Consolidated Communications Holdings
Consolidated Communications Holdings, Inc. (Form: 10-Q, Received: 08/10/2006 09:34:14)
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2006
or
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from                          to                      
Commission File Number 000-51446
CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   02-0636095
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
121 South 17 th Street
Mattoon, Illinois 61938-3987

(Address of principal executive offices)
Registrant’s telephone number, including area code: (217) 235-3311
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Applicable Only to Corporate Issuers
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer o                 Accelerated Filer o                 Non-accelerated Filer  þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The number of shares of the registrant’s common stock, $.01 par value, outstanding as of August 4, 2006 was 26,006,472
 
 

 


 

TABLE OF CONTENTS
         
       
 
       
       
       
       
       
 
       
       
 
       
       
       
       
       
  EX-31.1: CERTIFICATION
  EX-31.2: CERTIFICATION
  EX-32.1: CERTIFICATION

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Communications Holdings, Inc.
Condensed Consolidated Statements of Income

(Dollars in thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Revenues
  $ 79,340     $ 78,264     $ 158,766     $ 158,036  
Operating expenses:
                               
Cost of services and products (exclusive of depreciation and amortization shown separately below)
    23,951       24,353       48,624       48,770  
Selling, general and administrative expenses
    24,671       16,902       47,183       43,098  
Depreciation and amortization
    16,844       17,114       33,915       33,932  
 
                       
 
Income from operations
    13,874       19,895       29,044       32,236  
Other income (expense):
                               
Interest income
    429       278       615       531  
Interest expense
    (10,553 )     (11,835 )     (20,781 )     (23,529 )
Investment income
    1,398       524       2,983       952  
Minority interest
    (115 )     (183 )     (296 )     (348 )
Other, net
    103       2,865       47       2,989  
 
                       
 
Income before income taxes
    5,136       11,544       11,612       12,831  
Income tax (benefit) expense
    (3,089 )     4,385       (161 )     4,971  
 
                       
 
Net income
    8,225       7,159       11,773       7,860  
 
Dividends on redeemable preferred shares
          (4,498 )           (9,121 )
 
                       
Net income (loss) applicable to common stockholders
  $ 8,225     $ 2,661     $ 11,773     $ (1,261 )
 
                       
Net income (loss) per common share —
                               
Basic
  $ 0.28     $ 0.29     $ 0.40     $ (0.14 )
 
                       
Diluted
  $ 0.28     $ 0.27     $ 0.40     $ (0.14 )
 
                       
 
                               
Cash dividends declared per common share
  $ 0.39     $     $ 0.77     $  
 
                       
See accompanying notes

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Consolidated Communications Holdings, Inc.
Condensed Consolidated Balance Sheets

(Dollars in thousands, except share and per share amounts)
                 
    June 30,   December 31,  
    2006     2005  
    (unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 30,442     $ 31,409  
Accounts receivable, net of allowance of $3,041 and $2,825, respectively
    33,010       35,503  
Inventories
    3,753       3,420  
Deferred income taxes
    3,111       3,111  
Prepaid expenses and other current assets
    8,427       5,592  
 
           
 
Total current assets
    78,743       79,035  
 
Property, plant and equipment, net
    325,337       335,088  
Intangibles and other assets:
               
Investments
    38,894       44,056  
Goodwill
    314,243       314,243  
Customer lists, net
    128,374       135,515  
Tradenames
    14,546       14,546  
Deferred financing costs and other assets
    28,440       23,467  
 
           
Total assets
  $ 928,577     $ 945,950  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 7,085     $ 11,743  
Advance billings and customer deposits
    15,392       14,203  
Dividends payable
    11,540       11,537  
Accrued expenses
    23,319       30,376  
 
           
Total current liabilities
    57,336       67,859  
 
Long-term debt
    555,000       555,000  
Deferred income taxes
    64,541       66,228  
Pension and postretirement benefit obligations
    53,784       53,185  
Other liabilities
    1,269       1,476  
 
           
Total liabilities
    731,930       743,748  
 
           
 
               
Minority interest
    3,269       2,974  
 
           
 
               
Stockholders’ equity
               
Common stock, $0.01 par value, 100,000,000 shares, authorized, 29,788,851 and 29,775,010 issued and outstanding, respectively
    297       297  
Additional paid in capital
    255,412       254,162  
Accumulated deficit
    (68,806 )     (57,533 )
Accumulated other comprehensive income
    6,475       2,302  
 
           
Total stockholders’ equity
    193,378       199,228  
 
           
Total liabilities and stockholders’ equity
  $ 928,577     $ 945,950  
 
           
See accompanying notes

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Consolidated Communications Holdings, Inc.
Consolidated Statements of Cash Flows

(Dollars in thousands)
(Unaudited)
                 
    Six Months Ended June 30,  
    2006     2005  
OPERATING ACTIVITIES
               
Net income
  $ 11,773     $ 7,860  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    33,915       33,932  
Provision for bad debt losses
    2,499       2,525  
Deferred income tax
    (1,687 )     4,889  
Pension curtailment gain
          (7,880 )
Partnership income
    (2,828 )     (705 )
Non-cash stock compensation
    1,250        
Minority interest in net income of subsidiary
    296       348  
Amortization of deferred financing costs
    1,619       1,457  
Changes in operating assets and liabilities:
               
Accounts receivable
    (6 )     (605 )
Inventories
    (333 )     341  
Other assets
    (2,987 )     (5,848 )
Accounts payable
    (4,658 )     (583 )
Accrued expenses and other liabilities
    (5,474 )     (6,464 )
 
           
Net cash provided by operating activities
    33,379       29,267  
 
           
INVESTING ACTIVITIES
               
Proceeds from sale of investments
    5,921        
Capital expenditures
    (17,221 )     (14,830 )
 
           
Net cash used in investing activities
    (11,300 )     (14,830 )
 
           
FINANCING ACTIVITIES
               
Payments made on long-term obligations
          (10,109 )
Payment of deferred financing costs
          (755 )
Purchase of treasury shares
          (12 )
Distribution to preferred shareholders
          (37,500 )
Dividends on common stock
    (23,046 )      
 
           
Net cash used in financing activities
    (23,046 )     (48,376 )
 
           
 
Net decrease in cash and cash equivalents
    (967 )     (33,939 )
Cash and cash equivalents at beginning of period
    31,409       52,084  
 
           
Cash and cash equivalents at end of period
  $ 30,442     $ 18,145  
 
           
See accompanying notes

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Consolidated Communications Holdings, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
Six Months Ended June 30, 2006

(Dollars in thousands)
(Unaudited)
                                                 
                                    Accumulated        
                                    Other        
    Common Stock     Additional     Accumulated     Comprehensive        
    Shares     Amount     Paid in Capital     Deficit     Income     Total  
Balance, January 1, 2006
    29,775,010     $ 297     $ 254,162     $ (57,533 )   $ 2,302     $ 199,228  
 
                                               
Net income
                      11,773             11,773  
Dividends on common stock
                      (23,046 )           (23,046 )
Shares issued under employee plan, net of forfeitures
    13,841                                
Non-cash stock compensation
                1,250                   1,250  
Unrealized gain on marketable securities, net of $34 of tax
                            49       49  
Change in fair value of cash flow hedges, net of $2,479 of tax
                            4,124       4,124  
 
                                   
 
                                               
Balance, June 30, 2006
    29,788,851     $ 297     $ 255,412     $ (68,806 )   $ 6,475     $ 193,378  
 
                                   
See accompanying notes

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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended June 30, 2006 and 2005

(Dollars in thousand, except share and per share amounts)
1. Description of Business
     Consolidated Communications Holdings, Inc. and its wholly owned subsidiaries (the “Company”) operate under the name Consolidated Communications. The Company is an established rural local exchange company (“RLEC”) providing communications services to residential and business customers in Illinois and Texas. With approximately 238,904 local access lines, 45,948 digital subscriber lines (“DSL”) and 4,516 Internet protocol television (“IPTV”) lines, Consolidated Communications offers a wide range of telecommunications services, including local dial tone, custom calling features, private line services, long distance, dial-up and high-speed Internet access, inside wiring service and maintenance, carrier access, telephone directory publishing and billing and collection services. In addition, the Company launched IPTV in selected Illinois markets in 2005 and offers wholesale transport services on a fiber optic network in Texas. The Company also operates a number of complementary businesses, including telephone services to county jails and state prisons, operator services, equipment sales and telemarketing and order fulfillment services.
2. Initial Public Offering
     On July 27, 2005, the Company completed the initial public offering of its common stock (the “IPO”) . The IPO consisted of the sale of 6,000,000 shares of common stock newly issued by the Company and 9,666,666 shares of common stock sold by certain selling stockholders. The shares of common stock were sold at an initial public offering price of $13.00 per share resulting in net proceeds, after deduction of offering costs, to the Company of $67,589. The Company did not receive any proceeds from the sale of common stock by the selling stockholders.
     On July 29, 2005, the underwriters notified the Company of their intention to fully exercise their option to purchase an additional 2,350,000 shares of the Company’s common stock from the selling stockholders at the initial public offering price of $13.00 per share, less the underwriters’ discount. The sale of the over-allotment shares closed on August 2, 2005. The Company did not receive any proceeds from the sale of the over-allotment shares by the selling stockholders.
3. Presentation of Interim Financial Statements
     These unaudited interim condensed consolidated financial statements include the accounts of Consolidated Communications Holdings, Inc. and its wholly owned subsidiaries and subsidiaries in which it has a controlling financial interest. All material intercompany balances and transactions have been eliminated in consolidation. These interim statements have been prepared in accordance with Securities and Exchange Commission (“SEC”) guidelines and do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. These interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of its financial position and results of operations for the interim periods. All such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the financial statements and related notes for the year ended December 31, 2005, which were included in our annual report on Form 10-K previously filed with the SEC.
4. Recent Accounting Pronouncements
     In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 155, “ Accounting for Certain Hybrid Instruments” (“SFAS 155”). SFAS 155 is an amendment of SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities ” (“SFAS 133”) and SFAS No. 140, “ Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

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(“SFAS 140”) and allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 is effective for an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect that the adoption of SFAS 155 will have on the financial condition or results of operations of the Company but does not expect it to have a material impact.
     In June 2006, FASB issued Financial Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“ FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to adopt FIN 48 effective at the beginning of 2007 and is currently evaluating the impact of adopting FIN 48 on its future results of operations and financial condition.
5. Goodwill and Customer Lists
     The following table summarizes the carrying value of goodwill by segment:
                 
    June 30,     December 31,  
    2006     2005  
Telephone Operations
  $ 305,289     $ 305,289  
Other Operations
    8,954       8,954  
 
           
 
  $ 314,243     $ 314,243  
 
           
     The Company’s customer lists consist of an established core base of customers that subscribe to its services. The carrying amount of customer lists is as follows:
                 
    June 30,     December 31,  
    2006     2005  
Gross carrying amount
  $ 167,633     $ 167,633  
Less: accumulated amortization
    (39,259 )     (32,118 )
 
           
Net carrying amount
  $ 128,374     $ 135,515  
 
           
     The aggregate amortization expense associated with customer lists was $3,568 and $3,570 for the three months ended June 30, 2006 and 2005, respectively and was $7,141 and $7,139 for the six months ended June 30, 2006 and 2005, respectively. Customer lists are being amortized using a weighted average life of 11.7 years.
6. Pension Costs and Other Postretirement Benefits
     The Company has several defined benefit pension plans covering substantially all of its hourly employees and certain salaried employees, primarily those located in Texas. The plans provide retirement benefits based on years of service and earnings. The pension plans are generally noncontributory. The Company’s funding policy is to contribute amounts sufficient to meet the minimum funding requirements as set forth in employee benefit and tax laws.
     The Company currently provides other postretirement benefits (“Other Benefits”) consisting of health care and life insurance benefits for certain groups of retired employees. Retirees share in the cost of health care benefits. Retiree contributions for health care benefits are adjusted periodically based upon collective bargaining agreements for former hourly employees and as total costs of the program change for former salaried employees. The Company’s funding policy for retiree health benefits is generally to pay covered expenses as they are incurred. Postretirement life insurance benefits are fully insured.

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     The following tables present the components of net periodic benefit cost:
                                 
    Pension Benefits     Other Benefits  
    2006     2005     2006     2005  
Three months ended June 30,
                               
 
                               
Service cost
  $ 463     $ 843     $ 258     $ 208  
Interest cost
    1,871       2,530       541       384  
Expected return on plan assets
    (2,182 )     (2,715 )     46       3  
Curtailment gain
                      (7,880 )
Other, net
    310       (52 )     (469 )     (172 )
 
                       
Net periodic benefit cost
  $ 462     $ 606     $ 376     $ (7,457 )
 
                       
 
                               
Six months ended June 30,
                               
 
                               
Service cost
  $ 1,020     $ 2,076     $ 374     $ 551  
Interest cost
    3,367       5,145       773       892  
Expected return on plan assets
    (3,805 )     (5,603 )     10        
Curtailment gain
                      (7,880 )
Other, net
    319       26       (454 )     (146 )
 
                       
Net periodic benefit cost
  $ 901     $ 1,644     $ 703     $ (6,583 )
 
                       
     Effective as of April 30, 2005, the Company’s Board of Directors authorized amendments to several of the Company’s benefit plans. The Consolidated Communications Texas Retirement Plan was amended to freeze benefit accruals for all participants other than union participants and grandfathered participants. The rate of accrual for grandfathered participants in this plan was reduced. A grandfathered participant is defined as a participant age 50 or older with 20 or more years of service as of April 30, 2005. The Consolidated Communications Texas Retiree Medical and Life Plan was amended to freeze the Company subsidy for premium coverage as of April 30, 2005 for all existing retiree participants. This plan was also amended to limit future coverage to a select group of future retires who attain at least age 55 and 15 years of service, but with no Company subsidy. The amendments to the Retiree Medical and Life Plan resulted in a $7,880 curtailment gain that was included in general and administrative expenses during the quarter ended June 30, 2005.
7. Long-Term Debt
     Long-term debt consists of the following:
                 
    June 30,     December 31,  
    2006     2005  
Senior Secured Credit Facility
       
Revolving loan
  $     $  
Term loan D
    425,000       425,000  
Senior notes
    130,000       130,000  
 
           
 
    555,000       555,000  
Less: current portion
           
 
           
 
  $ 555,000     $ 555,000  
 
           

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8. Derivative Instruments
     The Company maintains interest rate swap agreements that effectively convert a portion of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense. At June 30, 2006, the Company had interest rate swap agreements covering $357,055 in aggregate principal amount of its variable rate debt at fixed LIBOR rates ranging from 3.0% to 4.8%. The swap agreements expire on December 31, 2006, May 19, 2007 and September 30, 2011. The fair value of the Company’s derivative instruments, comprised solely of its interest rate swaps, amounted to an asset of $10,720 and $4,117 at June 30, 2006 and December 31, 2005, respectively. The fair value is included in other assets. The Company recognized a net credit of $73 and zero in interest expense during the three months ended June 30, 2006 and 2005, respectively related to its derivative instruments and recognized a net credit of $147 and net loss of $50 during the six months ended June 30, 2006 and 2005, respectively. The change in the market value of derivative instruments, net of related tax effect, is recorded in Other Comprehensive Income. The Company recognized comprehensive income/(loss) of $1,690 and ($777) during the three months ended June 30, 2006 and 2005, respectively and comprehensive income of $4,124 and $909 during the six months ended June 30, 2006 and 2005, respectively.
9. Restricted Share Plan
     The following table summarizes restricted stock activity:
         
Restricted shares outstanding, December 31, 2005
    422,065  
Shares granted
    18,000  
Shares vested
     
Shares forfeited or retired
    (4,320 )
 
     
Restricted shares outstanding, June 30, 2006
    435,745  
 
     
     The Company recognized non-cash compensation expense associated with the restricted shares totaling $625 and zero for the three months ended June 30, 2006 and 2005, respectively and $1,250 and zero for the six months ended June 30, 2006 and 2005, respectively. The non-cash compensation expense is included in Selling, General and Administrative Expenses in the accompanying statement of income.
10. Income Taxes
     The following table sets forth the computation of our effective tax rate by period:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Income before income taxes
  $ 5,136     $ 11,544     $ 11,612     $ 12,831  
Income tax (benefit) expense
  $ (3,089 )   $ 4,385     $ (161 )   $ 4,971  
Effective tax rate
    -60.1 %     38.0 %     -1.4 %     38.7 %
     During the second quarter of 2006, the State of Texas enacted new tax legislation. The most significant impact of this legislation on the Company was the modification of the Texas franchise tax calculation to a new “margin tax” calculation used to derive taxable income. This new legislation resulted in a reduction of our net deferred tax liabilities and corresponding credit to our state tax provision of approximately $5,200. Exclusive of this adjustment, our effective tax rate would have been approximately 41% and 43% for the three and six months ended June 30, 2006, respectively.

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11. Net Income (Loss) per Common Share
     The following table sets forth the computation of net income (loss) per common share:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Basic:
                               
 
Net income (loss) applicable to common stockholders
  $ 8,225     $ 2,661     $ 11,773     $ (1,261 )
Weighted average number of common shares outstanding
    29,353,106       9,243,750       29,353,106       9,243,750  
 
                       
Net income (loss) per common share
  $ 0.28     $ 0.29     $ 0.40     $ (0.14 )
 
                       
Diluted:
                               
 
Net income (loss) applicable to common stockholders
  $ 8,225     $ 2,661     $ 11,773     $ (1,261 )
Weighted average number of common shares outstanding
    29,788,851       9,996,319       29,788,685       9,243,750  
 
                       
Net income (loss) per common share
  $ 0.28     $ 0.27     $ 0.40     $ (0.14 )
 
                       
     Non-vested shares issued pursuant to the Restricted Share Plan (Note 9) were considered outstanding for the computation of diluted net income per share as the recipients are entitled to dividends and voting rights. The non-vested shares were not considered outstanding for the computation of basic and diluted net loss per share during the six months ended June 30, 2005 as their effect was anti-dilutive.
12. Other Comprehensive Income
     The following table presents the components of comprehensive income:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Net income
  $ 8,225     $ 7,159     $ 11,773     $ 7,860  
Other comprehensive income:
                               
Unrealized gain on marketable securities, net of tax
                49        
Change in fair value of cash flow hedges, net of tax
    1,690       (777 )     4,124       909  
 
                       
Total comprehensive income
  $ 9,915     $ 6,382     $ 15,946     $ 8,769  
 
                       
13. Business Segments
     The Company is viewed and managed as two separate, but highly integrated, reportable business segments, “Telephone Operations” and “Other Operations”. Telephone Operations consists of a wide range of telecommunications services, including local dial tone, custom calling features, private line services, long-distance, dial-up and high speed Internet access, IPTV, inside wiring service and maintenance, carrier access, wholesale

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transport services on a fiber optic network, telephone directory publishing and billing and collection services. The Company also operates a number of complementary businesses that comprise “Other Operations”, including telephone services to county jails and state prisons, operator services, equipment sales and telemarketing and order fulfillment services. Management evaluates the performance of these business segments based upon revenue, gross margins, and net operating income.
                         
    Telephone     Other        
    Operations     Operations     Total  
Three months ended June 30, 2006:
                       
 
                       
Operating revenues
  $ 69,672     $ 9,668     $ 79,340  
Cost of services and products
    17,823       6,128       23,951  
 
                 
 
    51,849       3,540       55,389  
Operating expenses
    21,668       3,003       24,671  
Depreciation and amortization
    15,506       1,338       16,844  
 
                 
Operating income (loss)
  $ 14,675     $ (801 )   $ 13,874  
 
                 
 
                       
Three months ended June 30, 2005:
                       
 
                       
Operating revenues
  $ 68,544     $ 9,720     $ 78,264  
Cost of services and products
    18,170       6,183       24,353  
 
                 
 
    50,374       3,537       53,911  
Operating expenses
    14,465       2,437       16,902  
Depreciation and amortization
    15,832       1,282       17,114  
 
                 
Operating income (loss)
  $ 20,077     $ (182 )   $ 19,895  
 
                 
 
                       
Six months ended June 30, 2006:
                       
 
                       
Operating revenues
  $ 139,029     $ 19,737     $ 158,766  
Cost of services and products
    35,985       12,639       48,624  
 
                 
 
    103,044       7,098       110,142  
Operating expenses
    41,247       5,936       47,183  
Depreciation and amortization
    31,203       2,712       33,915  
 
                 
Operating income (loss)
  $ 30,594     $ (1,550 )   $ 29,044  
 
                 
 
                       
Six months ended June 30, 2005
                       
 
                       
Operating revenues
  $ 139,563     $ 18,473     $ 158,036  
Cost of services and products
    36,979       11,791       48,770  
 
                 
 
    102,584       6,682       109,266  
Operating expenses
    38,090       5,008       43,098  
Depreciation and amortization
    31,379       2,553       33,932  
 
                 
Operating income (loss)
  $ 33,115     $ (879 )   $ 32,236  
 
                 

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14. Subsequent event
     During July 2006, the Company entered into an agreement to repurchase and retire approximately 3.8 million shares of its common stock from Providence Equity for approximately $56,736, or $15.00 per share. The transaction closed on July 28, 2006. With this transaction, Providence Equity sold its entire position in the Company, which, prior to the transaction, totaled approximately 12.7 percent of the Company’s outstanding shares of common stock. This was a private transaction and did not decrease the Company’s publicly traded shares. The Company financed this repurchase using approximately $17,736 of cash on hand and $39,000 of additional term-loan borrowings.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
      We present below Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Consolidated Communications Holdings, Inc. (“we”, “our”, the “Company” or “CCHI”) on a consolidated basis. The following discussion should be read in conjunction with our historical financial statements and related notes contained elsewhere in this Report.
Forward-Looking Statements
     Any statements contained in this Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words “anticipates”, “believes”, “expects”, “intends”, “plans”, “estimates”, “targets”, “projects”, “should”, “may”, “will” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are contained throughout this Report, including, but not limited to, statements found in this Part I – Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Part I – Item 3 – “Quantitative and Qualitative Disclosures about Market Risk” and Part II – Item 1 – “Legal Proceedings”. Such forward-looking statements reflect, among other things, our current expectations, plans, strategies and anticipated financial results and involve a number of known and unknown risks, uncertainties and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including but not limited to:
    various risks to stockholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to our current dividend policy;
 
    various risks to the price and volatility of our common stock;
 
    our substantial amount of debt and our ability to incur additional debt in the future;
 
    our need for a significant amount of cash to service and repay our debt and to pay dividends on our common stock;
 
    restrictions contained in our debt agreements that limit the discretion of our management in operating our business;
 
    the ability to refinance our existing debt as necessary;
 
    regulatory changes, rapid development and introduction of new technologies and intense competition in the telecommunications industry;
 
    risks associated with our possible pursuit of acquisitions;
 
    economic conditions in our service areas in Illinois and Texas;
 
    system failures;
 
    loss of large customers or government contracts;
 
    risks associated with the rights-of-way for our network;
 
    disruptions in our relationship with third party vendors;
 
    loss of key management personnel and the inability to attract and retain highly qualified management and personnel in the future;
 
    changes in the extensive governmental legislation and regulations governing telecommunications providers and the provision of telecommunications services;
 
    telecommunications carriers disputing and/or avoiding their obligations to pay network access changes for use of our network;
 
    high costs of regulatory compliance;
 
    the competitive impact of legislation and regulatory changes in the telecommunications industry;

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    liability and compliance costs regarding environmental regulations; and
 
    the additional risk factors outlined in Part I — Item 1A — “Risk Factors” incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as well as the other documents that we file with the SEC from time to time that could cause our actual results to differ from our current expectations and from the forward-looking statements discussed in this Report.
     Many of these risks are beyond our ability to control or predict. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this Report. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Overview
     We are an established rural local exchange company that provides communications services to residential and business customers in Illinois and Texas. Our main sources of revenues are our local telephone businesses in Illinois and Texas, which offer an array of services, including local dial tone, custom calling features, private line services, long distance, dial-up and high-speed Internet access, inside wiring service and maintenance, carrier access, billing and collection services and telephone directory publishing. In addition, we launched our Internet protocol television service, which we refer to as IPTV, in selected Illinois markets in 2005 and offer wholesale transport services on a fiber optic network in Texas. We also operate a number of complementary businesses, which offer telephone services to county jails and state prisons, operator services, equipment sales and telemarketing and order fulfillment services.
Initial Public Offering
     On July 27, 2005, we completed the initial public offering of our common stock or IPO . The IPO consisted of the sale of 6,000,000 shares of common stock newly issued by the Company and 9,666,666 shares of common stock sold by certain selling stockholders. The shares of common stock were sold at an initial public offering price of $13.00 per share resulting in net proceeds to us of approximately $67.6 million. We did not receive any proceeds from the sale of common stock by the selling stockholders.
     We used the net proceeds from the IPO, together with additional borrowings under our credit facilities and cash on hand to:
    repay in full outstanding borrowings under our term loan A and C facilities, together with accrued but unpaid interest through the date of repayment and associated fees and expenses;
 
    redeem $70.0 million of the aggregate principal amount of our senior notes and pay the associated redemption premium of $6.8 million, together with accrued but unpaid interest through the date of redemption; and
 
    pre-fund expected integration and restructuring costs for 2005 relating to our acquisition of TXUCV.
Factors Affecting Future Results of Operations
Revenues
      Telephone Operations and Other Operations. To date, our revenues have been derived primarily from the sale of voice and data communications services to residential and business customers in our rural telephone companies’ service areas. We do not anticipate significant growth in revenues due to our primarily rural service area, but we do expect relatively consistent cash flow from year-to-year due to stable customer demand, limited

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competition and a generally supportive regulatory environment.
      Local Access Lines and Bundled Services. Local access lines are an important element of our business. An “access line” is the telephone line connecting a person’s home or business to the public switched telephone network. The monthly recurring revenue we generate from end users, the amount of traffic on our network and related access charges generated from other carriers, the amount of federal and state subsidies we receive and most other revenue streams are directly related to the number of local access lines in service. As illustrated in the table below, we had 238,904, 242,024, and 247,258 local access lines in service as of June 30, 2006, December 31, 2005 and June 30, 2005, respectively. We expect to continue to experience modest erosion in access lines.
     Many rural telephone companies have experienced a loss of local access lines due to challenging economic conditions, increased competition from wireless providers, competitive local exchange carriers and, in some cases, cable television operators. We have not been immune to these conditions. We also believe that we lost local access lines due to the disconnection of second telephone lines by our residential customers in connection with their substituting DSL or cable modem service for dial-up Internet access and wireless service for wireline service. As of June 30, 2006, December 31, 2005 and June 30, 2005, we had 8,323, 9,144 and 10,028 second lines, respectively. The disconnection of second lines represented 26.3% and 13.7% of our residential loss during the six months ended June 30, 2006 and 2005, respectively.
     A significant portion of our line loss in 2005 was attributable to the migration of MCIMetro’s Internet service provider, or ISP, traffic from our primary rate interface, or PRI, facilities and local T-1 facilities to interconnection trunks. As a result of this migration, we experienced a loss of approximately 4,708 lines during the first six months of 2005 and 5,332 lines during all of 2005. Because these lines did not generate long distance, access or subsidy revenue, the total revenue loss associated with the migration was approximately one-fourth the impact of the same number of commercial access lines.
     We have mitigated the decline in local access lines with increased average revenue per access line by focusing on the following:
    aggressively promoting DSL service;
 
    bundling value-adding services, such as DSL with a combination of local service, custom calling features, voicemail and Internet access;
 
    maintaining excellent customer service standards, particularly as we introduce new services to existing customers; and
 
    keeping a strong local presence in the communities we serve.
     We have implemented a number of initiatives to gain new local access lines and retain existing local access lines by enhancing the attractiveness of the bundle with new service offerings, including unlimited long distance, and promotional offers like discounted second lines. In January 2005, we introduced IPTV in selected Illinois markets. The initial roll-out was conducted in a controlled manner with little advertising or promotion. Upon completion of back-office testing, vendor interoperability between system components and final network preparation, we began aggressively marketing our “triple play” bundle, which includes local service, DSL and IPTV, in selected Illinois exchanges in September 2005. As of June 30, 2006, IPTV was available to approximately 27,000 homes, and we had 4,516 subscribers, which represented 16.7% of available homes. We are currently expanding IPTV availability in Illinois and believe that we will pass 36,000 homes by the end of August. We also anticipate introducing IPTV service in selected Texas markets later this year. In addition to our access line and video initiatives, we intend to continue to integrate best practices across our Illinois and Texas regions. These efforts may act to mitigate the financial impact of any access line loss we may experience.
     Because of our promotional efforts, the number of DSL subscribers we serve grew substantially. We had 45,948, 39,192 and 33,058 DSL lines in service as of June 30, 2006, December 31, 2005 and June 30, 2005, respectively. Approximately 92% of our rural telephone companies’ local access lines are currently DSL capable. The penetration rate for DSL lines in service was approximately 19.2% of our local access lines at June 30, 2006.
     We have also been successful in generating revenues by bundling combinations of local service, custom calling features, voicemail and Internet access. Our service bundles totaled 40,901, 36,627 and 33,300 at June 30,

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2006, December 31, 2005 and June 30, 2005, respectively.
     Our plan is to continue to execute our customer retention program by delivering excellent customer service and improving the value of our bundle with DSL and IPTV. However, if these actions fail to mitigate access line loss, or we experience a higher degree of access line loss than we currently expect, it could have an adverse impact on our revenues and earnings.
     The following summarizes several key metrics as of the end of the periods presented:
                         
    June 30,     December 31,     June 30,  
    2006     2005     2005  
Local access lines in service:
                       
Residential
    159,295       162,231       165,501  
Business
    79,609       79,793       81,757  
 
                 
Total local access lines
    238,904       242,024       247,258  
IPTV subscribers
    4,516       2,146       585  
DSL subscribers
    45,948       39,192       33,058  
 
                 
Total connections
    289,368       283,362       280,901  
 
                 
 
                       
Long distance lines
    146,117       143,882       141,080  
Dial-up subscribers
    13,731       15,971       18,028  
Service bundles
    40,901       36,627       33,300  
Expenses
     Our primary operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization expenses.
Cost of Services and Products
     Our cost of services includes the following:
    operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs and cable and wire facilities;
 
    general plant costs, such as testing, provisioning, network, administration, power and engineering; and
 
    the cost of transport and termination of long distance and private lines outside our rural telephone companies’ service area.
     We have agreements with carriers to provide long distance transport and termination services. These agreements contain various commitments and expire at various times. We believe we will meet all of our commitments in these agreements and believe we will be able to procure services for future periods. We are currently procuring services for future periods, and at this time, the costs and related terms under which we will purchase long distance transport and termination services have not been determined. We do not expect, however, any material adverse effects from any changes in any new service contract.
Selling, General and Administrative Expenses
     In general, selling, general and administrative expenses include the following:
    selling and marketing expenses;
 
    expenses associated with customer care;
 
    billing and other operating support systems; and
 
    corporate expenses, including non-cash stock compensation.
     Our Telephone Operations segment incurs selling, marketing and customer care expenses from its customer

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service centers and commissioned sales representatives. Our customer service centers are the primary sales channels for residential and business customers with one or two phone lines, whereas commissioned sales representatives provide customized proposals to larger business customers. In addition, we use customer retail centers for various communications needs, including new telephone, Internet and paging service purchases in Illinois.
     Each of our Other Operations businesses primarily uses an independent sales and marketing team comprised of dedicated field sales account managers, management teams and service representatives to execute our sales and marketing strategy.
     We have operating support and back office systems that are used to enter, schedule, provision and track customer orders, test services and interface with trouble management, inventory, billing, collections and customer care service systems for the local access lines in our operations. We have migrated most key business processes of our Illinois and Texas operations onto single, company-wide systems and platforms. Our objective is to improve profitability by reducing individual company costs through centralization, standardization and sharing of best practices. For the six months ended June 30, 2006 and 2005, we spent $2.1 million and $4.6 million, respectively, on integration and restructuring expenses (which included severance associated with staffing reductions and costs associated with projects to integrate our support and back office systems). We expect to continue the integration of our Illinois and Texas billing systems through July 2007.
Depreciation and Amortization Expenses
     We recognize depreciation expenses for our regulated telephone plant using rates and lives approved by the Illinois Commerce Commission, or ICC, in Illinois and the Public Utility Commission, or PUCT, in Texas. The provision for depreciation on nonregulated property and equipment is recorded using the straight-line method based upon the following useful lives:
    Buildings (15 to 35 years)
 
    Network and outside plant facilities (5 to 30 years)
 
    Furniture, fixtures and equipment (3 to 17 years)
     Amortization expenses are recognized primarily for our intangible assets considered to have finite useful lives on a straight-line basis. In accordance to SFAS No. 142, Goodwill and Other Intangible Assets , goodwill and intangible assets that have indefinite useful lives are not amortized but rather are tested annually for impairment. Because trade names have been determined to have indefinite lives, they are not amortized. Customer relationships are amortized over their useful lives at a weighted average life of 11.7 years.
Segments
     In accordance with the reporting requirement of Statement of Financial Accounting Standards, or SFAS, No. 131, Disclosure about Segments of an Enterprise and Related Information , the Company has two reportable business segments, Telephone Operations and Other Operations. The results of operations discussed below reflect our consolidated results, unless otherwise indicated.
Results of Operations
Three months ended June 30, 2006 compared to three months ended June 30, 2005
     The following summarizes our revenues and operating expenses on a consolidated basis for the three months ended June 30, 2006 and 2005:

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    Three Months Ended June 30,  
    2006     2005  
            % of Total             % of Total  
    $ (millions)     Revenues     $ (millions)     Revenues  
Revenues
                               
Telephone Operations
                               
Local calling services
  $ 21.5       27.1 %   $ 22.5       28.8 %
Network access services
    17.0       21.4       15.3       19.6  
Subsidies
    11.8       14.9       12.1       15.5  
Long distance services
    3.8       4.8       4.2       5.4  
Data and internet services
    7.4       9.3       6.3       8.1  
Other services
    8.2       10.3       8.1       10.4  
 
                       
Total Telephone Operations
    69.7       87.9       68.5       87.6  
Other Operations
    9.6       12.1       9.7       12.4  
 
                       
Total operating revenues
    79.3       100.0       78.2       100.0  
 
                       
 
                               
Expenses
                               
Operating expenses
                               
Telephone Operations
    39.6       49.9       32.7       41.8  
Other Operations
    9.1       11.5       8.6       11.0  
Depreciation and amortization
    16.8       21.2       17.1       21.9  
 
                       
Total operating expenses
    65.5       82.6       58.4       74.7  
 
                       
 
                               
Income from operations
    13.8       17.4       19.8       25.3  
 
                               
Interest expense, net
    (10.2 )     (12.9 )     (11.6 )     (14.8 )
Other income, net
    1.5       1.9       3.3       4.2  
Income tax benefit (expense)
    3.1       3.9       (4.4 )     (5.6 )
 
                       
Net income
  $ 8.2       10.3 %   $ 7.1       9.1 %
 
                       
Revenues
     Our revenues increased by 1.4%, or $1.1 million, to $79.3 million in 2006 from $78.2 million in 2005. Our discussion and analysis of the components of the variance follows:
Telephone Operations Revenues
      Local calling services revenues decreased by 4.4%, or $1.0 million, to $21.5 million in 2006 compared to $22.5 million in 2005. The decrease is primarily due to the decline in local access lines as previously discussed above under “Factors Affecting Future Results of Operations.”
      Network access services revenues increased by 11.1%, or $1.7 million, to $17.0 million in 2006 compared to $15.3 million in 2005. The increase was primarily driven by increased demand for point-to-point circuits and other network access services.
      Subsidies revenues decreased by 2.5%, or $0.3 million, to $11.8 in 2006 compared to $12.1 million in 2005. The decrease is primarily due an increase in the national average cost per loop, which resulted in lower subsidies to rural carriers.
      Long distance services revenues decreased by 9.5%, or $0.4 million, to $3.8 million in 2006 compared to $4.2 million in 2005. The decrease in long distance revenues was primarily due to a reduction in the average rate per minute. This was driven by general industry trends and the introduction of our unlimited long distance calling

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plans. While these plans are helpful in attracting new customers and selling additional bundles, they have also led to some extent to a reduction in long distance services revenues as heavy users of our long distance services take advantage of the fixed pricing offered by these service plans.
           Data and Internet revenues increased by 17.5%, or $1.1 million, to $7.4 million in 2006 compared to $6.3 million in 2005. The revenue increase is due to increased DSL and IPTV penetration. The number of DSL lines in service increased from 33,058 at June 30, 2005 to 45,948 at June 30, 2006. IPTV customers increased from 585 at June 30, 2005 to 4,516 at June 30, 2006. . These increases were partially offset by erosion of our dial-up Internet base, which decreased from 18,028 subscribers at June 30, 2005 to 13,731 at June 30, 2006.
           Other Services revenues decreased by 1.2%, or $0.1 million, to $8.2 million in 2006 compared to $8.1 million in 2005.
      Other Operations Revenue
          Other Operations revenues decreased by 1.0%, or $0.1 million, to $9.6 million in 2006 compared to $9.7 million in 2005.
      Operating Expenses
          Operating expenses increased by 12.2%, or $7.1 million, to $65.5 million in 2006 from $58.4 million in 2005.
      Telephone Operations Operating Expenses
          Operating expenses for Telephone Operations increased by 21.1%, or $6.9 million, to $39.6 in 2006 compared to $32.7 million in 2005. Effective April 30, 2005, the CCI Texas pension and other post-retirement plans were amended to freeze benefit accruals for all non-union participants. These amendments resulted in the recognition of a $7.9 million curtailment gain (reduction in operating expenses) in May 2005 and ongoing quarterly savings of approximately $1.0 million.
      Other Operations Operating Expenses
          Operating expenses for Other Operations increased by 5.8%, or $0.5 million, to $9.1 million in 2006 compared to $8.6 million in 2005. The increase primarily came from increased wages and general operating costs required to support these businesses.
      Depreciation and Amortization
          During 2006, depreciation and amortization expense decreased by 1.8%, or $0.3 million, to $16.8 million compared to $17.1 million in 2005.
      Non-Operating Income (Expense)
      Interest Expense, net
          Interest expense, net decreased by 12.1%, or $1.4 million, to $10.2 million in 2006 compared to $11.6 million in 2005. The decline is primarily due to the redemption of $70.0 million in the aggregate principal amount of our senior notes in 2005, which was partially offset by increased borrowings and interest rates on our term debt. At June 30, 2006 and 2005, the weighted average interest rate, including swaps, on our outstanding term debt was 5.95% and 5.49% per annum, respectively.
      Other Income, net
          Other income, net decreased by $1.8 million to $1.5 million in 2006 compared to $3.3 million for the same period in 2005. During 2005 we recognized $2.8 million in other income from the receipt of key-man life insurance proceeds relating to the passing of a former employee. During 2006 we recognized $1.4 million of investment income compared to $0.5 million in 2005.

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      Income Taxes
          Our provision for income taxes was a $3.1 million net tax benefit in 2006 compared to a $4.4 million net tax expense in 2005. During the second quarter of 2006, the State of Texas enacted new tax legislation. The most significant impact of this legislation for us was the modification of our Texas franchise tax calculation to a new “margin tax” calculation used to derive taxable income. This new legislation resulted in a reduction of our net deferred tax liabilities and corresponding credit to our state tax provision of approximately $5.2 million. Exclusive of this adjustment, our effective tax rate would have been approximately 41% in 2006 compared to 38% in 2005.
Six months ended June 30, 2006 compared to six months ended June 30, 2005
          The following summarizes our revenues and operating expenses on a consolidated basis for the six months ended June 30, 2006 and 2005:
                                 
    Six Months Ended June 30,  
    2006     2005  
            % of Total             % of Total  
    $ (millions)     Revenues     $ (millions)     Revenues  
Revenues
                               
Telephone Operations
                               
Local calling services
  $ 42.9       27.0 %   $ 45.0       28.5 %
Network access services
    34.0       21.4       31.7       20.1  
Subsidies
    24.0       15.1       25.8       16.3  
Long distance services
    7.5       4.7       8.2       5.2  
Data and internet services
    14.6       9.2       12.8       8.1  
Other services
    16.1       10.1       16.0       10.1  
 
                       
 
                               
Total Telephone Operations
    139.1       87.6       139.5       88.3  
Other Operations
    19.7       12.4       18.5       11.7  
 
                       
 
                               
Total operating revenues
    158.8       100.0       158.0       100.0  
 
                       
 
                               
Expenses
                               
Operating expenses
                               
Telephone Operations
    77.3       48.7       75.1       47.5  
Other Operations
    18.5       11.6       16.8       10.6  
Depreciation and amortization
    33.9       21.3       33.9       21.5  
 
                       
 
                               
Total operating expenses
    129.7       81.7       125.8       79.6  
 
                       
 
                               
Income from operations
    29.1       18.3       32.2       20.4  
 
                               
Interest expense, net
    (20.2 )     (12.7 )     (23.0 )     (14.6 )
Other income, net
    2.7       1.7       3.6       2.3  
Income tax benefit (expense)
    0.2       0.1       (5.0 )     (3.2 )
 
                       
 
                               
Net income
  $ 11.8       7.4 %   $ 7.8       4.9 %
 
                       
Revenues
          Our revenues increased by 0.5%, or $0.8 million, to $158.8 million in 2006 from $158.0 million in 2005. Our discussion and analysis of the components of the variance follows:

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      Telephone Operations Revenues
           Local calling services revenues decreased by 4.7%, or $2.1 million, to $42.9 million in 2006 compared to $45.0 million in 2005. The decrease is primarily due to the decline in local access lines as previously discussed above under “Factors Affecting Future Results of Operations.”
           Network access services revenues increased by 7.3%, or $2.3 million, to $34.0 million in 2006 compared to $31.7 million in 2005. The increase was primarily driven by increased demand for point-to-point circuits and other network access services.
           Subsidies revenues decreased by 7.0%, or $1.8 million, to $24.0 in 2006 compared to $25.8 million during in 2005. The decrease is primarily due to $1.1 million of subsidies received from prior period settlements in 2005 that did not reoccur in 2006. The balance of the decrease is primarily due to an increase in the national average cost per loop, which resulted in lower subsidies to rural carriers.
           Long distance services revenues decreased by 8.5%, or $0.7 million, to $7.5 million in 2006 compared to $8.2 million in 2005. The decrease in long distance revenues was primarily due to a reduction in the average rate per minute. This was driven by general industry trends and the introduction of our unlimited long distance calling plans.
           Data and Internet revenues increased by 14.1%, or $1.8 million, to $14.6 million in 2006 compared to $12.8 million in 2005. The revenue increase is due to increased DSL and IPTV penetration. The number of DSL lines in service increased from 33,058 at June 30, 2005 to 45,948 at June 30, 2006. IPTV customers increased from 585 at June 30, 2005 to 4,516 at June 30, 2006. . These increases were partially offset by erosion of our dial-up Internet base, which decreased from 18,028 subscribers at June 30, 2005 to 13,731 at June 30, 2006.
           Other Services revenues increased by 0.6%, or $0.1 million, to $16.1 million in 2006 compared to $16.0 million in 2005.
      Other Operations Revenue
          Other Operations revenues increased by 6.5%, or $1.2 million, to $19.7 million in 2006 compared to $18.5 million in 2005. Revenues from our Market Response business increased by $0.9 million due to increased sales to existing customers. Our prison systems unit generated increased revenue of $0.5 million for the period from increased minutes of use. These increases were partially offset by a net $0.2 million decrease in revenues associated with our other ancillary operations.
      Operating Expenses
          Operating expenses increased by 3.1%, or $3.9 million, to $129.7 million in 2006 from $125.8 million in 2005.
      Telephone Operations Operating Expense
          Operating expenses for Telephone Operations increased by 2.9%, or $2.2 million, to $77.3 in 2006 compared to $75.1 million in 2005. Effective April 30, 2005, the CCI Texas pension and other post-retirement plans were amended to freeze benefit accruals for all non-union participants. These amendments resulted in the recognition of a $7.9 million curtailment gain (reduction in operating expenses) in May 2005 and ongoing quarterly savings of approximately $1.0 million. During 2006, we realized savings of $2.5 million due to the termination of the professional services agreements with our chairman, Richard Lumpkin, Providence Equity and Spectrum Equity in connection with our IPO. These savings were partially offset in 2006 by the recognition of $1.2 million of non-cash compensation expense and $0.6 of incremental professional fees associated with Sarbanes Oxley compliance. During 2006 we also benefited $2.5 million from lower integration and severance costs versus 2005.

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      Other Operations Operating Expenses
          Operating expenses for Other Operations increased by 10.1%, or $1.7 million, to $18.5 million in 2006 compared to $16.8 million in 2005. The increase primarily came from increased costs required to support the growth in Market Response and Public Services revenues coupled with inflationary increases in wages and general operating costs associated with our ancillary operations.
      Depreciation and Amortization
          Depreciation and amortization expense remained constant at $33.9 million for both 2006 and 2005.
      Non-Operating Income (Expense)
      Interest Expense, net
          Interest expense, net decreased by 12.2%, or $2.8 million, to $20.2 million in 2006 compared to $23.0 million in 2005. The decline is primarily due to the redemption of $70.0 million in the aggregate principal amount of our senior notes in 2005, which was partially offset by increased borrowings and interest rates on our term debt. At June 30, 2006 and 2005, the weighted average interest rate, including swaps, on our outstanding term debt was 5.95% and 5.49% per annum, respectively.
      Other Income, net
          Other income, net decreased by 25.0%, or $0.9 million, to $2.7 million in 2006 compared to $3.6 million in 2005. During 2005, we recognized $2.8 million in other income from the receipt of key-man life insurance proceeds relating to the passing of a former employee. During 2006, we recognized $3.0 million of investment income compared to $1.0 million in 2005. The increased investment income is primarily the result of increased performance and distributions in 2006 from our investments in cellular partnerships.
      Income Taxes
          Our provision for income taxes was a $0.2 million net tax benefit in 2006 compared to a $5.0 million net tax expense in 2005. During the second quarter of 2006, the State of Texas enacted new tax legislation. The most significant impact of this legislation for us was the modification of our Texas franchise tax calculation to a new “margin tax” calculation used to derive taxable income. This new legislation resulted in a reduction of our net deferred tax liabilities and corresponding credit to our state tax provision of approximately $5.2 million. Exclusive of this adjustment, our effective tax rate would have been approximately 43% in 2006 compared to 39% in 2005.
Liquidity and Capital Resources
      General
          Historically, our operating requirements have been funded from cash flow generated from our business and borrowings under our credit facilities. As of June 30, 2006, we had $555.0 million of debt. Our $30.0 million revolving line of credit, however, remains unused. We expect that our future operating requirements will continue to be funded from cash flow generated from our business and borrowings under our revolving credit facility. As a general matter, our liquidity needs arise primarily from: (i) interest payments on our indebtedness; (ii) dividend payments; (iii) capital expenditures; (iv) taxes; (v) incremental costs associated with being a public company, including costs associated with Section 404 of the Sarbanes-Oxley Act; (vi) other post-retirement contributions; (vii) costs to further integrate our Illinois and Texas billing systems; and (viii) certain other costs as summarized above under “Factors Affecting Future Results of Operations – Expenses”. In addition, we may use cash and incur additional debt to fund selective acquisitions. However, our ability to use cash may be limited by our other cash needs, including our dividend policy, and our ability to incur additional debt will be limited by our existing and future debt agreements.

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          The following table summarizes the Company’s sources and uses of cash for the periods presented:
                 
    Six Months Ended
    June 30,
    2006   2005
    (In millions)
Net Cash Provided by (Used for):
               
Operating activities
  $ 33.4     $ 29.3  
Investing activities
    (11.3 )     (14.8 )
Financing activities
    (23.0 )     (48.4 )
      Operating Activities
          Net income adjusted for non-cash charges is our primary source of operating cash. Cash provided by operating activities was $33.4 million for the six months ended June 30, 2006. Net income adjusted for non-cash charges generated $46.8 million of operating cash. Partially offsetting the cash generated was increased working capital usage. Accounts receivable, net of provisions for bad debt, remained relatively constant and in line with revenues. Increases in prepaids and other assets used approximately $3.0 million of working capital primarily to prepay franchise taxes, contracts in progress, insurance and telephone directory publications. We also experienced a $10.1 million decline in accounts payable, accrued expenses and other liabilities as a result of differences in the timing of the payment of interest, taxes, capital expenditures and other routine vendor and employee obligations.
      Investing Activities
          For the six months ending June 30, 2006, we used $17.2 million for capital expenditures. We expect our capital expenditures for the remainder of 2006 will total approximately $15.8 million, which will continue to be used primarily to expand our DSL and IPTV capabilities as well as to maintain and upgrade our network. Because our network is modern and has been well maintained, we do not believe we will substantially increase capital spending on it beyond current levels in the future. Any such increase would likely occur as a result of a planned growth or expansion plan, if it all.
          During April 2006, we received $5.9 million in proceeds from the liquidation of our investment in Rural Telephone Bank (“RTB”).
      Financing Activities
          For the six months ended June 30, 2006, we paid $23.0 million of cash to our common stockholders in accordance with the dividend policy adopted by our board of directors in connection with the IPO.
      Debt
          The following table summarizes our indebtedness as of June 30, 2006:
                         
    Balance   Maturity Date   Rate (1)
    (In millions)                
Revolving credit facility
  $     April 14, 2010   LIBOR + 2.00%
Term loan D
    425.0     October 14, 2011   LIBOR + 1.75%
Senior notes
    130.0     April 1, 2012     9.75%
 
(1)   As of June 30, 2006, the 90-day LIBOR rate was 5.48%

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      Credit Facilities
          As of June 30, 2006, we had $425.0 million of term D loans outstanding under our credit facilities, which matures on October 14, 2011. In addition, our credit facilities provide for a $30.0 million revolving credit facility, maturing on April 14, 2010. As of June 30, 2006, nothing had been borrowed under the revolving credit facility.
          Borrowings under our credit facilities bore interest at a rate equal to an applicable margin plus, at the borrowers’ election, either a “base rate” or LIBOR. The applicable margin is based upon the borrowers’ total leverage ratio. As of June 30, 2006, the applicable margin for interest rates on LIBOR based loans was 1.75% and 2.00% on LIBOR based term D loans and the revolving credit facility, respectively. At June 30, 2006 and 2005, the weighted average interest rate, including swaps, on our term debt was 5.95% and 5.49% per annum, respectively.
          On July 28, 2006, we entered into Amendment No. 4 to our credit facilities which provides for, among other things, the following: (1) an increase in the size of the term D loan available by up to $45 million (subject to certain adjustments); (2) an increase in the applicable margin on the entire amount of term D loans outstanding from 175 basis points to 200 basis points; (3) an amendment to the definition of “cumulative available cash” to exclude the impact of our repurchase of shares of our common stock pursuant to the Stock Repurchase Agreement, dated July 13, 2006, by and among us and Providence Equity Partners IV L.P. and Providence Equity Operating Partners IV L.P. (the “Share Repurchase”); (4) an amendment to the definition of “consolidated EBITDA” to add back certain one-time expenses related to the Share Repurchase, severance, billing integration and compliance with the Sarbanes-Oxley Act of 2002; and (5) a reduction by $1.5 million of the quarterly amount of restricted payments (as defined in the credit agreement) that we may pay out of cumulative available cash without triggering mandatory loan prepayments.
      Derivative Instruments
          We maintain interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense. At June 30, 2006, we had interest rate swap agreements covering $357.1 million in aggregate principal amount of our variable rate debt at fixed LIBOR rates ranging from 3.0% to 4.8%. The swap agreements expire on December 31, 2006, May 19, 2007 and September 30, 2011. On July 11, 2006, we executed $50.0 million notional amount of floating fixed interest rate swap arrangements, which will become effective December 29, 2006, to replace the $50.0 million of existing swap arrangements that expire on December 31, 2006.
      Senior Notes
          The senior notes are our senior, unsecured obligations. The indenture contains customary covenants that restrict our, and our restricted subsidiaries’ ability to: incur debt and issue preferred stock; engage in business other than telecommunication businesses; make restricted payments (including paying dividends on, redeeming, repurchasing or retiring our capital stock); enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans, or transfer assets to us; enter into liens, effecting a change of control without making an offer to purchase the senior notes; sell or otherwise dispose of assets, including capital stock of subsidiaries; engage in transactions with affiliates; and consolidate or merge.
          We used a portion of the proceeds from the IPO, together with additional borrowings under our credit facilities and cash on hand to redeem 35.0%, or $70.0 million of our senior notes. The total cost of the redemption, including the redemption premium, was $76.8 million.
      Covenant Compliance
          Our credit agreement restricts our ability to pay dividends. During the quarter ended June 30, 2006, we generated $19.1 million of available cash (as such term is defined in our credit agreement) and paid $11.5 million of dividends leaving us with cumulative cash available to pay dividends of $40.6 million as of June 30, 2006 based on the restricted payments covenant contained in our credit agreement. We are also restricted from paying dividends under the indenture governing our senior notes. However, the indenture is less restrictive than our credit agreement. That is because the restricted payments covenant in our credit agreement allows a lower amount of dividends to be paid from the borrowers (Consolidated Communications, Inc. and Consolidated Communications Acquisition Texas,

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Inc.) to CCHI than the comparable covenant in the indenture (referred to as the build-up amount) permits CCHI to pay to its stockholders. However, the amount of dividends CCHI will be able to make under the indenture in the future will be based, in part, on the amount of cash distributed by the borrowers under the credit agreement to CCHI.
          Under our credit agreement, if our total net leverage ratio (as such term is defined in the credit agreement), as of the end of any fiscal quarter, is greater than 4.75:1.00, we will be required to suspend dividends on our common stock unless otherwise permitted by an exception for dividends that may be paid from the portion of proceeds of any sale of equity not used to make mandatory prepayments of loans and not used to fund acquisitions, capital expenditures or make other investments. During any dividend suspension period, we will be required to repay debt in an amount equal to 50.0% of any increase in available cash during such dividend suspension period, among other things. In addition, we will not be permitted to pay dividends if an event of default under the credit agreement has occurred and is continuing. Among other things, it will be an event of default if:
    our senior secured leverage ratio, as of the end of any fiscal quarter is greater than 4.00 to 1.00, or
 
    our fixed charge coverage ratio as of the end of any fiscal quarter, is not (x) after January 1, 2006 and on or prior to December 31, 2006, at least 2.00 to 1.00 and (y) after January 1, 2007, at least 1.75 to 1.00.
          As of June 30, 2006, we were in compliance with our debt covenants. The table below presents our ratios as of June 30, 2006:
         
Total net leverage ratio
    3.79 to 1.00  
Senior secured leverage ratio
    3.08 to 1.00  
Fixed charge coverage ratio
    3.22 to 1.00  
          The description of the covenants above and of our credit agreement and indenture generally in this Report are summaries only. They do not contain a full description, including definitions, of the provisions summarized. As such, these summaries are qualified in their entirety by these documents, which are incorporated by reference as indicated in the exhibit index to this report.
      Share buy back
          During July 2006, we entered into an agreement to repurchase and retire approximately 3.8 million shares of our common stock from Providence Equity for approximately $56.7 million, or $15.00 per share. The transaction closed on July 28, 2006. With this transaction, Providence Equity sold its entire position in our company, which, prior to the transaction, totaled approximately 12.7 percent of our outstanding shares of common stock. This was a private transaction and did not decrease our publicly traded shares. We financed this repurchase using approximately $17.7 million of cash on hand and $39.0 million of additional term-loan borrowings.
      Capital Requirements
          We expect our capital expenditures for the remainder of 2006 will total approximately $15.8 million, which will continue to be used primarily to expand our DSL and IPTV capabilities as well as to maintain and upgrade our network. Because our network is modern and has been well maintained, we do not believe we will substantially increase capital spending on it beyond current levels in the future. Any such increase would likely occur as a result of a planned growth or expansion plan, if it all.
          The cash requirements of our dividend policy are in addition to our other expected cash needs, both of which we expect to be funded with cash flow from operations. In addition, we expect we will have sufficient availability under our amended and restated revolving credit facility to fund dividend payments in addition to any expected fluctuations in working capital and other cash needs, although we do not currently intend to borrow under this facility to pay dividends.
          We believe that our dividend policy will limit, but not preclude, our ability to grow. If we continue paying dividends at the level currently anticipated under our dividend policy, we may not retain a sufficient amount of cash, and may need to seek refinancing, to fund a material expansion of our business, including any significant

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acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our current expectations. In addition, because we expect a significant portion of cash available will be distributed to holders of common stock under our dividend policy, our ability to pursue any material expansion of our business will depend more than it otherwise would on our ability to obtain third-party financing.
      Surety Bonds
          In the ordinary course of business, we enter into surety, performance and similar bonds. As of June 30, 2006, we had approximately $1.8 million of these bonds outstanding.
      Table of Contractual Obligations and Commitments
          As of June 30, 2006, our material contractual obligations and commitments were:
                                                         
    Payments Due by Period  
    Total     2006     2007     2008     2009     2010     Thereafter  
    (In millions)  
Long-term debt (a)
  $ 555.0     $     $     $     $     $     $ 555.0  
Operating leases
    12.2       1.9       2.8       2.0       1.7       1.7       2.1  
Pension and other post retirement obligations (b)
    49.5       1.1       5.4       5.6       5.8       6.1       25.5  
 
                                         
 
  $ 616.7     $ 3.0     $ 8.2     $ 7.6     $ 7.5     $ 7.8     $ 582.6  
 
                                         
 
(a)   Long-term debt consists of loans outstanding under our credit facilities and our senior notes. The credit facilities consist of a $425.0 million term loan D maturing on October 14, 2011 and a $30.0 million revolving credit facility, which was fully available but undrawn at June 30, 2006. Interest payments are not included in these amounts.
 
(b)   Pension funding is an estimate of our minimum funding requirements to provide pension benefits for employees based on service through June 30, 2006. Obligations relating to other post retirement benefits are based on estimated future benefit payments. Our estimates are based on forecasts of future benefits payments which may change over time due to a number of factors, including life expectancy, medical costs and trends and on the actual rate of return on the plan assets, discount rates, discretionary pension contributions and regulatory rules.
Recent Accounting Pronouncements
          In February 2006, FASB issued SFAS 155 which amendments SFAS 133 and SFAS 140 and allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 is effective for an entity’s first fiscal year that begins after September 15, 2006. We are currently evaluating the effect that the adoption of SFAS 155 will have on our financial condition or results of operations but do not currently expect it will have a material impact.
          In June 2006, FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. We are required to adopt FIN 48 effective at the beginning of 2007. We are currently evaluating the impact of adopting FIN 48 on our future results of operations and financial condition.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
          We are exposed to market risk from changes in interest rates on our long-term debt obligations. We estimate our market risk using sensitivity analysis. Market risk is defined as the potential change in the fair market value of a fixed-rate debt obligation due to hypothetical adverse change in interest rates and the potential change in interest expense on variable rate long-term debt obligations due to a change in market interest rates. The fair value on long-term debt obligations is determined based on discounted cash flow analysis, using the rates and the maturities of these obligations compared to terms and rates currently available in long-term debt markets. The potential change in interest expense is determined by calculating the effect of the hypothetical rate increase on the portion of variable rate debt that is not hedged through the interest swap agreements described below and does not assume changes in our capital structure. As of June 30, 2006, approximately 87.8% of our long-term obligations were fixed rate and approximately 12.2% were variable rate obligations not subject to interest rate swap agreements.
          As of June 30, 2006, we had $425.0 million of debt outstanding under our credit facilities. Our exposure to fluctuations in interest rates was limited by interest rate swap agreements that effectively converted a portion of our variable debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expenses. On June 30, 2006, we had interest rate swap agreements covering $357.1 million of aggregate principal amount of our variable rate debt at fixed LIBOR rates ranging from 3.0% to 4.8% and expiring on December 31, 2006, May 19, 2007 and September 30, 2011. As of June 30, 2006, we had $67.9 million of variable rate debt not covered by interest rate swap agreements. If market interest rates averaged 1.0% higher than the average rates that prevailed from January 1, 2006 through June 30, 2006, interest expense would have increased by approximately $0.2 million for the period. As of June 30, 2006 the fair value of interest rate swap agreements amounted to an asset of approximately $7.0 million net of taxes.
          As of June 30, 2006, we had $130.0 million in aggregate principal amount of fixed rate long-term debt obligations with an estimated fair market value of $133.9 million based on the overall weighted average interest rate of our fixed rate long-term debt obligations of 9.75% and an overall weighted maturity of 5.75 years, compared to rates and maturities currently available in long-term debt markets. Market risk is estimated as the potential loss in fair value of our fixed rate long-term debt resulting from a hypothetical increase of 10.0% in interest rates. Such an increase in interest rates would have resulted in an approximately $3.5 million decrease in the fair market value of our fixed-rate long-term debt.
Item 4. Controls and Procedures
          We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our report under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2006. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
          We currently and from time to time, are subject to claims and regulatory proceedings arising in the ordinary course of business. However, we are not currently subject to any such claims that we believe could reasonably be expected to have a material adverse effect on our results of operation or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
          We held our Annual Meeting of Stockholders on May 17, 2006, for the purpose of electing a director to hold office until our 2009 Annual Meeting of Stockholders and to ratify the appointment of Ernst & Young LLP as our independent auditors for 2006. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A, there was no solicitation in opposition to our submissions as listed in the Proxy Statement. Richard A. Lumpkin, nominee, was elected Class I director with 19,731,777 votes for and 4,462,136 votes withheld. The other directors, whose terms of office continued after the meeting, are Jack W. Blumenstein, Roger H. Moore, and Maribeth S. Rahe. Our stockholders also ratified the appointment of Ernst & Young LLP as our auditors for 2006 with 24,077,494 votes for, 103,519 votes against, 12,900 votes abstaining and no broker non-votes.
Item 6. Exhibits
          See the Exhibit Index following the signature page of this Report

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
    Consolidated Communications Holdings, Inc.
(Registrant)
   
 
           
Date: August 10, 2006
  By:   /s/ Robert J. Currey
 
Robert J. Currey
   
 
      President and Chief Executive Officer    
 
      (Principal Executive Officer)    
 
           
Date: August 10, 2006
  By:   /s/ Steven L. Childers
 
Steven L. Childers
   
 
      Chief Financial Officer    
 
      (Principal Financial Officer and    
 
      Chief Accounting Officer)    

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EXHIBIT INDEX
     
Exhibit    
Number   Description
 
   
2.1*
  Stock Purchase Agreement, dated January 15, 2004, between Pinnacle One Partners, L.P. and Consolidated Communications Acquisitions Texas Corp. (f/k/a Homebase Acquisition Texas Corp.)
 
   
2.2**
  Reorganization Agreement, dated July 21, 2005, among Consolidated Communications Illinois Holdings, Inc., Consolidated Communications Texas Holdings, Inc., Homebase Acquisition, LLC, and the equity holders named therein
 
   
3.1*
  Form of Amended and Restated Certificate of Incorporation
 
   
3.2*
  Form of Amended and Restated Bylaws
 
   
4.1*
  Specimen Common Stock Certificate
 
   
4.2*
  Indenture, dated April 14, 2004, by and among Consolidated Communications Illinois Holdings, Inc., Consolidated Communications Texas Holdings, Inc., Homebase Acquisition, LLC and Wells Fargo Bank, N.A., as Trustee, with respect to the 9 3 /4 % Senior Notes due 2012
 
   
10.1*
  Second Amended and Restated Credit Agreement, dated February 23, 2005, among Consolidated Communications Illinois Holdings, Inc., as Parent Guarantor, Consolidated Communications, Inc. and Consolidated Communications Acquisition Texas, Inc., as Co-Borrowers, the lenders referred to therein and Citicorp North America, Inc., as Administrative Agent
 
   
10.2*
  Amendment No. 1, dated April 22, 2005, to the Second Amended and Restated Credit Agreement, dated as of February 23, 2005, and Waiver under the Existing Credit Agreement among Consolidated Communications Illinois Holdings Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the lenders referred to therein and Citicorp North America, Inc.
 
   
10.3*
  Amendment No. 2, dated as of June 3, 2005, to the(i) Credit Agreement dated as of April 14, 2004, as amended and restated as of October 22, 2004 and (ii) the Second Amended and Restated
Credit Agreement, dated as of February 23, 2005, as amended on April 22, 2005, among Homebase Acquisition, LLC, Consolidated Communications Illinois Holdings, Inc., Consolidated Communications Texas Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the lenders referred to therein and Citicorp North America, Inc.
 
   
10.4***
  Amendment No. 3, dated as of November 25, 2005, to the (i) Credit Agreement dated as of April 14, 2004, as amended and restated as of October 22, 2004, (ii) the Second Amended and Restated Credit Agreement dated as of February 23, 2005, as amended on April 22, 2005 and as further amended June 3, 2005, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the lenders referred to therein as Citicorp North America, Inc.
 
   
10.5*
  Form of Amended and Restated Pledge Agreement, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the subsidiary guarantors named therein and Citicorp North America, Inc., as Collateral Agent

31


Table of Contents

     
Exhibit    
Number   Description
 
10.6*
  Form of Amended and Restated Security Agreement, among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., the subsidiary guarantors name therein and Citicorp North America, Inc., as Collateral Agent
 
   
10.7*
  Form of Amended and Restated Guarantee Agreement, among Consolidated Communications Holdings, Inc., Consolidated Communications Acquisition Texas, each subsidiary of each of Consolidated Communications, Inc. and Consolidated Communications Acquisition Texas, Inc. signatory thereto and Citicorp North America, Inc., as Administrative Agent
 
   
10.8*
  Lease Agreement, dated December 31, 2002, between LATEL, LLC and Consolidated Market Response, Inc.
 
   
10.9*
  Lease Agreement, dated December 31, 2002, between LATEL, LLC and Illinois Consolidated Telephone Company
 
   
10.10*
  Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company
 
   
10.11*
  Amendment No. 1 to Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company, dated March 18, 2002
 
   
10.12*
  Amended and Restated Consolidated Communications Holdings, Inc. Restricted Share Plan
 
   
10.13*
  Form of 2005 Long-term Incentive Plan
 
   
10.14^
  Stock Repurchase Agreement, dated July 13, 2006, by and among Consolidated Communications Holdings, Inc., Providence Equity Partners IV L.P. and Providence Equity Operating Partners IV L.P.
 
   
10.15^^
  Amendment No. 4 to the Second Amended and Restated Credit Agreement dated as of February 23, 2005, as amended as of April 22, 2005, June 3, 2005 and November 25, 2005, among the Company, Consolidated Communications Inc. and Consolidated Communications Acquisition Texas, Inc., as borrowers, the lenders referred to therein and Citicorp North America, Inc.
 
   
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
*   Incorporated by reference from the Registration Statement on Form S-1 (File No. 333-121086).
 
**   Incorporated by reference from the Current Report on Form 8-K filed on August 2, 2005.
 
***   Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
 
^   Incorporated by reference from the Current Report on Form 8-K filed on July 17, 2006.
 
^^   Incorporated by reference from the Current Report on Form 8-K filed on August 2, 2006.

32

 

Exhibit 31.1
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert J. Currey, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Consolidated Communications Holdings, Inc.,
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report,
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report,
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared,
 
  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and
 
  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information, and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
August 10, 2006
  /s/ Robert J. Currey
 
Robert J. Currey
   
 
  President and Chief Executive Officer    
 
  (Principal Executive Officer)    

33

 

Exhibit 31.2
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven L. Childers, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Consolidated Communications Holdings, Inc.,
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report,
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report,
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  (a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared,
 
  (b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and
 
  (c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  (a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information, and
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
August 10, 2006
  /s/ Steven L. Childers
 
Steven L. Childers
   
 
  Chief Financial Officer    
 
  (Principal Financial Officer and    
 
  Chief Accounting Officer)    

34

 

Exhibit 32.1
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002
     Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), Robert J. Currey and Steven L. Childers, President and Chief Executive Officer and Chief Financial Officer, respectively, of Consolidated Communications Holdings, Inc., each certify that to his knowledge (i) the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Consolidated Communications Holdings, Inc.
         
 
  / s/ Robert J. Currey
 
Robert J. Currey
   
 
  President and Chief Executive Officer    
 
  (Principal Executive Officer)    
 
  August 10, 2006    
 
       
 
  /s/ Steven L. Childers    
 
 
 
Steven L. Childers
   
 
  Chief Financial Officer    
 
  (Principal Financial Officer and    
 
  Chief Accounting Officer)    
 
  August 10, 2006    

35