|        |       | Consolidated  Statements of Cash Flows (unaudited) for the Three Months Ended March 31,  2007 and 2006 |       | 5        |
|        |       |                                                                                                   |       |     |
|        |       | Condensed  Notes to Consolidated Financial Statements (unaudited)                                      |       | 6-15     |
|        |       |                                                                                                   |       |     |
| Item 2.     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations            |       | 15-30    |
|        |       |                                                                                                   |       |     |
| Item 3.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                            |       | 30       |
|        |       |                                                                                                   |       |     |
| Item 4.     |       | Controls and  Procedures                                                                               |       | 30-31    |

 

**PART II.Other Information**
| Description | ** ** | ** **                                                   | ** ** | **Page** |
|-------------|------------|--------------------------------------------------------------|------------|----------|
|        |       |                                                         |       |     |
| Item 1.     |       | Legal  Proceedings                                           |       | 31       |
|        |       |                                                         |       |     |
| Item 1A.    |       | Risk  Factors                                                |       | 31       |
|        |       |                                                         |       |     |
| Item 2.     |       | Unregistered  Sales of Equity Securities and Use of Proceeds |       | 31       |
|        |       |                                                         |       |     |
| Item 3.     |       | Defaults  Upon Senior Securities                             |       | 31       |
|        |       |                                                         |       |     |
| Item 4.     |       | Submission  of Matters to a Vote of Security Holders         |       | 31       |
|        |       |                                                         |       |     |
| Item 5.     |       | Other  Information                                           |       | 31       |
|        |       |                                                         |       |     |
| Item 6.     |       | Exhibit  Listing                                             |       | 31       |
|        |       |                                                         |       |     |
|        |       | Signatures                                                   |       | 32       |
|        |       |                                                         |       |     |
|        |       | Exhibits                                                     |       |     |

 

 

 

2

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**HICKORYTECH CORPORATION**

Consolidated Statements of Operations(Unaudited)
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **March 31**                | ** ** |
| **(In Thousands Except Per Share Amounts)**                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Operating revenues:                                                                      |       |                             |       |   |   |
| Telecom sector                                                                           |       | **$**                            | **19,037** |   | $ | 18,656 |   |
| Enventis sector                                                                          |       | **17,890**                       |       | 14,084 |   |
| Total operating  revenues                                                                |       | **36,927**                       |       | 32,740 |   |
|                                                                                     |       |                             |       |   |   |
| Costs and expenses:                                                                      |       |                             |       |   |   |
| Cost of sales,  Enventis                                                                 |       | **10,314**                       |       | 7,683 |   |
| Cost of services  (excluding depreciation and amortization)                              |       | **10,917**                       |       | 10,416 |   |
| Selling, general  and administrative expenses  (excluding depreciation and amortization) |       | **5,836**                        |       | 6,124 |   |
| Depreciation                                                                             |       | **4,504**                        |       | 4,045 |   |
| Amortization of  intangibles                                                             |       | **289**                          |       | 293 |   |
| Total costs and  expenses                                                                |       | **31,860**                       |       | 28,561 |   |
| Operating income                                                                         | ** ** | **5,067**                        |       | 4,179 |   |
| Other  income/(expense):                                                                 |       |                             |       |   |   |
| Interest and  other income                                                               |       | **84**                           |       | 30 |   |
| Interest expense                                                                         |       | **(2,182**                       | **)**      | (1,649 | ) |
| Total other  income/(expense)                                                            |       | **(2,098**                       | **)**      | (1,619 | ) |
|                                                                                     |       |                             |       |   |   |
| Income before income  taxes                                                              | ** ** | **2,969**                        |       | 2,560 |   |
| Income taxes                                                                             | ** ** | **1,201**                        |       | 1,027 |   |
| Income from continuing  operations                                                       | ** ** | **1,768**                        |       | 1,533 |   |
| Discontinued  operations:                                                                |       |                             |       |   |   |
| Loss from  operations of discontinued component                                          |       | **(2**                           | **)**      | (240 | ) |
| Income tax  provision benefit                                                            |       | **(1**                           | **)**      | (96 | ) |
| Loss from discontinued  operations                                                       | ** ** | **(1**                           | **)**      | (144 | ) |
| Net income                                                                               | ** ** | **$**                            | **1,767**  |   | $ | 1,389 |   |
|                                                                                     |       |                             |       |   |   |
| Basic earnings per  share - continuing operations                                        | ** ** | **$**                            | **0.13**   |   | $ | 0.12 |   |
| Basic loss per share -  discontinued operations                                          | ** ** | **—**                       |       | (0.01 | ) |
|                                                                                     | ** ** | **$**                            | **0.13**   |   | $ | 0.11 |   |
| Dividends per share                                                                      | ** ** | **$**                            | **0.12**   |   | $ | 0.12 |   |
| Basic weighted average  common shares outstanding                                        | ** ** | **13,240**                       |       | 13,134 |   |
|                                                                                     |       |                             |       |   |   |
| Diluted earnings per  share - continuing operations                                      | ** ** | **$**                            | **0.13**   |   | $ | 0.12 |   |
| Diluted loss per share  - discontinued operations                                        | ** ** | **—**                       |       | (0.01 | ) |
|                                                                                     | ** ** | **$**                            | **0.13**   | ** ** | **$** | **0.11** | ** ** |
| Diluted weighted average common and equivalent common shares  outstanding                | ** ** | **13,241**                       |       | 13,134 |   |

 

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

3

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**HICKORY TECH CORPORATION**

ConsolidatedBalance Sheets

(Unaudited)
| ** **                                                                | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| **(In Thousands Except Per Share Amounts)**      | ** ** | **2007**           | ** **  | **2006**              | ** ** |
| ASSETS                                                                    |       |               |        |                  |       |
| Current assets:                                                           |       |               |        |                  |       |
| Cash and cash  equivalents                                                | ** ** | **$**              | **1,791**   |                  | $          | 84 |   |
| Receivables, net  of allowance for doubtful accounts of $829 and $851     | ** ** | **22,861**         |        | 20,780                |       |
| Inventories                                                               | ** ** | **8,446**          |        | 11,294                |       |
| Income tax  receivable                                                    | ** ** | **998**            |        | —                |       |
| Deferred income  taxes                                                    | ** ** | **815**            |        | 815                   |       |
| Prepaid expenses                                                          | ** ** | **2,007**          |        | 1,903                 |       |
| Other                                                                     | ** ** | **818**            |        | 1,662                 |       |
| Total current  assets                                                     | ** ** | **37,736**         |        | 36,538                |       |
|                                                                      |       |               |        |                  |       |
| Investments                                                               | ** ** | **3,830**          |        | 3,554                 |       |
|                                                                      |       |               |        |                  |       |
| Property, plant and  equipment                                            | ** ** | **308,630**        |        | 309,264               |       |
| Less accumulated  depreciation                                            | ** ** | **157,055**        |        | 156,429               |       |
| Property, plant  and equipment, net                                       | ** ** | **151,575**        |        | 152,835               |       |
|                                                                      |       |               |        |                  |       |
| Other assets:                                                             |       |               |        |                  |       |
| Goodwill                                                                  | ** ** | **25,239**         |        | 25,239                |       |
| Intangible  assets, net                                                   | ** ** | **2,851**          |        | 3,140                 |       |
| Financial  derivative instruments                                         | ** ** | **—**         |        | 2,489                 |       |
| Deferred costs  and other                                                 | ** ** | **2,979**          |        | 3,105                 |       |
| Total other  assets                                                       | ** ** | **31,069**         |        | 33,973                |       |
|                                                                      |       |               |        |                  |       |
| Total assets                                                              | ** ** | **$**              | **224,210** |                  | $          | 226,900 |   |
|                                                                      |       |               |        |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                |       |               |        |                  |       |
| Current liabilities:                                                      |       |               |        |                  |       |
| Checks written  in excess of available cash balances                      | ** ** | **$**              | **—**  |                  | $          | 1,475 |   |
| Short-term  financing                                                     | ** ** | **9,743**          |        | 7,719                 |       |
| Accounts payable                                                          | ** ** | **3,601**          |        | 4,211                 |       |
| Accrued expenses                                                          | ** ** | **5,073**          |        | 5,167                 |       |
| Accrued interest                                                          | ** ** | **415**            |        | 447                   |       |
| Accrued income  taxes                                                     | ** ** | **—**         |        | 4,528                 |       |
| Advanced billings  and deposits                                           | ** ** | **3,413**          |        | 3,488                 |       |
| Current portion  - post retirement benefits                               | ** ** | **264**            |        | 212                   |       |
| Current  maturities of long-term obligations                              | ** ** | **1,635**          |        | 1,560                 |       |
| Total current  liabilities:                                               | ** ** | **24,144**         |        | 28,807                |       |
|                                                                      |       |               |        |                  |       |
| Long-term liabilities:                                                    |       |               |        |                  |       |
| Debt  obligations, net of current maturities                              | ** ** | **137,474**        |        | 141,529               |       |
| Accrued income  taxes                                                     | ** ** | **6,666**          |        | —                |       |
| Deferred income  taxes                                                    | ** ** | **14,294**         |        | 15,332                |       |
| Deferred revenue                                                          | ** ** | **2,368**          |        | 2,596                 |       |
| Accrued employee  benefits and deferred compensation                      | ** ** | **8,566**          |        | 8,550                 |       |
| Financial  derivative instruments                                         | ** ** | **66**             |        | —                |       |
| Total long-term  liabilities:                                             | ** ** | **169,434**        |        | 168,007               |       |
|                                                                      |       |               |        |                  |       |
| Total  liabilities                                                        | ** ** | **193,578**        |        | 196,814               |       |
|                                                                      |       |               |        |                  |       |
| Commitments and  contingencies (Note 8)                                   | ** ** | **—**         |        | —                |       |
|                                                                      |       |               |        |                  |       |
| Shareholders' equity:                                                     |       |               |        |                  |       |
| Common stock, no  par value, $.10 stated value shares authorized: 100,000 |       |               |        |                  |       |
| Shares issued  and outstanding: 13,248 in 2007 and 13,208 in 2006         | ** ** | **1,325**          |        | 1,321                 |       |
| Additional  paid-in capital                                               | ** ** | **10,148**         |        | 9,992                 |       |
| Retained  earnings                                                        | ** ** | **18,568**         |        | 18,323                |       |
| Accumulated  other comprehensive income(loss)                             | ** ** | **591**            |        | 450                   |       |
| Total  shareholders’ equity                                          | ** ** | **30,632**         |        | 30,086                |       |
|                                                                      |       |               |        |                  |       |
| Total liabilities and shareholders’ equity                           | ** ** | **$**              | **224,210** |                  | $          | 226,900 |   |

 

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

4

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**HICKORY TECH CORPORATION**

ConsolidatedStatements of Cash Flows

(Unaudited)
| ** **                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **March 31**                | ** ** |
| **(Dollars In Thousands)**                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                           |       |                             |       |   |   |
| Net income                                                       | ** ** | **$**                            | **1,767**  |   | $ | 1,389 |   |
| Adjustments to  reconcile net income to net                      | ** ** | ** **                       |       |   |   |
| Cash provided by  operating activities:                          | ** ** | ** **                       |       |   |   |
| Loss from  discontinued operations                               | ** ** | **1**                            |       | 144 |   |
| Depreciation and  amortization                                   | ** ** | **4,793**                        |       | 4,338 |   |
| Amortization of  gain on sale of financial derivative instrument | ** ** | **(277**                         | **)**      | — |   |
| Accrued  patronage refunds                                       | ** ** | **221**                          |       | (290 | ) |
| Deferred income  tax provision (benefit)                         | ** ** | **(20**                          | **)**      | 63 |   |
| Other                                                            | ** ** | **263**                          |       | 356 |   |
| Changes in  operating assets and liabilities:                    | ** ** | ** **                       |       |   |   |
| Receivables                                                      | ** ** | **(2,260**                       | **)**      | (702 | ) |
| Inventories                                                      | ** ** | **2,848**                        |       | (1,339 | ) |
| Accounts payable  and accrued expenses                           | ** ** | **(735**                         | **)**      | (784 | ) |
| Deferred  revenue, billings and deposits                         | ** ** | **(303**                         | **)**      | (439 | ) |
| Prepaid assets                                                   | ** ** | **(103**                         | **)**      | 2,818 |   |
| Income taxes                                                     | ** ** | **1,203**                        |       | 939 |   |
| Other                                                            | ** ** | **470**                          |       | 384 |   |
| Net cash  provided by operating activities                       | ** ** | **7,868**                        |       | 6,877 |   |
|                                                             | ** ** | ** **                       |       |   |   |
| Cash flows from  investing activities:                           |       |                             |       |   |   |
| Additions to  property, plant and equipment                      | ** ** | **(2,730**                       | **)**      | (3,830 | ) |
| Other                                                            | ** ** | **44**                           |       | 151 |   |
| Net cash used in  investing activities                           | ** ** | **(2,686**                       | **)**      | (3,679 | ) |
|                                                             | ** ** | ** **                       |       |   |   |
| Cash flows from  financing activities:                           |       |                             |       |   |   |
| Short-term  financing                                            | ** ** | **2,024**                        |       | 4,456 |   |
| Checks written  in excess of available cash balances             | ** ** | **(1,475**                       | **)**      | (514 | ) |
| Payments of  capital lease obligations                           | ** ** | **(110**                         | **)**      | (119 | ) |
| Repayments on credit  facility                                   | ** ** | **(6,325**                       | **)**      | (8,860 | ) |
| Borrowings on  credit facility                                   | ** ** | **2,000**                        |       | 3,000 |   |
| Proceeds from  the sale of financial derivative instrument       | ** ** | **1,936**                        |       | — |   |
| Proceeds from  issuance of common stock                          | ** ** | **60**                           |       | 64 |   |
| Dividends paid                                                   | ** ** | **(1,585**                       | **)**      | (1,576 | ) |
| Net cash used in  financing activities                           | ** ** | **(3,475**                       | **)**      | (3,549 | ) |
|                                                             | ** ** | ** **                       |       |   |   |
| Cash flows from  discontinued operations                         |       |                             |       |   |   |
| Net cash  provided by operating activities                       | ** ** | **—**                       |       | 17 |   |
| Net cash used in  investing activities                           | ** ** | **—**                       |       | (2 | ) |
| Net cash  provided by discontinued operations                    | ** ** | **—**                       |       | 15 |   |
|                                                             | ** ** | ** **                       |       |   |   |
| Net increase in cash  and cash equivalents                       | ** ** | **1,707**                        |       | (336 | ) |
|                                                             | ** ** | ** **                       |       |   |   |
| Cash and cash  equivalents at beginning of period                | ** ** | **84**                           |       | 601 |   |
|                                                             | ** ** | ** **                       |       |   |   |
| Cash and cash  equivalents at end of period                      | ** ** | **$**                            | **1,791**  |   | $ | 265 |   |
|                                                             | ** ** | ** **                       |       |   |   |
| Supplemental disclosure  of cash flow information:               |       |                             |       |   |   |
| Cash paid for  interest                                          | ** ** | **$**                            | **2,177**  |   | $ | 1,641 |   |
| Net cash paid  for income taxes                                  | ** ** | **$**                            | **6**      |   | $ | 40 |   |
| Non-cash investing  activities:                                  |       |                             |       |   |   |
| Property, plant and  equipment acquired with capital leases      | ** ** | **$**                            | **455**    |   | $ | 132 |   |

 

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

5

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**HICKORYTECH CORPORATION**

**MARCH 31,2007**

**PART 1. FINANCIAL INFORMATION**

**ITEM 1. CONDENSED NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (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 for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, the unaudited condensed consolidated financial statementsreflect all adjustments (consisting only of normal and recurring accruals)considered necessary for the fair presentation of the Company’s financialstatements and present fairly the results of operations, financial position andcash flows of the Company for the interim periods presented. These unauditedinterim condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto,together with management’s discussion and analysis of financial condition andresults of operations contained in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2006.

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosures at the date of thefinancial statements and during the reporting period. Actual results coulddiffer from these estimates. The results of operations for the interim periodspresented are not necessarily indicative of the results that may be expectedfor the fiscal year as a whole or any other interim period.

Thecondensed consolidated financial statements of HickoryTech include Hickory TechCorporation and its subsidiaries in the following two business segments: theTelecom Sector and the Enventis Sector. All inter-company transactions havebeen eliminated from the consolidated financial statements.

Costof Sales

Costof sales for the Enventis Sector includes the material and labor costsassociated with the installation of products for customers.

Costof Services (excluding depreciation and amortization)

Costof services includes all costs related to the delivery of communicationservices for all HickoryTech Sectors. Those operating costs includeengineering, customer service, billing and collections, network monitoring andtransport costs.

Selling,General and Administrative Expenses (excluding depreciation and amortization)

Selling,general and administrative expenses include direct and indirect sellingexpenses, advertising, and all other general and administrative costsassociated with the operations of the business.

Reclassifications

Certainreclassifications of prior period data have been made to conform to the currentperiod’s presentation. The most significant of these reclassifications was toreclassify approximately $1,600,000 of transport costs from cost of sales tocost of services for the first quarter of 2006. This reclassification resultedin reporting these costs for the Enventis Sector in a manner consistent withthe rest of the organization. These reclassifications did not affect theCompany’s cash flows, financial position, or net income.

6

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OnDecember 30, 2005, HickoryTech purchased Enventis Telecom, Inc. (Enventis) fromALLETE, Inc. The purchase price totaled $38,602,000, after adjustments.Enventis is a transport and enterprise Internet Protocol (IP) telephony salesbusiness, which specializes in providing telecommunications and networksolutions. In addition to its statewide SONET-based network, Enventis providesinnovative IP services that combine voice and data onto a single platform.Since 1997, Enventis has provided network solutions for a broad spectrum of largecorporate, non-profit, government and small business clients. Enventis hasoffices located in Duluth, Plymouth and Rochester, Minnesota and Sioux Falls,South Dakota.

EffectiveDecember 31, 2006, HickoryTech sold Collins Communications Systems Co. (Collins)to Skyview Capital, LLC (Skyview). The selling price was comprised of a$100,000 note and up to $1,650,000 of earn-out payments in exchange for all ofCollins outstanding capital stock. Skyview paid HickoryTech $100,000 inFebruary 2007. The remaining selling price is due in contingent paymentspayable over the next four years if financial targets are reached by Skyview.The $100,000 mentioned above has been included in the calculation of the netloss mentioned below, while the contingent payments have not been included inthe net loss. The agreement contains covenants against competition by the newowner in south-central Minnesota. HickoryTech recorded a pre-tax loss on thesale of $3,385,000 ($2,040,000 net of income taxes). The Collins results of operationswere formerly reported in the Enterprise Solutions Sector. The consolidatedstatements of operations for all periods presented have been restated toreflect the Collins operations as discontinued operations.

RecentlyIssued Accounting Pronouncements

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 157, “Fair ValueMeasurements.” SFAS No. 157, which defines fair value, establishes a frameworkfor measuring fair value in accordance with accounting principles generallyaccepted in the United States, and expands disclosures about fair valuemeasurements. SFAS No. 157 will apply whenever another standard requires (orpermits) assets or liabilities to be measured at fair value. The standard doesnot expand the use of fair value to any new circumstances. SFAS No. 157 iseffective for the calendar year 2008. The Company is currently assessing theimpact of SFAS No. 157 on its results of operations, cash flows, and financialcondition.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115.” SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The objective isto improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. SFAS No. 159 is effective for the calendar year 2008. The Companyis currently assessing the impact of SFAS No. 159 on its results of operations,cash flows, and financial condition.

7

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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 assuming dilution calculation, are based on the weighted averagenumber of shares of common stock outstanding during the period increased bypotentially dilutive common shares. Potentially dilutive common shares includestock options and stock subscribed under the Hickory Tech Corporation Amended andRestated Employee Stock Purchase Plan (ESPP). Dilution is determined using thetreasury stock method. The dilutive effect shown below for 2006 has beenrevised from that previously reported to reflect the treasury stock method,consistent with the method currently applied. There was no impact to EPS due tothis revision.
|                                      | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** |
| ** **                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                 |       |                             |       |   |   |
| Income from  continuing operations   |       | $                                | 1,768      |   | $ | 1,533 |   |
| Income from  discontinued operatons  |       | (1                               | )          | (144 | ) |
| Net Income                           |       | $                                | 1,767      |   | $ | 1,389 |   |
|                                 |       |                             |       |   |   |
| Weighted average  shares outstanding |       | 13,240,434                       |       | 13,133,817 |   |
| Stock options  (dilutive only)       |       | —                           |       | 650 |   |
| Stock subscribed  (ESPP)             |       | 576                              |       | — |   |
| Total dilutive  shares outstanding   |       | 13,241,010                       |       | 13,134,467 |   |
|                                 |       |                             |       |   |   |
| Earnings Per Share:                  |       |                             |       |   |   |
| Basic - continuing operations        |       | $                                | 0.13       |   | $ | 0.12 |   |
| Basic - discontinued operations      |       | $                                | —     |   | $ | (0.01 | ) |
|                                 |       |                             |       |   |   |
| Diluted - continuing operations      |       | $                                | 0.13       |   | $ | 0.12 |   |
| Diluted -  discontinued operations   |       | $                                | —     |   | (0.01 | ) |

 

Options topurchase 490,550 shares and 538,850 shares for the three months ended March 31,2007 and 2006, respectively, were not included in the computation of dilutedEPS, because their effect on diluted EPS would have been antidilutive.

Cashdividends are based on the number of common shares outstanding at therespective record dates. Listed below is the number of shares outstanding as ofthe record date for the first quarter of 2007 and 2006, respectively.
| Shares outstanding on record date | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| First quarter  (Feb. 15)                              |       | 13,207,970 |       | 13,133,928 |       |

 

Dividendsper share are based on the quarterly dividend per share as declared by theHickoryTech Board of Directors. HickoryTech paid dividends of $0.12 per share for the first quarter of2007 and 2006, respectively.

Duringthe first three months of 2007 and 2006, shareholders have elected to reinvest$60,000 and $64,000, respectively, of dividends into HickoryTech common stockpursuant to the Hickory Tech Corporation Dividend Reinvestment Plan.

NOTE 3– ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

HickoryTechfollows the provisions of SFAS No. 130, “Reporting Comprehensive Income.” Thisstatement established rules for the reporting of comprehensive income and itscomponents. In addition to net income, HickoryTech’s comprehensive incomeincludes changes in unrealized gains and losses on derivative instrumentsqualifying and designated as cash flow hedges and recognized Net PeriodicBenefit Cost related to the Company’s Post-Retirement Benefit Plans.Comprehensive income for the three months ended March 31, 2007 and 2006 was$1,909,000 and $1,564,000, respectively.

8

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In March 2007, the Company terminated its twooutstanding interest-rate swap agreements, with original maturities in June,2008 in exchange for $1,936,000 in proceeds. Immediately following thetermination of these two agreements, HickoryTech executed a new interest-rateswap agreement, effectively locking in the interest rate on $60,000,000 ofvariable-interest rate debt through March, 2010.

The market value of the cumulative gain or (loss) onfinancial derivative instruments is reported as a component of accumulatedother comprehensive income (loss) in shareholders’ equity and will berecognized in earnings over the term of the swap agreement.

Thefollowing summary sets forth the components of accumulated other comprehensiveincome (loss), net of tax:
|                                          | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **              | ** ** | **Accumulated**   | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **Unrecognized**       | ** ** | **Unrecognized**       | ** ** | **Unrecognized**   | ** ** | **Unrealized**          | ** ** | **Other**         | ** ** |
| ** **                               | ** ** | **Net Actuarial** | ** ** | **Prior Service** | ** ** | **Transition**     | ** ** | **Gain/(Loss)**         | ** ** | **Comprehensive** | ** ** |
| ** **                               | ** ** | **Loss (1)**      | ** ** | **Credit (1)**    | ** ** | **Asset (1)** | ** ** | **on Derivatives** | ** ** | **Income/(Loss)** | ** ** |
| December 31,  2006                       |       | $                      | 867        |                   | $          | (37)               |       | $                       | 217        |              | $          | (1,497) |   | $ | (450) |   |
| 2007 Activity                            |       | —                 |       | —                 |       | —             |       | (123)                   |       | (123)             |       |
| Recognized as  Net Periodic Benefit Cost |       | (11)                   |       | 2                      |       | (9)                |       | —                  |       | (18)              |       |
| March 31, 2007                           |       | $                      | 856        |                   | $          | (35)               |       | $                       | 208        |              | $          | (1,620) |   | $ | (591) |   |

 

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*(1)* Amountspertain to our postretirement benefit plans.

 

NOTE 4 –ACQUISITION, DISPOSITION and DISCONTINUED OPERATIONS

Acquisition of Enventis

On December 30,2005 HickoryTech purchased Enventis from ALLETE, Inc. The purchase price wascash of $35,500,000 in exchange for the common stock of Enventis, with furtherpurchase price adjustments and transaction costs. After purchase priceadjustments, the total purchase consideration was $38,602,000. Enventis had nodebt at the time of the acquisition. The purchase agreement outlined certainpurchase price adjustments, which resulted in cash payments between ALLETE andHickoryTech in the first quarter of 2006. These purchase price adjustments werefor working capital, capital expenditures and employee benefits. There are nocontingent payments or earn-out payments.

The financing forthe estimated $38,602,000 total purchase consideration for Enventis, plus anadditional $8,500,000 for Enventis working capital, was entirely fromHickoryTech’s credit agreement, as established on December 30, 2005. The creditfacility is comprised of a $30,000,000 revolving credit component, whichexpires on December 30, 2011 and a $130,000,000 term loan component, which haspartial maturities during its term, with a final maturity on June 30, 2013.

The table belowsets forth the final Enventis purchase price allocation as of December 31,2006:
| (Dollars in Thousands)            | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| Identifiable  intangible assets:            |       |       |       |
| Customer relationship and contracts         |       | $          | 3,400      |       |
| Cisco gold supplier relationship            |       | 600        |       |
| Net working  capital                        |       | 4,226      |       |
| Property and  equipment                     |       | 23,649     |       |
| Indefeasible  rights to use                 |       | 5,496      |       |
| Other assets and  liabilities               |       | (959       | )          |
| Goodwill                                    |       | 2,190      |       |
| Allocation of purchase  price consideration |       | $          | 38,602     |       |

 

9

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Of theidentifiable intangible assets identified above, customer relationships andcontracts have useful lives of four years, and the Cisco Gold supplierrelationship has a useful life of three years. Useful lives for identifiableintangible assets were estimated at the time of the acquisition based on theperiods of time from which the Company expects to derive benefits from theidentifiable intangible assets. The identifiable intangible assets areamortized using the straight-line method, which reflects the pattern in whichthe assets are consumed.

Dispositionof Collins

EffectiveDecember 31, 2006, HickoryTech sold Collins to Skyview. The selling price wascomprised of a $100,000 note and up to $1,650,000 of earn-out payments inexchange for all of the Collins outstanding capital stock. Skyview paidHickoryTech $100,000 in February 2007. The remaining selling price is due incontingent payments payable over the next four years if financial targets arereached by Skyview. The $100,000 mentioned above has been included in thecalculation of the net loss mentioned below, while the contingent payments havenot been included in the net loss. The agreement contains covenants againstcompetition by the new owner in south-central Minnesota. HickoryTech recorded apre-tax loss on the sale of $3,385,000 ($2,040,000 net of income taxes). TheCollins results of operations were formerly reported in the EnterpriseSolutions Sector. The consolidated statements of operations for all periodspresented have been restated to reflect the Collins operations as discontinuedoperations.

NOTE 5– INVENTORIES

Inventoriesare valued using the lower of cost (perpetual weighted average-cost or specificidentification) or market method. Similar to its allowance for doubtfulaccounts, HickoryTech makes estimates related to the valuation of inventory.HickoryTech adjusts its inventory carrying value for estimated obsolescence orunmarketable inventory to the estimated market value based upon assumptionsabout future demand and market conditions. As market and other conditionschange, additional inventory reserves may be established at the time that thefacts that give rise to the lower value become known.

NOTE 6– INTANGIBLE ASSETS

Goodwillis subject to an impairment test annually as well as upon certain events thatindicate that impairment may be present. The goodwill impairment test includestwo steps, the first of which requires management to determine the fair valueof several of the Company’s reporting units (as defined by SFAS No. 142“Goodwill and Other Intangible Assets”). The Company determines the fair valueof its reporting units by application of a discounted cash flow analysis.Management makes estimates that are included in its discounted cash flowanalysis based upon the best available information at the time that thedeterminations of fair value are made. If circumstances change, HickoryTech’sestimates of fair value may also change and could result in a determination ofadditional impairment charges to reduce the carrying value of goodwill.

Thecarrying value of HickoryTech’s goodwill is $25,239,000 as of March 31, 2007and December 31, 2006.

Thecomponents of HickoryTech’s other intangible assets are as follows:
| ** **                           | ** ** | ** **            | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **            | ** ** | **Gross Carrying**      | ** ** | **Accumulated**                 | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| **(Dollars in Thousands)** | ** ** | **Useful Lives** | ** ** | **Amount**                   | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
|                                 |       |                  |       |                         |       |                            |       |   |   |   |   |
| Definite-lived  intangible assets    |       |                  |       |                         |       |                            |       |   |   |   |   |
| Customers                            |       | 1 - 8 years           |       | $                            | 4,229      |                            | $          | 1,742 |   | $ | 4,229 |   | $ | 1,504 |   |
| Other intangibles                    |       | 1 - 5 years           |       | 730                          |       | 366                             |       | 730 |   | 315 |   |
| Total                                |       |                  |       | $                            | 4,959      |                            | $          | 2,108 |   | $ | 4,959 |   | $ | 1,819 |   |

 

10

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As required by SFAS No.142, we periodically reassess the carrying value, useful lives andclassifications of identifiable assets. Amortization expense related to thedefinite-lived intangible assets for the three months ended March 31, 2007 and2006 was $289,000 and $293,000, respectively. Total estimated amortizationexpense for the remaining nine months of 2007 and the five years subsequent to2007 is as follows: 2007 (April 1 through December 31) - $868,000; 2008 -$1,127,000; 2009 - $853,000; 2010 - $3,000; none in 2011 and 2012.

NOTE 7 – QUARTERLY SECTORFINANCIAL SUMMARY
|                                           | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars In Thousands)**      | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended March 31, 2007        |       |        |       |         |       |                   |       |             |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Revenue from  Unaffiliated Customers      |       | $           | 19,037     |         | $          | 17,890                 |       | $                | —     |   | $ | 36,927 |   |
| Intersegment  revenues                    |       | 107         |       | 62           |       | (169                   | )          | —           |       |
| Total                                     |       | 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            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 
|                                           | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended March 31, 2006        |       |        |       |         |       |                   |       |             |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Revenue from  Unaffiliated Customers      |       | $           | 18,656     |         | $          | 14,084                 |       | $                | —     |   | $ | 32,740 |   |
| Intersegment  revenues                    |       | 32          |       | —       |       | (32                    | )          | —           |       |
| Total                                     |       | 18,688      |       | 14,084       |       | (32                    | )          | 32,740           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 3,575       |       | 737          |       | 26                     |       | 4,338            |       |
| Operating  income/(loss)                  |       | 4,264       |       | 567          |       | (652                   | )          | 4,179            |       |
| Interest  (expense)/benefit               |       | 122         |       | —       |       | (1,771                 | )          | (1,649           | )          |
| Income  taxes/(benefit)                   |       | 1,755       |       | 229          |       | (957                   | )          | 1,027            |       |
| Income/(loss)  from Continuing operations |       | 2,633       |       | 338          |       | (1,438                 | )          | 1,533            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 154,809     |       | 50,640       |       | 9,844                  |       | 215,293          |       |
| Property, plant  and equipment, net       |       | 119,012     |       | 29,810       |       | 203                    |       | 149,025          |       |
| Capital expenditures                      |       | 3,227       |       | 507          |       | 96                     |       | 3,830            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

NOTE 8– COMMITMENTS AND CONTINGENCIES

HickoryTechis involved in certain contractual disputes in the ordinary course of business.HickoryTech does not believe the ultimate resolution of any of the existingmatters will have a material adverse effect on its financial position, resultsof operations, or cash flows. HickoryTech did not experience any changes tomaterial contractual obligations in the first quarter of 2007. Refer to the Company’s Annual Report on Form10-K for the year ended December 31, 2006 for the discussion relating tocommitments and contingencies.

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NOTE 9– STOCK COMPENSATION

Refer to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 for a complete description of its stock-based compensationplans.

On January 1, 2006, the Company adopted SFAS No. 123(R)(revised 2004), “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.SFAS No. 123(R) supersedes the Company’s previous accounting under AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB No. 25) for periods beginning in 2006. In March 2005, theSecurities and Exchange Commission issued Staff Accounting BulletinNo. 107 (SAB No. 107) relating to SFAS No. 123(R). The Company has appliedthe provisions of SAB No. 107 in its adoption of SFAS No. 123(R).

The Company adopted SFAS No. 123(R) using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006. Share-based compensation expense recognized under SFASNo. 123(R) for the three months ended March 31, 2007 was approximately $27,000pre-tax and $19,000 after tax. Approximately $13,000 of this after-tax expenserelates to the expensing of stock options and $6,000 to the ESPP. Share-basedcompensation expense recognized under SFAS No. 123(R) for the three-monthsended March 31, 2006 was approximately $45,000 pre-tax and $27,000 after taxand was primarily related to the expensing of stock options. In addition, stockbased compensation included approximately $3,000 and $102,000 of equity basedstock awards for the three months ended March 31, 2007 and 2006, respectively.

Share-based compensation expense recognized during a period is based onthe value of the portion of share-based payment awards that are ultimately expectedto have vested during the period. Share-based compensation expense recognizedin the Company’s Consolidated Statement of Operations for the first threemonths of 2007 and 2006 included compensation expense for share-based paymentawards granted prior to, but not yet vested as of March 31, 2007 and 2006.Compensation expense for awards granted prior to 2006 is based on the grantdate fair value estimated in accordance with the fair value provisions of SFASNo. 123. Compensation expense for awards granted in 2006 and subsequent periodsis determined in accordance with the provisions of SFAS No. 123(R). Share-basedcompensation expense is recognized in the Consolidated Statement of Operationsfor the three months ended March 31, 2007 and 2006 and is based on awardsultimately expected to vest. We use historical data to estimate pre-vestingforfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the timeof the grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. The Company accounted for forfeituresas they occurred for the periods prior to 2006. The cumulative adjustment forthe change in accounting principle was immaterial.

The fair value of each option award is estimated on the date of thegrant using a Black-Scholes option valuation model. The Company uses aseven-year period to calculate the historical volatility of its stock price foruse in the valuation model. The dividend yield rate is based on the Company’scurrent dividend payout pattern and current market price. The risk-free ratefor options is based on a U.S. Treasury rate commensurate with the expectedterms. The expected term of options granted is derived from historicalexperience and represents the period of time that options granted are expectedto be outstanding.

Therewere no option awards granted during the three months ended March 31, 2007 and2006, respectively. The Stock Award Plan provides for the issuance of stockoptions, however, no current compensation programs have options as a component.

As of March 31, 2007 there was $71,000 of total unrecognizedcompensation costs related to non-vested stock options granted under theCompany’s Stock Award Plan. This expense is expected to be recognized over aweighted average period of 2 years.

12

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A summary of stock option activity is as follows:
|                                 | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding at  January 1, 2007 |       | 515,884    |       | $                         | 12.75      |   |
| Granted                         |       | —     |       | —                    |       |
| Exercised                       |       | —     |       | —                    |       |
| Forfeited                       |       | (25,334    | )          | 11.78                     |       |
| Outstanding at  March 31, 2007  |       | 490,550    |       | $                         | 12.80      |   |
| Exercisable at March  31, 2007  |       | 460,221    |       | $                         | 13.05      |   |

 

The following tableprovides certain information with respect to stock options outstanding at March31, 2007:
|                             | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Outstanding**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $6.00 - $8.00               |       | 15,000                 |       | $                         | 6.95       |                      | 9.4 years  |   |
| $8.00 - $12.00              |       | 187,000                |       | 10.26                     |       | 6.1 years                 |       |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 3.9 years                 |       |
| $16.00 - $21.00             |       | 58,500                 |       | 18.21                     |       | 4.1 years                 |       |
|                        |       | 490,550                |       | $                         | 12.80      |                      | 4.9 years  |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate intrinsic  value: |       |                   |       | $                         | —     |                      |       |   |

 

The following tableprovides certain information with respect to stock options exercisable at March31, 2007:
|                             | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Exercisable**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $8.00 - $12.00              |       | 171,671                |       | $                         | 10.20      |                      | 5.9 years  |   |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 3.9 years                 |       |
| $16.00 - $21.00             |       | 58,500                 |       | 18.21                     |       | 4.1 years                 |       |
|                        |       | 460,221                |       | $                         | 13.05      |                      | 4.7 years  |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate intrinsic  value: |       |                   |       | $                         | —     |                      |       |   |

 

As of March 31, 2007, thefollowing amount of shares, were available for each stock-based compensationplan:
| Plan                                         | ** ** | **Shares Available** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|
| Retainer Stock  Plans for Directors          |       | 235,669                   |       |
| Non-Employee  Directors’ Incentive Plan |       | 190,000                   |       |
| Stock Award Plan                             |       | 980,729                   |       |

 

In addition, a new Employee Stock Purchase Plan,which the HickoryTech Board of Directors has approved and is subject to shareholderapproval at the May, 2007 annual meeting, will have 500,000 common sharesreserved.

Shares issued under other stock-based compensationplans are as follows:
|                                           | ** ** | **For Three Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **March 31, 2007**              | ** ** |
| Retainer Stock  Plans for Directors       |       | 2,339                                     |       |
| market price/fair value at time of grant  |       | $6.95/share                               |       |
|                                      |       |                                      |       |
| Stock Award Plan                          |       | 34,960                                    |       |
| market  price/fair value at time of grant |       | $7.10/share                               |       |

 

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NOTE10 – FINANCIAL DERIVATIVE INSTRUMENTS

HickoryTech uses financial derivative instruments tomanage its overall exposure to fluctuations in interest rates.  HickoryTech accounts for derivativeinstruments in accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended by SFAS No. 149, “Amendment ofStatement 133 Accounting for Derivative Instruments and Hedging Activities,”which requires derivative instruments to be recorded on the balance sheet atfair value. Changes in fair value of derivative instruments must be recognizedin earnings unless specific hedge accounting criteria are met, in which casethe gains and losses are included in other comprehensive income rather than inearnings.

The Company utilizes interest-rate swap agreements thatqualify as cash-flow hedges, to manage its exposure to interest ratefluctuations on a portion of the Company’s variable-interest rate debt. InMarch 2007, the Company terminated its two outstanding interest-rate swap agreements,with original maturities of June, 2008 in exchange for $1,936,000 in proceeds.Proceeds of $277,000 were recognized as an offset to interest expense in thefirst quarter of 2007. The remaining proceeds will be recognized as an offsetto interest expense over the remaining original term of the agreements, aperiod of 15 months, ending in June 2008. The unrecognized portion of theproceeds is recorded as a long-term liability in the Company’s financialstatements.

Immediately following the termination of the two swapagreements discussed above, HickoryTech executed a new interest-rate swapagreement, effectively locking in the interest rate on $60,000,000 ofvariable-interest rate debt through March, 2010.

The market value of the cumulative gain or (loss) onfinancial derivative instruments is reported as a component of accumulatedother comprehensive income (loss) in shareholders’ equity and will berecognized in earnings over the term of the swap agreement.

The fair value of HickoryTech’s derivatives at March 31,2007 and December 31, 2006 is a net liability of $66,000 and a net asset of$2,489,000, respectively.

NOTE11 – EMPLOYEE POST-RETIREMENT BENEFITS

HickoryTechprovides post-retirement health care and life insurance benefits for certainemployees. HickoryTech accounts for these post-retirement benefits inaccordance with SFAS No.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 orafter January 1, 2007 will not be eligible for post-retirement health care andlife insurance benefits.
|                                          | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** |
| **(Dollars in Thousands)**     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Components of net  periodic benefit cost |       |                             |       |   |   |
| Service cost                             |       | $                                | 71         |   | $ | 81 |   |
| Interest cost                            |       | 114                              |       | 107 |   |
| Amortization of  transition obligation   |       | 15                               |       | 15 |   |
| Amortization of  prior service cost      |       | (3)                              |       | (3) |   |
| Recognized net  actuarial loss           |       | 18                               |       | 31 |   |
| Net periodic  benefit cost               |       | $                                | 215        |   | $ | 231 |   |

 
|                                                               | ** ** | **March 31, 2007** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| Employer's  contributions for current premiums                |       |                         |       |
| Contributions  made for the three months ended March 31, 2007 |       | $                            | 66         |   |
| Expected  contributions for remainder of 2007                 |       | 198                          |       |
| Total estimated  employer contributions for fiscal year 2007  |       | $                            | 264        |   |

 

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NOTE 12 - INCOME TAXES

*The effective income tax rate ofapproximately 40.5% for the first quarter of 2007 and 40.1% for the firstquarter of 2006 exceeds the federal statutory rate primarily due to stateincome taxes.*

HickoryTech adopted theprovisions of FASB Interpretation No. 48 (FIN No. 48), “Accounting forUncertainty in Income Taxes-an interpretation of FASB Statement No. 109,”on January 1, 2007. Among other things, FIN No. 48 provides guidance to addressuncertainty in tax positions and clarifies the accounting for income taxes byprescribing a minimum recognition threshold which income tax positions mustachieve before being recognized in the financial statements. As of the date ofadoption, HickoryTech had approximately $7,414,000 of unrecognized taxbenefits. Approximately $748,000 of the unrecognized tax benefits relateto a deferred tax asset that is fully reserved for financial reportingpurposes. The unrecognized tax benefits in its entirety, if recognized, wouldaffect the effective income tax rate in any future periods. As a result ofadoption, the Company recognized a credit of approximately $62,000 in theJanuary 1, 2007, retained earnings balance. There have been no significantchanges to these amounts during the quarter ended March 31, 2007.

The Company recognizes interest and penalties related to income taxmatters as income tax expense. As of the date of the adoption, the Companyhad $172,000 (net of tax) accrued for interest and nothing accrued forpenalties related to tax matters. There have been no significant changes tothese amounts during the quarter ended March 31, 2007.

TheCompany files consolidated income tax returns in the United States federaljurisdiction and combined or separate income tax returns in various statejurisdictions. In general, as of the date of the adoption, the Company is nolonger subject to United States federal income tax examinations for the yearsprior to 2003 and is no longer subject to examinations by state tax authoritiesfor the years prior to 2002.

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

#### FORWARD-LOOKING STATEMENTS

*This Quarterly Report on Form 10-Q contains certainforward-looking statements within the meaning of the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995. Statements in thisQuarterly Report on Form 10-Q that are not historical fact, are forward-lookingstatements that are based on management’s current expectations, estimates andprojections about the industry in which HickoryTech operates and management’sbeliefs and assumptions. Forward-looking statements may be identified by theuse of terminology such as “may,” “will,” “believes,” “seeks,” “projects,”“expects,” “plans,” “intends,” “estimates,” “continues,” “should,” or“anticipates” and similar expressions, as they relate to HickoryTech or itsmanagement. Such forward-looking statements are subject to important risks anduncertainties that could cause HickoryTech’s future actual results to differmaterially from such statements. These statements are not guarantees of futureperformance and involve certain risks, uncertainties and probabilities, whichare difficult to predict. Therefore, actual outcomes and results may differmaterially from what is expressed or forecasted in such forward-lookingstatements, whether as a result of new information, future events or otherwise.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 quarterly reporton Form 10-Q and Item 1A, “Risk Factors,” of HickoryTech’s Annual Report onForm 10-K for the year ended December 31, 2006, which is incorporated herein byreference. The Cautionary Statement in Part 1 of HickoryTech’s Annual Report onForm 10-K provides a comprehensive list of sources for risks and uncertaintieswhich may influence forward looking statements and is incorporated herein byreference. You are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date on which they weremade. Except as otherwise required by federal securities law, HickoryTechundertakes no obligation to update any of its forward-looking statements forany reason.*

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BUSINESSES

*HickoryTech is a diversified communications companyheadquartered in Mankato, Minnesota. HickoryTech has over a 100-year history inthe local telephone exchange business. It operates in two business segments:the Telecom Sector and the Enventis Sector. HickoryTech’s core business is itsTelecom Sector, which consists of two product lines. The first product line ofthe Telecom Sector is the operation of three incumbent local exchange carriers(ILEC) and the operation of a competitive local exchange carrier (CLEC), whichHickoryTech initiated in 1998, and its associated competitive services of longdistance and Internet access. The second product line of the Telecom Sector isNational Independent Billing, Inc. (NIBI), which provides data processingservices to the telecommunications industry.*

*On December 30, 2005, HickoryTech purchased EnventisTelecom. Enventis is a Minnesota-based regional provider of integrated fibernetwork, IP telephony and data services, with 1,500 route miles of fibernetwork serving more than 300 business customers in over 40 communities in theUpper Midwest. Enventis had formerly been a wholly owned subsidiary of anotherpublic company. Enventis is now reported as a separate business segment, ourEnventis Sector.*

*In December 2006, HickoryTech sold what had been a third businesssegment (Enterprise Solutions), which provided telephone, data and IP equipmentsales and service. All financial statements and schedules have been restated toreflect Enterprise Solutions operations as discontinued operations.*

*Operating results for NIBI, which had previously beenreported in the Information Solutions Sector, have been recast to be includedin the Telecom Sector to consolidate our reporting for similar operations forall quarters presented. With the addition of Enventis, NIBI became a smallproportion of the overall HickoryTech operations, measured on relativerevenues, operating income, manpower, strategic growth potential and on severalother levels. The primary internal user of NIBI services is the Telecom Sector.NIBI activities are of strategic value to HickoryTech, primarily because of thesupport services it provides to the Telecom Sector. The goals and objectives,and the way the NIBI product line is run, are closely aligned with that of theTelecom Sector. Due to the previously mentioned reasons, the NIBI product linewas combined with the Telecom Sector in 2006 and all comparative results wererecast to conform to the current presentation.*

*The HickoryTech parent company was incorporated in Minnesotain 1985 as part of an internal reorganization. HickoryTech replaced MankatoCitizens Telephone Company (formed in 1898) as the parent company.*

*In the years since 1985, HickoryTech has acquired andinitiated other businesses. The seven current subsidiaries of HickoryTech andthe business segments in which they operate are:*

**TELECOM SECTOR**

Mankato Citizens Telephone Company (MCTC)

Mid-Communications, Inc. (Mid-Comm)

Heartland Telecommunications Company of Iowa, Inc.(Heartland)

Cable Network, Inc. (CNI)

Crystal Communications, Inc. (Crystal)

NationalIndependent Billing, Inc. (NIBI)

**ENVENTIS SECTOR**

Enventis Telecom,Inc. (Enventis)

*HickoryTech and its subsidiaries are engaged in businessesthat provide services to their customers for a fee, as well as providinginnovative IP services that combine voice and data onto a single platform andprovide network solutions for a broad spectrum of large corporate, non-profit,government, and small business clients. Working capital requirements for theTelecom Sector include the financing of construction of networks, whichconsists of switches and cable, data, IP and digital TV. Capital requirementsare also needed for maintaining a high amount of fixed assets, capital forsoftware development, paying payroll costs of highly skilled labor, maintaininginventory to service capital projects and network and telephone equipmentcustomers, and providing for the carrying value of trade accounts receivable,which may take several months to collect in the normal course of business.Working capital requirements for the Enventis Sector include the constructionof fiber/optical equipment, IP equipment, capital for payroll costs, thecarrying value of accounts receivable, work-in-process and inventory.*

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*The materials and supplies that are necessary for theoperation of the businesses of HickoryTech and its subsidiaries are availablefrom a variety of sources. All of HickoryTech’s central office switches aresupplied by Nortel. A majority of HickoryTech’s equipment sold in its EnventisSector are supplied by Cisco. Nortel and Cisco are leading suppliers ofcommunications and data equipment, and HickoryTech’s dependence on these brandsis not viewed as a significant risk.*

INDUSTRY SEGMENTS

*HickoryTech reports the business operations of the ILEC andCLEC and their associated services, and data processing (NIBI) services as asingle segment referred to as the Telecom Sector. The results of operations ofthe Enterprise Solutions Sector are reported as discontinued operations. Theother business segment is the Enventis Sector.*

#### *TELECOMSECTOR*

HickoryTech’s Telecom Sector provides local exchangewireline telephone service, long distance, dial-up and broadband Internetaccess, and owns and operates fiber optic cable facilities. This Sectorincludes three ILECs: MCTC, Mid-Comm and Heartland. MCTC and Mid-Comm providetelephone service in south central Minnesota, specifically Mankato (a regionalhub) and eleven rural communities surrounding Mankato. The third ILEC,Heartland, provides telephone service for eleven rural communities in northwestIowa. In total, there are twenty-three ILEC exchanges within the TelecomSector.

The Telecom Sector also includes Crystal, a CLEC.Crystal provides local telephone service, long distance, dial-up and broadbandInternet access, and digital TV on a competitive basis. Crystal also connectscommunication networks of interexchange and wireless carriers with theequipment and facilities of end users. Crystal has customers in ten ruralcommunities, encompassing eight exchanges in Minnesota and three communities,encompassing two exchanges in Iowa that are not in HickoryTech’s ILEC serviceareas. Crystal also provides digital TV service in eight Minnesota communitiesin addition to its telephone services listed above. They include St. Peter,initiated in 2001; Waseca in 2004; New Richland, Ellendale and St. Clair in2005; and Faribault, Lake Crystal and Eagle Lake in 2006, all of which arecommunities that HickoryTech provides telephone service to, either as an ILECor CLEC. In September 2006, the Janesville City Council approved a cabletelevision franchise. HickoryTech plans to make digital TV services availableto the entire community in the second quarter of 2007. In October 2006, theCity Councils of both Mankato and North Mankato unanimously approved cabletelevision franchise agreements, which will allow HickoryTech to offer digitalTV services in those communities and is targeted to begin in the second quarterof 2007.

The Telecom Sector also includes NIBI, which providesdata processing and related services, principally for HickoryTech companies,other local exchange telephone companies, CLECs, interexchange networkcarriers, wireless companies and cable TV providers. NIBI’s principal activityis the provision of monthly batch processing of computerized data forHickoryTech companies as well as non-affiliated companies. Services fortelephone company customers include the processing of long distance telephonecalls from data sources and telephone switches, the preparation of thesubscriber telephone bills, customer record keeping and carrier access bills.There are a number of companies engaged in supplying data processing servicescomparable to those furnished by NIBI. Competition is based primarily on priceand service. NIBI has developed an integrated billing and management systemcalled SuiteSolution. SuiteSolution can provide wireline and wireless carriersthe individual benefits of a billing platform or a total system solution.SuiteSolution is comparable in the majority of functional elements to similarproducts/companies providing end user billing services for small tomedium-sized independent wireline and wireless service providers in NorthAmerica. Certain features and functionality of SuiteSolution, which are basedon “Request for Proposal” responses, are more highly rated than competingproducts, while other features and functionality may not be as highly rated ascompeting products. NIBI counts 18 to 20 companies as its primary competitorsin marketing to small to medium-sized independent wireline and wireless serviceproviders in North America. SuiteSolution does not utilize uniquely patentableinventions or technological innovations in the construction of the product.Commercially available programming languages are utilized in the development ofcode that may, based on the needs of a prospective user, deliver solutions thatare preferred over those of competing products.

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HickoryTech also owns and operates fiber optic cablefacilities in Minnesota in its Telecom Sector, in addition to its EnventisSector. These facilities are used to transport interexchange communications asa service to telephone industry customers. HickoryTech’s Minnesota ILECs andCLEC are the primary users of the fiber optic cable facilities in the TelecomSector. None of the remaining companies in the Telecom Sector experienced majorchanges in operations during the first quarter of 2007 or 2006, respectively,other than the cumulative effect of repeated periodic declines in networkaccess revenues and the gradual erosion of access lines in service, which hasreduced the profitability of this Sector.

MCTC derives its principal revenues and income fromlocal services charged to subscribers in its service area, access servicescharged to interexchange carriers and the operation of a toll tandem-switchingcenter in Mankato, Minnesota. Revenues and income for Mid-Comm are also derivedfrom local service charges in its area of operation and by providing access tolong distance services for its subscribers through the toll center in Mankato.Local and interexchange telephone access for the two companies is provided onan integrated basis. The local and interexchange telephone access for bothtelephone companies utilize the same facilities and equipment and are managedand maintained by a common workforce. Heartland derives its principal revenuesand income from local services charged to subscribers in its service area inIowa, as well as from providing interexchange access for its subscribers.Interexchange telephone access is provided by all three of HickoryTech’s ILECsubsidiaries by connecting the communications networks of interexchange andwireless carriers with the equipment and facilities of end users through itsswitched networks or private lines.

MCTC and Mid-Comm are Minnesota public utilitiesoperating pursuant to indeterminate permits issued by the Minnesota PublicUtilities Commission (MPUC). Heartland is also a public utility, which operatespursuant to a certificate of public convenience and necessity issued by the IowaUtilities Board (IUB). These state agencies regulate the services provided byMCTC, Mid-Comm and Heartland. CNI operations are not subject to regulation bythe state regulatory authority. Neither the MPUC nor the IUB regulate the rateof return or profits of each of HickoryTech’s ILEC operations due to the sizeof these companies relative to state regulation. In Minnesota, regulatorsmonitor MCTC and Mid-Comm price and service levels. MCTC and Mid-Comm localservice rates are below those of most Minnesota ILEC’s. HickoryTech and itssubsidiaries can change its local rates by evaluating various factors,including economic and competitive circumstances.

As local exchange telephone companies, MCTC, Mid-Command Heartland provide end office switching and dedicated circuits to longdistance interexchange carriers. These relationships allow HickoryTech’stelephone subscribers to place long distance telephone calls across to thetelephone network. HickoryTech provides interexchange access to its network forinterexchange carriers to conduct long distance business with individualcustomers who select a long distance carrier and for termination of calls toall customers. This interexchange access business is separate and distinct fromHickoryTech’s own long distance retail business, which is operated in itsCrystal subsidiary. The long distance interexchange carriers are significantcustomers of HickoryTech, but no carrier represents more than ten percent ofHickoryTech’s consolidated revenues.

Alternatives to HickoryTech service include customersleasing private lines in lieu of switched voice services and data services inor adjacent to the territories served by HickoryTech, which permits thebypassing of local telephone switching facilities. Additionally, servicesprovided by other companies utilizing various Internet, wireline or wirelesstechnologies permit bypass of the local exchange network. Cable TV companiesalso provide Internet, Digital Subscriber Line (DSL) and voice services in ourmarkets. These alternatives to the local exchange service represent a potentialthreat to HickoryTech’s long-term ability to provide local exchange service ateconomical rates.

Competition exists in several of HickoryTech’s ILECservice areas. A municipality has overbuilt Heartland’s network in onecommunity in Iowa and now serves over half of that market. Additionally, cableTV providers are offering voice services in several Heartland communities, twoMid-Comm communities and are also poised to do so in additional exchanges, includingMankato. MCTC, Mid-Comm, Heartland and Crystal are also periodically engaged innegotiations or renegotiations of arrangements for network interconnections andpotential unit price declines with other wireline carriers and various wirelessservice providers. Although competition from these various sources may resultin reduced revenue, HickoryTech cannot, at this time, estimate the potentialimpact related to these events or negotiations.

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Competition also exists for some of the HickoryTechservices provided to interexchange carriers, such as dedicated private lines,network switching and network routing. This competition comes primarily fromthe interexchange carriers themselves, in that carriers may decide that theservices provided by HickoryTech may be redirected or handled on their ownnetwork or on other networks. The provision of these services is primarilymonth-to-month service ordered from a general tariff, which is a schedule ofterms, rates and conditions that is approved by the appropriate state orfederal agency. The interexchange carriers primarily control the procurement ofthese services. As interexchange carriers make these service decisions, theyhave the potential to reduce the Company’s revenue in the Telecom Sector. Otherservices, such as the provision of broadband, long distance service, directoryadvertising, end user equipment and customer billings services are open tocompetition.

Crystal began operations in January 1998 as a new CLEC.Crystal offers local service, long distance, dial-up and broadband Internetaccess services, and digital TV on a competitive basis to customers in southernMinnesota and Iowa, which were not previously served by HickoryTech’s TelecomSector service area. These service offerings provide customers alternatives tothe incumbent communication providers in various communities and are offeredunder the brand name HickoryTech. These services are currently being offered tocustomers in ten rural communities, encompassing eight exchanges in Minnesota, aswell as three communities, encompassing two exchanges in Iowa. Crystal has alsobeen granted the necessary authority to provide service in another ILECcommunity in Northwest Iowa. Crystal also provides the long distance service,dial-up and broadband Internet access services to HickoryTech’s ILECsubscribers and is providing digital TV in three communities served byMid-Comm, as well as five CLEC communities.

CLEC activities require Crystal to file for authority tooperate with the appropriate public utilities commission (PUC) in each state itserves. Crystal competes directly against existing ILEC’s in the areas in whichit operates. Crystal competes directly with incumbent cable TV providers andsatellite for its high speed Internet and digital TV services. Crystal ispresently providing these services under franchise agreements with localcommunities. Crystal is not dependent upon any single customer or small groupof customers. No single customer in Crystal accounts for ten percent or more ofHickoryTech’s consolidated revenues.

HickoryTech is investigating a potential civil disputebeing discussed with a municipality regarding contract payments fromHickoryTech to the municipality in support of the Company’s CLEC product line.While no formal dispute or claim has been filed, HickoryTech and themunicipality have exchanged letters outlining their disagreement.

*ENVENTIS SECTOR*

On December 30, 2005, HickoryTech acquired Enventis.Through Enventis, HickoryTech provides integrated data services, offering fiberoptic-based communication and advanced data services to business communities inthe Upper Midwest. Enventis owns or has long-term leases to approximately 1,500route miles of fiber optic cable. Enventis also has extensive local fiber opticrings that directly connect the Enventis network with its larger clients (e.g.health care, government and education). Other local fiber rings connect theEnventis network to the local telephone company’s central offices. This allowsEnventis to utilize the telephone company’s connections to access its smallerclients. Enventis serves customers through facilities that are primarily leasedfrom third parties. Enventis has business relationships with Cisco Systems,Inc. and is recognized by Cisco as a Gold Partner. The relationship with CiscoSystems, Inc. is a strategic partnership of Cisco (as the supplier) andHickoryTech (as the distributor). Enventis is a regional leader in deployingleading edge technologies such as IP call centers. Enventis has offices locatedin Plymouth, Duluth and Rochester, Minnesota and Sioux Falls, South Dakota.Enventis provides converged IP services that allow all communications (e.g.voice, video and data) to use the same network.

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Enventis’ product portfolio includes EncompassUnified Communications (Encompass), which serves small-to-medium-sizedbusinesses. Encompass is a hosted or managed IP communications serviceincluding local and long distance voice; business IP telephony via hosted IPprivate branch exchange; unified messaging (a single inbox for voicemail,e-mail and fax), and dedicated Internet access. Encompass leverages Voice overInternet Protocol (VoIP) or IP telephony over a private connection, minimizingupfront capital investment and information technology management overhead. VoIPenables advanced functionality, voice interoperability with PCs andscalability. Enventis has been granted authority to operate from the PUCs inMinnesota and Wisconsin for private line services that are subject to minimalregulation. Enventis has been granted Minnesota authority to provide regulatedlocal telephone (voice) services. Those services are provided primarily in afashion that augments its VoIP service. Services provided by Enventis competedirectly with those from ILEC’s and other providers in the area in which itoperates. Enventis is not dependent upon any single customer or small group ofcustomers.

REGULATED INDUSTRY

ILEC Minnesota - HickoryTech’s two Minnesota ILECsubsidiaries continue to operate under an alternative form of regulation asdefined in Minnesota Statutes, Chapter 237, whereby companies with less than50,000 customers are regulated on price and service level rather than profit.In 2005, the Minnesota legislature enacted a statute deregulating multi-linebusinesses in certain metropolitan markets.

The MPUC has been considering intrastate access reformand universal service for several years. The MPUC opened two dockets in 2004regarding state access reform. These dockets were suspended in December 2004subsequent to concerns expressed by state agencies regarding increases in localrates and the potential that federal activity may also address this issue, andthey were officially closed in January 2006. The MPUC then opened a similardocket on the issue of state access reform and has recently asked for commentsto refresh the record. HickoryTech cannot estimate the impact, if any, offuture potential state access revenue changes.

ILEC Iowa – HickoryTech’s Iowa ILEC subsidiary is notprice regulated.

Wireline Interstate – The HickoryTech ILEC companies donot participate in the National Exchange Carrier Association (NECA) trafficsensitive pool. Instead, they set their own access rates according to either anationwide average cost of providing access, or in the case of Heartland,according to its own interstate costs. This biannual rate process was completedin June 2005, and established traffic sensitive interstate rates for the periodfrom July 1, 2005 through June 30, 2007. HickoryTech ILEC companies participatein the NECA common line pool. End User Common Line funds collected, are pooledand some of HickoryTech’s revenues are based on settlements distributed fromthe pool. Pool settlements are adjusted periodically.

CLEC – HickoryTech’s CLEC businesses provide services inMinnesota, Iowa and Wisconsin with less regulatory oversight than theHickoryTech ILEC companies. Crystal provides local exchange services inMinnesota and Iowa, and Enventis provides their own private line services inMinnesota and Wisconsin. Both Crystal and Enventis also offer long distanceservices. In-state services in Minnesota are regulated by the MPUC with respectto uniform pricing statewide. In-state long distance service in Iowa isunregulated. Long distance services are also deregulated at the federal level(for interstate services), but are subject to annual certification ofgeographical rate averaging and rate integration. Dial-up and broadbandInternet access are unregulated at both the state and federal levels.

In addition to the deregulation granted by Iowa law, theIUB has opened another docket investigating effective competition for severaladditional communities and may authorize additional deregulation for thosecommunities. This docket includes one community served by Crystal. HickoryTech cannot,at this time, estimate the revenue impact, if any, related to this IUBinvestigation.

Crystal offers digital TV service in eight Minnesotamarkets under franchises negotiated with these local municipalities.

Other – HickoryTech’s CLEC interstate access rates areestablished in accordance with an April 2001 FCC order. Under the final phaseof this order, interstate switched access rates for HickoryTech’s CLEC werereduced to levels comparable to those of the ILEC’s in June 2004.

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The FCC has an open docket on intercarrier compensationas well as several dockets on VoIP. In February 2005, the FCC issued a FurtherNotice of Public Rule Making and has received voluminous comments reflectingdiverse opinions for intercarrier compensation reform. This process continuesas an industry group has filed another plan (the Missoula Plan) with the FCCfor its consideration. HickoryTech cannot predict the outcome of suchproceedings nor can it estimate the impact, if any, on HickoryTech.

HickoryTech companies have entered into a civilcomplaint against a large interexchange carrier related to an access avoidancescheme for prepaid calling card traffic. HickoryTech cannot predict the outcomeof such proceedings nor their impact, if any, on HickoryTech.

Local Number Portability (LNP) – In 2003, the FCCreleased a decision providing guidance on porting between wireline and wirelessnetworks (inter-modal porting). All of the Company’s wireline operations haveoperated with LNP capabilities since early 2005. The effects of inter-modalporting on the Company’s wireline operations have been minimal to date. It ispossible that these requirements could adversely affect the Company’s wirelineoperating costs and customer growth rates. HickoryTech is also unable toquantify the long-term effects or revenue impact of wireline customers that mayswitch to wireless or other wireline alternatives.

**RESULTS OF OPERATIONS**

CONSOLIDATED OPERATING RESULTS

The following information includes a table and summarized discussion ofthe consolidated results of operations. A more detailed discussion of theoperating results by segment follows this discussion.

**OVERALLSUMMARY OF CONTINUING OPERATIONS**
|                                      | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31**                | ** ** |
| **(Dollars In Thousands)** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| * *                             | * *   | * *                         | * *   | * * | * * |
| Operating Income/(Loss)              |       |                             |       |   |   |
| Telecom Sector                       |       | **$**                            | **4,103**  |   | $ | 4,264 |   |
| Enventis Sector                      |       | **1,380**                        |       | 567 |   |
| Corporate                            |       | **(416**                         | **)**      | (652 | ) |
|                                 | ** ** | **5,067**                        |       | 4,179 |   |
| Other Income                         | ** ** | **84**                           |       | 30 |   |
| Interest Expense                     | ** ** | **(2,182**                       | **)**      | (1,649 | ) |
| Income Taxes                         | ** ** | **(1,201**                       | **)**      | (1,027 | ) |
| Income from Continuing Operations    | ** ** | **$**                            | **1,768**  |   | $ | 1,533 |   |

 

##### OPERATING REVENUES

Consolidatedoperating revenues were $36,927,000, which is $4,187,000 or 12.8% higher in thethree months ended March 31, 2007 compared to the three months ended March 31,2006. This increase was primarily due to increases in network equipmentrevenue, transport services, maintenance revenue and contract services, all inthe Enventis Sector. Also contributing to the increase in consolidatedoperating revenues were increases in data, digital TV and long distancerevenues, partially offset by decreases in local service and other revenues,all in the Telecom Sector.

COST OF SALES (ENVENTIS)

Cost of sales was $10,314,000, which is $2,631,000 or 34.2% higher inthe three months ended March 31, 2007 compared to the three months ended March31, 2006. This increase was primarily dueto the $3,146,000 increase in revenues in the Enterprise Network Servicesproduct line in the first three months of 2007 compared to the first threemonths of 2006.

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COST OF SERVICES (excludingDepreciation and Amortization)

##### Costof services (excluding depreciation and amortization) was $10,917,000, which is$501,000 or 4.8% higher in the three months ended March 31, 2007 compared tothe three months ended March 31, 2006. This increase was primarily due to a$524,000 increase in wages and benefits and a $287,000 increase in circuitexpenses, partially offset by a $160,000 decrease in bad debt expense and a$144,000 decrease in contract labor, all in the Enventis Sector. Alsocontributing to the increase in cost of services was a $292,000 increase inprogramming expense in the Telecom Sector, partially offset by a $109,000decrease in contract labor in that same Sector.

SELLING, GENERAL ANDADMINISTRATIVE EXPENSES (excluding Depreciation and Amortization)

Selling, general and administrative expenses (excluding depreciationand amortization) were $5,836,000, which is $288,000 or 4.7% lower in the threemonths ended March 31, 2007 compared to the three months ended March 31, 2006.This decrease was primarily due to a decrease in wages and benefits of $689,000, partially offset byincreases in professional fees of $73,000 and computer expenses of $57,000, allin the Enventis Sector. Also partially offsetting the decrease in selling,general and administrative expenses was an increase in advertising expense of$44,000, computer expenses of $43,000 and maintenance expenses of $38,000, allin the Telecom Sector. Also partially offsetting the decrease in selling,general and administrative expenses was an increase in corporate professionalfees of $280,000 due to increased auditing and Sarbanes-Oxley Section 404compliance work in connection with the implementation of a new enterpriseresource planning (ERP) software system and the integration of Enventisoperations into HickoryTech. Sarbanes-Oxley Section 404 testing was effectivein ensuring that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the applicablerules and forms and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, in a manner that allows timely decisions regarding requireddisclosure.

DEPRECIATION AND AMORTIZATION:

Depreciation expense was $4,504,000, which is $459,000 or 11.3% higherin the three months ended March 31, 2007 compared to the three months endedMarch 31, 2006. This increase was primarily due to an increase in fixed assetspending in both the Enventis and Telecom Sectors in 2006 and the first quarterof 2007. Amortization expense was$289,000, which is $4,000 or 1.4% lower in the three months ended March 31,2007 compared to the three months ended March 31, 2006.

OPERATING INCOME:

Operating income was $5,067,000, which is $888,000 or21.2% higher in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This increase was primarily due to the $4,187,000increase in operating revenue and the $288,000 decrease in selling, general andadministrative expenses, (excluding depreciation and amortization), offset bythe $2,631,000 increase in cost of sales, the $501,000 increase in cost ofservices (excluding depreciation and amortization) and the $459,000 increase indepreciation, all of which were described above. 

INTEREST EXPENSE:

Interest expense was $2,182,000,which is $533,000 or 32.3% higher in the three months ended March 31,2007 compared to the three months ended March 31, 2006. This increase was primarily due to a lower cooperative dividendreceived than had been accrued at December 31, 2006 from one of the Company’sparticipating lenders and a lower quarterly accrual of cooperative dividends inthe first quarter of 2007. HickoryTech accounts for cooperative dividends as anoffset to interest expense as earned. The outstanding balance of the revolvingcredit facility was $138,375,000 at March 31, 2007 and $142,700,000 at December31, 2006. The interest expense level of future quarters is expected to beapproximately $100,000 lower than the level of the first quarter of 2007.

INCOME TAXES

*The effective income tax rate ofapproximately 40.5% for the first quarter of 2007 and 40.1% for the firstquarter of 2006 exceeds the federal statutory rate primarily due to stateincome taxes. Due to the effects of implementing FASB Interpretation No. 48(FIN No. 48), “Accounting for Uncertainty in Income Taxes”, additional incometaxes accruals of approximately $100,000 per quarter will be accrued beginningin the second quarter of 2007.  This will raise the effective income taxrate in future periods.*

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INCOME FROMCONTINUING OPERATIONS

Consolidated income fromcontinuing operations was $1,768,000, which is $235,000 or 15.3% higher inthe three months ended March 31, 2007 compared to the three months ended March31, 2006. This increase was primarily due to the increase in operating income,partially offset by the increase in interest expense, both of which aredescribed above, and the change in income taxes. 

TRENDS

Telecom Sector profitability is trending down. Telecom revenues, whileincreasing in the first quarter of 2007, have steadily decreased due todeclines in network access revenue, competition for basic customer connectionsand choices made by specific customers not to interconnect or utilize theCompany’s network or services. At the same time, costs in the Telecom Sector,while tightly controlled, are not reducing at the same pace as the revenuedeclines. Declines in Telecom Sector access lines have been offset by increasesin DSL and digital TV customers. Declines in Telecom Sector local servicerevenue and network access revenue are partially offset by increases in TelecomSector broadband revenues such as data and digital TV. However, theprofitability of adding these new services is not as high as the services theTelecom Sector has lost. The trend in declining Telecom Sector profitability isviewed to be ongoing.

The Enventis Sector was new in 2006 and long-term trends have not yetbeen established. The nature of the Enventis business has been a higher levelof growth than that of the Company’s Telecom Sector. Enventis revenues for 2006represented a 14.1% increase over the unaudited Enventis revenues for 2005. Inaddition, 2007 first quarter revenues for Enventis were 27.5% higher than thosein the first quarter of 2006. Enventis provided profitable operations andrecorded positive operating income in each of the five quarters since itsacquisition. Enventis consists of two major product lines. The largest is itsEnterprise Network Services, or telecom equipment provisioning service. Thisservice is subject to cyclical highs and lows depending on customer demand. Theother product line is Enterprise Transport Services, or fiber optictransmission service for wholesale and retail use by customers. This productline contains more of a recurring revenue stream and is supported by long-termcontracts. Both the Enterprise Network Service and the Enterprise TransportService product lines show excellent growth characteristics.

Interest expense increased in 2006 after four years of decreases, whichwas primarily the result of the new company debt financing associated with theacquisition of Enventis in December 2005. A secondary factor was higherinterest rates. Interest expense increased again in the first quarter of 2007as the Company took action to extend its interest rate protection for threeadditional years and due to the change in the estimated cooperative dividendreceivable. Since a portion of the debt is subject to variable interest ratesand interest rates have risen over time, the Company’s interest expense may bean area of increasing expense, subject to the Company’s ability to pay down theoverall balance of interest bearing debt.

Incomefrom continuing operations, after declining in 2006 due to the decline inprofitability of the Telecom Sector and higher interest expense, has risenagain in 2007. The 2006 level of decline is primarily related to the impact ofthe Enventis acquisition, and was predicted as a twelve month temporarycondition. The 2007 level of increase in income from continuing operations is atrend which is expected to continue in 2007.

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SECTOR RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS

TELECOM – The following table provides a breakdown ofthe Telecom Sector operating results.

**TELECOMSECTOR**
|                                                                                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **March 31**                | ** ** |
| **(Dollars in Thousands)**                                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Revenues before  intersegment eliminations:                                               |       |                             |       |   |   |
|                                                                                      |       |                             |       |   |   |
| Revenues                                                                                  |       |                             |       |   |   |
| Local Service                                                                             | ** ** | **$**                            | **4,448**  |   | $ | 4,595 |   |
| Network Access                                                                            | ** ** | **7,359**                        |       | 7,341 |   |
| Long Distance                                                                             | ** ** | **1,332**                        |       | 1,148 |   |
| Data                                                                                      | ** ** | **1,676**                        |       | 1,391 |   |
| Internet                                                                                  | ** ** | **1,126**                        |       | 1,153 |   |
| Digital TV                                                                                | ** ** | **489**                          |       | 285 |   |
| Directory                                                                                 | ** ** | **885**                          |       | 894 |   |
| Message  Processing & Billing                                                         | ** ** | **689**                          |       | 688 |   |
| Intersegment                                                                              | ** ** | **107**                          |       | 32 |   |
| Other                                                                                     | ** ** | **1,033**                        |       | 1,161 |   |
| Total Telecom Revenues                                                                    | ** ** | **$**                            | **19,144** |   | $ | 18,688 |   |
|                                                                                      |       |                             |       |   |   |
| Total Telecom revenues  before intersegment eliminations:                                 |       |                             |       |   |   |
| Unaffiliated  customers                                                                   | ** ** | **$**                            | **19,037** |   | $ | 18,656 |   |
| Intersegment                                                                              | ** ** | **107**                          |       | 32 |   |
|                                                                                      | ** ** | **19,144**                       |       | 18,688 |   |
|                                                                                      |       |                             |       |   |   |
| Cost of services  (excluding depreciation and amortization)                               | ** ** | **7,855**                        |       | 7,688 |   |
| Selling, general, and  administrative expenses  (excluding depreciation and amortization) |       | **3,273**                        |       | 3,161 |   |
| Depreciation and  amortization                                                            | ** ** | **3,913**                        |       | 3,575 |   |
|                                                                                      |       |                             |       |   |   |
| Operating income                                                                          | ** ** | **$**                            | **4,103**  |   | $ | 4,264 |   |
| Net income                                                                                | ** ** | **$**                            | **2,439**  |   | $ | 2,633 |   |
|                                                                                      |       |                             |       |   |   |
| Key Metrics                                                                               |       |                             |       |   |   |
| Capital Expenditures                                                                      | ** ** | **$**                            | **1,646**  |   | $ | 3,227 |   |
| Access Lines                                                                              | ** ** | **67,578**                       |       | 69,556 |   |
| Long Distance Customers                                                                   | ** ** | **41,237**                       |       | 40,372 |   |
| Internet Customers                                                                        | ** ** | **20,387**                       |       | 18,959 |   |
| Digital Subscriber Line  (DSL) Customers                                                  | ** ** | **16,313**                       |       | 13,820 |   |
| Digital TV Customers                                                                      | ** ** | **4,865**                        |       | 2,967 |   |

 

Revenues

Telecom Sectoroperating revenues before intersegment eliminations were $19,144,000, which is$456,000 or 2.4% higher in the three months ended March 31, 2007 compared tothe three months ended March 31, 2006. This increase was primarily due to anincrease in data, digital TV and long distance revenues, partially offset bydecreases in local service and other revenues, all of which are describedbelow. 

Local service revenue was $4,448,000, which is$147,000 or 3.2% lower in the three months ended March 31, 2007 compared to thethree months ended March 31, 2006. This decrease was primarily due to a 1,978or 2.8% decrease in access lines from March 31, 2006 to March 31, 2007. Ahigher degree of competition from ILEC’s, CLEC’s and cable TV providers servingin the Company’s markets, and from wireless substitution, could impactHickoryTech’s local service revenue in future periods.

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Network access revenue was $7,359,000, which is$18,000 or 0.2% higher in the three months ended March 31, 2007 compared to thethree months ended March 31, 2006. This leveling of the network access revenuetrend is a departure from the many successive periods of quarterly declines.This leveling is believed to be an anomaly attributed to seasonality. Acombination of changing minutes of use (MOU), carriers optimizing their networkcosts and lower demand for dedicated lines may negatively impact future accessrevenues. In addition, future federal or state access reform may providefurther negative influences. The PUC has been considering intrastate accessreform and universal service for several years (see “Regulated Industry”). 

Long distance revenue was $1,332,000, which is$184,000 or 16.0% higher in the three months ended March 31, 2007 compared tothe three months ended March 31, 2006. This increase was primarily due to anincrease in the long distance customer base of 865 or 2.1% in the three monthsended March 31, 2007 compared to the three months ended March 31, 2006. Alsocontributing to the increase in long distance revenue was an increase in theMOUs in the first three months of 2007 compared to the first three months of2006.

Data revenue was $1,676,000, which is $285,000 or 20.5% higher in thethree months ended March 31, 2007 compared to the three months ended March 31,2006. This increase was primarily due to an increase in DSL customers of 2,493or 18.0% between March 31, 2007 and March 31, 2006. Also contributing to theincrease in data revenue was a $136,000 increase in Ethernet services to largebusiness customers. Ethernet service revenues will continue to provide growthopportunities for HickoryTech. Expanded networking opportunities among mediumand large enterprise customers are key drivers for this growth.

Internet revenue was $1,126,000, which is $27,000or 2.3% lower in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. The internet customer base increased 1,428 or 7.5%between March 31, 2006 and March 31, 2007. A reallocation of service packagerevenue, which is now being reflected in the data revenue, partially offset therevenue growth from the increase in the customer base.

Digital TV revenue was $489,000, which is$204,000 or 71.6% higher in the three months ended March 31, 2007 compared tothe three months ended March 31, 2006. This increase was primarily the resultof the offering of digital TV in three additional communities in 2006, whichresulted in a 1,898 or 64.0% increase in digital TV customers at March 31, 2007compared to March 31, 2006.

Other revenue, consisting primarily of revenues from cable networkservices, sales of Customer Premise Equipment (CPE), circuit private lines,maintenance, and add, moves and changes was $1,033,000, which is $128,000 or11.0% lower in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This decrease was primarily due to the loss of$432,000 from Project SOCRATES (see below). Partially offsetting the loss ofthe Project SOCRATES revenue was a $106,000 increase in CPE sales, a $97,000increase in pay station revenues and a $49,000 increase in add, moves andchanges revenue. Until June 2006,HickoryTech had been providing Internet access and video conferencing forProject SOCRATES, which is a distance-learning network connecting schools andlibraries in a 12-county region in south central Minnesota. HickoryTech’scontract with Project SOCRATES ended on June 30, 2006. 

Cost of Services (excludingDepreciation and Amortization)

Cost of services (excluding depreciation andamortization) was $7,855,000, which is $167,000 or 2.2% higher in the threemonths ended March 31, 2007 compared to the three months ended March 31, 2006.This increase was primarily due to a $292,000 increase in digital TVprogramming expense, which supported the increase in the digital TV revenues.Partially offsetting the increase in programming expense was a $109,000decrease in contract labor. Contract labor was used in the first three monthsof 2006 to support the Company’s ERP software conversion, which HickoryTechbegan using in January of 2006.

Selling, General andAdministrative Expenses (excluding Depreciation and Amortization)

Selling, general and administrative expenses(excluding depreciation and amortization) were $3,273,000, which is $112,000 or3.5% higher in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This increase was primarily due to a $44,000increase in advertising expense, a $43,000 increase in computer expenses and a$38,000 increase in maintenance expenses.

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Depreciation and Amortization

Depreciation and amortization were $3,913,000,which is $338,000 or 9.5% higher in the three months ended March 31, 2007compared to the three months ended March 31, 2006. Depreciation was $3,887,000,which is $342,000 or 9.6% higher in the three months ended March 31, 2007compared to the three months ended March 31, 2006. This increase was primarilydue to an increase in fixed asset spending in 2006. Amortization was $26,000 inthe three months ended March 31, 2007 and $30,000 in the three months endedMarch 31, 2006.

Operating Income

Operating income was $4,103,000, which is$161,000 or 3.8% lower in the three months ended March 31, 2007 compared to thethree months ended March 31, 2006. This decrease was due to the $338,000increase in depreciation and amortization, the $167,000 increase in cost ofservices (excluding depreciation and amortization) and the $112,000 increase inselling, general and administrative expenses (excluding depreciation andamortization), offset by the $456,000 increase in revenue, all of which weredescribed above.

Net Income

Net income was $2,439,000, which is $194,000 or7.4% lower in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This decrease was primarily due to the decrease inoperating income described above and the change in taxes. 

ENVENTIS – The following table provides a breakdown ofthe Enventis Sector operating results.

**ENVENTISSECTOR**
|                                                                                           | ** ** | **For Three Months Ended March 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(Dollars in Thousands)**                                                      | ** ** | **2007**                                                     | ** ** | **2006** | ** ** |
| Revenues before  intersegment eliminations:                                               |       |                                                         |       |   |   |
| Enterprise Network Services                                                               |       | $                                                            | 13,177     |   | $ | 10,031 |   |
| Enterprise Transport Services                                                             |       | 4,713                                                        |       | 4,053 |   |
| Intersegment                                                                              |       | 62                                                           |       | — |   |
|                                                                                      |       | $                                                            | 17,952     |   | $ | 14,084 |   |
|                                                                                      |       |                                                         |       |   |   |
| Total Enventis  revenues before intersegment eliminations:                                |       |                                                         |       |   |   |
| Unaffiliated customers                                                                    |       | $                                                            | 17,890     |   | $ | 14,084 |   |
| Intersegment                                                                              |       | 62                                                           |       | — |   |
|                                                                                      |       | $                                                            | 17,952     |   | $ | 14,084 |   |
|                                                                                      |       |                                                         |       |   |   |
| Cost of sales                                                                             |       | 10,314                                                       |       | 7,683 |   |
| Cost of services  (excluding depreciation and amortization)                               |       | 3,198                                                        |       | 2,687 |   |
| Selling, general  and administrative expenses,  (excluding depreciation and amortization) |       | 2,185                                                        |       | 2,410 |   |
| Depreciation and  amortization                                                            |       | 875                                                          |       | 737 |   |
|                                                                                      |       |                                                         |       |   |   |
| Operating income                                                                          |       | $                                                            | 1,380      |   | $ | 567 |   |
| Net income                                                                                |       | $                                                            | 822        |   | $ | 338 |   |
|                                                                                      |       |                                                         |       |   |   |
| Capital  expenditures                                                                     |       | $                                                            | 1,084      |   | $ | 507 |   |

 

Revenues:

Enventis operatingrevenues before intersegment eliminations were $17,952,000, which is $3,868,000or 27.5% higher in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This increase was primarily due to an increase innetwork services equipment revenue of $2,305,000, an increase in transportservices of $660,000, which was the result of an increase in wholesale contractactivity, an increase in maintenance revenue of $489,000 and an increase incontract services of $332,000.

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Cost of Sales

Cost of sales was $10,314,000, which is$2,631,000 or 34.2% higher in the three months ended March 31, 2007 compared tothe three months ended March 31, 2006. This increase was primarily due to the$3,146,000 increase in revenues in the Enterprise Network Services product linein the first three months of 2007 compared to the first three months of 2006.

Cost of Services (excludingDepreciation and Amortization)

Cost of services (excluding depreciation andamortization) was $3,198,000, which is $511,000 or 19.0% higher in the threemonths ended March 31, 2007 compared to the three months ended March 31, 2006.This increase was primarily due to a $524,000 increase in wages and benefitsdue to increased staffing, and a $287,000 increase in circuit expensesassociated with an increase in off-net revenues. The increase in cost ofservices was partially offset by a decrease in bad debt expense of $160,000,which was associated with a decrease in the allowance for potentialuncollectible accounts receivable. Also partially offsetting the increase incost of services was a $144,000 decrease in contract labor.

Selling, General andAdministrative Expenses (excluding Depreciation and Amortization)

Selling, general and administrative expenses(excluding depreciation and amortization) were $2,185,000, which is $225,000 or9.3% lower in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This decrease was primarily due to a decrease inwages and benefits of $689,000, which was largely the result of a decrease inretention payments made to certain employees. Partially offsetting the increasein selling, general and administrative expenses were increases in inter-companyexecutive services of $310,000, professional fees of $73,000 and computerexpenses of $57,000.

Depreciation and Amortization

Depreciation and amortization were $875,000,which is $138,000 or 18.7% higher in the three months ended March 31, 2007compared to the three months ended March 31, 2006. Depreciation was $612,000,which is $138,000 or 29.1% higher in the three months ended March 31, 2007compared to the three months ended March 31, 2006. This increase was primarilydue to an increase in assets added in 2006 and in the first three months of2007. Amortization was $263,000 in the three months ended March 31, 2007 and2006.

Operating Income

Operating income was $1,380,000, which is $813,000or 143.4% higher in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This increase was due to the $3,868,000 increasein revenues and the $225,000 decrease in selling, general and administrativeexpenses (excluding depreciation and amortization), offset by the $2,631,000increase in cost of sales, the $511,000 increase in cost of services (excludingdepreciation and amortization) and the $138,000 increase in depreciation, allof which are described above.

Net Income

Net income was $822,000, which is $484,000 or143.2% higher in the three months ended March 31, 2007 compared to the threemonths ended March 31, 2006. This increase was primarily due to the increase inoperating income mentioned above and the change in taxes. 

LIQUIDITY AND CAPITAL RESOURCES 

CASH FLOWS

Cash generated from operations was $7,868,000 in the first three monthsof 2007 compared to $6,877,000 in the first three months of 2006. Cash providedby operations in the first three months of 2007 was primarily attributable tonet income plus non-cash expenses for depreciation and amortization. Thedecrease in inventory of $2,848,000 was primarily due to a decrease ininventory in the Enventis Sector and directly correlated to the $2,260,000 increasein outstanding accounts receivables, which was the result of customerinstallations in progress evolving into the billing stage and normal collectionprocess. Cash generated from operations in the first three months of 2006 wasprimarily attributable to net income plus non-cash expenses for depreciationand amortization as well as for a decrease in prepaid assets of $2,818,000related to the Enventis acquisition.  

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Cash used in investing activities was $2,686,000 in the first threemonths of 2007 compared to $3,679,000 in the first three months of 2006.Capital expenditures were $2,730,000 in the first three months of 2007 comparedto $3,830,000 for the same period in 2006. Capital expenditures for the firstthree months of 2007 supported the fiber network upgrades and networkexpansions as well as success-based network improvements. The anticipated levelof Company spending over the next several years is expected to be below thelevel experienced in 2006.

Cash used in financing activities in the first three months of 2007 was$3,475,000, which was primarily due to a reduction in long-term debt of$4,325,000, the payment of dividends of $1,585,000 and a decrease in cashbalances of $1,475,000, partially offset by an increase in short-term financingin the Enventis Sector of $2,024,000 and proceeds of $1,936,000 relating to thetermination of two outstanding interest-rate swap agreements, which hadoriginal maturities of June 2008. Cash used in financing activities in 2006 was$3,549,000 and was primarily due to a reduction in long-term debt of$5,860,000, the payment of dividends of $1,576,000 and a decrease in cashbalances of $514,000, partially offset by an increase in short-tem financing inthe Enventis Sector of $4,456,000.

WORKING CAPITAL

Working capital (i.e. current assets minus current liabilities) was$13,592,000 as of March 31, 2007, compared to working capital of $7,731,000 asof December 31, 2006. The ratio of current assets to current liabilities was1.6 to 1.0 as of March 31, 2007 and 1.3 to 1.0 as of December 31, 2006.

SHORT-TERM FINANCING ARRANGEMENT

Enventis has a $10,000,000 credit facility with a financing company to purchaseinventories from certain approved vendors. Advances under the financingarrangement are collateralized by the accounts receivable and inventory ofEnventis and a guaranty of the principal indebtedness by HickoryTech. Thecredit facility provides sixty-day payment terms for working capital and can beterminated at any time by either party. Borrowings outstanding under the creditfacility were $9,743,000 and $7,719,000 at March 31, 2007 and December 31,2006, respectively.

LONG-TERMOBLIGATIONS

HickoryTech’slong-term obligations as of March 31, 2007 were $137,474,000 excluding currentmaturities of $1,300,000 on debt and $335,000 on capital leases. On December30, 2005 HickoryTech entered into a $160,000,000 credit agreement with asyndicate of banks (subsequently amortized to a $158,700,000 facility as ofDecember 31, 2006), which amended its previous credit facility. The creditfacility is comprised of a $30,000,000 revolving credit component that expireson December 30, 2011 and a $130,000,000 term loan component. 

Theterm loan component is comprised of two components, which are defined as termloan B and term loan C. The outstanding principal balance of term loan B is$108,625,000 as of March 31, 2007 and is held in varying amounts by three ofthe lenders in the syndicate (US Bank, GE Commercial Distribution FinanceCorporation and CoBank). Under the terms of term loan B, HickoryTech isrequired to make quarterly principal payments of $275,000 from March 31, 2007through December 31, 2011 with the remainder of the aggregate principal due intwo payments on March 31, 2012 and June 30, 2012. The outstanding principal balanceof term loan C is $19,750,000 as of March 31, 2007 and is held entirely byRural Telephone Finance Cooperative. Under the terms of term loan C,HickoryTech is required to make quarterly principal payments of $50,000 on theaggregate principal amount from March 31, 2007 through December 31, 2012 withthe remainder of the aggregate principal due in two payments on March 31, 2013and June 30, 2013. 

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Underthe terms of the revolving credit facility, any outstanding principal ispayable in full on December 30, 2011. The outstanding balance of the revolvingcredit facility is $10,000,000 as of March 31, 2007. Under the credit facility,interest will be payable at an applicable margin in excess of a prevailingpricing level. The prevailing pricing level will be based on a Base Rate, LIBORRate Loans or Rural Telephone Finance Corporation (RTFC) rate table. Theprevailing rate for Base Rate Loans is the higher of Prime Rate or the FederalFunds Rate plus 0.5%. The prevailing rate for LIBOR Rate Loans is publiclyavailable. The RTFC rate tables are established based on RTFC policies, whichare not publicly available and change from time to time. The applicable marginfor the revolving credit facility, term loan B and term loan C will bedetermined quarterly, based on the leverage ratio of HickoryTech. The creditfacility also provides for payment of a fee on any un-drawn commitment of therevolving credit facility and is payable quarterly. The credit facilityrequires HickoryTech to enter into or maintain in effect, interest rateprotection agreements on at least 50% of the facility’s outstanding balance inorder to manage the Company’s exposure to interest rate fluctuations.HickoryTech continually monitors the interest rates on its bank loans and hasimplemented interest rate protection agreements on various portions of theoverall debt outstanding for varying terms.

HickoryTechis required to comply with specified financial ratios and tests applicable tothe Company and its current subsidiaries, including maximum leverage ratio,minimum interest coverage ratio and maximum capital expenditures. HickoryTech’sobligations 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 and a first-priority pledge of the capital stock of HickoryTech’scurrent subsidiaries.

HickoryTech’sTelecom Sector leases certain computer equipment under capital leasearrangements. During the three months ended March 31, 2007 and 2006, thisSector recorded additions to property, plant and equipment of $455,000 and$132,000, respectively, related to these capital lease arrangements. 

CONSTRUCTIONPLANS

HickoryTechhas nearly completed its network enhancement program in its core telephoneproperty. In both its Telecom and its Enventis Sector, capital spending isbecoming more “success-based,” meaning the capital spending is associated withdefined revenue producing services and strategic initiatives. The level oftotal company capital spending over the next two to three years is expected tobe below the level of capital spending seen in 2006. Management believes thatthe enhancements of the past several years will support the broadband productdeployment strategies of the next few years, as well as serving as defenseagainst competition in its core businesses. These upgrades will give HickoryTechthe capability to offer more diversified services to its core customer base.

COMMITMENTS AND CONTINGENCIES

HickoryTech is involved in certain contractual disputes in the ordinarycourse of business. HickoryTech does not believe the ultimate resolution of anyof these existing matters will have a material adverse effect on its financialposition, results of operations, or cash flows. HickoryTech did not experienceany changes to material contractual obligations in the first quarter of 2007. Refer to the Company’s Annual Report on Form10-K for the year ended December 31, 2006 for the discussion relating tocommitments and contingencies.

OTHER

HickoryTech operates withoriginal equity capital, retained earnings and indebtedness in the form of bankterm and revolving lines of credit. HickoryTech believes its current level ofdebt to total capital is acceptable for ongoing operations.

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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 uponHickoryTech’s consolidated financial statements, which have been prepared inaccordance with generally accepted accounting principles and where applicable,conform to the accounting principles as prescribed by federal and statetelephone utility regulatory authorities. HickoryTech presently givesaccounting recognition to the actions of regulators where appropriate, asprescribed by SFAS No. 71, “Accounting for the Effects of Certain Types ofRegulation.” The preparation of these financial statements requires managementto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and the related disclosure of contingentassets and liabilities. Management believes that the application of theaccounting policies, which are important to HickoryTech’s financial positionand results of operations, requires significant judgments and estimates on thepart of management. A description of the critical accounting policies adheredto by HickoryTech is contained in the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in HickoryTech’s Annual Report onForm 10-K for the year ended December 31, 2006. HickoryTech adopted SFAS No.123(R), “Share-Based Payment,” as of January 1, 2006 and has chosen to use themodified prospective basis of the Black-Scholes option-pricing model tocalculate future stock compensation expense, using a fair value method asprescribed under SFAS No. 123(R). The valuation of equity instrumentsunderlying stock-based compensation and the period during which the relatedstock compensation expense is recognized will be based in part on variousassumptions, including the estimated useful life of equity instruments, stockvolatility, interest rates and vesting terms. For the historical impact ofshare-based payments to employees under APB No. 25, refer to the disclosures inNote 9 of the Notes to Consolidated Financial Statements contained in thisQuarterly Report on Form 10-Q.

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

HickoryTech does not have operations subject to risks of foreigncurrency fluctuations. HickoryTech does, however, use derivative financialinstruments to manage exposure to interest rate fluctuations. HickoryTech’sobjectives for holding derivatives are to minimize interest rate risks usingthe most effective methods to eliminate or reduce the impact of theseexposures. Variable rate debt instruments are subject to interest rate risk. InMarch 2007, the Company terminated its two outstanding interest-rate swapagreements, with original maturities of June 2008, in exchange for $1,936,000million in proceeds. Proceeds of $277,000 were recognized as an offset tointerest expense in the first quarter of 2007. The remaining proceeds will berecognized as an offset to interest expense over the remaining original term ofthe agreements (15 months ending in June 2008). The unrecognized portion of theproceeds is recorded as a long-term liability in the Company’s financialstatements. Immediately following the termination of the two agreementsdiscussed above, HickoryTech executed a new interest-rate swap agreement,effectively locking in the interest rate on $60,000,000 of variable-rate debt throughMarch of 2010.

The effective portion of the cumulative gain or loss on derivativeinstruments is reported as a component of accumulated other comprehensiveincome (loss) in shareholders’ equity and is recognized in earnings when theterm of the protection agreement is concluded. HickoryTech’s earnings areaffected by changes in interest rates as a portion of its long-term debt hasvariable interest rates based on LIBOR. If interest rates for the portion ofHickoryTech’s long-term debt based on variable rates had averaged 10% more forthe quarter ended March 31, 2007 HickoryTech’s interest expense would haveincreased $105,000. 

**ITEM 4. CONTROLS AND PROCEDURES**

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form10-Q (the Evaluation Date), the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, regarding the effectivenessof the design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Actof 1934, as amended). Based upon that evaluation, the Chief Executive Officerand Chief Financial Officer have concluded that, as of the Evaluation Date, theCompany’s disclosure controls and procedures were effective.

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There have been nochanges in the Company’s internal control over financial reporting during theCompany’s most recently completed fiscal quarter that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

**PART II. OTHER INFORMATION**
| Item 1.  | Legal Proceedings.                                                                                                                                                                                       |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                     |
|     | Other than routine litigation incidental to  HickoryTech’s business, there are no pending material legal proceedings to  which HickoryTech is a party or to which any of its property is subject.   |
|     |                                                                                                                                                                                                     |
| Item 1A. | Risk Factors.                                                                                                                                                                                            |
|     |                                                                                                                                                                                                     |
|     | There have not been any material changes to the risk  factors previously disclosed in Item 1A, “Risk Factors,” of our Annual Report  on Form 10-K for the fiscal year ended December 31, 2006. |
|     |                                                                                                                                                                                                     |
| Item 2.  | Unregistered Sales of Equity Securities and Use of  Proceeds.                                                                                                                                            |
|     |                                                                                                                                                                                                     |
|     | None.                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                     |
| Item 3.  | Defaults Upon Senior Securities.                                                                                                                                                                         |
|     |                                                                                                                                                                                                     |
|     | None.                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                     |
| Item 4.  | Submission of Matters to a Vote of Security Holders.                                                                                                                                                     |
|     |                                                                                                                                                                                                     |
|     | None.                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                     |
| Item 5.  | Other Information.                                                                                                                                                                                       |
|     |                                                                                                                                                                                                     |
|     | None.                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                     |
| Item 6.  | Exhibits Listing.                                                                                                                                                                                        |
|     |                                                                                                                                                                                                     |
|     | Exhibit 3.1 Bylaws, as amended                                                                                                                                                                           |
|     |                                                                                                                                                                                                     |
|     | Exhibit 31.1 Certification pursuant to Rule  13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                     |
|     |                                                                                                                                                                                                     |
|     | Exhibit 31.2 Certification pursuant to Rule  13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                     |
|     |                                                                                                                                                                                                     |
|     | Exhibit 32.1 Certification pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |
|     |                                                                                                                                                                                                     |
|     | Exhibit 32.2 Certification pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                             |

 

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SIGNATURES

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: | May 3, 2007 |                                                 | 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                              |
|        |             |                                                      |                          |  |  |  |

 

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