Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND 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  September 30, 2008**                                              |
| ** ** | ** **                                                                                               |
| **OR**     |
|       |
| ** ̈** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** ** | ** **                                                                                               |
| ** ** | **For the transition period from      to       .**     |

 

**Commission file number 0-13721**

 

**HICKORY TECH CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

**221 East Hickory Street**

**Mankato, Minnesota 56002-3248**

(Address of principal executive offices and zip code)

 

**(800) 326-5789**

(Registrant’s telephone number, including area code)

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes   x   No    ̈

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definition of “largeaccelerated filer, accelerated filer, a non-accelerated filer or smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer  o  Acceleratedfiler  x  Non-acceleratedfiler  o  Smallerreporting company   ̈

 

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

 

The total number of shares of the Registrant’s common stock outstandingas of Oct 29, 2008: 13,367,019.

 

 

** **

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I**  |
|------------------|
|             |   |   |
| Item 1.          | Financial Statements | 3 |
|             |   |   |
|             | Consolidated  Statements of Operations (unaudited) for the Three Months and Nine Months  EndedSeptember 30, 2008 and 2007 | 3 |
|             |   |   |
|             | Consolidated  Balance Sheets (unaudited) as of September 30, 2008 and  December 31, 2007 | 4 |
|             |   |   |
|             | Consolidated Statements of Cash Flows (unaudited) for  the Nine Months Ended September 30, 2008 and 2007 | 5 |
|             |   |   |
|             | Condensed Notes to Consolidated Financial Statements  (unaudited) | 6 |
|             |   |   |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 15 |
|             |   |   |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk | 26 |
|             |   |   |
| Item 4.          | Controls and  Procedures | 26 |
|             |   |   |
| **PART II** |
| ** **       |   |   |
| Item 1.          | Legal Proceedings | 26 |
|             |   |   |
| Item 1A.         | Risk Factors | 26 |
|             |   |   |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds | 27 |
|             |   |   |
| Item 3.          | Defaults Upon  Senior Securities | 27 |
|             |   |   |
| Item 4.          | Submission  of Matters to a Vote of Security Holders | 27 |
|             |   |   |
| Item 5.          | Other Information | 27 |
|             |   |   |
| Item 6.          | Exhibits Listing | 27 |
|             |   |   |
|             | Signatures | 28 |
|             |   |   |
|             | Exhibits |   |

 

2

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# **Table of Contents**

 

# **Item 1.   Financial Statements**

 

**HICKORY TECH CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Unaudited)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| **(Dollars in thousands, except share and per share amounts)**     | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  revenue:                                                |       |                   |       |                  |       |   |   |   |   |
| Telecom Sector                                                     | ** ** | **$**                  | **18,758** |                  | $          | 18,647 | ** ** | **$** | **55,051** |   | $ | 58,132 |   |
| Enventis Sector                                                    |       |                   |       |                  |       |   |   |   |   |
| Equipment                                                          | ** ** | **11,725**             |       | 10,092                | ** ** | **34,602** |   | 39,395 |   |
| Services                                                           | ** ** | **9,377**              |       | 7,120                 | ** ** | **25,852** |   | 20,861 |   |
| Total Enventis  Sector                                             | ** ** | **21,102**             |       | 17,212                | ** ** | **60,454** |   | 60,256 |   |
| Total operating  revenue                                           | ** ** | **39,860**             |       | 35,859                | ** ** | **115,505** |   | 118,388 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Costs and  expenses:                                               |       |                   |       |                  |       |   |   |   |   |
| Cost of sales,  equipment, excluding depreciation and amortization |       | **10,190**             |       | 8,705                 |       | **29,605** |   | 35,578 |   |
| Cost of  services, excluding depreciation and amortization         |       | **13,443**             |       | 11,137                |       | **37,760** |   | 32,832 |   |
| Selling, general  and administrative expenses                      | ** ** | **5,637**              |       | 5,900                 | ** ** | **16,786** |   | 17,627 |   |
| Depreciation                                                       | ** ** | **4,945**              |       | 4,254                 | ** ** | **14,371** |   | 13,190 |   |
| Amortization of  intangibles                                       | ** ** | **285**                |       | 289                   | ** ** | **863** |   | 867 |   |
| Total costs and  expenses                                          | ** ** | **34,500**             |       | 30,285                | ** ** | **99,385** |   | 100,094 |   |
| Operating income                                                   | ** ** | **5,360**              |       | 5,574                 | ** ** | **16,120** |   | 18,294 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Other income and  expense:                                         |       |                   |       |                  |       |   |   |   |   |
| Interest and  other income                                         | ** ** | **39**                 |       | 68                    | ** ** | **81** |   | 199 |   |
| Interest expense                                                   | ** ** | **(1,874**             | **)**      | (2,028                | )          | **(5,049** | **)** | (6,241 | ) |
| Total other  (expense)                                             | ** ** | **(1,835**             | **)**      | (1,960                | )          | **(4,968** | **)** | (6,042 | ) |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Income from  continuing operations before income taxes             |       | **3,525**              |       | 3,614                 |       | **11,152** |   | 12,252 |   |
| Income tax  provision                                              | ** ** | **1,453**              |       | 1,532                 | ** ** | **4,802** |   | 5,148 |   |
| Income from  continuing operations                                 | ** ** | **2,072**              |       | 2,082                 | ** ** | **6,350** |   | 7,104 |   |
| Discontinued  operations:                                          |       |                   |       |                  |       |   |   |   |   |
| Loss from  operations of discontinued component                    | ** ** | **—**             |       | (12                   | )          | **—** |   | (27 | ) |
| Income tax  benefit                                                | ** ** | **—**             |       | (4                    | )          | **—** |   | (10 | ) |
| Loss on  discontinued operations                                   | ** ** | **—**             |       | (8                    | )          | **—** |   | (17 | ) |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Net income                                                         | ** ** | **$**                  | **2,072**  |                  | $          | 2,074 | ** ** | **$** | **6,350** |   | $ | 7,087 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Basic earnings  per share - continuing operations:                 | ** ** | **$**                  | **0.16**   |                  | $          | 0.16 | ** ** | **$** | **0.48** |   | $ | 0.54 |   |
| Basic loss per  share - discontinued operations:                   | ** ** | **—**             |       | —                | ** ** | **—** |   | — |   |
|                                                               | ** ** | **$**                  | **0.16**   |                  | $          | 0.16 | ** ** | **$** | **0.48** |   | $ | 0.54 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Weighted average  common shares outstanding                        | ** ** | **13,352,005**         |       | 13,267,649            | ** ** | **13,325,967** |   | 13,250,033 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Diluted earnings  per share - continuing operations:               | ** ** | **$**                  | **0.16**   |                  | $          | 0.16 | ** ** | **$** | **0.48** |   | $ | 0.54 |   |
| Diluted loss per  share - discontinued operations:                 | ** ** | **—**             |       | —                | ** ** | **—** |   | — |   |
|                                                               | ** ** | **$**                  | **0.16**   |                  | $          | 0.16 | ** ** | **$** | **0.48** |   | $ | 0.54 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Weighted average  common and equivalent shares outstanding         | ** ** | **13,358,390**         |       | 13,273,304            | ** ** | **13,336,424** |   | 13,250,745 |   |
|                                                               |       |                   |       |                  |       |   |   |   |   |
| Dividends per  share                                               | ** ** | **$**                  | **0.12**   |                  | $          | 0.12 | ** ** | **$** | **0.36** |   | $ | 0.36 |   |

 

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

 

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**HICKORYTECH CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                              | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| **(Dollars in thousands except share and per share amounts)**                                                                                           | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| * *                                                                                                                                                | * *   | * *               | * *    | * *              | * *   |
| **ASSETS**                                                                                                                                              |       |                   |        |                  |       |
| Current assets:                                                                                                                                         |       |                   |        |                  |       |
| Cash and cash  equivalents                                                                                                                              |       | **$**                  | **1,499**   | ** **            | $          | 171 |   |
| Receivables, net  of allowance for doubtful accounts of $911 and $1,184                                                                                 |       | **33,538**             | ** **  | 28,357                |       |
| Inventories                                                                                                                                             |       | **8,788**              | ** **  | 7,054                 |       |
| Income taxes  receivable                                                                                                                                |       | **—**             | ** **  | 1,013                 |       |
| Deferred income  taxes, net                                                                                                                             |       | **1,334**              | ** **  | 1,334                 |       |
| Prepaid expenses                                                                                                                                        |       | **1,507**              | ** **  | 1,713                 |       |
| Other                                                                                                                                                   |       | **990**                | ** **  | 1,196                 |       |
| Total current  assets                                                                                                                                   |       | **47,656**             | ** **  | 40,838                |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Investments                                                                                                                                             | ** ** | **4,066**              |        | 3,830                 |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Property, plant  and equipment                                                                                                                          | ** ** | **333,401**            |        | 322,249               |       |
| Less accumulated  depreciation                                                                                                                          |       | **182,358**            | ** **  | 169,318               |       |
| Property, plant  and equipment, net                                                                                                                     | ** ** | **151,043**            |        | 152,931               |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Other assets:                                                                                                                                           |       |                   |        |                  |       |
| Goodwill                                                                                                                                                |       | **25,239**             | ** **  | 25,239                |       |
| Intangible  assets, net                                                                                                                                 |       | **1,120**              | ** **  | 1,983                 |       |
| Deferred costs  and other                                                                                                                               |       | **2,345**              | ** **  | 2,674                 |       |
| Total other  assets                                                                                                                                     | ** ** | **28,704**             |        | 29,896                |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Total assets                                                                                                                                            | ** ** | **$**                  | **231,469** |                  | $          | 227,495 |   |
|                                                                                                                                                    |       |                   |        |                  |       |
| **LIABILITIES & SHAREHOLDERS’ EQUITY**                                                                                                    |       |                   |        |                  |       |
| Current  liabilities:                                                                                                                                   |       |                   |        |                  |       |
| Extended term  payable                                                                                                                                  |       | **$**                  | **10,527**  | ** **            | $          | 14,443 |   |
| Accounts payable                                                                                                                                        |       | **4,339**              | ** **  | 4,538                 |       |
| Accrued expenses                                                                                                                                        |       | **7,733**              | ** **  | 7,740                 |       |
| Accrued income  taxes                                                                                                                                   |       | **1,224**              | ** **  | —                |       |
| Advanced  billings and deposits                                                                                                                         |       | **7,157**              | ** **  | 5,158                 |       |
| Current  maturities of long-term obligations                                                                                                            |       | **1,599**              | ** **  | 731                   |       |
| Total current  liabilities                                                                                                                              |       | **32,579**             | ** **  | 32,610                |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Long-term  liabilities:                                                                                                                                 |       |                   |        |                  |       |
| Debt  obligations, net of current maturities                                                                                                            | ** ** | **129,822**            |        | 128,475               |       |
| Financial  derivative instruments                                                                                                                       | ** ** | **1,138**              |        | 1,451                 |       |
| Accrued income  taxes                                                                                                                                   | ** ** | **8,024**              |        | 7,747                 |       |
| Deferred income  taxes                                                                                                                                  | ** ** | **15,045**             |        | 14,901                |       |
| Deferred revenue                                                                                                                                        | ** ** | **2,051**              |        | 1,527                 |       |
| Accrued employee  benefits and deferred compensation                                                                                                    | ** ** | **9,060**              |        | 8,852                 |       |
| Total long-term  liabilities                                                                                                                            | ** ** | **165,140**            |        | 162,953               |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Total  liabilities                                                                                                                                      |       | **197,719**            | ** **  | 195,563               |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Commitments and  contingencies (Note 8)                                                                                                                 | ** ** | **—**             |        | —                |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Shareholders’  equity:                                                                                                                             |       |                   |        |                  |       |
| Common stock, no  par value, $.10 stated value Shares authorized: 100,000,000 Shares issued and  outstanding: 13,367,019 in 2008 and 13,284,903 in 2007 |       | **1,337**              |        | 1,329                 |       |
| Additional  paid-in capital                                                                                                                             |       | **11,722**             |        | 11,031                |       |
| Retained  earnings                                                                                                                                      |       | **22,195**             |        | 20,639                |       |
| Accumulated other  comprehensive (loss)                                                                                                                 |       | **(1,504**             | **)**       | (1,067                | )          |
| Total  shareholders’ equity                                                                                                                        | ** ** | **33,750**             |        | 31,932                |       |
|                                                                                                                                                    |       |                   |        |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                        | ** ** | **$**                  | **231,469** |                  | $          | 227,495 |   |

 

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

 

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**HICKORYTECH CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **September 30** | ** ** |
| **(Dollars in thousands)**                                                         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| OPERATING ACTIVITIES:                                                              |       |                  |       |   |   |
| Net income                                                                         | ** ** | **$**                 | **6,350**  |   | $ | 7,087 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Loss from  discontinued operations                                                 | ** ** | **—**            |       | 17 |   |
| Depreciation and  amortization                                                     | ** ** | **15,234**            |       | 14,057 |   |
| Amortization of  gain on sale of financial derivative instrument                   | ** ** | **(664**              | **)**      | (940 | ) |
| Deferred income  tax provision (benefit)                                           | ** ** | **—**            |       | (60 | ) |
| Accrued  patronage refunds                                                         | ** ** | **(425**              | **)**      | (70 | ) |
| Other                                                                              | ** ** | **734**               |       | 682 |   |
| Changes in  operating assets and liabilities net of effects of dispositions:       |       |                  |       |   |   |
| Receivables                                                                        | ** ** | **(5,329**            | **)**      | (688 | ) |
| Prepaids                                                                           | ** ** | **207**               |       | 607 |   |
| Inventories                                                                        | ** ** | **(1,734**            | **)**      | 3,996 |   |
| Accounts payable  and accrued expenses                                             | ** ** | **(198**              | **)**      | 718 |   |
| Deferred  revenue, billings, and deposits                                          | ** ** | **2,523**             |       | 310 |   |
| Income taxes                                                                       | ** ** | **2,509**             |       | 2,780 |   |
| Other                                                                              | ** ** | **802**               |       | 1,181 |   |
| Net cash  provided by operating activities                                         | ** ** | **20,009**            |       | 29,677 |   |
|                                                                               |       |                  |       |   |   |
| INVESTING  ACTIVITIES:                                                             |       |                  |       |   |   |
| Additions to  property, plant and equipment                                        | ** ** | **(12,416**           | **)**      | (11,388 | ) |
| Other                                                                              | ** ** | **241**               |       | 100 |   |
| Net cash (used  in) investing activities                                           | ** ** | **(12,175**           | **)**      | (11,288 | ) |
| ** **                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| FINANCING  ACTIVITIES:                                                             |       |                  |       |   |   |
| Net change in  extended term payables arrangement                                  | ** ** | **(3,916**            | **)**      | 2,422 |   |
| Change in cash  overdraft                                                          | ** ** | **—**            |       | (1,475 | ) |
| Payments of  capital lease obligations                                             | ** ** | **(268**              | **)**      | (295 | ) |
| Borrowings on  credit facility                                                     | ** ** | **30,000**            |       | 7,500 |   |
| Repayments on  credit facility                                                     | ** ** | **(27,850**           | **)**      | (21,475 | ) |
| Proceeds from  the sale of financial derivative instrument                         | ** ** | **—**            |       | 1,936 |   |
| Proceeds from  issuance of common stock                                            | ** ** | **321**               |       | 283 |   |
| Dividends paid                                                                     | ** ** | **(4,793**            | **)**      | (4,764 | ) |
| Net cash (used  in) financing activities                                           | ** ** | **(6,506**            | **)**      | (15,868 | ) |
|                                                                               |       |                  |       |   |   |
| DISCONTINUED  OPERATIONS:                                                          |       |                  |       |   |   |
| Net cash (used  in) operating activities                                           | ** ** | **—**            |       | (17 | ) |
| Net cash (used  in) discontinued operations                                        | ** ** | **—**            |       | (17 | ) |
|                                                                               |       |                  |       |   |   |
| Net increase in  cash and cash equivalents                                         | ** ** | **1,328**             |       | 2,504 |   |
| Cash and cash  equivalents at beginning of the year                                | ** ** | **171**               |       | 84 |   |
| Cash and cash  equivalents at the end of the period                                | ** ** | **$**                 | **1,499**  |   | $ | 2,588 |   |
|                                                                               |       |                  |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                  |       |   |   |
| Cash paid for  interest                                                            | ** ** | **$**                 | **5,886**  |   | $ | 7,033 |   |
| Net cash paid  for income taxes                                                    | ** ** | **$**                 | **2,293**  |   | $ | 2,375 |   |
| Non-cash  investing activities:                                                    |       |                  |       |   |   |
| Property, plant  and equipment acquired with capital leases                        | ** ** | **$**                 | **334**    |   | $ | 490 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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** **

**HICKORY TECH CORPORATION**

**SEPTEMBER 30, 2008**

**PART 1. FINANCIAL INFORMATION**

 

**Item 1.   Condensed Notes to Consolidated FinancialStatements (Unaudited)**

 

**Note 1.   Basis of Presentationand Consolidation**

 

The accompanying unaudited condensed consolidatedfinancial statements of Hickory Tech Corporation (HickoryTech or the Company)have been prepared in accordance with accounting principles generally acceptedin the United States (GAAP) for interim financial information and with the rules andregulations of the Securities and Exchange Commission (SEC). Certaininformation and disclosures normally included in annual financial statementsprepared in accordance with GAAP have been omitted or condensed pursuant tosuch rules and regulations. In the opinion of the Company’s management,the unaudited condensed consolidated financial statements reflect alladjustments (consisting only of normal and recurring accruals) considerednecessary for the fair presentation of the Company’s financial statements andpresent fairly the results of operations, financial position, and cash flows ofthe Company for the interim periods presented as required by Regulation S-X, Rule 10-01.These unaudited interim condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notesthereto, together with the Company’s audited consolidated financial statementsand notes thereto contained in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

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

 

Our consolidated financial statements includeHickoryTech Corporation and its subsidiaries in the following two businesssegments: the Telecom Sector and the Enventis Sector. All inter-companytransactions have been eliminated from the consolidated financial statements.

 

Cost of Sales - equipment(excluding depreciation and amortization)

 

Cost of sales for the Enventis Sector includes costsassociated with the installation of products for customers. These costs areprimarily for equipment and materials. Labor associated with installation workis not included in this category, but is included in cost of services(excluding depreciation and amortization) described below.

 

Cost of Services(excluding depreciation and amortization)

 

Cost of services includes all costs related todelivery of communication services and products for all sectors. Theseoperating costs include all costs of performing services and providing relatedproducts including engineering, customer service, billing and collections,network monitoring, and transport costs.

 

Selling, General, andAdministrative Expenses

 

Selling, general and administrative expenses includedirect and indirect selling expenses, advertising and all other general andadministrative costs associated with the operations of the business.

 

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***Recent Accounting Developments***

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations” (“SFAS No. 141(R)”), which establishes principlesand requirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquired company and the goodwill acquired.SFAS No. 141(R) also establishes disclosure requirements to enablethe evaluation of the nature and financial effects of the business combination.SFAS No. 141(R) is effective as of the beginning of an entity’sfiscal year that begins after December 15, 2008, and will be adopted by usin the first quarter of 2009. SFAS No. 141(R) is currently notexpected to have a material effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in Consolidated Financial Statements – an amendmentof Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160will change the accounting and reporting for minority interests, which will bere-characterized as non-controlling interests and classified as a component ofequity. This new consolidation method will significantly change the accountingfor transactions with minority interest holders. SFAS No. 160 is effectivefor fiscal years beginning after December 15, 2008 and we will adopt it inthe first quarter 2009. We do not expect adoption of SFAS No. 160 to havea material effect on our consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities – an amendmentof FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161requires enhanced disclosures about an entity’s derivative and hedgingactivities and is effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. We are currently assessing the impactof SFAS No. 161 on our disclosures.

 

**Note 2.  Earnings and CashDividends per Common Share**

 

Basic earnings per share (EPS) are computed bydividing net income by the weighted average number of shares of common stockoutstanding during the applicable period. Shares used in the EPS dilutioncalculation are based on the weighted average number of shares of common stockoutstanding during the period increased by potentially dilutive common shares.Potentially dilutive common shares include stock options and stock subscribedunder the HickoryTech Corporation Amended and Restated Employee Stock PurchasePlan (ESPP). Dilution is determined using the treasury stock method.

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| **(Dollars in thousands, except share and per share amounts)** | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                           |       |                   |       |                  |       |   |   |   |   |
| Income from  continuing operations                             | ** ** | **$**                  | **2,072**  |                  | $          | 2,082 | ** ** | **$** | **6,350** |   | $ | 7,104 |   |
| Loss from  discontinued operations                             | ** ** | **—**             |       | (8                    | )          | **—** |   | (17 | ) |
| Net Income                                                     | ** ** | **$**                  | **2,072**  |                  | $          | 2,074 | ** ** | **$** | **6,350** |   | $ | 7,087 |   |
|                                                           |       |                   |       |                  |       |   |   |   |   |
| Weighted average  shares outstanding                           | ** ** | **13,352,005**         |       | 13,267,649            | ** ** | **13,325,967** |   | 13,250,033 |   |
| Stock options  (dilutive only)                                 | ** ** | **442**                |       | 5,655                 | ** ** | **1,305** |   | 712 |   |
| Stock subscribed  (ESPP)                                       | ** ** | **5,943**              |       | —                | ** ** | **9,152** |   | — |   |
| Total dilutive  shares outstanding                             | ** ** | **13,358,390**         |       | 13,273,304            | ** ** | **13,336,424** |   | 13,250,745 |   |
|                                                           |       |                   |       |                  |       |   |   |   |   |
| Earnings per  share:                                           |       |                   |       |                  |       |   |   |   |   |
| Basic -  continuing operations                                 | ** ** | **$**                  | **0.16**   |                  | $          | 0.16 | ** ** | **$** | **0.48** |   | $ | 0.54 |   |
| Basic -  discontinued operations                               | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |
|                                                           |       |                   |       |                  |       |   |   |   |   |
| Diluted -  continuing operations                               | ** ** | **$**                  | **0.16**   |                  | $          | 0.16 | ** ** | **$** | **0.48** |   | $ | 0.54 |   |
| Diluted -  discontinued operations                             | ** ** | **$**                  | **—** |                  | $          | — | ** ** | **$** | **—** |   | $ | — |   |

 

Options topurchase 456,200 and 415,551 shares for the three months ended September 30,2008 and 2007, respectively, and 436,200 and 415,551 shares for the nine monthsended September 30, 2008 and 2007, respectively, were not included in thecomputation of diluted EPS, because their effect on diluted EPS would have beenanti-dilutive.

 

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Cash dividends arebased on the number of common shares outstanding at their respective recorddates. Listed below is the number of shares outstanding as of the record datefor the first, second, and third quarters of 2008 and 2007, respectively.

 
| **Shares outstanding on record date** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| First quarter  (Feb. 15)         |       | 13,292,419 |       | 13,207,970 |       |
| Second quarter  (May 15)         |       | 13,319,782 |       | 13,243,525 |       |
| Third quarter  (August 15)       |       | 13,330,284 |       | 13,253,812 |       |

 

Dividends pershare are based on the quarterly dividend per share as declared by theHickoryTech Board of Directors. HickoryTech paid dividends of $.12 per share inthe third quarter of 2008 and 2007.

 

During the firstnine months of 2008 and 2007, shareholders have elected to reinvest $178,000and $179,000, respectively, of dividends into HickoryTech common stock pursuantto the HickoryTech Corporation Dividend Reinvestment Plan.

 

**Note 3.  Accumulated OtherComprehensive Income/(Loss)**

 

Comprehensiveincome includes changes in unrealized gains and losses on derivativeinstruments qualifying and designated as cash flow hedges and recognized NetPeriodic Benefit Cost related to our Post-Retirement Benefit Plans.Comprehensive income for the three months ended September 30, 2008 and2007 was $2,033,000 and $1,125,000, respectively. Comprehensive income for thenine months ended September 30, 2008 and 2007 was $5,913,000 and$6,362,000, respectively.

 

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

 

The market valueof the cumulative gain or (loss) on financial derivative instruments isreported as a component of accumulated other comprehensive income (loss) inshareholders’ equity.

 

The followingsummary 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** | ** ** |
| **(Dollars in thousands)** | *** *** | **Loss (1)**      | *** *** | **Credit (1)**    | *** *** | **Asset (1)**    | ** ** | **on Derivatives** | ** ** | **Income/(Loss)** | ** ** |
| December 31,  2007    |         | $                 | (954         | )                 | $            | 279              |       | $                  | (181       | )                 | $          | (211 | ) | $ | (1,067 | ) |
| 2008 Activity              |         |              |         |              |         |             |       | (1,324             | )          | (1,324            | )          |
| Net Periodic               |         |              |         |              |         |             |       |               |       | —            |       |
| Benefit Cost               |         | 12                |         | (8                | )            | 9                |       | —             |       | 13                |       |
| March 31,  2008       |         | $                 | (942         | )                 | $            | 271              |       | $                  | (172       | )                 | $          | (1,535 | ) | $ | (2,378 | ) |
| 2008 Activity              |         |              |         |              |         |             |       | 899                |       | 899               |       |
| Net Periodic               |         |              |         |              |         |             |       |               |       | —            |       |
| Benefit Cost               |         | 12                |         | (8                | )            | 9                |       | —             |       | 13                |       |
| June 30,  2008        |         | $                 | (930         | )                 | $            | 263              |       | $                  | (163       | )                 | $          | (636 | ) | $ | (1,466 | ) |
| 2008 Activity              |         |              |         |              |         |             |       | (51                | )          | (51               | )          |
| Net Periodic               |         |              |         |              |         |             |       |               |       | —            |       |
| Benefit Cost               |         | 12                |         | (8                | )            | 9                |       | —             |       | 13                |       |
| September 30,  2008   |         | $                 | (918         | )                 | $            | 255              |       | $                  | (154       | )                 | $          | (687 | ) | $ | (1,504 | ) |

 

----

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

 

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**Note 4.   Acquisition,Disposition and Discontinued Operations**

 

Effective December 31,2006, we sold all of the outstanding capital stock in Collins CommunicationsSystems Co. (“Collins”) to Skyview Capital, LLC for an initial price of$100,000, paid by delivery of a promissory note, plus up to $1,650,000 ofearn-out payments. Skyview Capital, LLC paid us $100,000 in February 2007.The remaining selling price is due in contingent payments payable over a threeyear period if financial targets are reached by Skyview Capital, LLC. We havereceived no payments to-date related to this earn-out provision. The $100,000mentioned above is included in the calculation of the net loss on salementioned below, while the contingent payments have not been included in thenet loss. The agreement contained covenants against competition by the newowner in south-central Minnesota, which expired on June 30, 2008. Werecorded a pre-tax loss on the sale of $3,385,000 ($2,040,000 net of incometaxes). The Collins results of operations were formerly reported in theEnterprise Solutions Sector. The consolidated statements of operations for allperiods presented have been restated to reflect the Collins operations as discontinuedoperations.

 

**Note 5.  Inventories**

 

Inventory includesparts, materials and supplies stored in our warehouses to support basic levelsof service and maintenance as well as scheduled capital projects and equipmentawaiting configuration for customers. Inventory also includes parts andequipment shipped directly from vendors to customer locations while in transitand parts and equipment returned from customers which are being returned tovendors for credit, as well as maintenance contracts associated with customersales which have not yet transferred to the customer. The inventory value inthe Telecom Sector, comprised of materials, as of September 30, 2008 and December 31,2007 was $4,109,000 and $3,312,000, respectively. The inventory value in the EnventisSector, comprised of finished goods, as of September 30, 2008 and December 31,2007 was $4,679,000 and $3,742,000, respectively.

 

Inventories arevalued using the lower of cost (perpetual weighted average-cost or specificidentification) or market method. We adjust our inventory carrying value forestimated obsolescence or unmarketable inventory to the estimated market valuebased upon assumptions about future demand and market conditions as market andother conditions change.

 

**Note 6.  Intangible Assets**

 

We are required totest acquired goodwill for impairment on an annual basis based upon a fairvalue approach. Additionally, we test goodwill between annual tests if an eventoccurs or circumstances change that would more likely than not reduce the fairvalue of an entity below its carrying value.****The carrying value of our goodwill is $25,239,000 asof September 30, 2008 and December 31, 2007.

 

The components ofother intangible assets are as follows:

 
| ** **                        | ** ** | ** **       | ** ** | **As of September 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------------------|------------|------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | ** **       | ** ** | **Gross Carrying**                | ** ** | **Accumulated**                  | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| **(Dollars in thousands)**        | ** ** | **Useful Lives** | ** ** | **Amount**                        | ** ** | **Amortization**                 | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Definite-Lived  Intangible Assets |       |             |       |                              |       |                             |       |   |   |   |   |
| Customer  relationships           |       | 1 - 8 years      |       | $                                 | 4,229      |                             | $          | 3,166 |   | $ | 4,229 |   | $ | 2,456 |   |
| Other  intangibles                |       | 1 - 5 years      |       | 730                               |       | 673                              |       | 730 |   | 520 |   |
| Total                             |       |             |       | $                                 | 4,959      |                             | $          | 3,839 |   | $ | 4,959 |   | $ | 2,976 |   |

 

As required by SFAS No. 142, we periodically reassessthe carrying value, useful lives and classifications of identifiable assets.Amortization expense related to the definite-lived intangible assets was$285,000 and $289,000 for the three months ended September 30, 2008 and2007, respectively. Amortization expense related to the definite-livedintangible assets was $863,000 and $867,000 for the nine months ended September 30,2008 and 2007, respectively. Total estimated amortization expense for theremaining three months of 2008 and the five years subsequent to 2008 is asfollows: 2008 (October 1 – December 31) – $264,000; 2009 - $853,000;2010 - $3,000; none in 2011, 2012, and 2013.

 

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**Note 7.  Quarterly SectorFinancial Summary**

 

*(Dollarsin thousands)*

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **Three Months Ended September 30, 2008** | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers      |       | $           | 18,758     |         | $          | 21,102            |       | $                | —     |   | $ | 39,860 |   |
| Intersegment  revenue                     |       | 174         |       | 138          |       | (312              | )          | —           |       |
| Total operating  revenue                  |       | 18,932      |       | 21,240       |       | (312              | )          | 39,860           |       |
|                                      |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization            |       | 4,059       |       | 1,158        |       | 13                |       | 5,230            |       |
| Operating income                          |       | 3,445       |       | 1,623        |       | 292               |       | 5,360            |       |
| Interest expense                          |       | 21          |       | —       |       | 1,853             |       | 1,874            |       |
| Income  taxes(benefit)                    |       | 1,413       |       | 667          |       | (627              | )          | 1,453            |       |
| Income/(loss)  from continuing operations |       | 2,033       |       | 959          |       | (920              | )          | 2,072            |       |
| Identifiable  assets                      |       | 149,483     |       | 74,228       |       | 7,758             |       | 231,469          |       |
| Property, plant  and equipment, net       |       | 113,468     |       | 37,442       |       | 133               |       | 151,043          |       |
| Capital  expenditures                     |       | 3,117       |       | 1,338        |       | 1                 |       | 4,456            |       |
|                                           |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **Three Months Ended September 30, 2007** | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers      |       | $           | 18,647     |         | $          | 17,212            |       | $                | —     |   | $ | 35,859 |   |
| Intersegment  revenue                     |       | 116         |       | 152          |       | (268              | )          | —           |       |
| Total operating  revenue                  |       | 18,763      |       | 17,364       |       | (268              | )          | 35,859           |       |
|                                      |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization            |       | 3,616       |       | 916          |       | 11                |       | 4,543            |       |
| Operating  income/(loss)                  |       | 3,972       |       | 1,689        |       | (87               | )          | 5,574            |       |
| Interest expense                          |       | 19          |       | —       |       | 2,009             |       | 2,028            |       |
| Income  taxes(benefit)                    |       | 1,585       |       | 684          |       | (737              | )          | 1,532            |       |
| Income/(loss)  from continuing operations |       | 2,376       |       | 1,026        |       | (1,320            | )          | 2,082            |       |
| Identifiable  assets                      |       | 153,074     |       | 57,895       |       | 8,906             |       | 219,875          |       |
| Property, plant  and equipment, net       |       | 116,746     |       | 34,575       |       | 160               |       | 151,481          |       |
| Capital  expenditures                     |       | 3,345       |       | 1,928        |       | 80                |       | 5,353            |       |
|                                           |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

 

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*(Dollars in thousands)*

 
| *** ***                              | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **Nine Months Ended September 30, 2008**  | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers      |       | $           | 55,051     |         | $          | 60,454            |       | $                | —     |   | $ | 115,505 |   |
| Intersegment  revenue                     |       | 465         |       | 404          |       | (869              | )          | —           |       |
| Total operating  revenue                  |       | 55,516      |       | 60,858       |       | (869              | )          | 115,505          |       |
|                                      |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization            |       | 11,993      |       | 3,203        |       | 38                |       | 15,234           |       |
| Operating income                          |       | 9,998       |       | 5,882        |       | 240               |       | 16,120           |       |
| Interest expense                          |       | 65          |       | —       |       | 4,984             |       | 5,049            |       |
| Income  taxes(benefit)                    |       | 4,109       |       | 2,432        |       | (1,739            | )          | 4,802            |       |
| Income/(loss)  from continuing operations |       | 5,848       |       | 3,453        |       | (2,951            | )          | 6,350            |       |
| Identifiable  assets                      |       | 149,483     |       | 74,228       |       | 7,758             |       | 231,469          |       |
| Property, plant  and equipment, net       |       | 113,468     |       | 37,442       |       | 133               |       | 151,043          |       |
| Capital  expenditures                     |       | 8,082       |       | 4,315        |       | 19                |       | 12,416           |       |
|                                           |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **Nine Months Ended September 30, 2007**  | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**  | ** ** | **Consolidated** | ** ** |
| Revenue from  unaffiliated customers      |       | $           | 58,132     |         | $          | 60,256            |       | $                | —     |   | $ | 118,388 |   |
| Intersegment  revenue                     |       | 334         |       | 299          |       | (633              | )          | —           |       |
| Total operating  revenue                  |       | 58,466      |       | 60,555       |       | (633              | )          | 118,388          |       |
|                                      |       |        |       |         |       |              |       |             |       |
| Depreciation and  amortization            |       | 11,318      |       | 2,718        |       | 21                |       | 14,057           |       |
| Operating  income/(loss)                  |       | 14,314      |       | 4,718        |       | (738              | )          | 18,294           |       |
| Interest expense                          |       | 54          |       | —       |       | 6,187             |       | 6,241            |       |
| Income  taxes(benefit)                    |       | 5,732       |       | 1,902        |       | (2,486            | )          | 5,148            |       |
| Income/(loss)  from continuing operations |       | 8,551       |       | 2,838        |       | (4,285            | )          | 7,104            |       |
| Identifiable  assets                      |       | 153,074     |       | 57,895       |       | 8,906             |       | 219,875          |       |
| Property, plant  and equipment, net       |       | 116,746     |       | 34,575       |       | 160               |       | 151,481          |       |
| Capital  expenditures                     |       | 7,279       |       | 4,029        |       | 80                |       | 11,388           |       |
|                                           |            |             |            |              |            |                   |            |                  |            |  |  |  |  |

 

**Note 8.  Commitments andContingencies**

 

We are involved incertain contractual disputes in the ordinary course of business. We do notbelieve the ultimate resolution of any of these existing matters will have amaterial adverse effect on our financial position, results of operations orcash flows. We did not experience any changes to material contractualobligations in the first nine months of 2008. Refer to the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007 for thediscussion relating to commitments and contingencies.

 

**Note 9.  Stock Compensation**

 

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

 

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Share-basedcompensation expense recognized for the three months ended September 30,2008 and 2007 was $8,000 and $27,000, respectively. Share-based compensationexpense recognized for the nine months ended September 30, 2008 and 2007was $30,000 and $81,000, respectively. Share-based compensation expenserecognized in our Consolidated Statement of Operations for the first ninemonths of 2008 and 2007 included compensation expense for share-based paymentawards granted prior to, but not yet completely vested as of September 30,2008 and 2007. Historical data is used to estimate pre-vesting forfeitures andare estimated at the time of the grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates.

 

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

 

There were nostock option awards granted during the nine months ended September 30,2008 and 2007, respectively.  Although wehave authority to issue options under the Stock Award Plan, no currentcompensation programs have options as a component.

 

As of September 30,2008 there was $6,000 of total unrecognized compensation costs related tonon-vested stock options granted under the Company’s Stock Award Plan. Thisexpense is expected to be recognized during the next twelve months.

 

A summary of stockoption activity is as follows:

 
| ** **                             | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                             | ** ** | **Shares** | ** ** | **Price**            | ** ** |
| Outstanding at January 1, 2008    |       | 476,000    |       | $                    | 12.79      |   |
| Granted                                |       | —     |       | —               |       |
| Exercised                              |       | —     |       | —               |       |
| Forfeited                              |       | —     |       | —               |       |
| Expired                                |       | (4,800     | )          | 13.38                |       |
| Outstanding at September 30, 2008 |       | 471,200    |       | $                    | 12.79      |   |
| Exercisable at September 30, 2008 |       | 466,200    |       | $                    | 12.85      |   |

 

The followingtable provides certain information with respect to stock options outstanding atSeptember 30, 2008:

 
| ** **                 | ** ** | ** **        | ** ** | **Weighted**       | ** ** | **Weighted**          | ** ** |
|----------------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| **Range of**               | ** ** | **Stock Options** | ** ** | **Average**        | ** ** | **Average Remaining** | ** ** |
| **Exercise Prices**        | ** ** | **Outstanding**   | ** ** | **Exercise Price** | ** ** | **Contractual Life**  | ** ** |
| $ 6.00 - $8.00        |       | 15,000            |       | $                  | 6.95       |                  | 7.92 years |   |
| $ 8.00 - $12.00       |       | 177,200           |       | 10.26              |       | 4.66 years            |       |
| $ 12.00 - $16.00      |       | 225,250           |       | 13.88              |       | 2.36 years            |       |
| $ 16.00 - $21.00      |       | 53,750            |       | 18.18              |       | 2.47 years            |       |
|                       |       | 471,200           |       | $                  | 12.79      |                  | 3.41 years |   |
| Aggregate  Intrinsic Value |       |              |       | $                  | —     |                  |       |   |

 

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The followingtable provides certain information with respect to stock options exercisable atSeptember 30, 2008:

 
| ** **                  | ** ** | ** **        | ** ** | ** **           | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|-------------------|------------|----------------------|------------|----------------------|------------|
| **Range of**                | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**        | ** ** |
| **Exercise Prices**         | ** ** | **Exercisable**   | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $ 6.00 - $8.00         |       | 10,000            |       | $                    | 6.95       |                 | 7.92 years |   |
| $ 8.00 - $12.00        |       | 177,200           |       | 10.26                |       | 4.66 years           |       |
| $ 12.00 - $16.00       |       | 225,250           |       | 13.88                |       | 2.36 years           |       |
| $ 16.00 - $21.00       |       | 53,750            |       | 18.18                |       | 2.47 years           |       |
|                        |       | 466,200           |       | $                    | 12.85      |                 | 3.41 years |   |
| Aggregate  intrinsic value: |       |              |       | $                    | —     |                 |       |   |

 

**Note 10.  Financial DerivativeInstruments**

 

We use financialderivative instruments to manage our overall exposure to fluctuations ininterest rates. We account for derivative instruments in accordance with SFAS No. 133,as amended by SFAS No. 149, which requires derivative instruments to berecorded on the balance sheet at fair value. Changes in fair value ofderivative instruments must be recognized in earnings unless specific hedgeaccounting criteria are met, in which case the gains and losses are included inother comprehensive income rather than in earnings.

 

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

 

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

 

·                  Level 1 – quoted prices in active markets for identical assets andliabilities.

 

·                  Level 2 – observable inputs other than quoted prices in active marketsfor identical assets and liabilities.

 

·                  Level 3 – unobservable inputs in which there is little or no marketdata available, which require the reporting entity to develop its own assumptions.

 

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

 

We utilizeinterest-rate swap agreements that qualify as cash-flow hedges to manage ourexposure to interest rate fluctuations on a portion of our variable-interestrate debt. In March 2007, we terminated two outstanding interest-rate swapagreements, with original maturities of June 2008, in exchange for$1,936,000 in proceeds. Proceeds of $332,000 and $940,000 were recognized as anoffset to interest expense in the three and nine months ending September 30,2007. Proceeds of $664,000 were recognized as an offset to interest expense inthe first nine months of 2008. Immediately following the termination of the twoswap agreements discussed above, we executed a new interest-rate swapagreement, effectively locking in the interest rate on $60,000,000 ofvariable-interest rate debt through March, 2010. In March 2008, weentered into a second interest-rate swap agreement, effectivelylocking in the interest rate on an additional $40,000,000 of variable-interestrate debt through February 2010.

 

The market valueof the cumulative gain or (loss) on financial derivative instruments isreported as a component of accumulated other comprehensive income (loss) in shareholders’equity. The fair value of our derivatives at September 30, 2008 and December 31,2007 is a net liability of $1,138,000 and $1,451,000, respectively.

 

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**Note 11.  EmployeePost-Retirement Benefits**

 

HickoryTechprovides post-retirement health care and life insurance benefits for certainemployees. HickoryTech accounts for these post-retirement benefits in accordancewith SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans – an amendment of FASB Statements No. 87, 88,106 and 132(R).” New employees hired on or after January 1, 2007 are noteligible for post-retirement health care and life insurance benefits.

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| **(Dollars in thousands)**               | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of  net periodic benefit cost |       |                   |       |                  |       |   |   |   |   |
| Service cost                             |       | $                      | 63         |                  | $          | 71 |   | $ | 189 |   | $ | 213 |   |
| Interest cost                            |       | 122                    |       | 114                   |       | 366 |   | 342 |   |
| Amortization of  transition obligation   |       | 15                     |       | 15                    |       | 45 |   | 45 |   |
| Amortization of  prior service cost      |       | (14                    | )          | (3                    | )          | (42 | ) | (9 | ) |
| Recognized net  actuarial loss           |       | 20                     |       | 18                    |       | 60 |   | 54 |   |
| Net periodic  benefit cost               |       | $                      | 206        |                  | $          | 215 |   | $ | 618 |   | $ | 645 |   |

 
| ** **                                                            | ** ** | **September 30,  2008** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|
| Employer’s  contributions for current premiums:                  |       |                         |       |
| Contributions  made for the nine months ended September 30, 2008 |       | $                            | 190        |   |
| Expected  contributions for remainder of 2008                         |       | 63                           |       |
| Total estimated  employer contributions for fiscal year 2008          |       | $                            | 253        |   |

 

**Note 12.  Income Taxes**

 

The effectiveincome tax rate from continuing operations of approximately 41.20% for thethird quarter of 2008 and 42.4% for the third quarter of 2007 exceeds thefederal statutory rate primarily due to state income taxes and accrued interestexpense on unrecognized tax benefits.

 

We adopted theprovisions of FIN No. 48 on January 1, 2007. Among other things, FIN No. 48provides guidance to address uncertainty in tax positions and clarifies theaccounting for income taxes by prescribing a minimum recognition threshold thatincome tax positions must achieve before being recognized in the financialstatements. As of September 30, 2008, we had unrecognized tax benefitstotaling $7,255,000 excluding interest. The amount of the unrecognized taxbenefits, if recognized, that would affect the effective income tax rates offuture periods is $7,237,000. There have been no significant changes to theseamounts during the nine months ended September 30, 2008.

 

We recognizeinterest and penalties related to income tax matters as income taxexpense. As of September 30, 2008, we have accrued $769,000 (net oftax) for interest related to unrecognized tax benefits.

 

We fileconsolidated income tax returns in the United States federal jurisdiction andcombined or separate income tax returns in various state jurisdictions. Ingeneral, we are no longer subject to United States federal income taxexaminations for the years prior to 2005 except to the extent of lossesutilized in subsequent years.

 

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

# ** **

*Forward Looking Statements*

 

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

 

Because of theserisks, uncertainties, and assumptions and the fact that any forward-lookingstatements made by HickoryTech and its management are based on estimates,projections, beliefs, and assumptions of management, they are not guarantees offuture performance and you should not place undue reliance on them. Inaddition, forward-looking statements speak only as of the date they are made.With the exception of the requirements set forth in the federal securities lawsor the rules and regulations of the Securities and Exchange Commission, wedo not undertake any obligations or update or review any forward-lookinginformation, whether as a result of new information, future events orotherwise.

 

*Critical Accounting Policies*

 

The preparation ofour financial statements requires management to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and the related disclosure of contingent assets and liabilities. We believethat the application of the accounting policies, which are important to ourfinancial position and results of operations, requires significant judgmentsand estimates on the part of management. A description of the criticalaccounting policies that we adhere to is contained in the Management’sDiscussion and Analysis of Financial Condition and Results of Operations in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

**Resultsof Operations**

 

Overview-Trends

 

We operate in twobusiness segments: the Telecom Sector and the Enventis Sector. The TelecomSector leverages more than 110 years of experience providing communicationssolutions to business and residential customers in southern Minnesota, andnorthwestern and central Iowa.  We offerlocal voice, long distance, high-speed internet, Digital TV and high-capacitydata transport. Additionally, we offer integrated communication businesssolutions and own fiber optic infrastructure. The Telecom Sector’s NationalIndependent Billing Inc. (NIBI) division develops telecom and carrier accessbilling and customer management software for our internal operations andexternal customers. The Enventis Sector specializes in providing integratedvoice, data and network communications solutions for businesses of all sizes – fromenterprise multi-office organizations to small and medium businesses. Inaddition to its statewide fiber optic network, Enventis provides IP telephony,transport, data and network integration services that combine voice and datainto a single platform – reducing operations costs and enhancing performance.Since 1997, Enventis, a Cisco Gold Certified Partner, has provided CiscoSystems network solutions for a broad spectrum of business clients.

 

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Our operatingresults are impacted by industry trends as well as the characteristics of ourinternal operations. Our Telecom Sector revenue has been, and we expect will continueto be, impacted by two significant industry trends: (1) recent andpotential future changes in rate regulation at the state and federal levels;and (2) access line losses resulting from increased competition, productsubstitution, interpretation of regulation, and other factors.  For example, many consumers are substitutingcable, wireless and VoIP for traditional voice telecommunicationsservices.  This has increased the numberand type of competitors within our industry and our marketplace.

 

Our response tothese trends will have an important impact to our future revenues. Productbundling – offering customers the ability to bundle several products andservices at a competitive discount continues to be one of our responses toaccess line losses. We believe customers value the convenience of, and pricediscounts associated with, receiving multiple services through a singlecompany.  While bundle price discountsmight result in lower average revenue for our individual products, we believeproduct bundles contribute to customer retention.

 

Our response tothe gradual and persistent decline in access revenue has been to grow ourbroadband services. Revenue from data, Internet and video services continues togrow. We also continue to see shifts in the makeup of this revenue as customersmove from traditional data, Internet and television products to more-advancedtechnologies. As a result, we continue to focus on these advanced, high-growthproducts, which include: broadband services, private line, multi-protocol labelswitching (MPLS), voice over Internet protocol (VoIP), digital video (DTV), andInternet protocol television (IPTV) services.

 

Enventis Sector operating results can fluctuate due to the timing ofactivity in the equipment product line. Periods of increased sales and systemimplementation - and the related revenue recognition – can lead to unevenresults on a quarter-to-quarter basis. These activities are important tobuilding valuable customer relationships and sustainable recurring revenue streamsbased on our ability to provide high-quality solutions, delivery, and support.It is in the relatively higher margin and recurring revenue-generating managedservices parts of the division on which we intend to focus our future growth.

 

Our businesscustomers are increasingly demanding customized and integrated voice, data andInternet services. We have responded with our managed services offerings, whichinclude diverse combinations of emerging technology products and services, suchas VoIP, Ethernet, MPLS, hosting services, unified communications, and securitymonitoring.  Revenue from managedservices has grown more than 40% in the first nine months of 2008 compared tothe same period in 2007, and we expect this trend to continue. We believe our businesscustomers will continue to demand turnkey solutions, such as managed services,that afford them more flexibility and total support of their communicationsneeds. These types of services also allow us to act as a strategic partner withour business customers in improving the effectiveness and efficiency of theiroperations. We believe this gives us an opportunity to form stronger bonds withthese customers. Some of our key managed services offerings include securitymonitoring, total care support, and our Enventis SingleLink TM UnifiedCommunications.

 

For the thirdquarter of 2008, revenue from the advanced products and strong results from ourNIBI division largely offset declines in subscriber and access line revenue inour Telecom Sector, and we experienced strong revenue growth in the EnventisSector. Higher investment in network and equipment to support high-techproducts, as well as our investment in personnel to grow the Enventis Sector,offset this revenue growth to cause our net income to decline slightly in thethird quarter of 2008 compared to the same period for 2007.

 

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**Sector Results of Operations**

 

**Telecom Sector**

 

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

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| **(Dollars in thousands)**                                 | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue before intersegment eliminations                   |       |                   |       |                  |       |   |   |   |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Revenue                                                    |       |                   |       |                  |       |   |   |   |   |
| Local Service                                              | ** ** | **$**                  | **4,079**  |                  | $          | 4,247 | ** ** | **$** | **12,296** |   | $ | 12,922 |   |
| Network Access                                             | ** ** | **6,752**              |       | 7,086                 | ** ** | **19,529** |   | 23,823 |   |
| Long Distance                                              | ** ** | **1,097**              |       | 1,248                 | ** ** | **3,484** |   | 3,877 |   |
| Data                                                       | ** ** | **1,877**              |       | 1,781                 | ** ** | **5,628** |   | 5,172 |   |
| Internet                                                   | ** ** | **1,211**              |       | 1,164                 | ** ** | **3,478** |   | 3,420 |   |
| Digital TV                                                 | ** ** | **871**                |       | 581                   | ** ** | **2,473** |   | 1,606 |   |
| Directory                                                  | ** ** | **1,081**              |       | 1,037                 | ** ** | **3,085** |   | 2,821 |   |
| Bill Processing                                            | ** ** | **1,058**              |       | 661                   | ** ** | **2,557** |   | 1,864 |   |
| Intersegment                                               | ** ** | **174**                |       | 116                   | ** ** | **465** |   | 334 |   |
| Other                                                      | ** ** | **732**                |       | 842                   | ** ** | **2,521** |   | 2,627 |   |
| Total Telecom Revenue                                      | ** ** | **$**                  | **18,932** |                  | $          | 18,763 | ** ** | **$** | **55,516** |   | $ | 58,466 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Total Telecom revenue before intersegment  eliminations    |       |                   |       |                  |       |   |   |   |   |
| Unaffiliated  customers                                    | ** ** | **$**                  | **18,758** |                  | $          | 18,647 | ** ** | **$** | **55,051** |   | $ | 58,132 |   |
| Intersegment                                               | ** ** | **174**                |       | 116                   | ** ** | **465** |   | 334 |   |
| ** **                                                 |       | **18,932**             | ** ** | 18,763                |       | **55,516** |   | 58,466 |   |
| Cost of services, excluding depreciation and  amortization | ** ** | **7,958**              |       | 7,794                 | ** ** | **23,450** |   | 22,807 |   |
| Selling, general and administrative expenses               | ** ** | **3,470**              |       | 3,381                 | ** ** | **10,075** |   | 10,027 |   |
| Depreciation and amortization                              | ** ** | **4,059**              |       | 3,616                 | ** ** | **11,993** |   | 11,318 |   |
|                                                       | ** ** | ** **             |       |                  | ** ** | ** ** |   |   |   |
| Operating Income                                           | ** ** | **$**                  | **3,445**  |                  | $          | 3,972 | ** ** | **$** | **9,998** |   | $ | 14,314 |   |
|                                                       | ** ** | ** **             | ** ** |                  |       |   | ** ** | ** ** | ** ** |   |   |   |   |
| Net income                                                 | ** ** | **$**                  | **2,033**  |                  | $          | 2,376 | ** ** | **$** | **5,848** |   | $ | 8,551 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Capital expenditures                                       | ** ** | **$**                  | **3,117**  |                  | $          | 3,345 | ** ** | **$** | **8,082** |   | $ | 7,279 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Key metrics                                                |       |                   |       |                  |       |   |   |   |   |
| Business access  lines                                     | ** ** | **26,350**             |       | 27,616                |       |   |   |   |   |
| Residential  access lines                                  | ** ** | **35,115**             |       | 38,674                |       |   |   |   |   |
| Total access lines                                         | ** ** | **61,465**             |       | 66,290                |       |   |   |   |   |
| Long distance customers                                    | ** ** | **39,533**             |       | 41,259                |       |   |   |   |   |
| Digital Subscriber Line customers                          | ** ** | **18,519**             |       | 17,250                |       |   |   |   |   |
| Digital TV customers                                       | ** ** | **7,882**              |       | 5,706                 |       |   |   |   |   |
|                                                            |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Telecom Sectoroperating revenue before intersegment eliminations was $18,932,000, which is$169,000 or 0.90% higher in the three months ended September 30, 2008compared to the three months ended September 30, 2007 and was $55,516,000,which is $2,950,000 or 5.0% lower in the nine months ended September 30,2008 compared to the nine months ended September 30, 2007. The decrease inthe year-to-date revenue was primarily due to lower revenue in network accesswhich includes the non-recurrence of a settlement with a large interexchangecarrier that provided $1,890,000 of revenue in June 2007. As atelecommunications provider, we were also negatively impacted by the number ofaccess lines that we serve, which primarily impacted our local and longdistance product lines.  Offsetting thisdecrease in revenue, were double-digit increases in broadband and billprocessing revenue.

 

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*LocalService.*We primarily receive monthly recurring revenue forbasic voice telephone service, enhanced calling features, local private linesand circuits, reciprocal compensation from wireless carriers, and miscellaneouslocal services. Local service revenue was $4,079,000, which is $168,000 or 4.0%lower in the three months ended September 30, 2008 compared to the threemonths ended September 30, 2007 and was $12,296,000, which is $626,000 or4.8% lower in the nine months ended September 30, 2008 compared to thenine months ended September 30, 2007. A decline in residential andbusiness access line revenue of $184,000 in the three months and $529,000 inthe nine month ended September 30, 2008, is the direct result of ouraccess line decline of 4,825 customers or 7.3% from September 30, 2008 to September 30,2007. The number of access lines we serve as an incumbent and competitive localexchange carrier have been decreasing, which is consistent with the generaltrend in our industry. Our strategy to directly offset loss of access linecustomers is to sell a competitive bundle of services. We believe these bundledpackages offer competitive discounts as more services, such as features,high-speed DSL and Digital TV, are added to the bundle.

 

In May of2008 we were served with a civil lawsuit by the City of St. Peter, Minn.regarding our contract payments to the municipality in support of our CLECvoice and data services. We do not agree with the contract interpretations madeby the City of St. Peter, Minn. and are vigorously defending the suit. Wecannot predict the outcome of such proceedings nor their impact, if any, on theCompany.

 

*NetworkAccess.*We receive a variety of fees and settlements tocompensate us for the origination, transport, and termination of calls andtraffic on our network. These include the fees assessed to interexchangecarriers, subscriber line charges imposed on end users, and settlements fromnationally administered pools.

 

The amount ofrevenue we have received from network access during the past two years has beenimpacted not only by industry trends of decreasing access lines, but litigationand settlement of disputes with interexchange carriers. Network access revenuewas $6,752,000, which is $334,000 or 4.7% lower in the three months ended September 30,2008 compared to the three months ended September 30, 2007 and was$19,529,000, which is $4,294,000 or 18.0% lower in the nine months ended September 30,2008 compared to the nine months ended September 30, 2007. We had threedisputes that impacted these results. We settled a switched access dispute witha large interexchange carrier, which resulted in a non-recurring increase inrevenue of $1,890,000 in the second quarter of 2007. We also settled a disputewith an interexchange carrier for bill nonpayment in the third quarter of 2008that resulted in revenue of $186,000 in the third quarter of 2008. Finally, adispute with the Universal Service Administrative Company (“USAC”)stemming from its reversal of earlier interpretation of revenuedistribution rules has reduced third quarter and YTD 2008 network accessrevenue by $66,000 and $673,000, respectively. We are appealing the USACinterpretation as arbitrary and unprecedented, however USAC is largelyunregulated and there is no likely forum for recovery of this lostrevenue.  Without these settlements,network access revenue would have been $2,590,000 or 11.8% lower in the ninemonths ended September 30, 2008 compared to the nine months ended September 30,2007.

 

On October 15, 2008, the chair of theFederal Communications Commission (“FCC”) indicated Inter-Carrier Compensationreform is under consideration and put it on the agenda for the November 4th,2008 open meeting of the FCC. We cannot predict the impact of this orother future developments in the regulatory environment on ourTelecom Sector revenue.

 

*LongDistance.*Our end-user customers are billed for toll or longdistance service on either a per call or flat-rate basis. This includes theprovision of directory assistance, operator service, and long distance privatelines. Long distance revenue was $1,097,000, which is $151,000 or 12.1% lowerin the three months ended September 30, 2008 compared to the three monthsended September 30, 2007 and was $3,484,000, which is $393,000 or 10.1%lower in the nine months ended September 30, 2008 compared to the ninemonths ended September 30, 2007. The decrease in revenue is the result ofthe loss of 1,726 customers, or 4.2% in the customer base from September 30,2008 to September 30, 2007, more residential customers selecting unlimitedlong distance calling plans, decreased rates per minute charged to customersdue to aggressive competition in the markets we serve, and due to a localout-bound call center customer going out of business.

 

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*Data.*Weprovide a variety of enhanced data network services on a monthly recurringbasis to our end-user customers. This**includes**the DSL**access portionof traditional Telecom DSL**service*.*Data revenue was**$1,877,000,which is $96,000 or 5.4% higher in the three months ended September 30, 2008compared to the three months ended September 30, 2007 and was $5,628,000,which is $456,000 or 8.8% higher the nine months ended September 30, 2008compared to the nine months ended September 30, 2007. The increase in bothperiods was primarily due to a 7.4% increase in DSL customers between September 30,2008 and September 30, 2007. We also experienced double-digit growth inour business Ethernet services which increased revenue by $52,000 in the threemonths ended and $187,000 in the nine months ended September 30, 2008.

 

*Internet*.We provide internet service to our dial-up and DSL subscribers as well asdedicated internet services for larger business customers. We receive revenuein various usage based and flat-rate packages based on the level of service,data speeds, and volume. There was no significant change in Internet revenuesfor the quarter or year-to-date periods.

 

*DigitalTV.*We receive monthly recurring revenue from our subscribersfor the provision of commercial TV programming in competition with local cableTV, satellite dish TV, and on-air TV service providers. Digital TV revenue was$871,000, which is $290,000 or 49.9% higher in the three months ended September 30,2008 compared to the three months ended September 30, 2007 and was$2,473,000, which is $867,000 or 54.0% higher in the nine months ended September 30,2008 compared to the nine months ended September 30, 2007. The increase inboth periods was primarily the result of offering Digital TV to threeadditional communities in 2007, which resulted in a 38.1% increase in DigitalTV customers at September 30, 2008 compared to September 30, 2007.Also contributing to the increase in Digital TV revenue was an increase inrates charged to customers of approximately 5.0%, which went into effect in April 2007.

 

*Directory.*We receive monthly recurring revenue from end-usersubscribers for the yellow page advertising in our telephone directories.Directory revenue was $3,085,000, which is $264,000 or 9.4% higher in the ninemonths ended September 30, 2008 compared to the nine months ended September 30,2007. This increase was the result of a favorable sales cycle of yellow-page advertisingin our directory, which went into effect in the beginning of the third quarterof 2007.

 

*BillProcessing.*We provide data processing as a service to othertelephone service providers. We collect a combination of monthly recurringrevenues, software license fees, and integration services revenue fromcompanies with which we have established a long-term data processingrelationship. NIBI bill processing revenue was $1,058,000, which is $397,000 or60.1% higher in the three months ended September 30, 2008 compared to thethree months ended September 30, 2007 and was $2,557,000, which is$693,000 or 37.2% higher in the nine months ended September 30, 2008compared to the nine months ended September 30, 2007. These increases weredriven by a single large contract of project and integration services revenueassociated with a new cellular service customer.

 

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

 

Telecom Sectorcost of services (excluding depreciation and amortization) was $7,958,000,which is $164,000 or 2.1% higher in the three months ended September 30,2008 compared to the three months ended September 30, 2007. This increasewas primarily due to a $226,000 increase in programming expenses incurred inconnection with Digital TV services and a $102,000 increase in directoryexpense associated with the increase in directory revenue, offset by a $78,000decrease in bad debt expense related to the reversal of previously recordedexpense from an interexchange carrier dispute and a $55,000 decrease in wagesand benefits.

 

Telecom Sectorcost of services (excluding depreciation and amortization) was $23,450,000,which is $643,000 or 2.8% higher in the nine months ended September 30,2008 compared to the nine months ended September 30, 2007. The increasewas primarily due to the following items: 1) a $585,000 increase in programmingexpenses incurred in connection with our growth in Digital TV services, 2) a$273,000 increase in directory expenses associated with the increase indirectory revenue and 2) a $252,000 increase in bad debt expense due anabnormally low expense in 2007, which was due to a $325,000 reversal ofpreviously recorded expense when we settled the interexchange carrier dispute.These increases were partially offset by a decrease in wages and benefits of$479,000.

 

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**Depreciation and Amortization**

 

Telecom Sectordepreciation and amortization was $4,059,000, which is $443,000 or 12.2% higherin the three months ended September 30, 2008 compared to the three monthsended September 30, 2007 and was $11,993,000, which is $675,000 or 6.0%higher in the nine months ended September 30, 2008 compared to the ninemonths ended September 30, 2007. This increase was primarily due tocapital expenditures associated with the investment in network expansion andimprovements to support Digital TV deployments.

 

**Operating Income**

 

Telecom Sectoroperating income was $3,445,000, which is $527,000 or 13.3% lower in the threemonths ended September 30, 2008 compared to the three months ended September 30,2007. Telecom operating income was $9,998,000, which is $4,316,000 or 30.1%lower in the nine months ended September 30, 2008 compared to the ninemonths ended September 30, 2007. Excluding a non-recurring interexchangecarrier settlement of $1,890,000 in the second quarter of 2007 and a disputesettlement with a large interexchange carrier for bill non-payment of $428,000,which was settled in the third quarter of 2008, our operating income decreased$2,854,000 or 23.0% in the nine months ended September 30, 2008 comparedto the nine months ended September 30, 2007. The decrease was due todecreases in revenue, increases in cost of services (excluding depreciation andamortization), and increases in depreciation and amortization expenses, all ofwhich are described above.

 

**Enventis Sector**

 

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

 

**ENVENTISSECTOR**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| **(Dollars  in thousands)**                              | ** ** | **2008**               | ** ** | **2007**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Revenue before  intersegment eliminations                |       |                   |       |                  |       |   |   |   |   |
| ENS equipment                                            |       | **$**                  | **11,725** |                  | $          | 10,092 | ** ** | **$** | **34,602** |   | $ | 39,395 |   |
| ENS services                                             |       | **3,114**              |       | 1,984                 | ** ** | **8,235** |   | 5,826 |   |
| ETS services                                             |       | **6,263**              |       | 5,136                 | ** ** | **17,617** |   | 15,035 |   |
| Intersegment                                             |       | **138**                |       | 152                   | ** ** | **404** |   | 299 |   |
| Total Enventis  revenue                                  | ** ** | **$**                  | **21,240** | ** **            | $          | 17,364 |   | **$** | **60,858** |   | $ | 60,555 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Total Enventis  revenue before intersegment eliminations |       |                   |       |                  |       |   |   |   |   |
| Unaffiliated  customers                                  | ** ** | **$**                  | **21,102** | ** **            | $          | 17,212 |   | **$** | **60,454** |   | $ | 60,256 |   |
| Intersegment                                             | ** ** | **138**                | ** ** | 152                   |       | **404** |   | 299 |   |
|                                                     | ** ** | **21,240**             | ** ** | 17,364                |       | **60,858** |   | 60,555 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Cost of sales,  equipment                                |       |                   |       |                  |       |   |   |   |   |
| (excluding  depreciation and amortization)               | ** ** | **10,190**             | ** ** | 8,705                 |       | **29,605** |   | 35,578 |   |
| Cost of services                                         |       |                   |       |                  |       |   |   |   |   |
| (excluding  depreciation and amortization)               | ** ** | **5,858**              | ** ** | 3,578                 |       | **15,017** |   | 10,562 |   |
| Selling, general  and administrative expenses            | ** ** | **2,411**              | ** ** | 2,476                 |       | **7,151** |   | 6,979 |   |
| Depreciation and  amortization                           | ** ** | **1,158**              | ** ** | 916                   |       | **3,203** |   | 2,718 |   |
| Operating income                                         | ** ** | **$**                  | **1,623**  | ** **            | $          | 1,689 |   | **$** | **5,882** |   | $ | 4,718 |   |
| Net income                                               | ** ** | **$**                  | **959**    | ** **            | $          | 1,026 |   | **$** | **3,453** |   | $ | 2,838 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Capital expenditures                                     | ** ** | **$**                  | **1,338**  | ** **            | $          | 1,928 |   | **$** | **4,315** |   | $ | 4,029 |   |

 

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HickoryTechCorporation acquired Enventis Telecom, Inc. on December 30, 2005. Wecontinue to manage and evaluate the Enventis operations in their entirety. Thetable below provides an illustration of the relative contributions andassociated trends from each of the Enventis primary product lines. Certainallocations have been made, particularly in the area of selling, general andadministrative expenses, in order to develop these tables.

 

**ENVENTISPRODUCT LINE REPORTING**

 
| ** **                                    | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **Enterpise Network  Services (ENS)**    | ** ** | **Enventis Transport  Services (ETS)**  | ** ** | **Enterpise Network  Services (ENS)** | ** ** | **Enventis Transport  Services (ETS)** | ** ** |
| **(Dollars in thousands)**                    | ** ** | **2008**                                 | ** ** | **2007**                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                          |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue before  intersegment eliminations:    |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equipment                                     | ** ** | **$**                                    | **11,725** |                                    | $          | 10,092 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **34,602** |   | $ | 39,395 | ** ** | **$** | **—** |   | $ | — |   |
| Service                                       | ** ** | **3,114**                                |       | 1,984                                   | ** ** | **6,263** |   | 5,136 | ** ** | **8,235** |   | 5,826 | ** ** | **17,617** |   | 15,035 |   |
| Intersegment                                  | ** ** | **—**                               |       | —                                  | ** ** | **138** |   | 152 | ** ** | **—** |   | — | ** ** | **404** |   | 299 |   |
| Total Enventis revenue                        | ** ** | **$**                                    | **14,839** |                                    | $          | 12,076 | ** ** | **$** | **6,401** |   | $ | 5,288 | ** ** | **$** | **42,837** |   | $ | 45,221 | ** ** | **$** | **18,021** |   | $ | 15,334 |   |
|                                          |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales, equipment                      |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| (excluding  depreciation and amortization)    | ** ** | **10,187**                               |       | 8,481                                   | ** ** | **3** |   | 224 | ** ** | **29,593** |   | 35,345 | ** ** | **12** |   | 233 |   |
| Cost of services                              |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| (excluding  depreciation and amortization)    | ** ** | **2,698**                                |       | 1,074                                   | ** ** | **3,160** |   | 2,504 | ** ** | **6,673** |   | 3,254 | ** ** | **8,344** |   | 7,308 |   |
| Selling, general  and administrative expenses | ** ** | **1,295**                                |       | 1,374                                   | ** ** | **1,116** |   | 1,102 | ** ** | **3,827** |   | 3,643 | ** ** | **3,324** |   | 3,336 |   |
| Depreciation and amortization                 | ** ** | **122**                                  |       | 128                                     | ** ** | **1,036** |   | 788 | ** ** | **366** |   | 376 | ** ** | **2,837** |   | 2,342 |   |
| Operating income                              | ** ** | **$**                                    | **537**    |                                    | $          | 1,019 | ** ** | **$** | **1,086** |   | $ | 670 | ** ** | **$** | **2,378** |   | $ | 2,603 | ** ** | **$** | **3,504** |   | $ | 2,115 |   |
| Net income                                    | ** ** | **$**                                    | **316**    |                                    | $          | 614 | ** ** | **$** | **643** |   | $ | 412 | ** ** | **$** | **1,394** |   | $ | 1,561 | ** ** | **$** | **2,059** |   | $ | 1,277 |   |
|                                          |       |                                     |       |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                          | ** ** | **$**                                    | **163**    |                                    | $          | 438 | ** ** | **$** | **1,175** |   | $ | 1,490 | ** ** | **$** | **452** |   | $ | 518 | ** ** | **$** | **3,863** |   | $ | 3,511 |   |

 

**Revenue**

 

Enventis Sectoroperating revenue before intersegment eliminations was $21,240,000 in the threemonths ended September 30, 2008, which is $3,876,000 or 22.3% higher thanrevenue in the three months ended September 30, 2007.  Revenue from all product lines increasedemphasizing the diversification of our revenue streams within this sector.Considerable increases seen in the Enterprise Network Services and EnventisTransport Services revenues reflect our business strategy of emphasizing theserevenue streams due to their recurring nature as well as their potentiallyhigher and more stable margin characteristics.

 

*EnterpriseNetwork Services (ENS) - Equipment.*This revenue is primarilyfrom the sale of telecommunications and data products provided by third partymanufacturers. The customers are generally businesses of medium to Enterprisesize. ENS equipment revenue in the three months ended September 30, 2008was $11,725,000, which is $1,633,000 or 16.2% higher than the three months endedSeptember 30, 2007. ENS equipment revenue was $34,602,000 in the ninemonths ended September 30, 2008, which is $4,793,000 or 12.2% lower thanequipment revenue earned in the nine months ended September 30, 2007.Timing of delivery and performance related to large equipment sales andinstallations significantly impact quarterly operating results. In the secondquarter of 2007, Enventis recognized $6,500,000 of revenue related to a singlelarge contract significantly impacting year over year comparisons.

 

*EnterpriseNetwork Services (ENS) - Services.* This revenue includesservices such as network and equipment monitoring, maintenance, and equipmentconsulting. ENS services revenue earned in the three months ended September 30,2008 was $3,114,000, which is $1,130,000 or 57.0% higher than ENS servicesrevenue earned in the three months ended September 30, 2007. ENS servicesrevenue in the nine months ended September 30, 2008 was $8,235,000, whichis $2,409,000 or 41.3% higher than services revenue earned in the nine monthsended September 30, 2007. These increases were primarily due to a$1,157,000 in the three months and a $1,449,000 increase in the nine monthperiod in contract services revenue associated with the design, configuration,and installation services of voice and data equipment. Also contributing to theyear-to-date increase in revenue was higher support fees revenue of $368,000.

 

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*EnventisTransport Services (ETS)*. This revenue is primarily of arecurring monthly basis and consists of billing for the use of our fibernetwork and network connections as well as our Hosted VOIP SinglelinkTM product.It is primarily under multi-year contracts with either interexchange carriersor end-user businesses. ETS revenue was $6,263,000 in the three months ended September 30,2008, which is $1,127,000 or 21.9% higher than revenue earned in the three monthsended September 30, 2007. ETS revenue was $17,617,000 in the nine monthsended September 30, 2008, which is $2,582,000 or 17.2% higher than revenueearned in the nine months ended September 30, 2007. Increased demandacross all ETS lines of business, especially our managed transport services,are driving new recurring revenue streams. Broadened availability of theEnventis SinglelinkTM Unified Communications solution, our centrally managed andhosted VoIP-based communications system, is driving monthly recurring revenuefrom both the hosted and transport components of this service.

 

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

 

Enventis Sectorcost of sales (excluding depreciation and amortization) associated withequipment revenue was $10,190,000 in the three months ended September 30,2008, which is $1,485,000 or 17.1% higher than cost of sales in the threemonths ended September 30, 2007. Cost of sales associated with equipmentrevenue was $29,605,000 in the nine months ended September 30, 2008, whichis $5,973,000 or 16.8% lower than cost of sales in the nine months ended September 30,2007. Cost of sales for the Enventis Sector includes costs of equipment andmaterials associated with procurement and installation of products forcustomers. Labor associated with installation work is not included in thiscategory, but is included in cost of services (excluding depreciation andamortization). Timing of delivery and performance related to large equipmentsales and installations significantly impact quarterly and year-to-datematerial costs.

 

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

 

Enventis Sectorcost of services (excluding depreciation and amortization) was $5,858,000 inthe three months ended September 30, 2008, which is $2,280,000 or 63.7%higher compared to cost of services in the three months ended September 30,2007. Cost of services (excluding depreciation and amortization) was$15,017,000 in the nine months ended September 30, 2008, which is$4,455,000 or 42.2% higher compared to cost of services in the nine monthsended September 30, 2007. The increases seen in the three-and nine-monthperiods were primarily due to the following items: 1) a $964,000 increase inthe quarter and a $2,276,000 increase in year-to-date wages and benefits due toincreased staffing levels, 2) a $859,000 increase in the quarter and a$1,334,000 increase in year-to-date contract labor costs related to externalproject support, and 3) a $202,000 increase in the quarter and a $489,000 increasein year-to-date circuit expenses, which supported the increase in off-nettransport revenue. The increased staffing and contract labor costs reflect ourinvestment in the growth of the managed service business as well as temporarystaffing for high levels of project activity. We are striving to increase ourrecurring revenue service capability in the Enventis Sector and the success inthe service level increase has brought increases in the cost of services forEnventis.

 

**Selling, General and Administrative Expenses**

 

Enventis Sectorselling, general and administrative expenses were $2,411,000 in the threemonths ended September 30, 2008, which is $65,000 or 2.6% lower thanselling, general, and administrative expenses in the three months ended September 30,2007. Selling, general and administrative expenses were $7,151,000 in the ninemonths ended September 30, 2008, which is $172,000 or 2.5% higher thanselling, general, and administrative expenses in the nine months ended September 30,2007. The increase in year-to-date expenses was primarily due to a $434,000increase in allocated corporate expenses, a $158,000 increase in commissions, a$158,000 increase in incentive compensation accruals, a $92,000 increase inadvertising expenses, partly offset by a $470,000 decrease in wages andbenefits and a $210,000 decrease in professional fees.

 

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**Depreciationand Amortization**

 

Enventis Sectordepreciation and amortization was $1,158,000, which is $242,000 or 26.4% higherin the three months ended September 30, 2008 compared to the three monthsended September 30, 2007 and was $3,203,000, which is $485,000 or 17.8%higher in the nine months ended September 30, 2008 compared to the ninemonths ended September 30, 2007. The increase in both periods was primarilydue to the increased capital investment in our network during 2007 and 2008supporting the growth in our ETS product line. Enventis Sector amortizationremained constant in 2008 and 2007, and is attributed to intangible assetsrelated to the Enventis acquisition in 2005.

 

**Operating Income**

 

EnventisSector operating income during the three months ended September 30,2008 was $1,623,000, which is $66,000 or 3.9% lower than operating income forthe three months ended September 30, 2007. Operating income for the ninemonths ended September 30, 2008 was $5,882,000, which is $1,164,000 or24.7% higher than operating income for the nine months ended September 30,2007. The increase in the nine-month period is the result of a combination oftwo factors. The first relates to the higher gross profit margin experienced onequipment sales in 2008 due to the product mix and favorable discounts andrebates offered by vendors. Equipment revenue was lower by $4,793,000 in thenine months ended September 30, 2008 however our cost of sales, which areprimarily costs for materials and equipment, were also lower by $5,973,000,resulting in an increase in margins on equipment sales. The second factoraffecting net income is the increase in services revenue within the ENS and ETSproduct lines offset by the increase in cost of services (excludingdepreciation and amortization), selling, general and administrative expenses,and depreciation to support the growth experienced within the Enventis productlines.

 

**InterestExpense**

 

Consolidated interestexpense was $1,874,000 which is $154,000 or 7.6% lower in the three monthsended September 30, 2008 compared to the three months ended September 30,2007. Interest expense was $5,049,000, which is $1,192,000 or 19.1% lower inthe nine months ended September 30, 2008 compared to the nine months endedSeptember 30, 2007. The decrease is a result of a lower average effectiveinterest rate in the first nine months of 2008. The outstanding balance of ourdebt obligations was $131,421,000 at September 30, 2008 and $129,206,000at December 31, 2007.

 

Interest expenseincreased $396,000 in the third quarter compared to the second quarter of 2008and is expected to remain higher in future quarters, subject to other normalinfluences such as debt principal amount and movement in interest rates onun-hedged or unfixed interest rate debt. Quarterly benefits of $330,000 frominterest-rate swap agreements sold at a gain in early 2007 became fullyamortized in the second quarter of 2008 and will no longer offset a portion ofinterest expense. The combined effects of lower interest rates and interestprotection strategies will nevertheless likely cause our interest expense to beapproximately $1,300,000 lower in 2008 than in 2007.

 

**IncomeTaxes**

 

The effective income taxrate from continuing operations of approximately 41.20% for the third quarterof 2008 and 42.4% for the third quarter of 2007 exceeds the federal statutoryrate primarily due to state income taxes and accrued interest expense onunrecognized tax benefits.

 

**Liquidityand Capital Resources**

 

**Overview**

 

We believe that we willbe able to meet our current and long-term liquidity and capital requirementsthrough our cash flow generated from our operating activities. Our primary useof cash in 2008 has been for payment of dividends, interest and principalpayments on our indebtedness, income tax payments, and capital expenditures. Weutilize our senior revolving credit facility to manage the temporary increasesand decreases in our cash balances. The following table summarizes our cashflow:

 

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| ** **                             | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **September 30, 2008** | ** ** |
| **(Dollars in thousands)**             | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Net Cash  Provided by/(Used for):      |       |                        |       |   |   |
| Operating  Activities                  |       | $                           | 20,009     |   | $ | 29,677 |   |
| Investing  Activities                  |       | (12,175                     | )          | (11,288 | ) |
| Financing  Activities                  |       | (6,506                      | )          | (15,868 | ) |
| Discontinued  Operations               |       | —                      |       | (17 | ) |
| Increase in Cash  and Cash Equivalents |       | $                           | 1,328      |   | $ | 2,504 |   |

 

**CashFlows**

 

Cash generated fromoperations was $20,009,000 in the first nine months of 2008 compared to$29,677,000 in the first nine months of 2007. Cash provided by operations inthe first nine months of 2008 and 2007 was primarily attributable to net incomeplus non-cash expenses for depreciation and amortization. The decrease in cashprovided by operations in 2008 is due to an increase in receivables andinventory associated with the growing Enventis sector.

 

Cash used in investingactivities was driven by capital expenditures which increased $1,028,000 duringthe first nine months of 2008 compared to the first nine months of 2007. We aremaking a concentrated effort to focus spending on revenue generating products,services, and key strategic initiatives. We anticipate the level of totalcapital spending in 2008 to be slightly higher than the level of capitalspending experienced in 2007.

 

Cash used in financingactivities in the first nine months of 2008 was $6,506,000 compared to $15,868,000during the first nine months of 2007. In 2008 our overall long-term debtposition has increased by $2,150,000 due primarily to working capital needs ofthe growing Enventis business. In 2007 we experienced long-term debt reductionof $13,975,000. In 2008, we are focusing on growth initiatives but expect thatour year-end debt level will be similar to the level existing at December 2007.

 

**WorkingCapital**

 

Working capital (i.e.current assets minus current liabilities) was $15,077,000 as of September 30,2008, compared to working capital of $8,228,000 as of December 31, 2007.The ratio of current assets to current liabilities was 1.5 as of September 30,2008 and 1.3 as of December 31, 2007.

 

**Extended-TermPayable**

 

Enventis has a$20,000,000 wholesale financing agreement with a financing company to fundinventory purchased from certain approved vendors. Advances under the financingarrangement are collateralized by the accounts receivable and inventory ofEnventis and a guaranty of up to $18,000,000 from HickoryTech Corporation. Thefinancing agreement provides sixty-day interest-free payment terms forinventory purchases and can be terminated at any time by either party. Thebalance outstanding under the financing arrangement was $10,527,000 at September 30,2008 and $14,443,000 at December 31, 2007. These balances are classifiedas current liabilities in the accompanying balance sheets and are notconsidered part of our debt financing.

 

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**Long-TermDebt Obligations**

 

Our long-term obligationsas of September 30, 2008 were $129,822,000, excluding current maturitiesof $1,300,000 on debt and of $299,000 on current maturities of capital leases.Long-term obligations as of December 31, 2007, were $128,475,000 excludingcurrent maturities of $475,000 on debt and of $256,000 on capital leases. On December 30,2005, we entered into a $160,000,000 credit agreement with a syndicate of banks(subsequently reduced to a $155,525,000 facility as of September 30, 2008through normal quarterly amortization), which amended our previous creditfacility. The credit facility is comprised of a $30,000,000 revolving creditcomponent that expires on December 30, 2011 and a $130,000,000 term loancomponent (subsequently reduced to $125,525,000 as of September 30, 2008through normal quarterly amortization).

 

The term loan componentof the credit facility is comprised of two components, which are defined asterm loan B and term loan C. The outstanding principal balance of termloan B is $106,075,000 as of September 30, 2008, and is held by commerciallenders. Under the terms of term loan B, we are required to make quarterlyprincipal payments of $275,000 from September 30, 2008 through December 31,2011 with the remainder of the aggregate principal due in two payments on March 31,2012 and June 30, 2012. Due to the aggressive pay down of debt in2007, we were not required to make quarterly principal payments during thefirst three quarters of 2008. The outstanding principal balance of term loan Cis $19,450,000 as of September 30, 2008 and is held entirely by the RuralTelephone Finance Cooperative (“RTFC”). Under the terms of term loan C, we arerequired to make quarterly principal payments of $50,000 on the aggregateprincipal amount from September 30, 2008 through December 31, 2012with the remainder of the aggregate principal due in two payments on March 31,2013 and June 30, 2013. Under the terms of the revolving credit facility,any outstanding principal is payable in full on December 30, 2011. Theoutstanding balance of the revolving credit component of the credit facility is$5,300,000 as of September 30, 2008.

 

Our credit facility requiresus to comply, on a consolidated basis, with specified financial ratios andtests. These financial ratios and tests include maximum leverage ratio, minimuminterest coverage ratio, and maximum capital expenditures. We were in fullcompliance with these ratios and tests as of September 30, 2008. Ourobligations under the credit facility are secured by a first-priority lien onall property and assets, tangible and intangible of HickoryTech and its currentsubsidiaries, including, but not limited to accounts receivable, inventory,equipment and intellectual property; general intangibles, cash and proceeds ofthe foregoing. HickoryTech has also given a first-priority pledge of thecapital stock of HickoryTech’s current subsidiaries to secure the credit facility.Our credit facility permits us to pay dividends to holders of our common stock,or to make repurchases of our common stock with restrictions related to netincome of the year prior to the dividend, offset by the dividend or repurchaseor both. The credit facility contains certain restrictions that, among otherthings, limit or restrict our ability to create liens or encumbrances; incuradditional debt; issue stock; make asset sales, transfers, or dispositions; andengage in mergers and acquisitions over a specified maximum value.

 

**NewAccounting Pronouncements**

 

The financial statementimpact relating to new accounting standards that have not yet been adopted byus can be found under Note 1. Basis of Presentation and Consolidation - “RecentAccounting Developments.”

 

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

# ** **

We do not have operationssubject to risks of foreign currency fluctuations. We do, however, usederivative financial instruments to manage exposure to interest ratefluctuations. Our objectives for holding derivatives are to minimize interestrate risks using the most effective methods to eliminate or reduce the impactof these exposures. Variable rate debt instruments are subject to interest raterisk. In March 2007, we terminated two outstanding interest-rate swapagreements, with original maturities of June 2008, in exchange for $1,936,000in proceeds. Proceeds of $664,000 in the first nine months of 2008 and $940,000in the first nine months of 2007 were recognized as an offset to interest.Immediately following the termination of the two agreements discussed above, weexecuted a new interest-rate swap agreement, effectively locking in theinterest rate on $60,000,000 of variable-rate debt through March of 2010.In March 2008, we entered into a second interest-rate swapagreement, effectively locking in the interest rate on an additional$40,000,000 of variable-interest rate debt through February 2010.

 

The cumulative gain orloss on current derivative instruments is reported as a component ofaccumulated other comprehensive income (loss) in shareholders’ equity and isrecognized in earnings when the term of the protection agreement is concluded.Our earnings are affected by changes in interest rates as a portion of ourlong-term debt has variable interest rates based on LIBOR. If interest ratesfor the portion of our long-term debt based on variable rates had averaged 10%more for the quarter ended September 30, 2008, our interest expense wouldhave increased $32,764.

 

# **Item4. Controls and Procedures**

# ** **

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

 

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

 

**Part II  Other Information**

# ** **

# **Item1. Legal Proceedings.**

# ** **

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

 

# **Item1A. Risk Factors.**

# ** **

As a result of thedomestic and international credit market turmoil of September and October 2008and its residual effects on commercial and residential business conditionsaffecting our Company, the following risk factors have been added to the riskfactors previously disclosed in Item 1A, “Risk Factors,” of our Annual Reporton Form 10-K for the fiscal year ended December 31, 2007.

 

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**As an additional Risk Related toOur Indebtedness and Capital Structure**

 

*We mayseek funding from our traditional sources of daily cash uses, i.e. our seniorcredit facility or our extended term payable*financing*company, and learn they cannot fulfill our request for cash*.We have binding contracts with six entities on which we depend upon for ourdaily supply of operating cash flow. The five entities in our senior creditfacility are CoBank ACB, Rural Telephone Finance Cooperative, Wachovia Bank NA,US Bank NA, and General Electric Capital Corporation. They operate under acommon syndicate agreement using unified terms and conditions. We also operatea wholesale financing agreement with General Electric Commercial DistributionFinance Corporation in our Enventis Sector to fund inventory purchased fromcertain vendors, in an extended term payable arrangement. It provides 60 daysinterest-free payment terms for Enventis working capital purposes. In spite ofthe contractual obligation of these institutions to perform under the financingagreement, and in spite of our attempts to remain informed of the capability ofthese institutions to perform their functions for us, we may learn that ourrequest for cash on any given day cannot be fulfilled. As of the end of thisreporting period we have not experienced any decline of cash advances.

 

**As an additional Risk Related toOur Business**

 

*As aresult of the domestic and international credit market turmoil at September andOctober 2008, and its residual effects, our commercial and residentialbusiness with customers may be adversely affected as they struggle for cash, orwith a downturn in the economy.*We have a long history ofproviding service in various economic conditions but to the extent that thecredit market turmoil in September and October 2008 is creating morerarely seen residual effects on our commercial and residential customers, wemay experience revenue declines or cost of business increases in the future.

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

 

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

 

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

 

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

 

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Signatures

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Dated:  October 30, 2008 | HICKORY TECH  CORPORATION |
|------------------------------------|---------------------------|
|                               |                      |
|                               |                      |
|                               | By:                       | /s/ John W. Finke |
|                               |                      | John W. Finke,  President and Chief Executive Officer |
|                               |                      |   |
|                               |                      |   |
|                               | By:                       | /s/ David A.  Christensen |
|                               |                      | David A. Christensen,  Senior Vice President and |
|                               |                      | Chief Financial Officer |

 

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