**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC 20549**

 

**FORM10-Q**

** **

**(Mark One)**
| **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                       |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                         |
| ** ** | **For the quarterly period ended  September 30, 2007**                                                                                                             |
| ** ** | ** **                                                                                                                                                         |
| ** ** | **OR**                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                         |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                      |
| ** ** | ** **                                                                                                                                                         |
| ** ** | **For the transition period from             to            .** |

 

**Commissionfile number   0-13721**

** **

**HICKORYTECH CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**221 EastHickory Street**

**Mankato,Minnesota 56002-3248**

(Address ofprincipal executive offices and zip code)

 

**(800)326-5789**

(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  x   No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See the definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer oAccelerated filer x Non-accelerated filer o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes o No x

 

Thetotal number of shares of the registrant's common stock outstanding as ofOctober 30, 2007:  13,276,158.

 

 

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**TABLE OFCONTENTS**

 
|                            | **PART I. Financial Information**                                                                                          |   |
|---------------------------------|----------------------------------------------------------------------------------------------------------------------------|--------|
|                            | ** **                                                                                                                 |   |
| Description                     | ** **                                                                                                                 |   |
|                            |                                                                                                                       |   |
| Item 1.                         | Financial Statements:                                                                                                      |   |
|                            |                                                                                                                       |   |
|                            | Consolidated  Statements of Operations (unaudited) for the Three Months and Nine Months  Ended September 30, 2007 and 2006 |   |
|                            |                                                                                                                       |   |
|                            | Consolidated  Balance Sheets (unaudited) as of September 30, 2007 and December 31, 2006                                    |   |
|                            |                                                                                                                       |   |
|                            | Consolidated  Statements of Cash Flows (unaudited) for the Nine Months Ended September 30,  2007 and 2006                  |   |
|                            |                                                                                                                       |   |
|                            | Condensed Notes to Consolidated Financial Statements  (unaudited)                                                          |   |
|                            |                                                                                                                       |   |
| Item 2.                         | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                |   |
|                            |                                                                                                                       |   |
| Item 3.                         | Quantitative and Qualitative Disclosures About Market  Risk                                                                |   |
|                            |                                                                                                                       |   |
| Item 4.                         | Controls and Procedures                                                                                                    |   |
|                            |                                                                                                                       |   |
| **PART  II. Other Information** |
| ** **                      | ** **                                                                                                                 |   |
| Description                     | ** **                                                                                                                 |   |
|                            |                                                                                                                       |   |
| Item  1.                        | Legal  Proceedings                                                                                                         |   |
|                            |                                                                                                                       |   |
| Item  1A.                       | Risk  Factors                                                                                                              |   |
|                            |                                                                                                                       |   |
| Item 2.                         | Unregistered Sales of Equity Securities and Use of  Proceeds                                                               |   |
|                            |                                                                                                                       |   |
| Item 3.                         | Defaults Upon Senior Securities                                                                                            |   |
|                            |                                                                                                                       |   |
| Item 4.                         | Submission of Matters to a Vote of Security Holders                                                                        |   |
|                            |                                                                                                                       |   |
| Item  5.                        | Other  Information                                                                                                         |   |
|                            |                                                                                                                       |   |
| Item  6.                        | Exhibit  Listing                                                                                                           |   |
|                            |                                                                                                                       |   |
|                            | Signatures                                                                                                                 |   |
|                            |                                                                                                                       |   |
|                            | Exhibits                                                                                                                   |   |

 

2

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**HICKORYTECH CORPORATION**

Consolidated Statements of Operations

(Unaudited)

 
| ** **                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In Thousands Except Per Share Amounts)**                    | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  revenues:                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Telecom sector                                                                          | ** ** | **$**                                                | **18,647** |                                                | $          | 18,698 | ** ** | **$** | **58,132** |   | $ | 56,264 |   |
| Enventis sector                                                                         | ** ** | **17,212**                                           |       | 13,972                                              | ** ** | **60,256** |   | 43,234 |   |
| Total operating  revenues                                                               | ** ** | **35,859**                                           |       | 32,670                                              | ** ** | **118,388** |   | 99,498 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of sales,  Enventis                                                                | ** ** | **8,705**                                            |       | 7,183                                               | ** ** | **35,578** |   | 23,322 |   |
| Cost of services  (excluding depreciation and amortization)                             | ** ** | **11,137**                                           |       | 11,131                                              | ** ** | **32,832** |   | 32,468 |   |
| Selling, general  and administrative expenses (excluding depreciation and amortization) |       | **5,900**                                            |       | 5,598                                               |       | **17,627** |   | 17,490 |   |
| Depreciation                                                                            | ** ** | **4,254**                                            |       | 4,235                                               | ** ** | **13,190** |   | 12,488 |   |
| Amortization of  intangibles                                                            | ** ** | **289**                                              |       | 293                                                 | ** ** | **867** |   | 879 |   |
| Total costs and  expenses                                                               | ** ** | **30,285**                                           |       | 28,440                                              | ** ** | **100,094** |   | 86,647 |   |
| Operating income                                                                        | ** ** | **5,574**                                            |       | 4,230                                               | ** ** | **18,294** |   | 12,851 |   |
| Other  income/(expense):                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and  other income                                                              | ** ** | **68**                                               |       | 40                                                  | ** ** | **199** |   | 109 |   |
| Interest expense                                                                        | ** ** | **(2,028**                                           | )          | (1,913                                              | **)**      | **(6,241** | ) | (5,392 | ) |
| Total other  income/(expense)                                                           | ** ** | **(1,960**                                           | )          | (1,873                                              | **)**      | **(6,042** | ) | (5,283 | ) |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Income before  income taxes                                                             | ** ** | **3,614**                                            |       | 2,357                                               | ** ** | **12,252** |   | 7,568 |   |
| Income taxes                                                                            | ** ** | **1,532**                                            |       | 728                                                 | ** ** | **5,148** |   | 2,819 |   |
| Income from  continuing operations                                                      | ** ** | **2,082**                                            |       | 1,629                                               | ** ** | **7,104** |   | 4,749 |   |
| Discontinued  operations:                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from  operations of discontinued component                                         | ** ** | **(12**                                              | )          | (308                                                | **)**      | **(27** | ) | (902 | ) |
| Income tax  benefit                                                                     | ** ** | **(4**                                               | )          | (124                                                | **)**      | **(10** | ) | (361 | ) |
| Loss from  discontinued operations                                                      | ** ** | **(8**                                               | )          | (184                                                | **)**      | **(17** | ) | (541 | ) |
| Net income                                                                              | ** ** | **$**                                                | **2,074**  |                                                | $          | 1,445 | ** ** | **$** | **7,087** |   | $ | 4,208 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings  per share - continuing operations                                       | ** ** | **$**                                                | **0.16**   |                                                | $          | 0.12 | ** ** | **$** | **0.54** |   | $ | 0.36 |   |
| Basic loss per  share - discontinued operations                                         | ** ** | **—**                                           |       | (0.01                                               | **)**      | **—** |   | (0.04 | ) |
| ** **                                                                              |       | **$**                                                | **0.16**   |                                                | $          | 0.11 | ** ** | **$** | **0.54** |   | $ | 0.32 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic weighted  average common shares outstanding                                       | ** ** | **13,268**                                           |       | 13,172                                              | ** ** | **13,250** |   | 13,152 |   |
|                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted earnings  per share - continuing operations                                     | ** ** | **$**                                                | **0.16**   |                                                | $          | 0.12 | ** ** | **$** | **0.54** |   | $ | 0.36 |   |
| Diluted loss per  share - discontinued operations                                       | ** ** | **—**                                           |       | (0.01                                               | **)**      | **—** |   | (0.04 | ) |
| ** **                                                                              |       | **$**                                                | **0.16**   |                                                | $          | 0.11 | ** ** | **$** | **0.54** | ** ** | **$** | **0.32** | ** ** |
| Diluted weighted  average common and equivalent common shares outstanding               | ** ** | **13,273**                                           |       | 13,172                                              | ** ** | **13,251** |   | 13,155 |   |
| Dividends per  share                                                                    | ** ** | **$**                                                | **0.12**   |                                                | $          | 0.12 | ** ** | **$** | **0.36** |   | $ | 0.36 |   |

 

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

 

3

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**HICKORYTECH CORPORATION**

ConsolidatedBalance Sheets

(Unaudited)

 
| ** **                                                                                                                                  | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| **(In Thousands Except Per Share Amounts)**                                                                        | ** ** | **2007**               | ** **  | **2006**              | ** ** |
| **ASSETS**                                                                                                                                  | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current assets:                                                                                                                             |       |                   |        |                  |       |
| Cash and cash  equivalents                                                                                                                  | ** ** | **$**                  | **2,588**   |                  | $          | 84 |   |
| Receivables, net  of allowance for doubtful accounts of $1,049 and $851                                                                     | ** ** | **21,222**             |        | 20,780                |       |
| Inventories                                                                                                                                 | ** ** | **7,297**              |        | 11,294                |       |
| Deferred income  taxes                                                                                                                      | ** ** | **815**                |        | 815                   |       |
| Prepaid expenses                                                                                                                            | ** ** | **1,294**              |        | 1,903                 |       |
| Other                                                                                                                                       | ** ** | **1,061**              |        | 1,662                 |       |
| Total current  assets                                                                                                                       | ** ** | **34,277**             |        | 36,538                |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Investments                                                                                                                                 | ** ** | **3,830**              |        | 3,554                 |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Property, plant  and equipment                                                                                                              | ** ** | **316,083**            |        | 309,264               |       |
| Less accumulated  depreciation                                                                                                              | ** ** | **164,602**            |        | 156,429               |       |
| Property, plant  and equipment, net                                                                                                         | ** ** | **151,481**            |        | 152,835               |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Other assets:                                                                                                                               |       |                   |        |                  |       |
| Goodwill                                                                                                                                    | ** ** | **25,239**             |        | 25,239                |       |
| Intangible  assets, net                                                                                                                     | ** ** | **2,273**              |        | 3,140                 |       |
| Financial  derivative instruments                                                                                                           | ** ** | **—**             |        | 2,489                 |       |
| Deferred costs  and other                                                                                                                   | ** ** | **2,775**              |        | 3,105                 |       |
| Total other  assets                                                                                                                         | ** ** | **30,287**             |        | 33,973                |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Total assets                                                                                                                                | ** ** | **$**                  | **219,875** |                  | $          | 226,900 |   |
|                                                                                                                                        |       |                   |        |                  |       |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                    | ** ** | ** **             | ** **  | ** **            | ** ** |
| Current  liabilities:                                                                                                                       |       |                   |        |                  |       |
| Checks written  in excess of available cash balances                                                                                        | ** ** | **$**                  | **—**  |                  | $          | 1,475 |   |
| Short-term  financing                                                                                                                       | ** ** | **10,141**             |        | 7,719                 |       |
| Accounts payable                                                                                                                            | ** ** | **4,065**              |        | 4,211                 |       |
| Accrued expenses                                                                                                                            | ** ** | **6,750**              |        | 5,826                 |       |
| Accrued income  taxes                                                                                                                       | ** ** | **347**                |        | 4,528                 |       |
| Advanced  billings and deposits                                                                                                             | ** ** | **4,889**              |        | 3,488                 |       |
| Current  maturities of long-term obligations                                                                                                | ** ** | **1,587**              |        | 1,560                 |       |
| Total current  liabilities                                                                                                                  | ** ** | **27,779**             |        | 28,807                |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Long-term  liabilities:                                                                                                                     |       |                   |        |                  |       |
| Debt  obligations, net of current maturities                                                                                                | ** ** | **127,722**            |        | 141,529               |       |
| Financial  derivative instruments                                                                                                           | ** ** | **461**                |        | —                |       |
| Accrued income  taxes                                                                                                                       | ** ** | **6,900**              |        | —                |       |
| Deferred income  taxes                                                                                                                      | ** ** | **14,097**             |        | 15,332                |       |
| Deferred revenue                                                                                                                            | ** ** | **1,505**              |        | 2,596                 |       |
| Accrued employee  benefits and deferred compensation                                                                                        | ** ** | **8,893**              |        | 8,550                 |       |
| Total long-term  liabilities                                                                                                                | ** ** | **159,578**            |        | 168,007               |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Total  liabilities                                                                                                                          | ** ** | **187,357**            |        | 196,814               |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Commitments and  contingencies (Note 8)                                                                                                     | ** ** | **—**             |        | —                |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Shareholders’  equity:                                                                                                                 |       |                   |        |                  |       |
| Common stock, no  par value, $.10 stated value shares authorized: 100,000 Shares issued and  outstanding: 13,276 in 2007 and 13,208 in 2006 |       | **1,328**              |        | 1,321                 |       |
| Additional  paid-in capital                                                                                                                 | ** ** | **10,757**             |        | 9,992                 |       |
| Retained  earnings                                                                                                                          | ** ** | **20,708**             |        | 18,323                |       |
| Accumulated other  comprehensive income/(loss)                                                                                              | ** ** | **(275**               | )           | 450                   |       |
| Total  shareholders’ equity                                                                                                            | ** ** | **32,518**             |        | 30,086                |       |
|                                                                                                                                        |       |                   |        |                  |       |
| Total  liabilities and shareholders’ equity                                                                                            | ** ** | **$**                  | **219,875** |                  | $          | 226,900 |   |

 

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

 

4

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**HICKORYTECH CORPORATION**

ConsolidatedStatements of Cash Flows

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars In Thousands)**                                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                |       |   |   |
| Net income                                                                         | ** ** | **$**                                               | **7,087**  |   | $ | 4,208 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Loss from  discontinued operations                                                 | ** ** | **17**                                              |       | 541 |   |
| Depreciation and  amortization                                                     | ** ** | **14,057**                                          |       | 13,367 |   |
| Amortization of  gain on sale of financial derivative instrument                   | ** ** | **(940**                                            | )          | — |   |
| Accrued  patronage refunds                                                         | ** ** | **(70**                                             | )          | (796 | ) |
| Deferred income  tax provision/(benefit)                                           | ** ** | **(60**                                             | )          | 148 |   |
| Other                                                                              | ** ** | **682**                                             |       | 566 |   |
| Changes in  operating assets and liabilities:                                      |       |                                                |       |   |   |
| Receivables, net                                                                   | ** ** | **(688**                                            | )          | (3,884 | ) |
| Inventories                                                                        | ** ** | **3,996**                                           |       | (5,384 | ) |
| Accounts payable  and accrued expenses                                             | ** ** | **718**                                             |       | (296 | ) |
| Deferred  revenue, billings and deposits                                           | ** ** | **310**                                             |       | 485 |   |
| Prepaid expenses                                                                   | ** ** | **607**                                             |       | 3,531 |   |
| Income taxes                                                                       | ** ** | **2,780**                                           |       | 1,004 |   |
| Other                                                                              | ** ** | **1,181**                                           |       | 1,439 |   |
| Net cash  provided by operating activities                                         | ** ** | **29,677**                                          |       | 14,929 |   |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                |       |   |   |
| Additions to  property, plant and equipment                                        | ** ** | **(11,388**                                         | )          | (16,773 | ) |
| Other                                                                              | ** ** | **100**                                             |       | 183 |   |
| Net cash used in  investing activities                                             | ** ** | **(11,288**                                         | )          | (16,590 | ) |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                |       |   |   |
| Short-term  financing, net                                                         | ** ** | **2,422**                                           |       | 5,734 |   |
| Checks written  in excess of available cash balances                               | ** ** | **(1,475**                                          | )          | (514 | ) |
| Payments of  capital lease obligations                                             | ** ** | **(295**                                            | )          | (374 | ) |
| Repayments on  credit facility                                                     | ** ** | **(21,475**                                         | )          | (19,510 | ) |
| Borrowings on  credit facility                                                     | ** ** | **7,500**                                           |       | 20,500 |   |
| Proceeds from  the sale of financial derivative instrument                         | ** ** | **1,936**                                           |       | — |   |
| Proceeds from  issuance of common stock                                            | ** ** | **283**                                             |       | 470 |   |
| Dividends paid                                                                     | ** ** | **(4,764**                                          | )          | (4,732 | ) |
| Net cash  provided by/(used in) financing activities                               | ** ** | **(15,868**                                         | )          | 1,574 |   |
|                                                                               |       |                                                |       |   |   |
| Cash flows from  discontinued operations                                           |       |                                                |       |   |   |
| Net cash  provided by/(used in) operating activities                               | ** ** | **(17**                                             | )          | 631 |   |
| Net cash used in  investing activities                                             | ** ** | **—**                                          |       | (26 | ) |
| Net cash  provided by/(used in) discontinued operations                            | ** ** | **(17**                                             | )          | 605 |   |
|                                                                               |       |                                                |       |   |   |
| Net increase in  cash and cash equivalents                                         | ** ** | **2,504**                                           |       | 518 |   |
|                                                                               |       |                                                |       |   |   |
| Cash and cash  equivalents at beginning of period                                  | ** ** | **84**                                              |       | 601 |   |
|                                                                               |       |                                                |       |   |   |
| Cash and cash  equivalents at end of period                                        | ** ** | **$**                                               | **2,588**  |   | $ | 1,119 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                                |       |   |   |
| Cash paid for  interest                                                            | ** ** | **$**                                               | **7,033**  |   | $ | 5,646 |   |
| Net cash paid  for income taxes                                                    | ** ** | **$**                                               | **2,375**  |   | $ | 1,290 |   |
| Non-cash  investing activities:                                                    |       |                                                |       |   |   |
| Property, plant  and equipment acquired with capital leases                        | ** ** | **$**                                               | **490**    |   | $ | 162 |   |

 

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

 

5

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**HICKORYTECH CORPORATION**

**SEPTEMBER30, 2007**

**PART 1.FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

NOTE 1 – BASIS OFPRESENTATION AND CONSOLIDATION

 

The accompanyingunaudited condensed consolidated financial statements of Hickory TechCorporation (HickoryTech or the Company) have been prepared in accordance withaccounting principles generally accepted in the United States (GAAP) forinterim financial information and with the rules and regulations of the Securitiesand Exchange Commission (SEC). Certain information and disclosures normallyincluded in annual financial statements prepared in accordance with GAAP havebeen omitted or condensed pursuant to such rules and regulations. In theopinion of the Company’s management, the unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting only of normal andrecurring accruals) considered necessary for the fair presentation of theCompany’s financial statements and present fairly the results of operations,financial position and cash flows of the Company for the interim periodspresented as required by Regulation S-X, Rule 10-01. These unaudited interimcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto, together with theCompany’s audited consolidated financial statements and notes thereto containedin the Company’s Annual Report on Form 10-K for the year ended December 31,2006.

 

The preparation of financialstatements in conformity with GAAP require management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenues,expenses and related disclosures at the date of the financial statements andduring the reporting period. Actual results could differ from these estimates.The results of operations for the interim periods presented are not necessarilyindicative of the results that may be expected for the fiscal year as a wholeor any other interim period.

 

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

 

Cost of Sales

 

Cost of sales for theEnventis Sector includes the material costs associated with the installation ofproducts for customers.

 

Cost of Services(excluding depreciation and amortization)

 

Cost of services includesall costs related to the delivery of communication services for all HickoryTechSectors. Those operating costs include engineering, customer service, billingand collections, network monitoring and transport costs.

 

Selling, General andAdministrative Expenses (excluding depreciation and amortization)

 

Selling, general andadministrative expenses include direct and indirect selling expenses,advertising, and all other general and administrative costs associated with theoperations of the business.

 

Reclassifications

 

Certain reclassificationsof prior period data have been made to conform to the current period’spresentation. The most significant of these reclassifications was to reclassifyapproximately $1,600,000 of transport costs from cost of sales to cost ofservices for the first and second quarters of 2006. This reclassificationresulted in reporting these costs for the Enventis Sector in a mannerconsistent with the remainder of the organization. These reclassifications didnot affect the Company’s cash flows, financial position or net income.

 

6

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Recently IssuedAccounting Pronouncements

 

In September 2006, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 157, “Fair Value Measurements”. SFAS No. 157,which defines fair value, establishes a framework for measuring fair value inaccordance with GAAP, and expands disclosures about fair value measurements.SFAS No. 157 will apply whenever another standard requires (or permits) assetsor liabilities to be measured at fair value. The standard does not expand theuse of fair value to any new circumstances. SFAS No. 157 is effective for thecalendar year 2008. The Company is currently assessing the impact of SFAS No.157 on its results of operations, cash flows and financial condition.

 

In February 2007, FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. SFAS No. 159 is effective for thecalendar year 2008. The Company is currently assessing the impact of SFAS No.159 on its results of operations, cash flows and financial condition.

 

NOTE 2 – EARNINGS ANDCASH DIVIDENDS PER COMMON SHARE

 

Basic earnings per share (EPS) are computed by dividing net income bythe weighted average number of shares of common stock outstanding during theapplicable period. Shares used in the EPS dilution calculation are based on theweighted average number of shares of common stock outstanding during the periodincreased by potentially dilutive common shares. Potentially dilutive commonshares include stock options and stock subscribed under the Hickory TechCorporation Amended and Restated Employee Stock Purchase Plan (ESPP). Dilutionis determined using the treasury stock method. The dilutive effect shown belowfor 2006 has been revised from what was previously reported to reflect thetreasury stock method, which is consistent with the method currently applied.There was no impact to EPS due to this revision.

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Income from  continuing operations   |       | $                                | 2,082      |                            | $          | 1,629 |   | $ | 7,104 |   | $ | 4,749 |   |
| Loss from  discontinued operations   |       | (8                               | )          | (184                            | )          | (17 | ) | (541 | ) |
| Net Income                           |       | $                                | 2,074      |                            | $          | 1,445 |   | $ | 7,087 |   | $ | 4,208 |   |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding |       | 13,267,649                       |       | 13,171,658                      |       | 13,250,033 |   | 13,152,435 |   |
| Stock options  (dilutive only)       |       | 5,655                            |       | —                          |       | 712 |   | — |   |
| Stock subscribed  (ESPP)             |       | —                           |       | 427                             |       | — |   | 2,353 |   |
| Total dilutive  shares outstanding   |       | 13,273,304                       |       | 13,172,085                      |       | 13,250,745 |   | 13,154,788 |   |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss)  per share:          |       |                             |       |                            |       |   |   |   |   |
| Basic -  continuing operations       |       | $                                | 0.16       |                            | $          | 0.12 |   | $ | 0.54 |   | $ | 0.36 |   |
| Basic -  discontinued operations     |       | $                                | —     |                            | $          | (0.01 | ) | $ | — |   | $ | (0.04 | ) |
|                                 |       |                             |       |                            |       |   |   |   |   |
| Diluted -  continuing operations     |       | $                                | 0.16       |                            | $          | 0.12 |   | $ | 0.54 |   | $ | 0.36 |   |
| Diluted -  discontinued operations   |       | $                                | —     |                            | $          | (0.01 | ) | $ | — |   | $ | (0.04 | ) |

 

Options to purchase 415,551 shares and 565,251 shares for the threemonths ended September 30, 2007 and 2006, respectively, and 415,551 shares and502,161 shares for the nine months ended September 30, 2007 and 2006,respectively, were not included in the computation of diluted EPS, becausetheir effect on diluted EPS would have been anti-dilutive.

 

7

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Cash dividends are based onthe number of common shares outstanding at their respective record dates.Listed below is the number of shares outstanding as of the record date for thefirst, second and third quarters of 2007 and 2006, respectively. 

 
| **Shares outstanding on record date** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|
| First quarter  (Feb. 15)                                  |       | 13,207,970 |       | 13,133,928 |       |
| Second quarter  (May 15)                                  |       | 13,243,525 |       | 13,153,067 |       |
| Third quarter  (August 15)                                |       | 13,253,812 |       | 13,156,490 |       |

 

Dividends per share arebased on the quarterly dividend per share as declared by the HickoryTech Boardof Directors. HickoryTech paid dividends of $0.12 per share for both the thirdquarter of 2007 and 2006, respectively.

 

During the first ninemonths of 2007 and 2006, shareholders have elected to reinvest $179,000 and$186,000, respectively, of dividends into HickoryTech common stock pursuant tothe Hickory Tech Corporation Dividend Reinvestment Plan.

 

NOTE 3 – ACCUMULATEDOTHER COMPREHENSIVE INCOME/(LOSS)

 

HickoryTech follows theprovisions of SFAS No. 130, “Reporting Comprehensive Income”. This statementestablished rules for the reporting of comprehensive income and its components.In addition to net income, HickoryTech’s comprehensive income includes changesin unrealized gains and losses on derivative instruments qualifying and designatedas cash flow hedges and recognized Net Periodic Benefit Cost related to theCompany’s Post-Retirement Benefit Plans. Comprehensive income for the threemonths ended September 30, 2007 and 2006 was $1,125,000 and $847,000,respectively. Comprehensive income for the nine months ended September 30, 2007and 2006 was $6,362,000 and $3,820,000, respectively.

 

InMarch 2007, the Company terminated its two outstanding interest-rate swapagreements with original maturities in June 2008, in exchange for $1,936,000 inproceeds. Immediately following the termination of these two agreements,HickoryTech executed a new interest-rate swap agreement, effectively locking inthe interest rate on $60,000,000 of variable-interest rate debt through March2010.

 

Themarket value of the cumulative gain or (loss) on financial derivativeinstruments is reported as a component of accumulated other comprehensiveincome (loss) in shareholders’ equity and will be recognized in earnings overthe term of the original swap agreement.

 

The following summarysets forth the components of accumulated other comprehensive income (loss), netof tax:

 
| ** **           | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **              | ** ** | **Accumulated**   | ** ** |
|----------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|-------------------------|------------|-------------------|------------|
| ** **           | ** ** | **Unrecognized**       | ** ** | **Unrecognized**       | ** ** | **Unrecognized**   | ** ** | **Unrealized**          | ** ** | **Other**         | ** ** |
| ** **           | ** ** | **Net Actuarial** | ** ** | **Prior Service** | ** ** | **Transition**     | ** ** | **Gain/(Loss)**         | ** ** | **Comprehensive** | ** ** |
| ** **           | ** ** | **Loss (1)**      | ** ** | **Credit (1)**    | ** ** | **Asset (1)** | ** ** | **on Derivatives** | ** ** | **Income/(Loss)** | ** ** |
| December 31,  2006   |       | $                      | (867       | )                      | $          | 37                 |       | $                       | (217       | )                 | $          | 1,497 |   | $ | 450 |   |
| Derivative  Activity |       | —                 |       | —                 |       | —             |       | 123                     |       | 123               |       |
| Net Periodic         |       |                   |       |                   |       |               |       |                    |       |              |       |
| Benefit Cost         |       | 11                     |       | (2                     | )          | 9                  |       | —                  |       | 18                |       |
| March 31, 2007       |       | $                      | (856       | )                      | $          | 35                 |       | $                       | (208       | )                 | $          | 1,620 |   | $ | 591 |   |
| Derivative  Activity |       | —                 |       | —                 |       | —             |       | 65                      |       | 65                |       |
| Net Periodic         |       |                   |       |                   |       |               |       |                    |       |              |       |
| Benefit Cost         |       | 11                     |       | (2                     | )          | 9                  |       | —                  |       | 18                |       |
| June 30, 2007        |       | $                      | (845       | )                      | $          | 33                 |       | $                       | (199       | )                 | $          | 1,685 |   | $ | 674 |   |
| Derivative  Activity |       | —                 |       | —                 |       | —             |       | (967                    | )          | (967              | )          |
| Net Periodic         |       |                   |       |                   |       |               |       |                    |       |              |       |
| Benefit Cost         |       | 11                     |       | (2                     | )          | 9                  |       | —                  |       | 18                |       |
| September 30,  2007  |       | $                      | (834       | )                      | $          | 31                 |       | $                       | (190       | )                 | $          | 718 |   | $ | (275 | ) |

 

----

*(1)***Amounts pertain to our postretirement benefit plans.

 

8

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NOTE 4 – ACQUISITION,DISPOSITION and DISCONTINUED OPERATIONS

 

Acquisition of Enventis

 

On December 30, 2005,HickoryTech purchased all of the capital stock of Enventis from ALLETE, Inc.The initial purchase price was $35,500,000, paid in cash, with the possibilityof further purchase price adjustments and transition costs. After purchaseprice adjustments, the total consideration was $38,602,000. Enventis had nodebt at the time of the acquisition and there were no contingent payments or earnouts.

 

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

 

Disposition of Collins

 

Effective December 31,2006, HickoryTech sold all of the outstanding capital stock in CollinsCommunications Systems Co. to Skyview Capital for an initial price of $100,000,paid by delivery of a promissory note, plus up to $1,650,000 of earn-out payments.Skyview repaid HickoryTech $100,000 in February 2007. The remaining sellingprice is due in contingent payments payable over the next four years iffinancial targets are reached by Skyview. The $100,000 mentioned above has beenincluded in the calculation of the net loss 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. HickoryTech recorded a pre-tax loss on the sale of $3,385,000($2,040,000 net of income taxes). The Collins results of operations wereformerly reported in the Enterprise Solutions Sector. The consolidatedstatements of operations for all periods presented have been restated toreflect the Collins operations as discontinued operations.

 

NOTE 5 – INVENTORIES

 

Inventoryincludes parts, materials and supplies stored in HickoryTech warehouses tosupport basic levels of service and maintenance as well as scheduledtelecom sector capital projects and equipment awaiting configuration forcustomers. Inventory also includes parts and equipment shipped directlyfrom vendors to customer locations while in transit and parts and equipmentreturned from customers which is being returned to vendors for credit, as wellas maintenance contracts associated with customer sales which have not yettransferred to the customer. The inventory value in the Telecom Sector,comprised of raw materials, as of September 30, 2007 and December 31 2006 was$3,769,000 and $2,850,000, respectively. The inventory value in the EnventisSector, comprised of finished goods, as of September 30, 2007 and December 312006, was $3,528,000 and $8,444,000, respectively.

 

Inventories are valuedusing the lower of cost (perpetual weighted average-cost or specificidentification) or market method. HickoryTech adjusts its inventory carryingvalue for estimated obsolescence or unmarketable inventory to the estimatedmarket value based upon assumptions about future demand and market conditions.As market and other conditions change, additional inventory reserves may beestablished at the time that the facts that give rise to the lower value becomeknown.

 

NOTE 6 – INTANGIBLEASSETS

 

Goodwill is subject to animpairment test annually as well as upon certain events that indicate thatimpairment may be present. The goodwill impairment test includes two steps, thefirst of which requires management to determine the fair value of several ofthe Company’s reporting units (as defined by SFAS No. 142 “Goodwill and OtherIntangible Assets”). The Company determines the fair value of its reportingunits by the application of a discounted cash flow analysis. Management makesestimates that are included in its discounted cash flow analysis based upon thebest available information at the time that the determinations of fair valueare made. If circumstances change, HickoryTech’s estimates of fair value mayalso change and could result in a determination of additional impairmentcharges to reduce the carrying value of goodwill.

 

9

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The carrying value ofHickoryTech’s goodwill is $25,239,000 as of September 30, 2007 and December 31,2006.

 

The components ofHickoryTech’s other intangible assets are as follows:

 
| ** **                           | ** ** | ** **            | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | ** **            | ** ** | **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      |                            | $          | 2,218 |   | $ | 4,229 |   | $ | 1,504 |   |
| Other  intangibles                   |       | 1 - 5 years           |       | 730                              |       | 468                             |       | 730 |   | 315 |   |
| Total                                |       |                  |       | $                                | 4,959      |                            | $          | 2,686 |   | $ | 4,959 |   | $ | 1,819 |   |

 

As required by SFAS No.142, we periodically reassess the carrying value, useful lives andclassifications of identifiable assets. Amortization expense relating to thedefinite-lived intangible assets for the three months ended September 30, 2007and 2006 was $289,000 and $293,000, respectively. Amortization expense relatingto the definite-lived intangible assets for the nine months ended September 30,2007 and 2006 was $867,000 and $879,000, respectively. Total estimatedamortization expense for the remaining three months of 2007 and the five yearssubsequent to 2007 is as follows: 2007 (October 1 through December 31) -$290,000; 2008 - $1,127,000; 2009 - $853,000; 2010 - $3,000; 2011 and 2012 -$0.

 

10

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NOTE 7 – QUARTERLY SECTORFINANCIAL SUMMARY

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

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Three Months  Ended September 30, 2006    |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 18,698     |         | $          | 13,972                 |       | $                | —     |   | $ | 32,670 |   |
| Intersegment  revenues                    |       | 58          |       | —       |       | (58                    | )          | —           |       |
| Total operating  revenues                 |       | 18,756      |       | 13,972       |       | (58                    | )          | 32,670           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 3,781       |       | 732          |       | 15                     |       | 4,528            |       |
| Operating  income/(loss)                  |       | 3,633       |       | 680          |       | (83                    | )          | 4,230            |       |
| Interest expense                          |       | (12         | )          | —       |       | (1,901                 | )          | (1,913           | )          |
| Income  taxes/(benefit)                   |       | 1,448       |       | 274          |       | (994                   | )          | 728              |       |
| Income/(loss)  from continuing operations |       | 2,174       |       | 403          |       | (948                   | )          | 1,629            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 157,617     |       | 57,420       |       | 10,318                 |       | 225,355          |       |
| Property, plant  and equipment, net       |       | 120,982     |       | 31,828       |       | 80                     |       | 152,890          |       |
| Capital  expenditures                     |       | 5,300       |       | 1,240        |       | (35                    | )          | 6,505            |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

11

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

 
| ** **                                | ** ** | ** **  | ** ** | ** **   | ** ** | **Corporate and** | ** ** | **HickoryTech**  | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                | ** ** | **Telecom** | ** ** | **Enventis** | ** ** | **Eliminations**       | ** ** | **Consolidated** | ** ** |
| Nine Months  Ended September 30, 2006     |       |        |       |         |       |                   |       |             |       |
| Revenue from  unaffiliated customers      |       | $           | 56,264     |         | $          | 43,234                 |       | $                | —     |   | $ | 99,498 |   |
| Intersegment  revenues                    |       | 122         |       | —       |       | (122                   | )          | —           |       |
| Total operating  revenues                 |       | 56,386      |       | 43,234       |       | (122                   | )          | 99,498           |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Depreciation and  amortization            |       | 11,070      |       | 2,237        |       | 60                     |       | 13,367           |       |
| Operating  income/(loss)                  |       | 11,895      |       | 1,978        |       | (1,022                 | )          | 12,851           |       |
| Interest  (expense)/benefit               |       | 91          |       | —       |       | (5,483                 | )          | (5,392           | )          |
| Income  taxes/(benefit)                   |       | 4,800       |       | 801          |       | (2,782                 | )          | 2,819            |       |
| Income/(loss)  from continuing operations |       | 7,198       |       | 1,178        |       | (3,627                 | )          | 4,749            |       |
|                                      |       |        |       |         |       |                   |       |             |       |
| Identifiable  assets                      |       | 157,617     |       | 57,420       |       | 10,318                 |       | 225,355          |       |
| Property, plant  and equipment, net       |       | 120,982     |       | 31,828       |       | 80                     |       | 152,890          |       |
| Capital  expenditures                     |       | 12,374      |       | 4,340        |       | 59                     |       | 16,773           |       |
|                                           |            |             |            |              |            |                        |            |                  |            |  |  |  |  |

 

NOTE8 - COMMITMENTS AND CONTINGENCIES

 

HickoryTechis involved in certain contractual disputes in the ordinary course of business.HickoryTech does not believe the ultimate resolution of any of these existingmatters will have a material adverse effect on its financial position, resultsof operations or cash flows. HickoryTech did not experience any changes tomaterial contractual obligations in the first nine months of 2007. Refer to theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006 forthe discussion relating to commitments and contingencies.

 

12

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NOTE 9 – STOCKCOMPENSATION

 

Refer to the Company’s Annual Report on Form10-K for the year ended December 31, 2006 for a complete description of itsstock-based compensation plans.

 

On January 1, 2006, the Company adoptedSFAS No. 123(R) (revised 2004), “Share-Based Payment”, (SFAS No. 123(R)),which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including employeestock options and employee stock purchases related to the ESPP, based onestimated fair values. SFAS No. 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB No. 25) for periods beginning in 2006. InMarch 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No.107) relating to SFAS No. 123(R). The Company has applied the provisions of SABNo. 107 in its adoption of SFAS No. 123(R). The Company adopted SFAS No. 123(R)using the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006.

 

Share-based compensation expense recognizedunder SFAS No. 123(R) for the three and nine months ended September 30, 2007and 2006 is as follows:

 
| ** **                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                | ** ** | **Options**                                              | ** ** | **ESPP**                                                | ** ** | **Options** | ** ** | **ESPP** | ** ** | **Options** | ** ** | **ESPP** | ** ** | **Options** | ** ** | **ESPP** | ** ** |
| ** **                | ** ** | **2007**                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** | **2006** | ** ** | **2006** | ** ** |
| Compensation  expense     |       | $                                                        | 21,000     |                                                    | $          | 6,000 |   | $ | 38,000 |   | $ | 4,000 |   | $ | 63,000 |   | $ | 18,000 |   | $ | 116,000 |   | $ | 12,000 |   |
| Tax                       |       | 8,000                                                    |       |                                                    |       | 16,000 |   |   |   | 25,000 |   |   |   | 50,000 |   |   |   |
| Net compensation  expense |       | $                                                        | 13,000     |                                                    | $          | 6,000 |   | $ | 22,000 |   | $ | 4,000 |   | $ | 38,000 |   | $ | 18,000 |   | $ | 66,000 |   | $ | 12,000 |   |

 

Share-based compensation expense recognizedin the Company’s Consolidated Statement of Operations for the first nine monthsof 2007 and 2006 included compensation expense for share-based payment awardsgranted prior to, but not yet vested as of September 30, 2007 and 2006.Compensation expense for awards granted prior to 2006 is based on the grantdate fair value estimated in accordance with the fair value provisions of SFASNo. 123. Compensation expense for awards granted in 2006 and subsequent periodsis determined in accordance with the provisions of SFAS No. 123(R). Historicaldata is used to estimate pre-vesting forfeitures. SFAS No. 123(R) requires forfeituresto be estimated at the time of the grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. TheCompany accounted for forfeitures as they occurred for the periods prior to2006. The cumulative adjustment for the change in accounting principle wasimmaterial.

 

The fair value of each option award isestimated on the date of the grant using a Black-Scholes option valuationmodel. The Company uses a seven-year period to calculate the historical volatilityof its stock price for use in the valuation model. The dividend yield rate isbased on the Company’s 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 no stock option awardsgranted during the nine months ended September 30, 2007. In September 2006, Mr.John W. Finke, current Chief Executive Officer, received a one-time grant of15,000 options associated with his acceptance of the Chief Executive Officerposition. The Stock Award Plan provides for the issuance of stock options,however, no current compensation programs have options as a component. Theweighted average grant date fair value for options granted in 2006 was $1.43.

 

13

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As of September 30, 2007 there was $35,000 oftotal unrecognized compensation costs related to non-vested stock optionsgranted under the Company’s Stock Award Plan. This expense is expected to berecognized over a weighted average period of 2 years.

 

Asummary of stock option activity is as follows:

 
| ** **                         | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** |
| Outstanding at  January 1, 2007    |       | 515,884    |       | $                         | 12.75      |   |
| Granted                            |       | —     |       | —                    |       |
| Exercised                          |       | —     |       | —                    |       |
| Forfeited                          |       | (499       | )          | 10.76                     |       |
| Expired                            |       | (29,834    | )          | 11.43                     |       |
| Outstanding at  September 30, 2007 |       | 485,551    |       | $                         | 12.83      |   |
| Exercisable at  September 30, 2007 |       | 460,721    |       | $                         | 13.02      |   |

 

The following table provides certain information with respect to stockoptions outstanding at September 30, 2007:

 
| ** **                  | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Outstanding**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $6.00 - $8.00               |       | 15,000                 |       | $                         | 6.95       |                      | 8.9 years  |   |
| $8.00 - $12.00              |       | 182,001                |       | 10.27                     |       | 5.7 years                 |       |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 3.3 years                 |       |
| $16.00 - $21.00             |       | 58,500                 |       | 18.21                     |       | 3.5 years                 |       |
|                        |       | 485,551                |       | $                         | 12.83      |                      | 4.4 years  |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate  intrinsic value: |       | $                      | 101,100    |                      |       |                      |       |   |
|                             |            |                        |            |                           |            |                           |            |  |  |

 

The following table provides certain information with respect to stockoptions exercisable at September 30, 2007:

 
| ** **                  | ** ** | ** **             | ** ** | ** **                | ** ** | **Weighted Average** | ** ** |
|-----------------------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Range of**           | ** ** | **Stock Options** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** |
| **Exercise Prices**    | ** ** | **Exercisable**        | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** |
| $6.00 - $8.00               |       | 5,000                  |       | $                         | 6.95       |                      | 8.9 years  |   |
| $8.00 - $12.00              |       | 167,171                |       | 10.22                     |       | 5.5 years                 |       |
| $12.00 - $16.00             |       | 230,050                |       | 13.87                     |       | 3.3 years                 |       |
| $16.00 - $21.00             |       | 58,500                 |       | 18.21                     |       | 3.5 years                 |       |
|                        |       | 460,721                |       | $                         | 13.02      |                      | 4.2 years  |   |
|                        |       |                   |       |                      |       |                      |       |
| Aggregate  intrinsic value: |       | $                      | 73,700     |                      |       |                      |       |   |
|                             |            |                        |            |                           |            |                           |            |  |  |

 

As of September 30, 2007, the following amount of shares, wereavailable for each stock-based compensation plan:

 
| Employee Stock  Purchase Plan                |   | 486,208 |   |
|----------------------------------------------|--------|---------|--------|
| Retainer Stock  Plan for Directors           |   | 232,211 |   |
| Non-Employee  Directors’ Incentive Plan |   | 190,000 |   |
| Stock Award Plan                             |   | 983,644 |   |

 

14

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Shares issued under stock-based compensation plans are as follows:

 
| ** **                                | ** ** | **For Three Months Ended** | ** ** | **For Nine Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **September 30, 2007**          | ** ** | **September 30, 2007**         | ** ** |
| Retainer Stock  Plans for Directors       |       | 1,664 shares                              |       | 4,133 shares                             |       |
| market  price/fair value at time of grant |       | $                                         | 9.77       |                                     | $          | 7.86 |   |
|                                      |       |                                      |       |                                     |       |
| Employee Stock  Purchase Plan             |       | 13,792 shares                             |       | 13,792 shares                            |       |
| market  price/fair value at time of grant |       | $                                         | 8.87       |                                     | $          | 8.87 |   |
|                                      |       |                                      |       |                                     |       |
| Stock Award Plan                          |       | 1,000 shares                              |       | 37,044 shares                            |       |
| market  price/fair value at time of grant |       | $                                         | 9.22       |                                     | $          | 7.25 |   |

 

NOTE 10 – FINANCIAL DERIVATIVE INSTRUMENTS

 

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

 

The Company utilizes interest-rate swap agreements that qualify ascash-flow hedges to manage its exposure to interest rate fluctuations on aportion of the Company’s variable-interest rate debt. In March 2007 the Companyterminated its two outstanding interest-rate swap agreements, with originalmaturities of June 2008, in exchange for $1,936,000 in proceeds. Proceeds of$940,000 were recognized as an offset to interest expense in the first, secondand third quarters of 2007. The remaining proceeds will be recognized as anoffset to interest expense over the remaining original term of the agreements,a period of nine months, ending in June 2008. Immediately following thetermination of the two swap agreements discussed above, HickoryTech executed anew interest-rate swap agreement, effectively locking in the interest rate on$60,000,000 of variable-interest rate debt through March, 2010.

 

The market value of the cumulative gain or (loss) on financialderivative instruments is reported as a component of accumulated othercomprehensive income (loss) in shareholders’ equity and will be recognized inearnings over the term of the swap agreement. The fair value of HickoryTech’sderivatives at September 30, 2007 and December 31, 2006 is a net liability of$461,000 and a net asset of $2,489,000, respectively.

 

15

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NOTE 11 – EMPLOYEE POST-RETIREMENT BENEFITS

 

HickoryTech provides post-retirement health care and life insurancebenefits for certain employees. HickoryTech accounts for these post-retirementbenefits in accordance with SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and132(R)”. New employees hired on or after January 1, 2007 are noteligible for post-retirement health care and life insurance benefits.

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in Thousands)**     | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Components of  net periodic benefit cost |       |                             |       |                            |       |   |   |   |   |
| Service cost                             |       | $                                | 71         |                            | $          | 81 |   | $ | 213 |   | $ | 243 |   |
| Interest cost                            |       | 114                              |       | 107                             |       | 342 |   | 321 |   |
| Expected return  on plan assets          |       | —                           |       | —                          |       | — |   | — |   |
| Amortization of  transition obligation   |       | 15                               |       | 15                              |       | 45 |   | 45 |   |
| Amortization of  prior service cost      |       | (3                               | )          | (3                              | )          | (9 | ) | (9 | ) |
| Recognized net  actuarial loss           |       | 18                               |       | 31                              |       | 54 |   | 93 |   |
| Net periodic  benefit cost               |       | $                                | 215        |                            | $          | 231 |   | $ | 645 |   | $ | 693 |   |

 
| ** **                                                            | ** ** | **September 30, 2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| Employer’s  contributions for current premiums                   |       |                             |       |
| Contributions  made for the nine months ended September 30, 2007 |       | $                                | 202        |   |
| Expected  contributions for remainder of 2007                         |       | 68                               |       |
| Total estimated  employer contributions for fiscal year 2007          |       | $                                | 270        |   |

 

NOTE 12 - INCOME TAXES

 

The effective income tax rate from continuingoperations of approximately 42.4% for the third quarter of 2007 and 37.2% forthe third quarter of 2006 exceeds the federal statutory rate primarily due tostate income taxes and accrued interest expense on unrecognized tax benefits.The change in effective tax rate from 2006 to 2007 is the result of interestaccrued on uncertain tax positions according to FASB Interpretation No. 48(FIN No. 48) “Accounting for Uncertainty in Income Taxes-an interpretation ofFASB Statement No. 109”, and a one time reversal of a tax reserve in 2006.

 

HickoryTech adopted the provisions of FIN No.48 on January 1, 2007. Among other things, FIN No. 48 provides guidance toaddress uncertainty in tax positions and clarifies the accounting for incometaxes by prescribing a minimum recognition threshold which income tax positionsmust achieve before being recognized in the financial statements. As of thedate of adoption, HickoryTech had approximately $7,414,000 of unrecognized taxbenefits. Approximately $748,000 of the unrecognized tax benefits relateto a deferred tax asset that is fully reserved for financial reportingpurposes. The unrecognized tax benefits in their entirety, if recognized, wouldaffect the effective income tax rate in any future periods. As a result ofadoption, the Company recognized a credit of approximately $62,000 in theJanuary 1, 2007 retained earnings balance. There have been no significantchanges to these amounts during the nine months ended September 30, 2007.

 

The Company recognizes interest and penaltiesrelated to income tax matters as income tax expense. As of the date of theadoption, the Company had $172,000 (net of tax) accrued for interest andnothing accrued for penalties related to tax matters. As of September 30, 2007,the Company has accrued $406,000 (net of tax) for interest related to unrecognizedtax benefits.

 

The Company files consolidated income tax returns inthe United States federal jurisdiction and combined or separate income taxreturns in various state jurisdictions. In general, the Company is no longersubject to United States federal income tax examinations for the years prior to2004 and is no longer subject to examinations by state tax authorities for theyears prior to 2002.

 

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

 

#### FORWARD-LOOKINGSTATEMENTS

 

*This QuarterlyReport on Form 10-Q contains certain forward-looking statements within themeaning of the safe harbor provisions of the Private Securities LitigationReform Act of 1995. Statements in this Quarterly Report on Form 10-Q that arenot historical fact, are forward-looking statements that are based on ourcurrent expectations, estimates and projections about the industry in which weoperate and our beliefs and assumptions. Forward-looking statements may beidentified by the use of terminology such as “may”, “will”, “believes”, “seeks”,“projects”, “expects”, “plans”, “intends”, “estimates”, “continues”, “should”or “anticipates” and similar expressions. Such forward-looking statements aresubject to important risks and uncertainties that could cause our future actualresults to differ materially from such statements. These statements are notguarantees of future performance and involve certain risks, uncertainties andprobabilities, which are difficult to predict. Therefore, actual outcomes andresults may differ materially from what is expressed or forecasted in suchforward-looking statements, whether as a result of new information, futureevents or otherwise. Factors that might cause such a difference include, butare not limited to, those contained in Item 1A of Part II, “Risk Factors” ofthis quarterly report on Form 10-Q and Item 1A, “Risk Factors” of our AnnualReport on Form 10-K for the year ended December 31, 2006, which is incorporatedherein by reference. The Cautionary Statement in Part 1 of our Annual Report onForm 10-K provides a comprehensive list of sources for risks and uncertainties,which may influence forward looking statements and is incorporated herein by reference.You are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date on which they were made. Except asotherwise required by federal securities law, we undertake no obligation toupdate any of its forward-looking statements for any reason.*

* *

**RESULTS OF OPERATIONS**

 

OVERVIEW-TRENDS

 

Weoperate in two business segments: the Telecom Sector and the Enventis Sector.The Telecom Sector includes our historical rural telephone business operations,including three incumbent local exchange carriers (“ILECs”), a competitivelocal exchange carrier (“CLEC”) and a company providing data processingservices for the telecommunications industry (National Independent Billing,Inc.).

 

TheEnventis Sector operations are conducted through Enventis Telecom, Inc, whichwe acquired on December 30, 2005. Enventis provides integrated fiber network, internet protocol telephony and dataservices, through 1,500 route miles of fiber network serving more than 300business customers in over 40 communities in the Upper Midwest. Enventisoffers these services through two major product line offerings: EnterpriseNetwork Services, which is a telecom equipment provision service, andEnterprise Transport Services, which is a fiber optic transmission service forwholesale and retail use by customers as well as our hosted IP telephonyproduct.

 

Ourconsolidated revenues increased 9.8% and our income from continuing operationsincreased 27.8% in the three months ended September 30, 2007 compared to thethree months ended September 30, 2006. Our consolidated revenues increased19.0% and our income from continuing operations increased 49.6% in the ninemonths ended September 30, 2007 compared to the nine months ended September 30,2006. These substantial improvements in the results of operations were afunction of improvements in both the Telecom and Enventis Sectors. EnventisSector revenues increased 24.3% during the three months and 40.1% during thenine months ended September 30, 2007, and income more than doubled as comparedto the same periods in the prior year. The Enventis Sector recorded acquisitionintegration costs of approximately $550,000 and $1,650,000 in the three andnine months ended September 30, 2006, respectively, which did not reoccur in2007. While the Telecom Sector revenues remained stable in the third quarter of2007, expense reductions enabled the Telecom Sector to post a 9.3% increase inoperating income for that same period. The combination of a $1,890,000 recoveryfrom a switched access dispute with a large interexchange carrier in the secondquarter of 2007, as well as expense reductions, enabled the Telecom Sector topost a 20.3% increase in operating income in the nine months ended September30, 2007 compared to the nine months ended September 30, 2006.

 

17

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Longerterm, we expect local service and network access revenues in our Telecom Sectorto continue to trend downward because of competition from CLECs, cable TVproviders, voice over internet protocol, wireless telephone, other telephonecompetitors and due to reduced usage and pricing on the network access servicewe provide. We were largely successful in the nine months ended September 30,2007 in offsetting this declining revenue with increased revenue from digitalsubscriber line (DSL) and digital TV customers. In addition, our network accessrevenues and Telecom margins were further impacted by a reduction in interstatenetwork access rates that went into effect on July 1, 2007, as well as by thecompetitive voice services that were offered by the primary cable TV providerin Mankato, our largest market, in the third quarter of 2007. As a result,network access revenue declined 6.3% in the third quarter of 2007 compared tothe third quarter of 2006. Accordingly, while we will continue to work tooffset declining revenue with new services to our customers in the TelecomSector, the trend toward decreasing profitability in this Sector may resume.

 

Webelieve that our Enventis Sector provides a platform for longer-term growth.Enventis revenues for 2006 represented a 14.1% increase over the unauditedEnventis revenues for 2005. The 2007 first quarter revenues for Enventis were27.5% higher than those in the first quarter of 2006, the second quarterrevenues were 66.3% higher than those in the second quarter of 2006 and thethird quarter revenues were 24.3% higher than those in the third quarter of2006. Enventis has provided profitable operations and recorded positive operatingincome in each of the seven quarters since its acquisition. The EnventisEnterprise Network Services product line is subject to cyclical highs and lowsdepending on customer demand. Enterprise Transport Services contains more of arecurring revenue stream and is supported by long-term contracts. Both theEnterprise Network Service and the Enterprise Transport Service product lineshave shown excellent growth characteristics.

 

18

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SECTOR RESULTS OFOPERATIONS FROM CONTINUING OPERATIONS

 

TELECOM– The following table provides a breakdown of the Telecom Sector operatingresults.

 

**TELECOM SECTOR**

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in Thousands)**                                                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues before  intersegment eliminations:                                               |       |                             |       |                            |       |   |   |   |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Revenues                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Local Service                                                                             | ** ** | **$**                            | **4,247**  |                            | $          | 4,550 | ** ** | **$** | **12,922** |   | $ | 13,721 |   |
| Network Access                                                                            | ** ** | **7,086**                        |       | 7,562                           | ** ** | **23,823** |   | 22,318 |   |
| Long Distance                                                                             | ** ** | **1,248**                        |       | 1,252                           | ** ** | **3,877** |   | 3,654 |   |
| Data                                                                                      | ** ** | **1,781**                        |       | 1,645                           | ** ** | **5,172** |   | 4,521 |   |
| Internet                                                                                  | ** ** | **1,164**                        |       | 1,072                           | ** ** | **3,420** |   | 3,355 |   |
| Digital TV                                                                                | ** ** | **581**                          |       | 386                             | ** ** | **1,606** |   | 990 |   |
| Directory                                                                                 | ** ** | **1,037**                        |       | 939                             | ** ** | **2,821** |   | 2,736 |   |
| Message  Processing & Billing                                                         | ** ** | **661**                          |       | 482                             | ** ** | **1,864** |   | 1,705 |   |
| Intersegment                                                                              | ** ** | **116**                          |       | 58                              | ** ** | **334** |   | 122 |   |
| Other                                                                                     | ** ** | **842**                          |       | 810                             | ** ** | **2,627** |   | 3,264 |   |
| Total telecom  revenues                                                                   | ** ** | **$**                            | **18,763** |                            | $          | 18,756 | ** ** | **$** | **58,466** |   | $ | 56,386 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Total Telecom  revenues before intersegment eliminations:                                 |       |                             |       |                            |       |   |   |   |   |
| Unaffiliated  customers                                                                   | ** ** | **$**                            | **18,647** |                            | $          | 18,698 | ** ** | **$** | **58,132** |   | $ | 56,264 |   |
| Intersegment                                                                              | ** ** | **116**                          |       | 58                              | ** ** | **334** |   | 122 |   |
| ** **                                                                                |       | **18,763**                       |       | 18,756                          | ** ** | **58,466** |   | 56,386 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Cost of services  (excluding depreciation and amortization)                               | ** ** | **7,794**                        |       | 7,818                           | ** ** | **22,807** |   | 23,555 |   |
| Selling,  general, and administrative expenses  (excluding depreciation and amortization) | ** ** | **3,381**                        |       | 3,524                           | ** ** | **10,027** |   | 9,866 |   |
| Depreciation and  amortization                                                            | ** ** | **3,616**                        |       | 3,781                           | ** ** | **11,318** |   | 11,070 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Operating income                                                                          | ** ** | **$**                            | **3,972**  |                            | $          | 3,633 | ** ** | **$** | **14,314** |   | $ | 11,895 |   |
| Net income                                                                                | ** ** | **$**                            | **2,376**  |                            | $          | 2,174 | ** ** | **$** | **8,551** |   | $ | 7,198 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Capital  expenditures                                                                     | ** ** | **$**                            | **3,345**  |                            | $          | 5,300 | ** ** | **$** | **7,279** |   | $ | 12,374 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Key metrics                                                                               |       |                             |       |                            |       |   |   |   |   |
| Access lines                                                                              | ** ** | **66,290**                       |       | 68,829                          |       |   |   |   |   |
| Long distance  customers                                                                  | ** ** | **41,259**                       |       | 40,959                          |       |   |   |   |   |
| Internet  customers                                                                       | ** ** | **20,911**                       |       | 19,678                          |       |   |   |   |   |
| Digital  Subscriber Line customers                                                        | ** ** | **17,250**                       |       | 15,076                          |       |   |   |   |   |
| Digital TV  customers                                                                     | ** ** | **5,706**                        |       | 4,254                           |       |   |   |   |   |

 

Revenues

 

TelecomSector operating revenues before intersegment eliminations were $18,763,000,which is $7,000 or 0.04% higher in the three months ended September 30, 2007compared to the three months ended September 30, 2006, and were $58,466,000,which is 2,080,000 or 3.7% higher in the nine months ended September 30, 2007compared to the nine months ended September 30, 2006. The increase in revenuesin the nine months ended September 30, 2007 compared to the nine months endedSeptember 30, 2006 was primarily due to increases in network access, data,digital TV and long distance, offset by decreases in local service and otherrevenues. Without the non-recurring settlement of a switched access disputewith a large interexchange carrier (see below), which increased revenues by$1,890,000 in the second quarter of 2007, revenues in the nine months endedSeptember 30, 2007 would have only increased by 0.3% compared to the revenuesin the nine months ended September 30, 2006.

 

19

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Localservice revenue was $4,247,000, which is $303,000 or 6.7% lower in the threemonths ended September 30, 2007 compared to the three months ended September30, 2006. Local service revenue was $12,922,000, which is $799,000 or 5.8%lower in the nine months ended September 30, 2007 compared to the nine monthsended September 30, 2006. The decrease in both periods was primarily due to a 2,539or 3.7% decrease in access lines from September 30, 2006 to September 30, 2007.Also contributing to the decrease in local service revenues is a decline inreciprocal compensation received from wireless carriers under contract usingminute-of-use pricing. Many of these contracts and their associated pricingwere renegotiated in the first nine months of 2007. A higher degree ofcompetition from ILECs, CLECs and cable TV providers serving in our markets andfrom wireless substitution, could impact our local service revenue in futureperiods.

 

Networkaccess revenue was $7,086,000, which is $476,000 or 6.3% lower in the threemonths ended September 30, 2007 compared to the three months ended September30, 2006. This decrease was primarily due to lower interstate network accessrates that went into effect on July 1, 2007 and lower minutes of use (MOU).Network access revenue was $23,823,000, which is $1,505,000 or 6.7% higher inthe nine months ended September 30, 2007 compared to the nine months endedSeptember 30, 2006. Despite the lower interstate network access rates mentionedabove and lower MOUs, network access revenue increased in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006primarily due to the settlement of a switched access dispute with a largeinterexchange carrier, which resulted in a non-recurring increase in revenue of$1,890,000 in the second quarter of 2007. A combination of MOUs, carriersoptimizing their network costs and lower demand for dedicated lines maynegatively impact future access revenues. In addition, future federal or stateaccess reform may provide further negative influences. As a result of FCCregulations, we receive federally administered universal service support, whichrepresented approximately 2.3% of our total revenues for the first nine monthsof 2007. Network access revenues are based on tariff rates filed with federaland state regulatory authorities.

 

Long distance revenue was$1,248,000, which is $4,000 or 0.3% lower in the three months ended September30, 2007 compared to the three months ended September 30, 2006. Despite a 300or 0.7% increase in the customer base at September 30, 2007 compared toSeptember 30, 2006 and higher MOUs, revenue was lower due to a higher number ofcustomers subscribing to lower rate per-minute plans in the current period.Long distance revenue was $3,877,000, which is $223,000 or 6.1% higher in thenine months ended September 30, 2007 compared to the nine months endedSeptember 30, 2006. This increase was primarily due to an increase in MOUs andan increase in the long distance customer base mentioned above.

 

Data revenue was$1,781,000, which is $136,000 or 8.3% higher in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006, andwas $5,172,000, which is $651,000 or 14.4% higher in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Theincrease in both periods was primarily due to a $133,000 increase in the threemonth period and a $383,000 increase in the nine month period of Ethernetservices to business customers. We believe that Ethernet service revenues willcontinue to provide growth opportunities. Expanded networking opportunitiesamong medium and large enterprise customers are key drivers for this growth.Also contributing to the growth in data revenue was an increase in DSLcustomers of 2,174 or 14.4% between September 30, 2007 and September 30, 2006.

 

Internet revenue was$1,164,000, which is $92,000 or 8.6% higher in the three months ended September30, 2007 compared to the three months ended September 30, 2006, and was$3,420,000, which is $65,000 or 1.9% higher in the nine months ended September30, 2007 compared to the nine months ended September 30, 2006. The increase inboth periods was primarily due to an increase in Internet customers of 1,233 or6.3% between September 30, 2007 and September 30, 2006.

 

Digital TV revenue was$581,000, which is $195,000 or 50.5% higher in the three months ended September30, 2007 compared to the three months ended September 30, 2006 and $1,606,000,which is $616,000 or 62.2% higher in the nine months ended September 30, 2007compared to the nine months ended September 30, 2006. This increase wasprimarily the result of the offering of digital TV in three additionalcommunities in 2006 and two additional communities in 2007, which resulted in a1,452 or 34.1% increase in digital TV customers at September 30, 2007 comparedto September 30, 2006. Also contributing to the increase in digital TV revenuewas an increase in rates charged to customers of approximately 5.0%, which wentinto effect in April 2007.

 

20

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Directory revenue was$1,037,000, which is $98,000 or 10.4% higher in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006, andwas $2,821,000, which is $85,000 or 3.1% higher in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Theincrease in both periods was the result of increased sales of yellow-pageadvertising in the Company directories, which went into effect in the beginningof the third quarter of 2007.

 

Message processing andbilling revenue was $661,000, which is $179,000 or 37.1% higher in the threemonths ended September 30, 2007 compared to the three months ended September30, 2006, and was $1,864,000, which is $159,000 or 9.3% higher in the ninemonths ended September 30, 2007 compared to the nine months ended September 30,2006. The increase in both periods was primarily due to the recognition of$96,000 and $285,000 of non-recurring license fee revenue in the three and ninemonth periods ended September 30, 2007, compared to the three and nine monthperiods ended September 30, 2006, respectively. The increase in revenue in thenine months ended September 30, 2007 compared to the nine months endedSeptember 30, 2006 was offset by a rate decrease negotiated with a carrieraccess billing processing customer, which resulted in reduced revenues fromthat customer.

 

Other revenue, consistingprimarily of revenues from cable network services, sales of Customer PremiseEquipment (CPE), circuit private lines, maintenance, and add, moves and changeswas $842,000, which is $32,000 or 4.0% higher in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006. Thisincrease was primarily due to an increase in contract service revenues of$85,000, partially offset by the loss of $73,000 from Project SOCRATES. UntilJune 2006, HickoryTech had been providing Internet access and videoconferencing for Project SOCRATES, which is a distance-learning networkconnecting schools and libraries in a 12-county region in south centralMinnesota. HickoryTech’s contract with Project SOCRATES ended on June 30, 2006,although HickoryTech did provide some services for Project SOCRATES in thethird quarter of 2006 as they transitioned to their new vendor.

 

Other revenue was$2,627,000, which is $637,000 or 19.5% lower in the nine months ended September30, 2007 compared to the nine months ended September 30, 2006. This decreasewas primarily due to the loss of $766,000 from Project SOCRATES (see above),partially offset by an increase in contract service revenues of $116,000.

 

Cost of Services(excluding Depreciation and Amortization)

 

Telecom Sector cost ofservices (excluding depreciation and amortization) was $7,794,000, which is$24,000 or 0.3% lower in the three months ended September 30, 2007 compared tothe three months ended September 30, 2006, and was $22,807,000, which is$748,000 or 3.2% lower in the nine months ended September 30, 2007 compared tothe nine months ended September 30, 2006. The decrease in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006 wasprimarily due to a $568,000 decrease in professional fees due to lower feesassociated with the conversion of the Company’s enterprise resource planningsoftware and provisioning software, a $551,000 decrease in contract laborlargely due to the retirement of mainframe computer functions in the NationalIndependent Billing, Inc. business in 2006 and the settlement of a switchedaccess dispute with a large interexchange carrier in the second quarter of2007, which resulted in the reversal of bad debt expense of $325,000. The abovedecrease was offset by a $562,000 increase in programming expense to supportthe increase in digital TV services and a $374,000 increase in wages andbenefits, which was the result of fewer dollars being capitalized in 2007 thanin 2006 in connection with the enhancement of the Company’s networkinfrastructure.

 

Selling, General andAdministrative Expenses (excluding Depreciation and Amortization)

 

Telecom Sector selling,general and administrative expenses (excluding depreciation and amortization)were $3,381,000, which is $143,000 or 4.1% lower in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006. Thisdecrease was primarily due to a $198,000 decrease in costs used to support CPEsales. Telecom Sector selling, general and administrative expenses (excludingdepreciation and amortization) were $10,027,000, which is $161,000 or 1.6%higher in the nine months ended September 30, 2007 compared to the nine monthsended September 30, 2006.

 

21

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Depreciation andAmortization

 

Telecom Sectordepreciation and amortization were $3,616,000, which is $165,000 or 4.4% lowerin the three months ended September 30, 2007 compared to the three months endedSeptember 30, 2006. Telecom Sector depreciation was $3,589,000, which is$162,000 or 4.3% lower in the three months ended September 30, 2007 compared tothe three months ended September 30, 2006. This trend is dependent on the netlevel of capital assets placed in service and retirements on a quarter byquarter basis. Telecom Sector amortization was $27,000, which is $3,000 or10.0% lower in the three months ended September 30, 2007 compared to the threemonths ended September 30, 2006.

 

Telecom Sectordepreciation and amortization were $11,318,000, which is $248,000 or 2.2%higher in the nine months ended September 30, 2007 compared to the nine monthsended September 30, 2006. Telecom Sector depreciation was $11,238,000, which is$259,000 or 2.4% higher in the nine months ended September 30, 2007 compared tothe nine months ended September 30, 2006. This increase was primarily due to anincrease in fixed asset spending in 2006. Telecom Sector amortization was$80,000, which is $11,000 or 12.1% lower in the nine months ended September 30,2007 compared to the nine months ended September 30, 2006.

 

Operating Income

 

Telecom Sector operatingincome was $3,972,000, which is $339,000 or 9.3% higher in the three monthsended September 30, 2007 compared to the three months ended September 30, 2006.This increase was due to the $165,000 decrease in depreciation andamortization; the $143,000 decrease in selling, general and administrativeexpenses (excluding depreciation and amortization); the $24,000 decrease incost of services (excluding depreciation and amortization) and the $7,000increase in revenues, all of which are discussed above.

 

Telecom Sector operatingincome was $14,314,000, which is a $2,419,000 or 20.3% higher in the ninemonths ended September 30, 2007 compared to the nine months ended September 30,2006. This increase was due to the $2,080,000 increase in revenues, the$748,000 decrease in costs of services (excluding depreciation andamortization) and the $11,000 decrease in amortization, offset by the $259,000increase in depreciation and the $161,000 increase in selling, general andadministrative expenses (excluding depreciation and amortization), all of whichare described above.

 

Net Income

 

Telecom Sector net incomefrom operations was $2,376,000, which is $202,000 or 9.3% higher in the threemonths ended September 30, 2007 compared to the three months ended September30, 2006 and $8,551,000, which is $1,353,000 or 18.8% higher in the nine monthsended September 30, 2007 compared to the nine months ended September 30, 2006.This increase was primarily due to the increase in operating income mentionedabove, offset by the change in taxes.

 

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ENVENTIS– The following table provides a breakdown of the Enventis Sector operatingresults.

 

**ENVENTIS SECTOR**

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in Thousands)**                                                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues before  intersegment eliminations:                                               |       |                             |       |                            |       |   |   |   |   |
| Enterprise  Network Services                                                              | ** ** | **$**                            | **12,076** |                            | $          | 9,741 | ** ** | **$** | **45,221** |   | $ | 30,916 |   |
| Enterprise  Transport Services                                                            | ** ** | **5,136**                        |       | 4,231                           | ** ** | **15,035** |   | 12,318 |   |
| Intersegment                                                                              | ** ** | **152**                          |       | —                          | ** ** | **299** |   | — |   |
| ** **                                                                                |       | **$**                            | **17,364** |                            | $          | 13,972 | ** ** | **$** | **60,555** |   | $ | 43,234 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Total Enventis  revenues before intersegment eliminations:                                |       |                             |       |                            |       |   |   |   |   |
| Unaffiliated  customers                                                                   | ** ** | **$**                            | **17,212** |                            | $          | 13,972 | ** ** | **$** | **60,256** |   | $ | 43,234 |   |
| Intersegment                                                                              | ** ** | **152**                          |       | —                          | ** ** | **299** |   | — |   |
| ** **                                                                                |       | **17,364**                       |       | 13,972                          | ** ** | **60,555** |   | 43,234 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Cost of sales                                                                             | ** ** | **8,705**                        |       | 7,183                           | ** ** | **35,578** |   | 23,322 |   |
| Cost of services  (excluding depreciation and amortization)                               | ** ** | **3,578**                        |       | 3,320                           | ** ** | **10,562** |   | 8,939 |   |
| Selling, general  and administrative expenses,  (excluding depreciation and amortization) | ** ** | **2,476**                        |       | 2,057                           | ** ** | **6,979** |   | 6,758 |   |
| Depreciation and  amortization                                                            | ** ** | **916**                          |       | 732                             | ** ** | **2,718** |   | 2,237 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Operating income                                                                          | ** ** | **$**                            | **1,689**  |                            | $          | 680 | ** ** | **$** | **4,718** |   | $ | 1,978 |   |
| Net income                                                                                | ** ** | **$**                            | **1,026**  |                            | $          | 403 | ** ** | **$** | **2,838** |   | $ | 1,178 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Capital  expenditures                                                                     | ** ** | **$**                            | **1,928**  |                            | $          | 1,240 | ** ** | **$** | **4,029** |   | $ | 4,340 |   |

 

**ENVENTISPRODUCT LINE REPORTING**

 
| ** **                                                                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Network Services**                                | ** ** | **Transport Services**                             | ** ** | **Network Services** | ** ** | **Transport Services** | ** ** |
| **(Dollars in Thousands)**                                                      | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues before  intersegment eliminations:                                               |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                  | ** ** | **$**                                                    | **12,076** |                                                    | $          | 9,741 | ** ** | **$** | **5,136** |   | $ | 4,231 | ** ** | **$** | **45,221** |   | $ | 30,916 | ** ** | **$** | **15,035** |   | $ | 12,318 |   |
| Intersegment                                                                              | ** ** | **—**                                               |       | —                                                  | ** ** | **152** |   | — | ** ** | **—** |   | — | ** ** | **299** |   | — |   |
| ** **                                                                                |       | **12,076**                                               |       | 9,741                                                   | ** ** | **5,288** |   | 4,231 | ** ** | **45,221** |   | 30,916 | ** ** | **15,334** |   | 12,318 |   |
|                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                                             | ** ** | **$**                                                    | **8,481**  |                                                    | $          | 7,183 | ** ** | **$** | **224** |   | $ | — | ** ** | **$** | **35,345** |   | $ | 23,252 | ** ** | **$** | **233** |   | $ | 70 |   |
| Cost of services  (excluding depreciation and amortization)                               | ** ** | **1,074**                                                |       | 891                                                     | ** ** | **2,504** |   | 2,429 | ** ** | **3,254** |   | 2,496 | ** ** | **7,308** |   | 6,443 |   |
| Selling, general  and administrative expenses,  (excluding depreciation and amortization) | ** ** | **1,374**                                                |       | 1,169                                                   | ** ** | **1,102** |   | 888 | ** ** | **3,643** |   | 3,646 | ** ** | **3,336** |   | 3,112 |   |
| Depreciation and  amortization                                                            | ** ** | **128**                                                  |       | 73                                                      | ** ** | **788** |   | 659 | ** ** | **376** |   | 246 | ** ** | **2,342** |   | 1,991 |   |
|                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                                          | ** ** | **$**                                                    | **1,019**  |                                                    | $          | 425 | ** ** | **$** | **670** |   | $ | 255 | ** ** | **$** | **2,603** |   | $ | 1,276 | ** ** | **$** | **2,115** |   | $ | 702 |   |
| Net income                                                                                | ** ** | **$**                                                    | **614**    |                                                    | $          | 251 | ** ** | **$** | **412** |   | $ | 152 | ** ** | **$** | **1,561** |   | $ | 758 | ** ** | **$** | **1,277** |   | $ | 420 |   |
|                                                                                      |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                     | ** ** | **$**                                                    | **438**    |                                                    | $          | 60 | ** ** | **$** | **1,490** |   | $ | 1,180 | ** ** | **$** | **518** |   | $ | 210 | ** ** | **$** | **3,511** |   | $ | 4,130 |   |

 

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Revenues:

 

Enventis Sector operating revenuesbefore intersegment eliminations were $17,364,000, which is $3,392,000 or 24.3%higher in the three months ended September 30, 2007 compared to the threemonths ended September 30, 2006. Enventis Sector operating revenues beforeintersegment eliminations were $60,555,000, which is $17,321,000 or 40.1%higher in the nine months ended September 30, 2007 compared to the nine monthsended September 30, 2006. The increase in both periods was primarily due to theincrease in revenues in the Enterprise Network Services product line.

 

Enterprise Network Servicesrevenues were $12,076,000, which is $2,335,000 or 24.0% higher in the threemonths ended September 30, 2007 compared to the three months ended September30, 2006. This increase was largely the result of revenue recognized from alarge equipment installation contract with a customer of approximately$5,500,000. Enterprise Network Services revenues were $45,221,000, which is$14,305,000 or 46.3% higher in the nine months ended September 30, 2007compared to the nine months ended September 30, 2006. This increase was largelythe result of revenue recognized from a large equipment installation contractwith a customer of approximately $12,100,000 and revenue recognized from amaintenance contract of approximately $1,400,000 with another customer.

 

Enterprise Transport Servicesrevenues were $5,136,000, which is $905,000 or 21.4% higher in the three monthsended September 30, 2007 compared to the three months ended September 30, 2006.This increase was primarily due to increases in wholesale business revenues(services provided to other communications carriers) of $808,000 and theEncompass line of business of $134,000. Enterprise Transport Services revenueswere $15,035,000, which is $2,717,000 or 22.1% higher in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Thisincrease was primarily due to increases in wholesale business revenues of$1,692,000 and the Encompass line of business of $382,000. Also contributing tothe increase in revenues were one-time gains associated with the earlytermination of several customer contracts of $264,000.

 

Cost of Sales

 

Enventis Sector cost ofsales was $8,705,000, which is $1,522,000 or 21.2% higher in the three monthsended September 30, 2007 compared to the three months ended September 30, 2006.Enventis Sector cost of sales was $35,578,000, which is $12,256,000 or 52.6%higher in the nine months ended September 30, 2007 compared to the nine monthsended September 30, 2006. The increases in both periods were primarily due tothe costs incurred to support the increased revenue in the Enterprise NetworkServices product line. These costs are primarily equipment material costs.Labor associated with installation work is not included in this category, butis included in cost of services (excluding depreciation and amortization)described below.

 

Cost of Services(excluding Depreciation and Amortization)

 

Enventis Sector cost ofservices (excluding depreciation and amortization) was $3,578,000, which is$258,000 or 7.8% higher in the three months ended September 30, 2007 comparedto the three months ended September 30, 2006. This increase was primarily dueto a $180,000 increase in circuit expenses associated with an increase inoff-net revenues and a $108,000 increase in professional fees due to externalproject management consulting. Offsetting the increase in cost of services wasa decrease of $63,000 in bad debt expense associated with the collection ofseveral previously written-off customer accounts and a lower amount of bad debtaccruals in the third quarter of 2007.

 

Enventis Sector cost ofservices (excluding depreciation and amortization) was $10,562,000, which is$1,623,000 or 18.2% higher in the nine months ended September 30, 2007 comparedto the nine months ended September 30, 2006. This increase was primarily due toan $871,000 increase in circuit expenses associated with an increase in off-netrevenues and an $847,000 increase in wages and benefits due to increasedstaffing. Offsetting the increase in cost of services was a decrease of$348,000 in bad debt expense associated with the collection of severalpreviously written-off customer accounts and a lower amount of bad debt accrualsin 2007.

 

Selling, General andAdministrative Expenses (excluding Depreciation and Amortization)

 

Enventis Sector selling,general and administrative expenses (excluding depreciation and amortization)were $2,476,000, which is $419,000 or 20.4% higher in the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006. Thisincrease was primarily due to a $238,000 increase in corporate expenseallocations and a $153,000 increase in commissions paid as a result of theincrease in business activity.

 

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Enventis Sector selling,general and administrative expenses (excluding depreciation and amortization)were $6,979,000, which is $221,000 or 3.3% higher in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Thisincrease was primarily due to a $710,000 increase in corporate expenseallocations, a $307,000 increase in commissions paid as a result of theincrease in business activity and a $157,000 increase in computer expenses.Offsetting the increase in selling, general and administrative expenses was a$992,000 decrease in wages and benefits which was largely the result of adecrease in retention payments made to certain employees.

 

The Enventis Sectorrecorded acquisition integration costs of approximately $550,000 and $1,650,000in the three and nine months ended September 30, 2006, respectively, which didnot reoccur in 2007. Without these one-time costs, Enventis Sector selling, generaland administrative expenses (excluding depreciation and amortization) wouldhave increased 64.3% and 36.6% in the three and nine months ended September 30,2007, respectively, compared to the same periods in 2006. This substantialincrease in costs was used to support the higher activity levels of theEnventis Sector operations in 2007.

 

Depreciation andAmortization

 

Enventis Sectordepreciation and amortization were $916,000, which is $184,000 or 25.1% higherin the three months ended September 30, 2007 compared to the three months endedSeptember 30, 2006. Enventis Sector depreciation was $654,000, which is$186,000 or 39.7% higher in the three months ended September 30, 2007 comparedto the three months ended September 30, 2006. This increase was primarily dueto the increase in assets placed in service in 2006 and 2007. Enventis Sectoramortization was $262,000 in the three months ended September 30, 2007 and2006.

 

Enventis Sectordepreciation and amortization were $2,718,000, which is $481,000 or 21.5%higher in the nine months ended September 30, 2007 compared to the nine monthsended September 30, 2006. Enventis Sector depreciation was $1,931,000, which is$482,000 or 33.3% higher in the nine months ended September 30, 2007 comparedto the nine months ended September 30, 2006. This increase was primarily due tothe increase in assets placed in service in 2006 and 2007. Enventis Sectoramortization was $787,000 in the nine months ended September 30, 2007 and 2006.

 

Operating Income

 

Enventis Sector operatingincome was $1,689,000, which is $1,009,000 or 148.4% higher in the three monthsended September 30, 2007 compared to the three months ended September 30, 2006,and was $4,718,000, which is $2,740,000 or 138.5% higher in the nine monthsended September 30, 2007 compared to the nine months ended September 30, 2006.The increase in both periods was due to the increase in revenues, offset by theincreases in cost of sales, cost of services (excluding depreciation andamortization), selling, general and administrative expenses (excludingdepreciation and amortization) and depreciation, all of which are describedabove.

 

Net Income

 

Enventis Sector netincome was $1,026,000, which is $623,000 or 154.6% higher in the three monthsended September 30, 2007 compared to the three months ended September 30, 2006,and was $2,838,000, which is $1,660,000 or 140.9% higher in the nine monthsended September 30, 2007 compared to the nine months ended September 30, 2006.This increase was primarily due to the increase in operating income mentionedabove, offset by the change in taxes.

 

INTEREST EXPENSE:

 

Consolidated interestexpense was $2,028,000, which is $115,000 or 6.0% higher in the three monthsended September 30, 2007 compared to the three months ended September 30, 2006,and was $6,241,000, which is $849,000 or 15.8% higher in the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Theseincreases were primarily due to lower cooperative dividends received in 2007from one of the Company’s participating lenders. Cooperative dividends areaccounted for as an offset to interest expense when earned. In addition, theCompany’s effective interest rate is also higher in 2007 than 2006. Thepreviously mentioned reasons offset the fact that the Company’s outstandingdebt balance is lower in 2007 than 2006.

 

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The outstanding balanceof the revolving credit facility was $128,725,000 at September 30, 2007 and$142,700,000 at December 31, 2006. The interest expense level of futurequarters, while not affected by the receivable change, is expected to remain atapproximately the same level experienced in the second and third quarters of2007 due to the new interest rate swap agreements initiated in March 2007. Theaverage effective interest rate on outstanding debt was 5.92% for the threemonths ended September 30, 2007 compared to 5.42% for the three months endedSeptember 30, 2006.

 

INCOME TAXES

 

The effective income tax rate from continuingoperations of approximately 42.4% for the third quarter of 2007 and 37.2% forthe third quarter of 2006 exceeds the federal statutory rate primarily due tostate income taxes and interest expense accrued on unrecognized tax benefits.The change in the effective tax rate from 2006 to 2007 is the result ofinterest accrued on uncertain tax positions according to FASB InterpretationNo. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes-aninterpretation of FASB Statement No. 109”, and a one time reversal of atax reserve in 2006.

 

CONSOLIDATED INCOME FROMCONTINUING OPERATIONS

 

Consolidatedincome from continuing operations was $2,082,000, which is $453,000 or 27.8%higher in the three months ended September 30, 2007 compared to the threemonths ended September 30, 2006, and was $7,104,000, which is $2,355,000 or49.6% higher in the nine month ended September 30, 2007 compared to the ninemonths ended September 30, 2006. The increase in both periods was primarily dueto the increase in overall Company profitability, offset by the increase inincome taxes.

 

LIQUIDITY AND CAPITALRESOURCES

 

CASH FLOWS

 

Cashgenerated from operations was $29,677,000 in the first nine months of 2007compared to $14,929,000 in the first nine months of 2006. Cash provided byoperations in the first nine months of 2007 was primarily attributable to netincome plus non-cash expenses, including depreciation and amortization of$14,057,000. Also contributing to the increase in cash generated fromoperations was a decrease in inventory on hand within the Enventis sector of$4,916,000, offset by an increase in the Telecom sector inventory of $920,000due to seasonal projects.

 

Cashgenerated from operations in the first nine months of 2006 was $14,748,000lower than the cash generated from operations in 2007. Contributing to thisdecrease in cash provided by operations was an increase in inventory of$5,384,000 due to seasonal construction projects in the Telecom sector combinedwith increased projects in process in the Enventis sector. Also contributing tothe decrease in cash provided by operations were increased outstanding accountsreceivable balances in the Enventis sector as a result of the increased salesactivity. The decrease in cash provided by operations was partially offset by adecrease of $3,529,000 in prepaid inventory acquired in the Enventisacquisition.

 

Cashused in investing activities was $11,288,000 in the first nine months of 2007compared to $16,590,000 in the first nine months of 2006. We experienced a decreaseof $5,385,000 in capital spending, which was primarily related to reducedexpenditures in our network enhancement program, which is nearly complete and aconcentrated effort to focus spending on revenue generating products, servicesand key strategic initiatives.

 

Cashused in financing activities in the first nine months of 2007 was $15,868,000compared to cash provided by financing activities during the first nine monthsof 2006 of $1,574,000. This is primarily due to continual efforts to reduce borrowingsunder our long-term credit facility. The total long-term credit facilitybalance bas been reduced by $13,975,000 in 2007 and now totals $128,725,000 asof September 30, 2007. Also contributing to the change in net cash used infinancing activities was the receipt of proceeds of $1,936,000 relating to thetermination of two outstanding interest-rate swap agreements and an increase inshort-term financing of $2,422,000, which was offset by the payment ofdividends totaling $4,764,000.

 

26

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WORKING CAPITAL

 

Working capital (i.e.current assets minus current liabilities) was $6,498,000 as of September 30,2007, compared to working capital of $7,731,000 as of December 31, 2006. Theratio of current assets to current liabilities was 1.2 to 1.0 as of September30, 2007 and 1.3 to 1.0 as of December 31, 2006.

 

SHORT-TERMFINANCING ARRANGEMENT

 

Enventishas a $13,000,000 credit facility with a financing company to purchaseinventories from certain approved vendors. Advances under the financingarrangement are collateralized by the accounts receivable and inventory ofEnventis and a guaranty of the principal indebtedness by Hickory TechCorporation. The credit facility provides sixty-day payment terms without interestaccrual for working capital and can be terminated at any time by either party.Borrowings outstanding under the credit facility were $10,141,000 and$7,719,000 at September 30, 2007 and December 31, 2006, respectively. Thesebalances are classified as current liabilities in the accompanying BalanceSheet and are not considered part of the Company’s debt financing.

 

LONG-TERM OBLIGATIONS

 

Long-term obligations asof September 30, 2007 were $127,722,000 excluding current maturities of$1,300,000 on debt and $287,000 on capital leases. On December 30, 2005, weentered into a $160,000,000 credit agreement with a syndicate of banks(subsequently amortized to a $158,700,000 facility as of December 31, 2006),which amended our previous credit facility. The credit facility is comprised ofa $30,000,000 revolving credit component that expires on December 30, 2011 anda $130,000,000 term loan component.

 

The term loan componentis comprised of two components, which are defined as term loan B and term loanC. The outstanding principal balance of term loan B is $108,075,000 as ofSeptember 30, 2007 and is held in varying amounts by three of the lenders inthe syndicate (US Bank, GE Commercial Distribution Finance Corporation andCoBank). Under the terms of term loan B, we are required to make quarterlyprincipal payments of $275,000 from September 30, 2007 through December 31,2011 with the remainder of the aggregate principal due in two payments on March31, 2012 and June 30, 2012. The outstanding principal balance of term loan C is$19,650,000 as of September 30, 2007 and is held entirely by Rural TelephoneFinance Cooperative (RTFC). Under the terms of term loan C, we are required tomake quarterly principal payments of $50,000 on the aggregate principal amountfrom September 30, 2007 through December 31, 2012 with the remainder of theaggregate principal due in two payments on March 31, 2013 and June 30, 2013.

 

Under the terms of therevolving credit facility, any outstanding principal is payable in full onDecember 30, 2011. The outstanding balance of the revolving credit facility is$1,000,000 as of September 30, 2007.

 

For all components of thetotal credit facility, interest will be payable at an applicable margin inexcess of a prevailing pricing level. The prevailing pricing level will bebased on a Base Rate, LIBOR Rate Loans or RTFC rate table. The prevailing ratefor Base Rate Loans is the higher of Prime Rate or the Federal Funds Rate plus0.5%. The prevailing rate for LIBOR Rate Loans is publicly available. The RTFCrate tables are established based on RTFC policies, which are not publiclyavailable and change from time to time. The applicable margin for the revolvingcredit facility, term loan B and term loan C will be determined quarterly,based on our leverage ratio. The credit facility also provides for payment of afee on any un-drawn commitment of the revolving credit facility and is payablequarterly. The credit facility requires us to enter into or maintain in effect,interest rate protection agreements on at least 50% of the facility’soutstanding balance in order to manage our exposure to interest ratefluctuations. We continually monitor the interest rates on our bank loans andhave implemented interest rate protection agreements on various portions of theoverall debt outstanding for varying terms.

 

Our debt requires us tocomply, on a consolidated basis, with specified financial ratios and testsincluding maximum leverage ratio, minimum interest coverage ratio and maximumcapital expenditures. Our obligations under the credit facility are secured bya first-priority lien on all of our property and assets, tangible andintangible, and all of the property of our subsidiaries including, but notlimited to accounts receivable, inventory, equipment and intellectual property;general intangibles, cash and proceeds of the foregoing. We have also pledgedthe capital stock of our subsidiaries to secure the credit facility.

 

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Our Telecom Sector leasescertain computer equipment under capital lease arrangements. During the threemonths ended September 30, 2007 and 2006, this Sector recorded additions toproperty, plant and equipment of $490,000 and $162,000, respectively, relatedto these capital lease arrangements.

 

COMMITMENTS ANDCONTINGENCIES

 

We are involved in certain contractual disputes in the ordinary courseof business. We do not believe the ultimate resolution of any of these existingmatters will have a material adverse effect on our financial position, resultsof operations or cash flows. We did not experience any changes to materialcontractual obligations in the first nine months of 2007. Refer to our Annual Report on Form 10-K forthe year ended December 31, 2006 for the discussion relating to commitments andcontingencies.

 

OTHER

 

The Company has notconducted a public equity offering and operates with original equity capital,retained earnings and indebtedness in the form of bank term and revolving linesof credit.

 

By utilizing cash flowfrom operations and current cash balances, the Company feels it has adequateresources to meet its anticipated operating, capital expenditures and debtservice requirements.

 

CRITICAL ACCOUNTINGPOLICIES

 

Management’s discussionand analysis of financial condition and results of operations stated in thisQuarterly Report on Form 10-Q are based on HickoryTech’s consolidated financialstatements, which have been prepared in accordance with GAAP and whereapplicable, conform to the accounting principles as prescribed by federal andstate telephone utility regulatory authorities. We presently give accountingrecognition to the actions of regulators where appropriate, as prescribed bySFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”. 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, 2006.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We do not have operationssubject to risks of foreign currency fluctuations. We do, however, usederivative financial instruments to manage exposure to interest ratefluctuations. Our objectives for holding derivatives are to minimize interestrate risks using the most effective methods to eliminate or reduce the impactof these exposures. Variable rate debt instruments are subject to interest raterisk. In March 2007, we terminated two outstanding interest-rate swapagreements, with original maturities of June 2008, in exchange for $1,936,000in proceeds. Proceeds of $940,000 were recognized as an offset to interestexpense in the first nine months of 2007. The unrecognized portion of theproceeds is recorded as a component of accumulated other comprehensive income(loss) in shareholders’ equity and will be recognized as an offset to interestexpense over the remaining original term of the agreement (nine months endingin June 2008). 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 Marchof 2010.

 

The cumulative gain orloss on current derivative instruments is reported as a component ofaccumulated other comprehensive income (loss) in shareholders’ equity and isrecognized in earnings when the term of the protection agreement is concluded.Our earnings are affected by changes in interest rates as a portion of itslong-term debt has variable interest rates based on LIBOR. If interest ratesfor the portion of our long-term debt based on variable rates had averaged 10%more for the quarter ended September 30, 2007 our interest expense would haveincreased $103,000.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

Evaluationof Disclosure Controls and Procedures.

 

Asof the end of the period covered by this Quarterly Report on Form 10-Q (theEvaluation Date), we carried out an evaluation, under the supervision and withthe participation 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 Rule13a-15(e) promulgated under the Securities and Exchange Act of 1934, asamended). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the end of the period covered bythis Quarterly Report, our disclosure controls and procedures were effective inensuring that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in applicable rules and forms andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, in a mannerthat allows timely decisions regarding required disclosure.

 

There have been no changes in our internal control over financial reportingduring our most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II. OTHER INFORMATION**

 

Item 1. Legal Proceedings.

 

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

 

HickoryTech is investigating a potential civil dispute being discussedwith a municipality regarding contract payments from HickoryTech to themunicipality in support of the Company’s CLEC product line. No formal disputeor claim has been filed to-date.

 

Item 1A. Risk Factors.

 

There have not been anymaterial changes to the risk factors previously disclosed in Item 1A, “Risk  Factors”,of  our Annual Report on Form 10-K forthe fiscal year ended December 31, 2006.

 

Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults UponSenior Securities.

 

None.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders.

 

None.

 

Item 5.  Other Information.

 

None.

 

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Item 6. Exhibits Listing.

 

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

 

Exhibit 31.2Certification pursuant to Rule 13a-14(a) under the Exchange Act, as adoptedpursuant 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 906 ofthe Sarbanes-Oxley Act of 2002

 

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

 

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SIGNATURES

 

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

 
| Dated: October 30,  2007 | HICKORY TECH  CORPORATION |
|--------------------------|---------------------------|
|                     |                      |
|                     |                      |
|                     | By:                       | /s/ John W. Finke |   |
|                     |                      | John W. Finke,  President and Chief Executive Officer |
|                     |                      |
|                     |                      |
|                     | By:                       | /s/ David A.  Christensen |   |
|                     |                      | David A. Christensen,  Senior Vice President and |
|                     |                      | Chief Financial Officer |
|                          |                           |  |  |  |

 

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