HICKORY TECH CORP – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe
harbor provisions regarding forward-looking statements. This Quarterly Report on
Form 10-Q may include forward-looking statements. These statements may include,
without limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities and growth rates, acquisition and
divestiture opportunities, business strategies, business and competitive
outlook, and other similar forecasts and statements of expectation. Words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "targets," "projects," "will," "may," "continues," and "should,"
and variations of these words and similar expressions, are intended to identify
these forward-looking statements. Such forward-looking statements are subject to
risks and uncertainties that could cause our actual results to differ materially
from such statements. Factors that might cause such a difference include, but
are not limited to, those contained in Item 1A of Part II, "Risk Factors" of
this quarterly report on Form 10-Q and Item 1A, "Risk Factors" of our Annual
Report on Form 10-K for the year ended December 31, 2011 which is incorporated
herein by reference.

Because of these risks, uncertainties, and assumptions and the fact that any
forward-looking statements made by us and our management are based on estimates,
projections, beliefs, and assumptions of management, they are not guarantees of
future performance and you should not place undue reliance on them. In addition,
forward-looking statements speak only as of the date they are made. With the
exception of the requirements set forth in the federal securities laws or the
rules and regulations of the Securities and Exchange Commission, we do not
undertake any obligations to update any forward-looking information, whether as
a result of new information, future events or otherwise.

Critical Accounting Policies

The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and the related disclosure of contingent assets and
liabilities. A description of the accounting policies that we consider
particularly important for the portrayal of our results of operations and
financial position, and which may require a higher level of judgment by our
management, is contained under the caption, "Critical Accounting Policies," in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2011.

Acquisition/Business Combinations
We utilize the acquisition accounting method for acquisitions/business
combinations requiring us to recognize assets acquired, liabilities assumed and
any noncontrolling interest in the acquiree at fair value on the acquisition
date. Acquisition costs are expensed as incurred.

17
——————————————————————————–Results of Operations

We conduct our operations in three business segments: (i) Fiber and Data, (ii)
Equipment and (iii) Telecom.

Our Fiber and Data Segment serves wholesale, enterprise and small-to-medium
business customers with high-speed communications products supported by our
extensive statewide fiber network and community access rings. With our
experience and communication expertise we are able to provide standard and
customized network solutions which can be extended beyond our network to provide
end-to-end national connectivity. The Fiber and Data segment also includes
revenue from our SingleLink services and voice, data and Internet services sold
to SMB business customers in several metropolitan markets.

Our Equipment Segment provides equipment solutions and support for a broad
spectrum of business customers. Our equipment solutions team plans, designs and
implements networks utilizing emerging technological advancements including
TelePresence Video, Unified Communications and data center solutions. We provide
a complete array of products and services to support the Cisco equipment sold to
business customers including professional services, maintenance, total care
support and security. Professional services include network assessments,
planning, design, implementation and training. Our total care support team
provides a single-point-of-contact for the support of applications, systems and
infrastructure. We also offer security solutions combining leading network
security products with our experience and expertise in integrated communications
systems.

Our Telecom Segment provides bundled residential and business services including
high-speed Internet, broadband services, digital TV, local voice and long
distance services in our legacy telecom service area. Telecom is comprised of
two markets. The first includes an incumbent local exchange carrier ("ILEC")
operating in 13 south central Minnesota communities and 13 rural northwest Iowa
communities. The second market is a competitive local exchange carrier ("CLEC")
operation. We own our network in both the ILEC and CLEC communities. The Telecom
Segment, through National Independent Billing, Inc., also provides data
processing and related billing services to HickoryTech and external
communication providers including wireline, wireless and entertainment
providers.

Executive Summary

Total consolidated revenue of $46.9 million during the first quarter of 2012
represents an increase of 22% over the first quarter of 2011. Net income of $2.3
million, or $0.17 per diluted share, compares to net income of $2.1 million, or
$0.16 per diluted share, earned during the same period in 2011.

Our Fiber and Data Segment posted revenue of $13.4 million in the first quarter
of 2012, an increase of $2.4 million or 22% compared to 2011. Organic business
revenue grew by $1.3 million with the balance attributable to one month of
results from our IdeaOne Telecom acquisition which closed on March 1, 2012. Our
Equipment Segment had a high of $17.4 million of revenue in the first quarter of
2012, a $7.0 million increase from the first quarter of 2011 driven by advanced
unified communication and data center equipment sales.

Revenue from our Telecom Segment declined by $1,035,000, or 6%, reflecting a
decline in legacy voice and switched access services. Network access services
revenue fell by $909,000 or 16%, reflecting the continued decline in these
services as well as the additional impact of certain provisions of FCC order
11-161, released in November 2011. Intense competition and price compression
impacted broadband services revenue, which was 1% lower in the first quarter of
2012 compared to 2011. While we cannot predict the ultimate impact of the new
FCC order, we anticipate that the new requirements could increase the level of
decline in our legacy services. This decline, combined with an intense
competitive environment, provides challenges for our Telecom Segment revenue
streams. Offsetting a portion of the revenue decline within the Telecom Segment
was a $468,000 or 64% increase in bill processing revenue resulting from the
growth in our external customer base utilizing our billing and customer
management software system SuiteSolution®.

Total costs and expenses increased by 23% in the first quarter of 2012 compared
to 2011, reflecting higher sales volumes in our Equipment Segment combined with
continued investment in growing our Fiber and Data Segment. Depreciation
increased 8% driven by our acquisition of IdeaOne Telecom and higher levels of
capital spending totaling $22.9 million in 2010 and $21.4 million in 2011. We
have made significant investments in our network during the last two years
expanding our fiber footprint and increasing capacity in strategic locations.

These investments, which increase costs in advance of generating revenue,
provide the groundwork for continued growth in our Fiber and Data Segment.

18
——————————————————————————–

We completed our IdeaOne Telecom acquisition on March 1, 2012, utilizing a $22
million expansion of our senior credit facility. This raised our debt obligation
(short and long-term) from $120.2 million at December 31, 2011 to $141.9 million
at March 31, 2012. We have maintained a leverage ratio of approximately 2.9
times debt to EBITDA as defined in our credit agreement, well within acceptable
limits for our agreement and our industry. Interest expense in the first quarter
of 2012 was $296,000 or 28% higher than the same period in 2011 as a result of
higher interest rates associated with our new credit facility and increased debt
levels.

19——————————————————————————–

Table of Contents

Fiber and Data Segment
The following table provides a breakdown of the Fiber and Data Segment operating
results.

Fiber and Data

Three Months Ended March 31 %

(Dollars in thousands) 2012 2011 ChangeOperating revenue before intersegment eliminations:

Services $ 13,219 $ 10,861 22 %

Intersegment 193 161 20 %

Total operating revenue $ 13,412 $ 11,022 22 %

Cost of services
(excluding depreciation and amortization) 6,595 5,821 13 %

Selling, general and administrative expenses 2,506 2,130 18 %

Depreciation and amortization 1,966 1,586 24 %

Total costs and expenses 11,067 9,537 16 %

Operating income $ 2,345 $ 1,485 58 %

Net income $ 1,395 $ 883 58 %

Capital expenditures $ 1,965 $ 1,806 9 %

Revenue
Fiber and Data. We serve wholesale, enterprise and small-to-medium business
customers with high-speed communications products delivered through our
extensive regional fiber network and community access rings supported by a
24x7x365 network operations center. This revenue stream is generally based on
multi-year contracts with retail businesses, regional and national service
providers and wireless carriers, building a solid monthly recurring revenue
base.

Fiber and Data services revenue increased $2,390,000 or 22% in the first quarter
of 2012 compared to the same period in 2011. Organic growth in the first quarter
was $1,315,000 or 12%, led by revenue from data services such as Ethernet,
Multi-Protocol Label Switching ("MPLS"), Internet, data center services and VoIP
and dynamic services. Our acquisition of IdeaOne Telecom, a metro fiber network
provider serving Fargo, ND, was completed on March 1 and contributed $1,075,000
to revenue in the first quarter of 2012.

The IdeaOne acquisition advances our strategy of growing our business and
broadband services, as approximately 85% of IdeaOne revenue comes from business
services. In 2010, we extended our fiber network to Fargo, ND and will further
accentuate the capabilities and services we have in this market when we complete
our Broadband stimulus route from Brainerd, MN to Fargo, ND in 2012. The IdeaOne
acquisition adds 225 fiber route miles to our regional network, extending to 650
on-net fiber-lit buildings within the Fargo market.

Total Cost and Expenses

IdeaOne Telecom's operating results are reflected in our financial results of
this Segment beginning on March 1, 2012. The primary drivers of expense
variances are noted below with the balance of the increases resulting from
including this new entity, which is reported within the Fiber and Data Segment.

20——————————————————————————–

Table of Contents

Cost of Services (excluding Depreciation and Amortization)

Fiber and Data Segment cost of services increased by $774,000 or 13% in the
first quarter of 2012 as compared to the same period in 2011. The primary
drivers of the increase in cost of services were a $145,000 increase in
volume-driven circuit costs supporting increased revenue and a $125,000 increase
in wages and benefits supporting the organic growth in Fiber and Data services.

Selling, General and Administrative Expenses

Fiber and Data Segment selling, general and administrative expenses increased
$376,000 or 18% in the first quarter of 2012 as compared to the same period in
2011 primarily due to a $139,000 increase in corporate overhead costs and a
$110,000 increase in wages and benefits.

Depreciation and Amortization

Fiber and Data Segment depreciation and amortization increased by $380,000 or
24% in the first quarter of 2012 as compared to the same period in 2011. This
increase was primarily due to our IdeaOne Telecom acquisition which added
$283,000 of depreciation and amortization to the first quarter and the
investments made in our fiber and broadband network during the past several
years. Amortization expense remained constant except for the addition of IdeaOne
Telecom intangible assets.

21——————————————————————————–

Table of Contents

Equipment Segment
The following table provides a breakdown of the Equipment Segment operating
results.

Equipment

Three Months Ended March 31 %

(Dollars in thousands) 2012 2011 Change

Operating revenue before intersegment eliminations:
Equipment $ 15,299 $ 8,195 87 %

Services 2,122 2,229 -5 %

Total operating revenue $ 17,421 $ 10,424 67 %

Cost of sales
(excluding depreciation and amortization) 13,466 6,999 92 %

Cost of services

(excluding depreciation and amortization) 1,712 1,678 2 %

Selling, general and administrative expenses 1,352 1,181 14 %

Depreciation and amortization 71 68 4 %

Total costs and expenses 16,601 9,926 67 %

Operating income $ 820 $ 498 65 %

Net income $ 486 $ 295 65 %

Capital expenditures $ 73 $ 6 1117 %

Revenue

Equipment. We are a Master Unified Communications and Gold Certified Cisco
partner providing Cisco equipment solutions and support for a broad spectrum of
business clients. Our equipment solutions team plans, designs and implements
networks utilizing emerging technological advancements including TelePresence
Video, Unified Communications and data center solutions. Equipment sales are
non-recurring in nature, making this revenue dependent upon new sales to
existing and new customers, which makes it susceptible to fluctuations on a
quarter to quarter basis based on customer contracts and project completion.

Equipment revenue was $15,299,000, an increase of $7,104,000 or 87% in the first
quarter of 2012 compared to the same period in 2011, and $6,982,000 higher than
our fourth quarter 2011 equipment revenue. In the first quarter we experienced
strong sales of advanced unified communication and data center equipment and
also had success selling new technology advanced products including converged
infrastructure solutions which enable our customers to rapidly deploy cloud
computing applications.

Equipment Services. Services include network assessments, planning, design,
implementation, and training. Maintenance contracts ("Smartnet" contracts) are
offered in collaboration with Cisco systems. Our total care support team
provides a single-point-of-contact for the support of applications, systems and
infrastructure. We also offer security solutions combining leading network
security products with our experience and expertise in integrated communications
systems.

Services revenue declined by $107,000 or 5% in the first quarter of 2012
compared to the same period in 2011, primarily due a decline of $169,000 in
contract services revenue which includes the design, configuration and
installation of voice and data equipment. In late 2010, we implemented a new
approach to our network and equipment monitoring services in an attempt to grow
recurring revenue streams in the Equipment Segment. In the first quarter of
2012, we realized a year-over-year growth rate of 29% in this area, partially
offsetting the decline in contract services.

22——————————————————————————–

Table of Contents

Cost of Sales

Equipment Segment cost of sales is composed primarily of equipment material
costs. Higher equipment sales volume in the first quarter of 2012 as compared to
the same period in 2011 drove the $6,467,000 or 92% increase in cost of sales.

Labor associated with installation of the equipment is included in cost of
services (excluding depreciation and amortization) described below.

Cost of Services (excluding Depreciation and Amortization)

Equipment Segment cost of services increased by $34,000 or 2% in the first
quarter of 2012 as compared to the same period in 2011 due to an increase of
$171,000 in wages and benefit costs, partly offset by a $76,000 reduction in
contract labor resources.

Selling, General and Administrative Expenses

Equipment Segment selling, general and administrative expenses increased
$171,000 or 14% in the first quarter of 2012 as compared to the same period in
2011 primarily due to a $103,000 increase in corporate overhead costs and a
$83,000 increase in wages and benefits.

Depreciation and Amortization

Equipment Segment depreciation and amortization increased by $3,000 or 4% in the
first quarter of 2012 as compared to the same period in 2011.

23——————————————————————————–

Table of Contents

Telecom Segment
The following table provides a breakdown of the Telecom Segment operating
results.

Telecom

Three Months Ended March 31 %

(Dollars in thousands) 2012 2011 ChangeOperating revenue before intersegment eliminations:

Local Service $ 3,429 $ 3,693 -7 %

Network Access 4,903 5,812 -16 %

Broadband 5,002 5,054 -1 %

Directory 782 872 -10 %

Long Distance 648 729 -11 %

Bill Processing 1,205 737 64 %

Intersegment 410 412 0 %

Other 335 440 -24 %

Total Telecom operating revenue $ 16,714 $ 17,749 -6 %

Total Telecom revenue before intersegment eliminations

Unaffiliated customers $ 16,304 $ 17,337
Intersegment 410 412
16,714 17,749

Cost of services (excluding depreciation and amortization) 7,561 7,761 -3 %

Selling, general and administrative expenses 2,833 3,084 -8 %

Depreciation and amortization 4,133 4,003 3 %

Total Telecom costs and expenses 14,527 14,848 -2 %

Operating Income $ 2,187 $ 2,901 -25 %

Net income $ 1,299 $ 1,716 -24 %

Capital expenditures $ 1,596 $ 1,930 -17 %

Key metrics
Business access lines 21,954 23,932 -8 %

Residential access lines 23,679 26,678 -11 %

Total access lines 45,633 50,610 -10 %

Long distance customers 31,498 33,513 -6 %

Digital Subscriber Line customers 19,451 20,032 -3 %

Digital TV customers 10,247 10,591 -3 %

Revenue
Local Service. We receive monthly recurring revenue from end-user customers
primarily for providing local telephone services, enhanced calling features,
miscellaneous local services and reciprocal compensation from wireless carriers.

Local service revenue declined by $264,000 or 7% in the first quarter of 2012 as
compared to the same period in 2011 with the largest declines experienced in
residential access and feature revenue. Total access lines as of March 31, 2012
were 45,633, down 4,977 subscribers or 10% from March 31, 2011. The Telecom
Segment's access lines declined at a higher rate than we have experienced in
recent years. Some of our own business customers' are replacing traditional
wire-line services with our VoIP services, primarily our Enventis Hosted VoIP
Solution, Singlelink which is recorded within the Fiber and Data Segment. Also
contributing to the decline in our business lines was the modification of a
contract with an external communications provider as required by traffic
stimulation provisions in FCC order 11-161.

24
——————————————————————————–

Voice service revenue will continue to be adversely impacted by the decline in
access lines due to intense competition, changes within the regulatory
environment and continued technological advances providing alternative
communications offerings for our customers. In an effort to manage the decline
we emphasize our service bundles, which include local phone service and long
distance as well as a variety of features and broadband options including: DSL,
high-speed internet and digital TV.

Network Access. We receive a variety of fees and settlements to compensate us
for the origination, transport, and termination of calls and traffic on our
network. These include the fees assessed to interexchange carriers, subscriber
line charges imposed on end-users, and settlements from nationally administered
and jointly funded revenue pools.

Network access revenue declined by $909,000 or 16% in the first quarter of 2012
as compared to the same period in 2011. Declining switched minutes-of-use from
access lines and carriers and lower end-user fees accounted for $443,000 of the
first quarter decline. In the first quarter of 2012 we also experienced a
one-time reduction of support totaling $152,000 from the National Exchange
Carrier Association ("NECA"). At December 31, 2011 a type of USAC support
reimbursing us for significant investments made in our infrastructure expired
lowering year-over-year revenue by approximately $200,000. We believe the loss
of this support mechanism combined with the business customer loss noted below
will increase the percentage decline we will realize in this revenue stream in
2012.

In November 2011, the FCC released order 11-161, which contains comprehensive
rules reforming all forms of intercarrier compensation and implements a new
support mechanism for the deployment of broadband. Generally, the intercarrier
compensation reform sets forth a path toward a "Bill & Keep" method where there
is no compensation for termination of traffic received from another carrier. The
timeline for this transition has numerous steps depending on the type of traffic
exchanged and the regulated status of the affected local exchange carrier. We
anticipate that these changes will increase the rate of decline in access
revenue that we have experienced in prior years and are reflecting these
declines in our 2012 and long-term plans.

We felt the first impact of the order in January of 2012, when we modified a
contract with an external communications provider due to traffic stimulation
provisions in the order. This drove our business line loss percentage to top 8%
in the first quarter of 2012, up from loss rates of 3% to 4% in 2011 and 2010,
respectively. We will experience additional line loss in the second quarter of
2012 due to this contract termination and then anticipate 2012 business line
loss rates to return to levels realized in the past.

Long Distance. We charge our end-user customers for toll or long distance
service on either a per-call or flat-rate basis. Services include the provision
of directory assistance, operator service, and long distance private lines.

Long distance revenue declined by $81,000 or 11% in the first quarter of 2012 as
compared to the same period 2011. This decrease is primarily due to the decline
in our customer base, a growing number of residential customers selecting
unlimited long distance calling plans and our decision to reduce
rates-per-minute charged to customers due to aggressive competition in the
markets we serve.

Broadband. We receive monthly recurring revenue for a variety of residential and
business broadband data network services. Broadband services include: DSL
service, Internet service, digital TV services, and business Ethernet and other
data services.

Broadband revenue declined by $52,000 or 1% in the first quarter of 2012 as
compared to the same period in 2011 primarily due to a decline in DSL service
revenue driven by a 3% loss in our customer base combined with intense price
compression and competition from cable providers within our markets. Also
contributing to the decline in Telecom broadband revenue is the replacement of
Ethernet services by our enhanced MPLS service offering which is recorded within
our Fiber and Data Segment. This migration represents success within our
business customer retention strategy and testifies to the strength and diversity
of our overall product and service offering portfolio.

Directory. We receive monthly recurring revenue from end-user subscribers for
yellow page advertising in our telephone directories.

Directory revenue declined by $90,000 or 10% in the first quarter of 2012 as
compared to the same period in 2011. This is primarily due to decreased demand
for published advertising by local and national businesses and increased
competition from other directories. We expect the trend of declining directory
revenue to continue.

25——————————————————————————–

Bill Processing. We provide data processing and billing services to other
communication service providers. We collect a combination of monthly recurring
revenue, software license fees and integration services revenue from companies
with whom we have established long-term data processing relationships.

Bill processing revenue increased $468,000 or 64% in the first quarter of 2012
compared to 2011. We continue to have success selling our billing and customer
management software system SuiteSolution® to competitive communications
providers. SuiteSolution® provides communications billing, customer management
and operations support systems coupled with the latest in database and screen
presentation technology. Growth in our external customer base utilizing
SuiteSolution® has increased demand for contract and support services
strengthening revenue streams from this business.

Other Revenue. Other revenue consists primarily of sales of wholesale contract
services, late fees applied to subscriber billings, and add, move, and change
revenue on customer premise equipment.

Other revenue declined $105,000 or 24% in the first quarter of 2012 compared to
2011 primarily due to a decline in revenue from a joint network arrangement
combined with a decline in wholesale contract service revenue.

Cost of Services (excluding Depreciation and Amortization)

Cost of services (excluding depreciation and amortization) decreased by $200,000
or 3% in the first quarter of 2012 compared to 2011. The primary cause was a
decline of $157,000 in expense related to the loss of a external communications
provider, helping to offset the declines in revenue noted in our discussion of
network access revenue. Direct product expenses declined slightly on a
year-over-year basis offset by an increase in programming costs of $99,000

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $251,000 or 8% in the
first quarter of 2012 compared to 2011. This decline is primarily due to a
decrease in corporate cost of $254,000.

Depreciation and Amortization

Depreciation and amortization expense increased by $130,000 or 3% in the first
quarter of 2012 compared to 2011. This increase is primarily due to our
continued investment to support broadband infrastructure enhancements on our
network.

Consolidated Results

Interest Expense

Consolidated interest expense increased 28% in the three months ended March 31,
2012 compared to March 31, 2011. The quarterly increase is driven by higher
interest rates associated with our debt refinancing which took place in the
third quarter of 2011 and higher debt levels. For these reasons, we anticipate
interest expense in 2012 will be approximately $1,500,000 higher than 2011. The
outstanding balance of our debt obligations (long-term and current portion) has
increased $23,107,000 from $118,786,000 at March 31, 2011 to $141,893,000 as of
March 31, 2012. The March 31, 2012 debt balance is $21,658,000 higher than the
December 31, 2011 balance of $120,235,000. The higher debt balance is associated
with the $22,000,000 incremental debt we borrowed to fund the IdeaOne
acquisition.

Income Taxes

Our effective income tax rate for the first quarter of 2012 and 2011 was 40.6%
and 40.7%, respectively. The effective tax rate from operations differs from the
federal statutory rate primarily due to state income taxes.

26——————————————————————————–

Table of Contents

Liquidity and Capital Resources

Capital Structure

The total capital structure (long-term and current maturities of long-term debt
obligations plus shareholders' equity) was $185,876,000 at March 31, 2012,
reflecting 24% equity and 76% debt. This compares to a total capital structure
of $163,432,000 at December 31, 2011, reflecting 26% equity and 74% debt. In the
communications industry, debt financing is most often based on multiples of
operating cash flows. Specifically, our current use of the senior credit
facility is in a ratio of approximately 2.9 times debt to Earnings before
Interest, Tax, Depreciation and Amortization, ("EBITDA") as defined in our
credit agreement; well within the acceptable limit for our agreement of 3.5
times debt to EBITDA and our industry.

We employ an extended term payable financing arrangement for the equipment
provisioning portion of our Equipment Segment and view this arrangement as a
structured accounts payable that is paid within 60 days with no separate
interest charge. As such, the extended term payable financing amount of
$8,615,000 and $6,920,000 as of March 31, 2012 and December 31, 2011,
respectively, is not considered to be part of our capital structure and has been
excluded from the above amounts (see Note 8 to the Notes to the Consolidated
Financial Statements).

Internal operations of our business continue to be our primary source of
liquidity. We have invested in capital expenditures, paid interest, taxes,
dividends and debt obligations. We have not changed our equity capitalization
and equity was not a source of liquidity during this period. Cash and cash
equivalents increased approximately $7,700,000 from $13,057,000 at December 31,
2011 to $20,724,000 at March 31, 2012.

Cash Flows

Management believes we will have the ability to meet our current and long-term
liquidity and capital requirements through operating cash flows, borrowings
available under our credit facility and other internal and available external
resources. For temporary increases in cash demand we use our cash inflow and
utilize our senior credit facility for more significant fluctuations in
liquidity driven by growth initiatives. These sources coupled with our access to
a $30,000,000 revolving credit facility provide further assurance against
interruption in our business plans due to financing. Our primary uses of cash
include ongoing operating requirements, capital expenditures, scheduled
principal and interest payments on our credit facility, temporary financing of
trade accounts receivable and the payment of dividends as they are declared.

While it is difficult for us to predict the impact general economic conditions
may have on our business, we believe that we will be able to meet our current
and long-term cash requirements through our operating cash flows. As of March
31, 2012 we were in full compliance with our debt covenants and anticipate that
we will be able to plan for and match future liquidity needs with future
internal and available external resources. Our senior debt agreement will be the
sole external source of financing.

We feel we can adjust the timing or the number of strategic and growth
initiatives according to any limitation we may face or be imposed by our capital
structure or sources of financing. We do not anticipate our capital structure
will limit future growth initiatives over the next 12 months.

Cash from operations represents the amount of cash generated by our daily
operations after the payment of operating obligations. This continues to be our
primary source of funds. Cash generated from operations in the first three
months of 2012 was $17,932,000 up $1,035,000 compared to the first three months
of 2011. The increase in cash provided by operating activities is driven by the
decrease in our inventory balance primarily attributable to our Equipment
Segment which is dependent on the timing and volume of equipment orders. This
was offset by a decrease in the receipt of routine income tax refunds related to
the benefit of bonus deprecation permitted by legislation signed in 2010.

Cash used for investing activities was $31,814,000 up $28,141,000 driven by our
acquisition of IdeaOne Telecom for an adjusted purchase price of $28,180,000.

The acquisition was funded partially with cash reserves and the remainder with
additional term loan debt. Capital spending decreased 3% when comparing 2012 and
2011 after taking into account the receipt of $1,321,000 in BTOP grant
reimbursement. We continue to invest in success-based and network expansion
projects along with required spending to maintain our network. Investment in
business services will continue to support growth and demand in backhaul
transport services and optimize long-term revenue opportunities. Overall, 2012
capital spending is expected to range between $25,000,000-$29,000,000 (net of
government grant).

27——————————————————————————–

Table of Contents

In 2012, construction will continue on our Greater Minnesota Broadband
Collaborative project which is being funded in part by the NTIA Broadband
Technology Opportunities Program. The project will extend our fiber-optic
network across greater Minnesota to provide governmental, educational and
healthcare organizations with a high-capacity broadband network. The project is
anticipated to be complete by August 2013.

Financing activities primarily consist of borrowings and payments on our credit
facility and the payment of dividends to our shareholders. Cash provided by
financing activities was $21,549,000 in 2012 compared to cash used for financing
activities of $3,438,000 in 2011. On March 1, 2012 we entered into an
Incremental Term credit facility for $22,000,000, an expansion of our senior
credit facility we entered into in August 2011, with the proceeds used to fund
our IdeaOne Telecom acquisition. Due to the timing and volume of equipment
orders in our Equipment Segment, there was a $1,695,000 increase in our extended
term payable in the first three months of 2012 compared to a $1,296,000 decrease
in 2011. We have used $1,877,000 and $1,797,000 in cash to make dividend
payments to our shareholders in the first three months of 2012 and 2011,
respectively.

Our long-term obligations, including current maturities of debt and capital
leases as of March 31, 2012 and December 31, 2011 were $141,893,000 and
$120,235,000, respectively. Our credit facility requires us to comply with
specified financial ratios and tests. The financial ratios required by our
credit facility are not calculated in accordance with accounting principles
generally accepted in the United States ("non-GAAP financial measures"). These
calculations allow for the inclusion of historical EBITDA results for IdeaOne
Telecom, our acquisition which closed on March 1, 2012. The non-GAAP financial
measures are presented below for the purpose of demonstrating compliance with
our debt covenants:

(Dollars in thousands)
Leverage Ratio: March 31, 2012
(A) Total debt $ 141,893
(B) EBITDA per our credit agreement

Three Months Ended 6-30-11 10,698

Three Months Ended 9-30-11 12,162

Three Months Ended 12-31-11 10,069

IdeaOne Telecom Historical EBITDA (reflects eleven months) 4,135

Three Months Ended 3-31-12 (reflects one month of IdeaOne) 11,466

Total EBITDA per our credit agreement $ 48,530

Total Leverage Ratio (A)/(B) 2.9

Maximum leverage ratio allowed 3.5

March
31,
Debt Service Coverage Ratio: 2012

(A) EBITDA per our credit agreement, minus $ 48,530
Income Taxes (6,313 )
$ 42,217
(B) the sum of (i) all scheduled principal payments to be made on debt
and (ii) interest expense

6,166

Debt Service Coverage Ratio (A)/(B) 6.8

Minimum debt service ratio allowed 2.5

Working Capital

Working capital (i.e. current assets minus current liabilities) was $20,841,000
as of March 31, 2012 compared to working capital of $23,079,000 as of December
31, 2011. The ratio of current assets to current liabilities was 1.7 and 1.8 as
of March 31, 2012 and December 31, 2011.

28——————————————————————————–

Table of Contents

New Accounting Pronouncements

The financial statement impact relating to new accounting standards that have
not yet been adopted by us can be found under Note 1. Basis of Presentation and
Consolidation – "Recent Accounting Developments."

Reconciliation of non-GAAP financial measures

In addition to the results reported in accordance with US GAAP, we also use
certain non-GAAP measures including EBITDA (as defined in our credit agreement)
to evaluate operating performance and to facilitate the comparison of our
historical results and trends. These non-GAAP measures are also used to manage
and evaluate the operating performance of our reportable segments. These
financial measures should not be considered in isolation or as a substitute for
net income (loss) as a measure of performance and net cash provided by operating
activities as a measure of liquidity. Reconciliations to the most directly
comparable GAAP measure are provided below.

Three months ended
December September
(Dollars in thousands) March 31, 2012 31, 2011 30, 2011 June 30, 2011

Reconciliation of net income to EBITDA:
Net income $ 2,322 $ 1,430 $ 2,971 $ 2,694

Add:
Depreciation 6,056 5,812 5,706 5,593

Amortization 138 89 88 89

Interest expense 1,364 1,315 1,487 1,015

Income taxes 1,586 913 1,910 1,307

Acquisition related expenses – 510 – -

EBITDA $ 11,466 $ 10,069 $ 12,162 $ 10,698