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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definition of“large accelerated filer, accelerated filer, a non-accelerated filer or smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

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

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theAct).

Yes   ̈  No  x

 

The total number of sharesof the Registrant’s common stock outstanding as of July 25, 2008: 13,330,284

 

 

 

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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 Six Months  Ended June 30, 2008 and 2007 |   | 3      |
|     |   |                                                                                                                      |   |   |
|     |   | Consolidated  Balance Sheets (unaudited) as of June 30, 2008 and December 31,  2007                             |   | 4      |
|     |   |                                                                                                                      |   |   |
|     |   | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended June 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                                                               |   | 25     |
|     |   |                                                                                                                      |   |   |
| 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                                                              |   | 26     |
|     |   |                                                                                                                      |   |   |
| Item 3.  |   | Defaults  Upon Senior Securities                                                                                          |   | 26     |
|     |   |                                                                                                                      |   |   |
| Item 4.  |   | Submission  of Matters to a Vote of Security Holders                                                                      |   | 26     |
|     |   |                                                                                                                      |   |   |
| 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** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(Dollars  in thousands except share and per share amounts)**     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  revenue:                                                |       |                             |       |                           |       |   | ** ** |   |   |
| Telecom Sector                                                     | ** ** | **$**                            | **17,999** | ** **                     | $          | 20,448 |   | **$** | **36,293** | ** ** | $ | 39,485 |   |
| Enventis Sector                                                    |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Equipment  revenue                                                 | ** ** | **12,709**                       | ** ** | 17,869                         |       | **22,877** | ** ** | 29,303 |   |
| Services revenue                                                   | ** ** | **9,037**                        | ** ** | 7,285                          |       | **16,475** | ** ** | 13,741 |   |
| Total Enventis  Sector                                             | ** ** | **21,746**                       | ** ** | 25,154                         |       | **39,352** | ** ** | 43,044 |   |
| Total operating  revenue                                           | ** ** | **39,745**                       | ** ** | 45,602                         |       | **75,645** | ** ** | 82,529 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Costs and  expenses:                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Cost of sales,  equipment, excluding depreciation and amortization |       | **10,718**                       | ** ** | 16,559                         |       | **19,415** | ** ** | 26,873 |   |
| Cost of  services, excluding depreciation and amortization         |       | **12,627**                       | ** ** | 10,778                         |       | **24,319** | ** ** | 21,695 |   |
| Selling, general  and administrative expenses                      | ** ** | **5,463**                        | ** ** | 5,891                          |       | **11,147** | ** ** | 11,727 |   |
| Depreciation                                                       | ** ** | **4,757**                        | ** ** | 4,432                          |       | **9,426** | ** ** | 8,936 |   |
| Amortization of  intangibles                                       | ** ** | **289**                          | ** ** | 289                            |       | **578** | ** ** | 578 |   |
| Total costs and  expenses                                          | ** ** | **33,854**                       | ** ** | 37,949                         |       | **64,885** | ** ** | 69,809 |   |
| Operating income                                                   | ** ** | **5,891**                        | ** ** | 7,653                          |       | **10,760** | ** ** | 12,720 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Other income and  expense:                                         |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Interest and  other income                                         | ** ** | **15**                           | ** ** | 47                             |       | **42** | ** ** | 131 |   |
| Interest expense                                                   | ** ** | **(1,478**                       | **)**      | (2,031                         | )          | **(3,175** | **)** | (4,213 | ) |
| Total other  (expense)                                             | ** ** | **(1,463**                       | **)**      | (1,984                         | )          | **(3,133** | **)** | (4,082 | ) |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Income from  continuing operations before income taxes             |       | **4,428**                        | ** ** | 5,669                          |       | **7,627** | ** ** | 8,638 |   |
| Income tax  provision                                              | ** ** | **1,931**                        | ** ** | 2,415                          |       | **3,349** | ** ** | 3,616 |   |
| Income from  continuing operations                                 | ** ** | **2,497**                        | ** ** | 3,254                          |       | **4,278** | ** ** | 5,022 |   |
| Discontinued  operations:                                          |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Loss from  operations of discontinued component                    | ** ** | **—**                       | ** ** | (13                            | )          | **—** | ** ** | (15 | ) |
| Income tax  benefit                                                | ** ** | **—**                       | ** ** | (5                             | )          | **—** | ** ** | (6 | ) |
| Loss on  discontinued operations                                   | ** ** | **—**                       | ** ** | (8                             | )          | **—** | ** ** | (9 | ) |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Net income                                                         | ** ** | **$**                            | **2,497**  | ** **                     | $          | 3,246 |   | **$** | **4,278** | ** ** | $ | 5,013 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Basic earnings  per share - continuing operations:                 | ** ** | **$**                            | **0.19**   | ** **                     | $          | 0.25 |   | **$** | **0.32** | ** ** | $ | 0.38 |   |
| Basic loss per  share - discontinued operations:                   | ** ** | **—**                       | ** ** | —                         |       | **—** | ** ** | — |   |
| ** **                                                         |       | **$**                            | **0.19**   | ** **                     | $          | 0.25 |   | **$** | **0.32** | ** ** | $ | 0.38 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Weighted average  common shares outstanding                        | ** ** | **13,324,200**                   | ** ** | 13,247,508                     |       | **13,312,804** | ** ** | 13,241,079 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Diluted earnings  per share - continuing operations:               | ** ** | **$**                            | **0.19**   | ** **                     | $          | 0.25 |   | **$** | **0.32** | ** ** | $ | 0.38 |   |
| Diluted loss per  share - discontinued operations:                 | ** ** | **—**                       | ** ** | —                         |       | **—** | ** ** | — |   |
| ** **                                                         |       | **$**                            | **0.19**   | ** **                     | $          | 0.25 |   | **$** | **0.32** | ** ** | $ | 0.38 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Weighted average  common and equivalent shares outstanding         | ** ** | **13,326,719**                   | ** ** | 13,247,508                     |       | **13,317,145** | ** ** | 13,241,079 |   |
|                                                               |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Dividends per  share                                               | ** ** | **$**                            | **0.12**   | ** **                     | $          | 0.12 |   | **$** | **0.24** | ** ** | $ | 0.24 |   |

 

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

 

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**HICKORY TECH CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                            | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **(Dollars in thousands except share and per share amounts)** | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| ASSETS                                                                                                |       |              | ** **  |                  |       |
| Current assets:                                                                                       |       |              | ** **  |                  |       |
| Cash and cash  equivalents                                                                            | ** ** | **$**             | **920**     | ** **            | $          | 171 |   |
| Receivables, net  of allowance for doubtful accounts of $958 and $1,184                               | ** ** | **32,187**        | ** **  | 28,357                |       |
| Inventories                                                                                           | ** ** | **9,273**         | ** **  | 7,054                 |       |
| Income taxes  receivable                                                                              | ** ** | **—**        | ** **  | 1,013                 |       |
| Deferred income  taxes, net                                                                           | ** ** | **1,334**         | ** **  | 1,334                 |       |
| Prepaid expenses                                                                                      | ** ** | **1,640**         | ** **  | 1,713                 |       |
| Other                                                                                                 | ** ** | **858**           | ** **  | 1,196                 |       |
| Total current  assets                                                                                 | ** ** | **46,212**        | ** **  | 40,838                |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Investments                                                                                           | ** ** | **4,066**         | ** **  | 3,830                 |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Property, plant  and equipment                                                                        | ** ** | **329,365**       | ** **  | 322,249               |       |
| Less accumulated  depreciation                                                                        | ** ** | **177,725**       | ** **  | 169,318               |       |
| Property, plant  and equipment, net                                                                   | ** ** | **151,640**       | ** **  | 152,931               |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Other assets:                                                                                         |       |              | ** **  |                  |       |
| Goodwill                                                                                              | ** ** | **25,239**        | ** **  | 25,239                |       |
| Intangible  assets, net                                                                               | ** ** | **1,405**         | ** **  | 1,983                 |       |
| Deferred costs  and other                                                                             | ** ** | **2,452**         | ** **  | 2,674                 |       |
| Total other  assets                                                                                   | ** ** | **29,096**        | ** **  | 29,896                |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Total assets                                                                                          | ** ** | **$**             | **231,014** | ** **            | $          | 227,495 |   |
| LIABILITIES & SHAREHOLDERS’ EQUITY                                                      |       |              | ** **  |                  |       |
| Current  liabilities:                                                                                 |       |              | ** **  |                  |       |
| Extended term  payable                                                                                | ** ** | **$**             | **13,041**  | ** **            | $          | 14,443 |   |
| Accounts payable                                                                                      | ** ** | **4,027**         | ** **  | 4,538                 |       |
| Accrued expenses                                                                                      | ** ** | **7,098**         | ** **  | 7,740                 |       |
| Accrued income  taxes                                                                                 | ** ** | **364**           | ** **  | —                |       |
| Advanced  billings and deposits                                                                       | ** ** | **5,226**         | ** **  | 5,158                 |       |
| Current  maturities of long-term obligations                                                          | ** ** | **1,341**         | ** **  | 731                   |       |
| Total current  liabilities:                                                                           | ** ** | **31,097**        | ** **  | 32,610                |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Long-term  liabilities:                                                                               |       |              | ** **  |                  |       |
| Debt  obligations, net of current maturities                                                          | ** ** | **132,313**       | ** **  | 128,475               |       |
| Financial  derivative instruments                                                                     | ** ** | **1,053**         | ** **  | 1,451                 |       |
| Accrued income  taxes                                                                                 | ** ** | **7,930**         | ** **  | 7,747                 |       |
| Deferred income  taxes                                                                                | ** ** | **15,072**        | ** **  | 14,901                |       |
| Deferred revenue                                                                                      | ** ** | **1,506**         | ** **  | 1,527                 |       |
| Accrued employee  benefits and deferred compensation                                                  | ** ** | **8,925**         | ** **  | 8,852                 |       |
| Total long-term  liabilities                                                                          | ** ** | **166,799**       | ** **  | 162,953               |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Total  liabilities                                                                                    | ** ** | **197,896**       | ** **  | 195,563               |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Commitments and  contingencies (Note 8)                                                               | ** ** | **—**        | ** **  | —                |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Shareholders’  equity:                                                                           |       |              | ** **  |                  |       |
| Common stock, no  par value, $.10 stated value                                                        |       |              | ** **  |                  |       |
| Shares  authorized: 100,000,000                                                                       |       |              | ** **  |                  |       |
| Shares issued  and outstanding: 13,330,284 in 2008 and 13,284,903 in 2007                             | ** ** | **1,333**         | ** **  | 1,329                 |       |
| Additional  paid-in capital                                                                           | ** ** | **11,527**        | ** **  | 11,031                |       |
| Retained  earnings                                                                                    | ** ** | **21,724**        | ** **  | 20,639                |       |
| Accumulated  other comprehensive (loss)                                                               | ** ** | **(1,466**        | **)**       | (1,067                | )          |
| Total  shareholders’ equity                                                                      | ** ** | **33,118**        | ** **  | 31,932                |       |
|                                                                                                  |       |              | ** **  |                  |       |
| Total  liabilities and shareholders’ equity                                                      | ** ** | **$**             | **231,014** | ** **            | $          | 227,495 |   |

 

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

 

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**HICKORYTECH CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands)**                                               | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| OPERATING  ACTIVITIES:                                                             |       |                           | ** ** |   |   |
| Net income                                                                         | ** ** | **$**                          | **4,278**  | ** ** | $ | 5,013 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           | ** ** |   |   |
| Loss from  discontinued operations                                                 | ** ** | **—**                     | ** ** | 9 |   |
| Depreciation and  amortization                                                     | ** ** | **10,004**                     | ** ** | 9,514 |   |
| Amortization of  gain on sale of financial derivative instrument                   | ** ** | **(664**                       | **)**      | (609 | ) |
| Deferred income  tax provision (benefit)                                           | ** ** | **—**                     | ** ** | (40 | ) |
| Accrued  patronage refunds                                                         | ** ** | **(293**                       | **)**      | 75 |   |
| Other                                                                              | ** ** | **480**                        | ** ** | 180 |   |
| Changes in  operating assets and liabilities net of effects of dispositions:       |       |                           | ** ** |   |   |
| Receivables                                                                        | ** ** | **(3,674**                     | **)**      | (7,254 | ) |
| Prepaids                                                                           | ** ** | **73**                         | ** ** | 268 |   |
| Inventories                                                                        | ** ** | **(2,219**                     | **)**      | 2,125 |   |
| Accounts payable  and accrued expenses                                             | ** ** | **(1,148**                     | **)**      | (695 | ) |
| Deferred  revenue, billings, and deposits                                          | ** ** | **47**                         | ** ** | (789 | ) |
| Income taxes                                                                       | ** ** | **1,557**                      | ** ** | 2,871 |   |
| Other                                                                              | ** ** | **616**                        | ** ** | 872 |   |
| Net cash  provided by operating activities                                         | ** ** | **9,057**                      | ** ** | 11,540 |   |
|                                                                               |       |                           | ** ** |   |   |
| INVESTING  ACTIVITIES:                                                             |       |                           | ** ** |   |   |
| Additions to  property, plant and equipment                                        | ** ** | **(7,960**                     | **)**      | (6,035 | ) |
| Other                                                                              | ** ** | **14**                         | ** ** | 46 |   |
| Net cash (used  in) investing activities                                           | ** ** | **(7,946**                     | **)**      | (5,989 | ) |
|                                                                               |       |                           | ** ** |   |   |
| FINANCING  ACTIVITIES:                                                             |       |                           | ** ** |   |   |
| Net change in  extended term payables arrangement                                  | ** ** | **(1,402**                     | **)**      | 4,230 |   |
| Change in cash  overdraft                                                          | ** ** | **—**                     | ** ** | (1,475 | ) |
| Payments of  capital lease obligations                                             | ** ** | **(185**                       | **)**      | (202 | ) |
| Borrowings on  credit facility                                                     | ** ** | **15,900**                     | ** ** | 4,000 |   |
| Repayments on  credit facility                                                     | ** ** | **(11,600**                    | **)**      | (10,650 | ) |
| Proceeds from  the sale of financial derivative instrument                         | ** ** | **—**                     | ** ** | 1,936 |   |
| Proceeds from  issuance of common stock                                            | ** ** | **118**                        | ** ** | 119 |   |
| Dividends paid                                                                     | ** ** | **(3,193**                     | **)**      | (3,174 | ) |
| Net cash (used  in) financing activities                                           | ** ** | **(362**                       | **)**      | (5,216 | ) |
|                                                                               |       |                           | ** ** |   |   |
| DISCONTINUED  OPERATIONS:                                                          |       |                           | ** ** |   |   |
| Net cash (used  in) operating activities                                           | ** ** | **—**                     | ** ** | (9 | ) |
| Net cash (used  in) discontinued operations                                        | ** ** | **—**                     | ** ** | (9 | ) |
|                                                                               |       |                           | ** ** |   |   |
| Net increase in  cash and cash equivalents                                         | ** ** | **749**                        | ** ** | 326 |   |
| Cash and cash  equivalents at beginning of the year                                | ** ** | **171**                        | ** ** | 84 |   |
| Cash and cash  equivalents at the end of the year                                  | ** ** | **$**                          | **920**    | ** ** | $ | 410 |   |
|                                                                               |       |                           | ** ** |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                           | ** ** |   |   |
| Cash paid for  interest                                                            | ** ** | **$**                          | **3,966**  | ** ** | $ | 4,614 |   |
| Net cash paid  for income taxes                                                    | ** ** | **$**                          | **1,792**  | ** ** | $ | 756 |   |
| Non-cash  investing activities:                                                    |       |                           | ** ** |   |   |
| Property, plant  and equipment acquired with capital leases                        | ** ** | **$**                          | **334**    | ** ** | $ | 455 |   |

 

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

 

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**HICKORY TECH CORPORATION**

**JUNE 30, 2008**

**PART 1. FINANCIAL INFORMATION**

 

**Item 1.      CondensedNotes to Consolidated Financial Statements (Unaudited)**

 

**Note 1.      Basis of Presentation andConsolidation**

 

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

 

Cost of Sales - equipment(excluding depreciation and amortization)

 

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

 

Cost of Services(excluding depreciation and amortization)

 

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

 

Selling, General, andAdministrative Expenses

 

Selling, generaland administrative expenses include direct and indirect selling expenses,advertising and all other general and administrative costs associated with theoperations 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 principles and requirements for how an acquirer recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, and any non-controlling interest in the acquired companyand the goodwill acquired. SFAS No. 141(R) also establishesdisclosure requirements to enable the evaluation of the nature and financialeffects of the business combination. SFAS No. 141(R) is effective asof the beginning of an entity’s fiscal year that begins after December 15,2008, and will be adopted by us in the first quarter of 2009. SFAS No. 141(R) iscurrently not expected to have a material effect on our consolidated financialstatements.

 

In December 2007,the FASB issued SFAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements – an amendment of Accounting Research Bulletin No. 51”(“SFAS No. 160”). SFAS No. 160 will change the accounting andreporting for minority interests, which will be re-characterized asnon-controlling interests and classified as a component of equity. This newconsolidation method will significantly change the accounting for transactionswith minority interest holders. SFAS No. 160 is effective for fiscal yearsbeginning after December 15, 2008 and we will adopt it in the firstquarter 2009. We do not expect adoption of SFAS No. 160 to have a materialeffect on our consolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”).SFAS No. 161 requires enhanced disclosures about an entity’s derivativeand hedging activities and is effective for financial statements issued for fiscalyears beginning after November 15, 2008. We are currently assessing theimpact of SFAS No. 161 on our disclosures.

 

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

 

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

 
| ** **                                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                             | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands, except share and per share amounts)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Income from  continuing operations                                                                     |       | $                                | 2,497      |                           | $          | 3,254 |   | $ | 4,278 |   | $ | 5,022 |   |
| Loss from  discontinued operations                                                                     |       | —                           |       | (8                             | )          | — |   | (9 | ) |
| Net Income                                                                                             |       | $                                | 2,497      |                           | $          | 3,246 |   | $ | 4,278 |   | $ | 5,013 |   |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding                                                                   |       | 13,324,200                       |       | 13,247,508                     |       | 13,312,804 |   | 13,241,079 |   |
| Stock options  (dilutive only)                                                                         |       | 2,228                            |       | —                         |       | 3,210 |   | — |   |
| Stock subscribed  (ESPP)                                                                               |       | 291                              |       | —                         |       | 1,131 |   | — |   |
| Total dilutive  shares outstanding                                                                     |       | 13,326,719                       |       | 13,247,508                     |       | 13,317,145 |   | 13,241,079 |   |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share:                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic -  continuing operations                                                                         |       | $                                | 0.19       |                           | $          | 0.25 |   | $ | 0.32 |   | $ | 0.38 |   |
| Basic -  discontinued operations                                                                       |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Diluted -  continuing operations                                                                       |       | $                                | 0.19       |                           | $          | 0.25 |   | $ | 0.32 |   | $ | 0.38 |   |
| Diluted -  discontinued operations                                                                     |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

Options topurchase 436,200 shares and 486,050 shares for the three and six months ended June 30,2008 and 2007, respectively, were not included in the computation of dilutedEPS, because their effect on diluted EPS would have been anti-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 and second 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 |       |

 

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 second quarter of 2008 and 2007.

 

During the firstsix months of 2008 and 2007, shareholders have elected to reinvest $118,000 and$119,000, respectively, of dividends into HickoryTech common stock pursuant tothe 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 June 30, 2008 and 2007 was$3,409,000 and $3,337,000, respectively. Comprehensive income for the sixmonths ended June 30, 2008 and 2007 was $3,879,000 and $5,246,000,respectively.

 

In March 2007,we terminated our two outstanding interest-rate swap agreements with originalmaturities in 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. On March 28,2008, we entered into a second interest-rate swapagreement, effectively locking in the interest rate on an additional$40,000,000 of variable interest rate debt through February 2010.

 

The market valueof the cumulative gain or (loss) on financial derivative instruments isreported as a component of accumulated other comprehensive income (loss) inshareholders’ equity and will be recognized in earnings over the term of theoriginal swap agreement.

 

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 | ) |

 

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

 

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**Note 4.  Acquisition, Dispositionand Discontinued Operations**

 

Effective December 31, 2006, we sold all of theoutstanding capital stock in Collins Communications Systems Co. (“Collins”) toSkyview Capital, LLC for an initial price of $100,000, paid by delivery of apromissory note, plus up to $1,650,000 of earn-out payments. Skyview Capital,LLC paid us $100,000 in February 2007. The remaining selling price is duein contingent payments payable over the next three years if financial targetsare reached by Skyview Capital, LLC. We have received no payments to-daterelated to this earn-out provision. The $100,000 mentioned above has beenincluded in the calculation of the net loss on sale mentioned below, while thecontingent payments have not been included in the net loss. The agreementcontains covenants against competition by the new owner in south-centralMinnesota. We recorded a pre-tax loss on the sale of $3,385,000 ($2,040,000 netof income taxes). The Collins results of operations were formerly reported inthe Enterprise Solutions Sector. The consolidated statements of operations forall periods presented have been restated to reflect the Collins operations as discontinuedoperations.

 

**Note 5.  Inventories**

 

Inventory includes parts, materials and suppliesstored in our warehouses to support basic levels of service and maintenance aswell as scheduled capital projects and equipment awaiting configuration forcustomers. Inventory also includes parts and equipment shipped directly fromvendors to customer locations while in transit and parts and equipment returnedfrom customers which is being returned to vendors for credit, as well asmaintenance contracts associated with customer sales which have not yettransferred to the customer. The inventory value in the Telecom Sector,comprised of materials, as of June 30, 2008 and December 31, 2007 was$3,874,000 and $3,312,000, respectively. The inventory value in the EnventisSector, comprised of finished goods, as of June 30, 2008 and December 31,2007 was $5,399,000 and $3,742,000, respectively.

 

Inventories are valued using the lower of cost(perpetual weighted average-cost or specific identification) or market method. Weadjust our inventory carrying value for estimated obsolescence or unmarketableinventory to the estimated market value based upon assumptions about futuredemand and market conditions. As market and other conditions change, additionalinventory write-downs may be recorded at the time acts that give rise to thelower value become known.

 

**Note 6.  Intangible Assets**

 

We are required to test acquired goodwill forimpairment on an annual basis based upon a fair value approach. Additionally,goodwill shall be tested for impairment between annual tests if an event occursor circumstances change that would more likely than not reduce the fair valueof an entity below its carrying value.****The carrying value of our goodwill is $25,239,000 as of June 30,2008 and December 31, 2007.

 

The components of otherintangible assets are as follows:

 
| ** **                           | ** ** | ** **            | ** ** | **As of June 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      |                                            | $          | 2,932 |   | $ | 4,229 |   | $ | 2,456 |   |
| Other  intangibles                   |       | 1 - 5 years           |       | 730                                         |       | 622                                             |       | 730 |   | 520 |   |
| Total                                |       |                  |       | $                                           | 4,959      |                                            | $          | 3,554 |   | $ | 4,959 |   | $ | 2,976 |   |

 

As required by SFAS No. 142, we periodically reassessthe carrying value, useful lives and classifications of identifiable assets.Amortization expense related to the definite-lived intangible assets was$289,000 for the three months ended June 30, 2008 and 2007, respectively.Amortization expense related to the definite-lived intangible assets was$578,000 for the six months ended June 30, 2008 and 2007, respectively.Total estimated amortization expense for the remaining six months of 2008 andthe five years subsequent to 2008 is as follows: 2008 (July 1 – December 31)– $549,000; 2009 - $853,000; 2010 - $3,000; none in 2011, 2012, and 2013.

 

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**Note 7.  Quarterly SectorFinancial Summary**

** **
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars in thousands)**      | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended June 30, 2008    |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 17,999     |         | $          | 21,746                 |       | $                | —     |   | $ | 39,745 |   |
| Intersegment  revenue                     |       | 161         |       | 128          |       | (289                   | )          | —           |       |
| Total operating  revenue                  |       | 18,160      |       | 21,874       |       | (289                   | )          | 39,745           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 4,008       |       | 1,025        |       | 13                     |       | 5,046            |       |
| Operating income                          |       | 3,006       |       | 2,838        |       | 47                     |       | 5,891            |       |
| Interest expense                          |       | 21          |       | —       |       | 1,457                  |       | 1,478            |       |
| Income  taxes(benefit)                    |       | 1,240       |       | 1,178        |       | (487                   | )          | 1,931            |       |
| Income/(loss)  from continuing operations |       | 1,747       |       | 1,660        |       | (910                   | )          | 2,497            |       |
| Identifiable  assets                      |       | 150,378     |       | 73,884       |       | 6,752                  |       | 231,014          |       |
| Property, plant  and equipment, net       |       | 114,403     |       | 37,091       |       | 146                    |       | 151,640          |       |
| Capital  expenditures                     |       | 2,545       |       | 1,984        |       | 18                     |       | 4,547            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended June 30, 2007    |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 20,448     |         | $          | 25,154                 |       | $                | —     |   | $ | 45,602 |   |
| Intersegment  revenue                     |       | 111         |       | 85           |       | (196                   | )          | —           |       |
| Total operating  revenue                  |       | 20,559      |       | 25,239       |       | (196                   | )          | 45,602           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 3,789       |       | 927          |       | 5                      |       | 4,721            |       |
| Operating  income/(loss)                  |       | 6,239       |       | 1,649        |       | (235                   | )          | 7,653            |       |
| Interest expense                          |       | 18          |       | —       |       | 2,013                  |       | 2,031            |       |
| Income  taxes(benefit)                    |       | 2,490       |       | 660          |       | (735                   | )          | 2,415            |       |
| Income/(loss)  from continuing operations |       | 3,736       |       | 990          |       | (1,472                 | )          | 3,254            |       |
| Identifiable  assets                      |       | 153,182     |       | 66,103       |       | 7,251                  |       | 226,536          |       |
| Property, plant  and equipment, net       |       | 117,053     |       | 33,303       |       | 90                     |       | 150,446          |       |
| Capital  expenditures                     |       | 2,288       |       | 1,017        |       | —                 |       | 3,305            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

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| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| **(Dollars in thousands)**      | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Six Months Ended  June 30, 2008      |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 36,293     |         | $          | 39,352                 |       | $                | —     |   | $ | 75,645 |   |
| Intersegment  revenue                     |       | 291         |       | 266          |       | (557                   | )          | —           |       |
| Total operating  revenue                  |       | 36,584      |       | 39,618       |       | (557                   | )          | 75,645           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 7,934       |       | 2,045        |       | 25                     |       | 10,004           |       |
| Operating  income/(loss)                  |       | 6,553       |       | 4,259        |       | (52                    | )          | 10,760           |       |
| Interest expense                          |       | 44          |       | —       |       | 3,131                  |       | 3,175            |       |
| Income  taxes(benefit)                    |       | 2,696       |       | 1,765        |       | (1,112                 | )          | 3,349            |       |
| Income/(loss)  from continuing operations |       | 3,815       |       | 2,494        |       | (2,031                 | )          | 4,278            |       |
| Identifiable  assets                      |       | 150,378     |       | 73,884       |       | 6,752                  |       | 231,014          |       |
| Property, plant  and equipment, net       |       | 114,403     |       | 37,091       |       | 146                    |       | 151,640          |       |
| Capital  expenditures                     |       | 4,965       |       | 2,977        |       | 18                     |       | 7,960            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Six Months Ended  June 30, 2007           |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 39,485     |         | $          | 43,044                 |       | $                | —     |   | $ | 82,529 |   |
| Intersegment  revenue                     |       | 218         |       | 147          |       | (365                   | )          | —           |       |
| Total operating  revenue                  |       | 39,703      |       | 43,191       |       | (365                   | )          | 82,529           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 7,702       |       | 1,802        |       | 10                     |       | 9,514            |       |
| Operating  income/(loss)                  |       | 10,342      |       | 3,029        |       | (651                   | )          | 12,720           |       |
| Interest expense                          |       | 35          |       | —       |       | 4,178                  |       | 4,213            |       |
| Income  taxes(benefit)                    |       | 4,147       |       | 1,218        |       | (1,749                 | )          | 3,616            |       |
| Income/(loss)  from continuing operations |       | 6,175       |       | 1,812        |       | (2,965                 | )          | 5,022            |       |
| Identifiable  assets                      |       | 153,182     |       | 66,103       |       | 7,251                  |       | 226,536          |       |
| Property, plant  and equipment, net       |       | 117,053     |       | 33,303       |       | 90                     |       | 150,446          |       |
| Capital  expenditures                     |       | 3,934       |       | 2,101        |       | —                 |       | 6,035            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

**Note8.  Commitments and Contingencies**

 

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 six 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.

 

**Note9.  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 June 30, 2008and 2007 was $8,000 and $27,000, respectively. Share-based compensation expenserecognized for the six months ended June 30, 2008 and 2007 was $22,000 and$54,000, respectively. Share-based compensation expense recognized in ourConsolidated Statement of Operations for the first six months of 2008 and 2007included compensation expense for share-based payment awards granted prior to,but not yet completely vested as of June 30, 2008 and 2007. Historicaldata is used to estimate pre-vesting forfeitures and are estimated at the timeof the grant and revised, if necessary, in subsequent periods if actualforfeitures 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 six months ended June 30, 2008 and2007, respectively.  Although we haveauthority to issue options under the Stock Award Plan no current compensationprograms have options as a component.

 

As of June 30,2008 there was $8,000 of total unrecognized compensation costs related tonon-vested stock options granted under the Company’s Stock Award Plan. Thisexpense is expected to be recognized over a weighted average period of twoyears.

 

A summary of stockoption activity is as follows:

 
| ** **                           | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|--------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                           | ** ** | **Shares** | ** ** | **Exercise Price**        | ** ** |
| Outstanding at  January 1, 2008 |       | 476,000    |       | $                         | 12.79      |   |
|                                 | Granted    |       | —     |                      | —     |   |
|                                 | Exercised  |       | —     |                      | —     |   |
|                                 | Forfeited  |       | —     |                      | —     |   |
|                                 | Expired    |       | (4,800     | )                         | 13.38      |   |
| Outstanding at  June 30, 2008   |       | 471,200    |       | $                         | 12.79      |   |
| Exercisable at  June 30, 2008   |       | 461,200    |       | $                         | 12.91      |   |

 

The following tableprovides certain information with respect to stock options outstanding at June 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       |                       | 8.2 years  |   |
| $8.00 - $12.00             |       | 177,200                |       | 10.26                   |       | 5.0 years                  |       |
| $12.00 - $16.00            |       | 225,250                |       | 13.88                   |       | 2.6 years                  |       |
| $16.00 - $21.00            |       | 53,750                 |       | 18.18                   |       | 2.7 years                  |       |
|                       |       | 471,200                |       | $                       | 12.79      |                       | 3.7 years  |   |
|                       |       |                   |       |                    |       |                       |       |
| Aggregate  Intrinsic Value |       |                   |       | $                       | 24,800     |                       |       |   |

 

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The following tableprovides certain information with respect to stock options exercisable at June 30,2008:

 
| ** **                  | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Exercisable**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $6.00 - $8.00               |       | 5,000                  |       | $                         | 6.95       |                      | 8.2 years  |   |
| $8.00 - $12.00              |       | 177,200                |       | 10.26                     |       | 5.0 years                 |       |
| $12.00 - $16.00             |       | 225,250                |       | 13.88                     |       | 2.6 years                 |       |
| $16.00 - $21.00             |       | 53,750                 |       | 18.18                     |       | 2.7 years                 |       |
|                        |       | 461,200                |       | $                         | 12.91      |                      | 3.6 years  |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate  intrinsic value: |       |                   |       | $                         | 11,600     |                      |       |   |

 

**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 Statementof Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS157). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles and expandsdisclosures about fair value measurements. The adoption of SFAS 157 did nothave a material impact on our financial condition and results of operations.

 

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 activemarkets for identical assets and liabilities.

 

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

 

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

 

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

 

We utilize interest-rate swap agreements that qualifyas cash-flow hedges to manage our exposure to interest rate fluctuations on aportion of our variable-interest rate debt. In March 2007, we terminatedtwo outstanding interest-rate swap agreements, with original maturities of June 2008,in exchange for $1,936,000 in proceeds. Proceeds of $332,000 were recognized asan offset to interest expense in the second quarter of 2008 and 2007.Immediately following the termination of the two swap agreements discussedabove, we executed a new interest-rate swap agreement, effectively locking inthe interest rate on $60,000,000 of variable-interest rate debt through March,2010. On March 28, 2008, we entered into a secondinterest-rate swap agreement, effectively locking in the interestrate on an additional $40,000,000 of variable-interest rate debt through February 2010.

 

The market value of the cumulative gain or (loss) onfinancial derivative instruments is reported as a component of accumulatedother comprehensive income (loss) in shareholders’ equity and will berecognized in earnings over the term of the swap agreement. The fair value ofour derivatives at June 30, 2008 and December 31, 2007 is a netliability of $1,053,000 and $1,451,000, respectively.

 

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**Note 11.  EmployeePost-Retirement Benefits**

 

HickoryTech provides post-retirement health care andlife insurance benefits for certain employees. HickoryTech accounts for thesepost-retirement benefits in accordance with SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans – anamendment of FASB Statements No. 87, 88, 106 and 132(R).” New employeeshired on or after January 1, 2007 are not eligible for post-retirementhealth care and life insurance benefits.

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands)**     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of  net periodic benefit cost |       |                             |       |                           |       |   |   |   |   |
| Service cost                             |       | $                                | 63         |                           | $          | 71 |   | $ | 126 |   | $ | 142 |   |
| Interest cost                            |       | 122                              |       | 114                            |       | 244 |   | 228 |   |
| Amortization of  transition obligation   |       | 15                               |       | 15                             |       | 30 |   | 30 |   |
| Amortization of  prior service cost      |       | (14                              | )          | (3                             | )          | (28 | ) | (6 | ) |
| Recognized net  actuarial loss           |       | 20                               |       | 18                             |       | 40 |   | 36 |   |
| Net periodic  benefit cost               |       | $                                | 206        |                           | $          | 215 |   | $ | 412 |   | $ | 430 |   |

 
| ** **                                                      | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| Employer’s  contributions for current premiums:            |       |                   |       |
| Contributions  made for the six months ended June 30, 2008 |       | $                      |  128  |   |
| Expected  contributions for remainder of 2008                   |       | 128                    |       |
| Total estimated  employer contributions for fiscal year 2008    |       | $                      | 256        |   |

 

**Note 12. Income Taxes**

 

The effective income tax rate from continuing operations ofapproximately 43.6% for the second quarter of 2008 and 42.6% for the secondquarter of 2007 exceeds the federal statutory rate primarily due to stateincome taxes and accrued interest expense on unrecognized tax benefits. Theincrease in the effective tax rate from 2008 compared to 2007 is primarily theresult of interest accrued on uncertain tax positions according to FASBInterpretation No. 48 (FIN No. 48) “Accounting for Uncertainty inIncome Taxes-an interpretation of FASB Statement No. 109.”

 

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 June 30, 2008, we had unrecognized tax benefits totaling$7,255,000 excluding interest. The amount of the unrecognized tax benefits, ifrecognized, that would affect the effective income tax rates of future periodsis $7,237,000. There have been no significant changes to these amounts duringthe six months ended June 30, 2008.

 

We recognize interest and penalties related to income tax matters asincome tax expense. As of June 30, 2008, we have accrued $675,000(net of tax) for interest related to unrecognized tax benefits.

 

We file consolidatedincome tax returns in the United States federal jurisdiction and combined orseparate income tax returns in various state jurisdictions. In general, we areno longer subject to United States federal income tax examinations for theyears prior to 2004 except to the extent of losses utilized in subsequentyears.

 

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# **Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

# ** **

*Forward Looking Statements*

 

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

 

Because of these risks,uncertainties, and assumptions and the fact that any forward-looking statementsmade by HickoryTech and its management are based on estimates, projections,beliefs, and assumptions of management, they are not guarantees of futureperformance and you should not place undue reliance on them. In addition,forward-looking statements speak only as of the date they are made. With theexception of the requirements set forth in the federal securities laws or the rules andregulations of the Securities and Exchange Commission, we do not undertake anyobligations or update or review any forward-looking information, whether as aresult of new information, future events or otherwise.

 

*Critical Accounting Policies*

 

Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and the related disclosure of contingent assets and liabilities.We believe that the application of the accounting policies, which are importantto our financial position and results of operations, requires significantjudgments and estimates on the part of management. A description of thecritical accounting 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 two business segments: the Telecom Sector and theEnventis Sector. The Telecom Sector includes our historical rural telephonebusiness operations, including three incumbent local exchange carriers (“ILECs”),a competitive local exchange carrier (“CLEC”) and National Independent Billing, Inc.(“NIBI”), which provides data processing services for the telecommunicationsindustry.

 

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Our consolidated income from continuing operations decreased $757,000or 23.3% in the three months ended June 30, 2008 compared to the threemonths ended June 30, 2007 and $744,000 or 14.8% in the six months ended June 30,2008 compared to the six months ended June 30, 2007. The decrease in bothcomparative periods was primarily due to a settlement with a largeinterexchange carrier which provided $1,100,000 of non-recurring benefit to the2007 comparative numbers. Excluding the non-recurring settlement that occurredin June 2007, our consolidated income from continuing operations increased$343,000 or 15.9% in the three months ended June 30, 2008 compared to thethree months ended June 30, 2007 and $356,000 or 9.1% in the six monthsended June 30, 2008 compared to the six months ended June 30, 2007.Net income in the Enventis sector, which we believe provides a platform forlong-term growth, increased $670,000 or 67.7% in the three months ended June 30,2008 compared to the three months ended June 30, 2007 and $682,000 or37.6% in the six months ended June 30, 2008 compared to the six monthsended June 30, 2007.

 

Second quarter revenue of $39,745,000 declined $5,857,000 or 12.8%compared to the second quarter of 2007 and was $75,645,000 or $6,884,000 lowerin the six months ended June 30, 2008 compared to the six months ended June 30,2007. The decline in revenue was impacted by two significant items occurring inthe second quarter of 2007. The timing and execution of equipment sales withinour Enventis Sector drove higher second quarter 2007 equipment revenue. TelecomSector revenue was also higher due to non-recurring settlement revenue of$1,890,000 from an interexchange carrier. Despite the decrease seen in revenuewe continue to focus on strategic revenue streams.

 

The increase in strategic revenue streams in both the Enventis andTelecom Sectors are providing growth needed to offset the downward trends inTelecom local and network access revenue. The service revenue portion of theEnventis sector increased $1,752,000 or 24.1% in the three months ended June 30,2008 compared to the three months ended June 30, 2007 and $2,734,000 or19.9% in the six months ended June 30, 2008 compared to the six monthsended June 30, 2007. The service element of the Enventis sector, with itsrecurring revenue and higher margin characteristics is a main focus for us.

 

Strategic broadband revenue in our Telecom sector continued to postdouble-digit increases. Broadband revenue increased $510,000 or 22.7% in thethree months ended June 30, 2008 compared to the three months ended June 30,2007 and $937,000 or 21.2% in the six months ended June 30, 2008 comparedto the six months ended June 30, 2007. We continue to experience increasedcompetition from cable TV providers, CLECs, voice over internet protocol,wireless telephone, and other telephone competitors causing reduced customercounts and network access volume declines of $1,277,000 in the Telecom Sector.Telecom Sector results have also been significantly impacted by disputes withUSAC and a large interexchange carrier lowering 2008 year-to-datenetwork access revenue by $793,000 fromdisputes. Comparisons with 2007 revenue are affected by a $1,890,000 settlementwith an interexchange carrier received in June 2007. While we continue towork to offset declining Telecom Sector revenue with new services to ourcustomers, we may not be able to match the profitability of services we losewith the same profitability in the new services we provide.

 

Our focus on debt reduction in 2007 along with our ability to lock infavorable interest rates in the first quarter of 2008 are the factors drivinginterest expense to be $1,038,000 or 24.6% lower in the six months ended June 30,2008 compared to the six months ended June 30, 2007. By locking in ourlong-term debt rates, we will experience lower interest expense for the year2008 compared to 2007. Due to the expiration of amortization of previouslyrecognized gains on interest rate hedge instruments, the quarterly interestexpense will increase approximately $330,000 per quarter beginning in the thirdquarter of 2008.

 

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**Sector Results of Operations**

 

**Telecom Sector**

 

The following table provides a breakdown of theTelecom Sector operating results.

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands)**                       | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue before  intersegment eliminations                  |       |                             |       |                           |       |   |   |   |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Revenue                                                    |       |                             |       |                           |       |   |   |   |   |
| Local Service                                              | ** ** | **$**                            | **4,086**  |                           | $          | 4,227 | ** ** | **$** | **8,217** |   | $ | 8,675 |   |
| Network Access                                             | ** ** | **5,952**                        |       | 9,378                          | ** ** | **12,777** |   | 16,737 |   |
| Long Distance                                              | ** ** | **1,197**                        |       | 1,297                          | ** ** | **2,387** |   | 2,629 |   |
| Data                                                       | ** ** | **1,903**                        |       | 1,715                          | ** ** | **3,751** |   | 3,391 |   |
| Internet                                                   | ** ** | **1,189**                        |       | 1,130                          | ** ** | **2,267** |   | 2,256 |   |
| Digital TV                                                 | ** ** | **858**                          |       | 536                            | ** ** | **1,602** |   | 1,025 |   |
| Directory                                                  | ** ** | **1,004**                        |       | 899                            | ** ** | **2,004** |   | 1,784 |   |
| Bill Processing                                            | ** ** | **905**                          |       | 514                            | ** ** | **1,499** |   | 1,203 |   |
| Intersegment                                               | ** ** | **161**                          |       | 111                            | ** ** | **291** |   | 218 |   |
| Other                                                      | ** ** | **905**                          |       | 752                            | ** ** | **1,789** |   | 1,785 |   |
| Total Telecom  Revenue                                     | ** ** | **$**                            | **18,160** |                           | $          | 20,559 | ** ** | **$** | **36,584** |   | $ | 39,703 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Total Telecom  revenue before intersegment eliminations    |       |                             |       |                           |       |   |   |   |   |
| Unaffiliated  customers                                    | ** ** | **$**                            | **17,999** |                           | $          | 20,448 | ** ** | **$** | **36,293** |   | $ | 39,485 |   |
| Intersegment                                               | ** ** | **161**                          |       | 111                            | ** ** | **291** |   | 218 |   |
| ** **                                                 |       | **18,160**                       |       | 20,559                         | ** ** | **36,584** |   | 39,703 |   |
|                                                       | ** ** | ** **                       |       |                           | ** ** | ** ** |   |   |   |
| Cost of  services, excluding depreciation and amortization | ** ** | **7,845**                        |       | 7,158                          | ** ** | **15,492** |   | 15,013 |   |
| Selling, general  and administrative expenses              | ** ** | **3,301**                        |       | 3,373                          | ** ** | **6,605** |   | 6,646 |   |
| Depreciation and  amortization                             | ** ** | **4,008**                        |       | 3,789                          | ** ** | **7,934** |   | 7,702 |   |
| Operating Income                                           | ** ** | **$**                            | **3,006**  |                           | $          | 6,239 | ** ** | **$** | **6,553** |   | $ | 10,342 |   |
| Net income                                                 | ** ** | **$**                            | **1,747**  |                           | $          | 3,736 | ** ** | **$** | **3,815** |   | $ | 6,175 |   |
| Capital  expenditures                                      | ** ** | **$**                            | **2,545**  |                           | $          | 2,288 | ** ** | **$** | **4,965** |   | $ | 3,934 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Key metrics                                                |       |                             |       |                           |       |   |   |   |   |
| Business access  lines                                     | ** ** | **27,023**                       |       | 27,306                         |       |   |   |   |   |
| Residential  access lines                                  | ** ** | **35,872**                       |       | 39,716                         |       |   |   |   |   |
| Total access  lines                                        | ** ** | **62,895**                       |       | 67,022                         |       |   |   |   |   |
| Long distance  customers                                   | ** ** | **40,565**                       |       | 41,287                         |       |   |   |   |   |
| Digital  Subscriber Line customers                         | ** ** | **18,126**                       |       | 16,677                         |       |   |   |   |   |
| Digital TV  customers                                      | ** ** | **7,353**                        |       | 5,194                          |       |   |   |   |   |

 

**Revenue**

 

Telecom Sector operating revenue before intersegmenteliminations was $18,160,000, which is $2,399,000 or 11.7% lower in the threemonths ended June 30, 2008 compared to the three months ended June 30,2007 and was $36,584,000, which is $3,119,000 or 7.9% lower in the six monthsended June 30, 2008 compared to the six months ended June 30, 2007.The decrease in both periods was primarily due to lower revenue in networkaccess which includes the non-recurrence of a settlement with a largeinterexchange carrier that provided $1,890,000 of revenue in June 2007.

 

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Local servicerevenue was $4,086,000, which is $141,000 or 3.3% lower in the three monthsended June 30, 2008 compared to the three months ended June 30, 2007.This is due to a $193,000 decline in first line residential and business accessline revenue. Our access lines declined 4,127 or 6.2% from June 30, 2007to June 30, 2008. This decline was offset by an increase of $70,000 inreciprocal compensation revenue due to a non-recurring adjustment made in 2007increasing a revenue reserve to account for proposed contracts with wirelesscarriers.

 

Local Servicerevenue was $8,217,000, which is $458,000 or 5.3% lower in the six months endedJune 30, 2008 compared to the six months ended June 30, 2007. Firstline residential and business access revenue declined by $365,000 due to theaccess line loss mentioned above. Also contributing to lower revenue was a$95,000 decrease in reciprocal compensation revenue received from wirelesscarriers under contract using minute-of-use pricing. Many of these contractsand their associated pricing were renegotiated in 2007. A higher degree ofcompetition from cable TV providers, ILECs, and CLECs serving in our markets aswell as wireless substitution, could continue to impact our local servicerevenue in future periods.

 

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.

 

Network accessrevenue was $5,952,000, which is $3,426,000 or 36.5% lower in the three monthsended June 30, 2008 compared to the three months ended June 30, 2007and was $3,960,000 or 23.7% lower in the six months ended June 30, 2008compared to the six months ended June 30, 2007.  This is primarily due to the settlement of aswitched access dispute with a large interexchange carrier, which resulted in anon-recurring increase in revenue of $1,890,000 in the second quarter of 2007.Without this settlement, network access revenue would have been $1,536,000 or20.5% lower in the three months ended June 30, 2008 compared to the threemonths ended June 30, 2007 and $2,070,000 or 13.9% lower in the six monthsJune 30, 2008 compared to the six months ended June 30, 2007.

 

A dispute with theUniversal Service Administrative Company (“USAC”) stemming fromits reversal of earlier interpretations of revenue distribution rules hasimpacted second quarter 2008 network access revenue. USAC claimed $475,000 ofpreviously distributed revenue for years prior to 2008, and has lowered 2008revenue by $66,000 in the first and second quarters. Year-to-date 2008impact is $607,000 of which $541,000 is reflected in the second quarter of2008. The expected impact of the USAC decision for future quarters is$66,000 of lowered revenue per quarter. We are appealing the USACinterpretation as arbitrary and unprecedented, however USAC is largelyunregulated and there is no likely forum for recovery of this lost revenue.Additionally, an ongoing dispute with a large interexchange carrier isresulting in bill non-payment and impacting second quarter network accessrevenue by a reduction of $105,000. Previously, this carrier disputereduced first quarter 2008 network access revenue by $81,000. In May of2008 we filed a lawsuit against the carrier to recover unpaid amounts billed inSeptember 2007 to present. In July of 2008, the carrier filed acounterclaim against us. We intend to continue to pursue collection throughlitigation. It is not known when an outcome of that litigation willoccur. Altogether, the disputes with USAC and the large interexchangecarrier have lowered 2008 year-to-date network access revenue by$793,000. The expected future quarterly impact of these two disputes isapproximately $160,000, until resolved.

 

Long distancerevenue was $1,197,000 which is $100,000 or 7.7% lower in the three monthsended June 30, 2008 compared to the three months ended June 30, 2007and was $2,387,000, which is $242,000 or 9.2% lower in the six months ended June 30,2008 compared to the six months ended June 30, 2007. The decrease in bothperiods was primarily due to a decrease of 722 or 1.8% in the customer base at June 30,2008 compared to June 30, 2007 and large call-volume business customersundergoing economic slowdowns.

 

Data revenue was$1,903,000, which is $188,000 or 11.0% higher in the three months ended June 30,2008 compared to the three months ended June 30, 2007 and was $3,751,000,which is $360,000 or 10.6% higher the six months ended June 30, 2008 comparedto the six months ended June 30, 2007. The increase in both periods wasprimarily due to an 8.7% increase in DSL customers between June 30, 2008and June 30, 2007. Also contributing to the increase were strong sales ofour Ethernet service product offset by a decrease in our private line localrevenue.

 

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Digital TV revenuewas $858,000, which is $322,000 or 60.1% higher in the three months ended June 30,2008 compared to the three months ended June 30, 2007 and was $1,602,000,which is $577,000 or 56.3% higher in the six months ended June 30, 2008compared to the six months ended June 30, 2007. The increase in bothperiods was primarily the result of the offering of digital TV to threeadditional communities in 2007, which resulted in a 41.6% increase in digitalTV customers at June 30, 2008 compared to June 30, 2007. Alsocontributing to the increase in digital TV revenue was an increase in ratescharged to customers of approximately 5.0%, which went into effect in April 2007.

 

Directory revenuewas $1,004,000, which is $105,000 or 11.7% higher in the three months ended June 30,2008 compared to the three months ended June 30, 2007 and was $2,004,000,which is $220,000 or 12.3% higher in the six months ended June 30, 2008compared to the six months ended June 30, 2007. This increase was theresult of increased sales of yellow-page advertising in our directory,which went into effect in the beginning of the third quarter of 2007.

 

NIBI billprocessing revenue was $905,000, which is $391,000 or 76.1% higher in the threemonths ended June 30, 2008 compared to the three months ended June 30,2007 and was $1,499,000, which is $296,000 or 24.6% higher in the six monthsended June 30, 2008 compared to the six months ended June 30, 2007.Contributing to the increase in revenue was a $296,000 increase in the threemonth period and a $342,000 increase in the six month period of project andintegration services revenue associated with a new cellular service customer.

 

Other revenue,consisting primarily of sales of customer premise equipment (CPE), circuitprivate lines, maintenance, and adds, moves and changes was $905,000, which is$153,000 or 20.4% higher in the three months ended June 30, 2008 comparedto the three months ended June 30, 2007. This increase was due to a higher volume of CPE sales of $93,000 andhigher add/move/change revenue of $63,000.

 

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

 

Telecom Sectorcost of services (excluding depreciation and amortization) was $7,845,000,which is $687,000 or 9.6% higher in the three months ended June 30, 2008compared to the three months ended June 30, 2007. This increase wasprimarily due to a $297,000 increase in bad debt expense. Bad debt expenseduring the three months ended June 30, 2007 was abnormally low because ofa reversal of $325,000 of previously recorded expense when we settled theinterexchange carrier dispute. Also contributing to the increase in cost ofservices was a $199,000 increase in programming expenses incurred in connectionwith digital TV services, a $108,000 increase in CPE material costs due to theincrease in CPE revenue, and a $72,000 increase in directory expense associatedwith the increase in directory revenue.

 

Telecom Sectorcost of services (excluding depreciation and amortization) was $15,492,000,which is $479,000 or 3.2% higher in the six months ended June 30, 2008compared to the six months ended June 30, 2007. The increase was primarilydue to the following items:  1) a$360,000 increase in programming expenses incurred in connection with digitalTV services, 2) a $330,000 increase in bad debt expense due an abnormally lowexpense in 2007, which was due to a $325,000 reversal of previously recordedexpense when we settled the interexchange carrier dispute, and 3) a $171,000increase in directory expenses associated with the increase in directoryrevenue. These increases were partially offset by a decrease in wages andbenefits of $480,000 due to one-time severance payments made in 2007 and adecrease in co-location expenses of $184,000 due primarily to a credit receivedfrom a vendor in 2008.

 

**Selling, General and Administrative Expenses**

 

Telecom Sectorselling, general and administrative expenses (excluding depreciation andamortization) were $3,301,000, which is 72,000 or 2.1% lower in the threemonths ended June 30, 2008 compared to the three months ended June 30,2007. Telecom Sector selling, general and administrative expenses (excludingdepreciation and amortization) were $6,605,000, which is $41,000 or .60% lowerin the six months ended June 30, 2008 compared to the six months ended June 30,2007. The company is actively managing its overhead and administrative costs.

 

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**Depreciation and Amortization**

 

Telecom Sectordepreciation and amortization was $4,008,000, which is $219,000 or 5.8% higherin the three months ended June 30, 2008 compared to the three months endedJune 30, 2007 and was $7,934,000, which is $232,000 or 3.0% higher in thesix months ended June 30, 2008 compared to the six months ended June 30,2007. This increase was primarily due to an increase in fixed asset spending in2007. Amortization was $27,000 in the three months ended June 30, 2008 and2007 and was $53,000 in the six months ended June 30, 2008 and 2007, respectively.

 

**Operating Income**

 

Telecom Sectoroperating income decreased $3,233,000 or 51.8% in the three months ended June 30,2008 compared to the three months ended June 30, 2007 and decreased$3,789,000 or 36.7% in the six months ended June 30, 2008 compared to thesix months ended June 30, 2007. Excluding the non-recurring interexchangecarrier settlement of $1,890,000 our operating income decreased $1,343,000 or30.9% in the three months ended June 30, 2008 compared to the three monthsended June 30, 2007 and decreased $1,899,000 or 22.5% in the six monthsended June 30, 2008 compared to the six months ended June 30, 2007.The decrease in both periods was due to decreases in revenue and increases incost of services (excluding depreciation and amortization), increases indepreciation and amortization expenses offset by a decrease in selling,general, and administrative expenses, all of which are described above.

 

**EnventisSector**

 

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

 

**ENVENTIS SECTOR**

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands)**                                           | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue before intersegment eliminations                             |       |                             |       |                           |       |   |   |   |   |
| ENS equipment  revenue                                               | ** ** | **$**                            | **12,709** |                           | $          | 17,869 | ** ** | **$** | **22,877** |   | $ | 29,303 |   |
| ENS services  revenue                                                | ** ** | **3,056**                        |       | 2,099                          | ** ** | **5,121** |   | 3,842 |   |
| ETS services  revenue                                                | ** ** | **5,981**                        |       | 5,186                          | ** ** | **11,354** |   | 9,899 |   |
| Intersegment                                                         | ** ** | **128**                          |       | 85                             | ** ** | **266** |   | 147 |   |
| Total Enventis revenue                                               | ** ** | **$**                            | **21,874** |                           | $          | 25,239 | ** ** | **$** | **39,618** |   | $ | 43,191 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Total Enventis revenue before intersegment  eliminations             |       |                             |       |                           |       |   |   |   |   |
| Unaffiliated  customers                                              | ** ** | **$**                            | **21,746** |                           | $          | 25,154 | ** ** | **$** | **39,352** |   | $ | 43,044 |   |
| Intersegment                                                         | ** ** | **128**                          |       | 85                             | ** ** | **266** |   | 147 |   |
| ** **                                                           |       | **21,874**                       |       | 25,239                         | ** ** | **39,618** |   | 43,191 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Cost of sales,  equipment  (excluding depreciation and amortization) | ** ** | **10,718**                       |       | 16,559                         | ** ** | **19,415** |   | 26,873 |   |
| Cost of services  (excluding depreciation and amortization)          | ** ** | **4,880**                        |       | 3,786                          | ** ** | **9,159** |   | 6,984 |   |
| Selling, general and administrative expenses                         | ** ** | **2,413**                        |       | 2,318                          | ** ** | **4,740** |   | 4,503 |   |
| Depreciation and amortization                                        | ** ** | **1,025**                        |       | 927                            | ** ** | **2,045** |   | 1,802 |   |
| Operating income                                                     | ** ** | **$**                            | **2,838**  |                           | $          | 1,649 | ** ** | **$** | **4,259** |   | $ | 3,029 |   |
| Net income                                                           | ** ** | **$**                            | **1,660**  |                           | $          | 990 | ** ** | **$** | **2,494** |   | $ | 1,812 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Capital expenditures                                                 | ** ** | **$**                            | **1,984**  |                           | $          | 1,017 | ** ** | **$** | **2,977** |   | $ | 2,101 |   |

 

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HickoryTechCorporation acquired Enventis on December 30, 2005. We continue to manageand evaluate the Enventis operations in their entirety. The table belowprovides an illustration of the relative contributions and associated trendsfrom each of the Enventis primary product lines. Certain allocations have beenmade, particularly in the area of selling, general and administrative expenses,in order to develop these tables.

 

**ENVENTISPRODUCT LINE REPORTING**

 
| ** **                                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **Network Services**                          | ** ** | **Transport Services**                      | ** ** | **Network Services** | ** ** | **Transport Services** | ** ** |
| **(Dollars in thousands)**                                 | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue before  intersegment eliminations:                           |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equipment  revenue                                                   | ** ** | **$**                                              | **12,709** |                                             | $          | 17,869 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **22,877** |   | $ | 29,303 | ** ** | **$** | **—** |   | $ | — |   |
| Service revenue                                                      | ** ** | **3,056**                                          |       | 2,099                                            | ** ** | **5,981** |   | 5,186 | ** ** | **5,121** |   | 3,842 | ** ** | **11,354** |   | 9,899 |   |
| Intersegment                                                         | ** ** | **—**                                         |       | —                                           | ** ** | **128** |   | 85 | ** ** | **—** |   | — | ** ** | **266** |   | 147 |   |
| Total Enventis revenue                                               | ** ** | **$**                                              | **15,765** |                                             | $          | 19,968 | ** ** | **$** | **6,109** |   | $ | 5,271 | ** ** | **$** | **27,998** |   | $ | 33,145 | ** ** | **$** | **11,620** |   | $ | 10,046 |   |
|                                                                 |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales,  equipment  (excluding depreciation and amortization) | ** ** | **10,714**                                         |       | 16,554                                           | ** ** | **4** |   | 5 | ** ** | **19,406** |   | 26,864 | ** ** | **9** |   | 9 |   |
| Cost of services  (excluding depreciation and amortization)          | ** ** | **2,143**                                          |       | 1,253                                            | ** ** | **2,737** |   | 2,533 | ** ** | **3,975** |   | 2,180 | ** ** | **5,184** |   | 4,804 |   |
| Selling, general  and administrative expenses                        | ** ** | **1,273**                                          |       | 1,171                                            | ** ** | **1,140** |   | 1,147 | ** ** | **2,532** |   | 2,269 | ** ** | **2,208** |   | 2,234 |   |
| Depreciation and amortization                                        | ** ** | **123**                                            |       | 153                                              | ** ** | **902** |   | 774 | ** ** | **244** |   | 248 | ** ** | **1,801** |   | 1,554 |   |
| Operating income                                                     | ** ** | **$**                                              | **1,512**  |                                             | $          | 837 | ** ** | **$** | **1,326** |   | $ | 812 | ** ** | **$** | **1,841** |   | $ | 1,584 | ** ** | **$** | **2,418** |   | $ | 1,445 |   |
| Net income                                                           | ** ** | **$**                                              | **885**    |                                             | $          | 502 | ** ** | **$** | **775** |   | $ | 488 | ** ** | **$** | **1,078** |   | $ | 947 | ** ** | **$** | **1,416** |   | $ | 865 |   |
|                                                                 |       |                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                 | ** ** | **$**                                              | **156**    |                                             | $          | 112 | ** ** | **$** | **1,828** |   | $ | 905 | ** ** | **$** | **289** |   | $ | 80 | ** ** | **$** | **2,688** |   | $ | 2,021 |   |

 

**Revenue**

 

Enventis Sectoroperating revenue before intersegment eliminations was $21,874,000 in the threemonths ended June 30, 2008, which is $3,365,000 or 13.3% lower thanrevenue in the three months ended June 30, 2007.  Similarly, Enventis operating revenue beforeintersegment eliminations was $39,618,000 in the six months ended June 30,2008, which is $3,573,000 or 8.3% lower than revenue earned in the six monthsended June 30, 2007. These fluctuations were heavily influenced by thetiming and execution of equipment sales under large contracts.

 

Enterprise NetworkServices’ equipment revenue in the three months ended June 30, 2008 was$12,709,000, which is $5,160,000 or 28.9% lower than the three months ended June 30,2007. Enterprise Network Services equipment revenue was $22,877,000 in the sixmonths ended June 30, 2008, which is $6,426,000 or 22.0% lower thanequipment revenue earned in the six months ended June 30, 2007. The mostsignificant impact was due to recognizing $6,500,000 of revenue related to asingle large contract in the second quarter of 2007. Overall operating resultsfrom the Enventis Sector can be impacted by the timing of delivery andperformance related to large equipment sales and installations. Therelationship between revenue and costs associated with the various products anddelivery elements of large contracts can also fluctuate depending on theproduct mix, vendor discounts, and rebates. These fluctuations can beespecially dramatic in the Enterprise Network Services’ equipment revenueproduct line.

 

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The decline inequipment revenue recognition in the first two quarters of 2008 was partlyoffset by increases in services revenue in both the Enterprise Network Servicesand Enterprise Transport Services product lines.  Enterprise Network Services’ revenue earnedfrom services in the three months ended June 30, 2008 was $3,056,000,which is $957,000 or 45.6% higher than services revenue earned in the threemonths ended June 30, 2007. The increase was primarily due to a $767,000increase in maintenance contract revenue and an increase of $99,000 in supportfees revenue related to technology support and monitoring of systems for ourcustomers. Enterprise Network Services’ services revenue in the six monthsended June 30, 2008 was $5,121,000, which is $1,279,000 or 33.3% higherthan services revenue earned in the six months ended June 30, 2007. Theincrease was primarily due to an increase in maintenance contract revenue of$512,000, an increase in contract services revenue of $293,000 associated withan increase in the design, configuration, and installation services related tovoice and data equipment, and a $240,000 increase in support fees revenue. Theincrease in services revenue reflects our business strategy of emphasizing thisrevenue stream due to its recurring nature as well as its higher and morestable margin characteristics. Maintenance contract sales carry a significantprofitability factor. Enventis costs for maintenance contracts are nettedagainst revenue rather than posted to Cost of Services based on our role as anagent in the transaction for Cisco.

 

EnterpriseTransport Services revenue was $5,981,000 in the three months ended June 30,2008, which is $795,000 or 15.3% higher than revenue earned in the three monthsended June 30, 2007. Enterprise Transport Services revenue was $11,354,000in the six months ended June 30, 2008, which is $1,455,000 or 14.7% higherthan revenue earned in the six months ended June 30, 2007.  The increase in both periods was primarilydue to increases in fiber transport service revenue due to higher customerdemand in the wholesale, business, and managed transport service areas.

 

**Cost ofSales – Equipment (excluding Depreciation and Amortization)**

 

Enventis Sectorcost of sales (excluding depreciation and amortization) associated withequipment revenue was $10,718,000 in the three months ended June 30, 2008,which is $5,841,000 or 35.3% lower than cost of sales in the three months endedJune 30, 2007. Cost of sales associated with equipment revenue was$19,415,000 in the six months ended June 30, 2008, which is $7,458,000 or27.8% lower than cost of sales in the six months ended June 30, 2007.Thedecrease in both periods was primarily due to the lower equipment revenueexperienced in the Enterprise Network Services product line. The relationshipbetween cost of equipment sold to equipment sales revenue can fluctuate and isinfluenced by a number of factors including product mix, dealer discounts, andvendor incentive rebate programs. The relationship of cost as a percentage ofsales revenue in the three and six month periods of 2008 compared to the sameperiods in 2007 is more favorable (lower) due primarily to the mix of productssold and Enventis’ leverage of vendor incentive programs. Labor associated withinstallation work is not included in this category, but is included in cost ofservices (excluding depreciation and amortization) described below.

 

**Cost ofServices (excluding Depreciation and Amortization)**

 

Enventis Sectorcost of services (excluding depreciation and amortization) was $4,880,000 inthe three months ended June 30, 2008, which is $1,094,000 or 28.9% highercompared to cost of services in the three months ended June 30, 2007. Theincrease was primarily due to the following items: 1) a $595,000 increase inwages and benefits due to increased staffing levels, 2) a $561,000 increase incontract labor costs related to external project support,  and 3) a $155,000 increase in circuit expenses,which supported the increase in off-net revenue. The increased staffing andcontract labor costs reflect our investment in the growth of the managedservice business as well as temporary staffing for high levels of projectactivity. These increases were partly offset by declines in consulting fees of$247,000 due to lower usage of external project management consultants.

 

Cost of services(excluding depreciation and amortization) was $9,159,000 in the six monthsended June 30, 2008, which is $2,175,000 or 31.1% higher compared to costof services in the six months ended June 30, 2007. The increase wasprimarily due to the following items: 1) a $1,313,000 increase in wages andbenefits due to increased staffing levels, 2) an $830,000 increase in contractlabor costs related to external project support, and 3) a $288,000 increase incircuit expenses, which supported the increase in off-net revenue. Theincreased staffing and contract labor costs reflect our investment in thegrowth of the managed service business as well as temporary staffing for highlevels of project activity. These increases were partly offset by declines inconsulting fees of $277,000 due to lower usage of external project managementconsultants.

 

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**Selling,General and Administrative Expenses**

 

Enventis Sectorselling, general and administrative expenses were $2,413,000 in the threemonths ended June 30, 2008, which is $95,000 or 4.1% higher than selling,general, and administrative expenses in the three months ended June 30,2007. The increase was primarily due to a $135,000 increase in commissions andan $86,000 increase in corporate expenses, partly offset by a $129,000 decreasein wages and benefits.

 

Selling, generaland administrative expenses were $4,740,000 in the six months ended June 30,2008, which is $237,000 or 5.3% higher than selling, general, andadministrative expenses in the six months ended June 30, 2007. Theincrease was primarily due to a $174,000 increase in commissions, $166,000increase in corporate expenses, and a $144,000 increase in incentivecompensation accruals, partly offset by a $202,000 decrease in wages and benefits.

 

**Depreciation andAmortization**

 

Enventis Sectordepreciation and amortization was $1,025,000, which is $98,000 or 10.6% higherin the three months ended June 30, 2008 compared to the three months endedJune 30, 2007 and was $2,045,000, which is $243,000 or 13.5% higher in thesix months ended June 30, 2008 compared to the six months ended June 30,2007. The increase in both periods was primarily due to the increase in assetsplaced in service in 2007 and 2008 to support the growth in our Enventis TransportServices line of business. Enventis Sector amortization remained constant in2008 and 2007, and is attributed to intangible assets related to the Enventisacquisition in 2005.

 

**Operating Income**

 

Enventis Sector operating income during the three months ended June 30,2008 was $1,189,000 or 72.1% greater than operating income for the three monthsended June 30, 2007. Operating income for the six months ended June 30,2008 was $1,230,000 or 40.6% higher than operating income for the six monthsended June 30, 2007. The increase was due to higher services revenue andlower cost of sales offsetting the decrease in equipment sales revenue and theincreases in cost of services (excluding depreciation and amortization),selling, general, and administrative expenses, and depreciation expenses, allof which are described above. The increases in maintenance contract revenuediscussed above especially affected this relationship, as revenue from thesesales is recognized net of associated costs, directly impacting overalloperating income. The increase in both periods was driven by the higher profitmargin characteristics of the mix of product and services sold – especiallymaintenance contracts – and the favorable discounts and rebates offered byvendors.

 

**Interest Expense**

 

Consolidatedinterest expense was $1,478,000 which is $553,000 or 27.2% lower in the threemonths ended June 30, 2008 compared to the three months ended June 30,2007. Interest expense was $3,175,000, which is $1,038,000 or 24.6% lower inthe six months ended June 30, 2008 compared to the six months ended June 30,2007. The decrease is a result of a lower average effective interest rate inthe first six months of 2008. The outstanding balance of our debt obligationswas $133,654,000 at June 30, 2008 and $129,206,000 at December 31,2007.

 

Interest expensewill increase approximately $330,000 per quarter starting in the third quarterof 2008, subject to other normal influences such as debt principal amount andmovement in interest rates on un-hedged or unfixed interest rate debt.Quarterly benefits of $330,000 from interest-rate swap agreements sold at again in early 2007 become fully amortized in the second quarter of 2008 and nolonger offset a portion of interest expense. The combined effects of lowerinterest rates, interest protection strategies, and lower debt principalindicate that our interest expense will be approximately $1,300,000 lower forthe year 2008 than 2007.

 

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**Income Taxes**

 

The effectiveincome tax rate from continuing operations of approximately 43.6% for thesecond quarter of 2008 and 42.6% for the second quarter of 2007 exceeds thefederal statutory rate primarily due to state income taxes and interest expenseaccrued on unrecognized tax benefits. The change in the effective tax rate from2008 to 2007 is the result of interest accrued on uncertain tax positionsaccording to FASB Interpretation No. 48 (FIN No. 48), “Accounting forUncertainty in Income Taxes-an interpretation of FASB Statement No. 109.”

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

Cash generatedfrom operations was $9,057,000 in the first six months of 2008 compared to$11,540,000 in the first six months of 2007. Cash provided by operations in thefirst six months of 2008 and 2007 was primarily attributable to net income plusnon-cash expenses for depreciation and amortization. Outstanding accountsreceivable balances increased by $3,674,000 and $7,254,000 in the first sixmonths of 2008 and 2007, respectively as a result of customer installations inprogress evolving into the billing stage primarily in the Enventis Sector. In2008, inventory in the Enventis Sector increased primarily due to customeractivity levels at the end of the second quarter. Inventory for the EnventisSector is a temporary staging point in the customized equipmentordering/installation cycle. The decrease in inventory of $2,125,000 in thefirst six months of 2007 was primarily due to a decrease in inventory in theEnventis Sector which was a direct consequence of the increased billings tocustomers noted above.

 

Cash used ininvesting activities was driven by capital expenditures which increased$1,925,000 during the first six months of 2008 compared to the first six monthsof 2007. We are making a concentrated effort to focus spending on revenuegenerating products, services, and key strategic initiatives. We anticipate thelevel of total capital spending in 2008 to be slightly higher than the level ofcapital spending seen in 2007.

 

Cash used infinancing activities in the first six months of 2008 was $362,000 compared to$5,216,000 in the first six months of 2007. In 2007, a decrease in the overallcredit facility of $6,650,000 resulted from repayments of $10,650,000, offsetby borrowings of $4,000,000. During the first six months of 2008, weexperienced an increase in our long term debt position of $4,300,000 whichresulted from repayments of $11,600,000 offset by borrowings of $15,900,000. In2008, we anticipate that our growth initiatives will cause minimal reductionsin our current debt level by year end. In 2007, we terminated two outstandinginterest-rate swap agreements which had original maturities of June 2008resulting in proceeds of $1,936.000.

 

**Working Capital**

 

Working capital(i.e. current assets minus current liabilities) was $15,115,000 as of June 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 June 30,2008 and 1.3 as of December 31, 2007.

 

**Extended-Term Payable**

 

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 $16,000,000 from HickoryTech Corporation. Thefinancing agreement provides sixty-day interest-free payment terms for inventorypurchases and can be terminated at any time by either party. The balanceoutstanding under the financing arrangement was $13,041,000 at June 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-Term Obligations**

 

Our long-termobligations as of June 30, 2008 were $132,313,000, excluding currentmaturities of $1,025,000 on debt and $316,000 on current maturities of capitalleases. Long-term obligations as of December 31, 2007, were $128,475,000excluding current maturities of $475,000 on debt and $256,000 of capitalleases. On December 30, 2005, we entered into a $160,000,000 creditagreement with a syndicate of banks (subsequently reduced to a $155,575,000facility as of June 30, 2008 through normal quarterly amortization), whichamended our previous credit facility. The credit facility is comprised of a$30,000,000 revolving credit component that expires on December 30, 2011and a $130,000,000 term loan component (subsequently reduced to $125,575,000 asof June 30, 2008 through normal quarterly amortization).

 

The term loancomponent is comprised of two components, which are defined as term loan B andterm loan C. The outstanding principal balance of term loan B is$106,075,000 as of June 30, 2008, and is held by commercial lenders. Underthe terms of term loan B, we are required to make quarterly principal paymentsof $275,000 from March 31, 2008 through December 31, 2011 with theremainder of the aggregate principal due in two payments on March 31, 2012and June 30, 2012. Due to the aggressive pay down of debt in 2007, weare not required to make quarterly principal payments during the first threequarters of 2008. The outstanding principal balance of term loan C is$19,500,000 as of June 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 March 31, 2008 through December 31, 2012 withthe remainder of the aggregate principal due in two payments on March 31,2013 and June 30, 2013. Under the terms of the revolving credit facility,any outstanding principal is payable in full on December 30, 2011. Theoutstanding balance of the revolving credit facility is $7,400,000 as of June 30,2008.

 

Our debt requiresus to comply, on a consolidated basis, with specified financial ratios andtests. These financial ratios and tests include maximum leverage ratio, minimuminterest coverage ratio, and maximum capital expenditures. We were in fullcompliance with these ratios and tests as of June 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 creditfacility.

 

**Other**

 

We believe thatcash flow from operations and current cash balances, are adequate to meet ouranticipated operating, capital expenditures, and debt service requirements forthe foreseeable future.

# ** **

# **Item 3. Quantitativeand Qualitative Disclosures about Market Risk**

# ** **

We do not haveoperations subject to risks of foreign currency fluctuations. We do, however,use derivative financial instruments to manage exposure to interest ratefluctuations. Our objectives for holding derivatives are to minimize interestrate risks using the most effective methods to eliminate or reduce the impactof these exposures. Variable rate debt instruments are subject to interest raterisk. In March 2007, we terminated two outstanding interest-rate swapagreements, with original maturities of June 2008, in exchange for$1,936,000 in proceeds. Proceeds of $664,000 and $609,000 were recognized as anoffset to interest expense during the first six months of 2008 and 2007,respectively. Immediately following the termination of the two agreementsdiscussed above, we executed a new interest-rate swap agreement, effectivelylocking in the interest rate on $60,000,000 of variable-rate debt through March of2010. On March 28, 2008, we entered into a secondinterest-rate swap agreement, effectively locking in the interestrate on an additional $40,000,000 of variable-interest rate debt through February 2010.

 

The cumulativegain or loss on current derivative instruments is reported as a component of accumulatedother comprehensive income (loss) in shareholders’ equity and is recognized inearnings when the term of the protection agreement is concluded. Our earningsare affected by changes in interest rates as a portion of our long-term debthas variable interest rates based on LIBOR. If interest rates for the portionof our long-term debt based on variable rates had averaged 10% more for thequarter ended June 30, 2008, our interest expense would have increased$16,000.

 

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# **Item 4.  Controls and Procedures**

# ** **

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

 

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

 

**Part II  Other Information**

 

# **Item1.  Legal Proceedings.**

# ** **

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

 

# **Item1A.  Risk Factors.**

# ** **

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

 

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

# ** **

None.

 

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

# ** **

None.

 

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

# ** **

| a.     |   | The annual  shareholders’ meeting was held on May 6, 2008. The only matter presented  to the shareholders at the annual meeting was the reelection of four  directors to terms expiring in 2011. Lyle T. Bosaker, Myrita T. Craig, and  John W. Finke continued as directors after the meeting whose terms expire in  2009, and John H. Holdredge, Lyle G. Jacobson, and Starr J. Kirklin continued  as directors after the meeting whose terms expire in 2010. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| b.     |   | The names of the  directors elected at the annual meeting and the applicable votes were as  follows:                                                                                                                                                                                                                                                                                                                                                                      |

 
| **Director**               | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|----------------------------|------------|-----------|------------|--------------|------------|
| Robert D.  Alton, Jr. |       | 9,423,123 |       | 836,638      |       |
| James W. Bracke            |       | 9,922,806 |       | 336,955      |       |
| R. Wynn  Kearney, Jr. |       | 9,908,513 |       | 351,249      |       |
| Dale E. Parker             |       | 9,912,701 |       | 347,060      |       |

 

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# **Item5.  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 to Section 906of the Sarbanes-Oxley Act of 2002

 

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

 

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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: | July 29, 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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