Consolidated Communications Holdings, Inc. - Quarter Report: 2005 September (Form 10-Q)

 

 

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 Period Ended September 30, 2005

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from                                         to                                         

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No 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 November 7, 2005 was 29,737,510.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
Signatures
Exhibit Index
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-31.3: CERTIFICATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Communications Holdings, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Revenues		$	82,168			$	84,405			$	240,204			$	191,010
Operating expenses:
Cost of services and products (exclusive of depreciation and amortization shown separately below)			25,953				23,223				74,723				57,998
Selling, general and administrative expenses			32,419				27,768				75,517				60,798
Depreciation and amortization			16,920				16,942				50,852				37,484
Income from operations			6,876				16,472				39,112				34,730
Other income (expense):
Interest income			361				88				892				260
Interest expense			(20,175	)			(11,560	)			(43,704	)			(28,352	)
Partnership income			371				491				1,076				843
Dividend income			942				857				1,189				1,396
Minority interest			(85	)			(126	)			(433	)			(290	)
Other, net			215				107				3,204				219
Income (loss) before income taxes			(11,495	)			6,329				1,336				8,806
Income tax (benefit) expense			(1,270	)			2,842				3,701				3,662
Net income (loss)			(10,225	)			3,487				(2,365	)			5,144
Dividends on redeemable preferred shares			(1,142	)			(4,330	)			(10,263	)			(10,623	)
Net loss applicable to common stockholders		$	(11,367	)		$	(843	)		$	(12,628	)		$	(5,479	)
Net loss per common share:
Basic and diluted		$	(0.49	)		$	(0.09	)		$	(0.90	)		$	(0.61	)

See accompanying notes

Consolidated Communications Holdings, Inc.

Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)

		September 30,				December 31,
		2005				2004
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	33,687			$	52,084
Accounts receivable, net of allowance of $3,078 and $2,613, respectively			37,718				33,817
Inventories			3,107				3,529
Deferred income taxes			3,278				3,278
Prepaid expenses and other current assets			11,301				6,179
Total current assets			89,091				98,887
Property, plant and equipment, net			338,417				360,760
Intangibles and other assets:
Investments			43,853				42,884
Goodwill			324,721				318,481
Customer lists, net			139,097				149,805
Tradenames			14,546				14,546
Deferred financing costs and other assets			22,660				20,736
Total assets		$	972,385			$	1,006,099
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	—			$	41,079
Accounts payable			11,242				11,176
Advance billings and customer deposits			16,460				11,061
Accrued expenses			31,784				34,251
Total current liabilities			59,486				97,567
Long-term debt less current maturities			560,000				588,342
Deferred income taxes			70,724				66,641
Pension and postretirement benefit obligations			53,254				61,361
Other liabilities			2,592				3,223
Total liabilities			746,056				817,134
Minority interests			2,724				2,291
Redeemable preferred shares			—				205,469
Stockholders’ equity
Common stock, $0.01 par value, 100,000,000 shares, authorized, 29,687,510 and 10,000,000 issued and outstanding, respectively			297				—
Paid in capital			253,025				58
Accumulated deficit			(31,739	)			(19,111	)
Accumulated other comprehensive income			2,022				258
Total stockholders’ equity (deficit)			223,605				(18,795	)
Total liabilities and stockholders’ equity		$	972,385			$	1,006,099

See accompanying notes

Consolidated Communications Holdings, Inc.

Condensed Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2005				2004
OPERATING ACTIVITIES
Net income (loss)		$	(2,365	)		$	5,144
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization			50,852				37,484
Provision for bad debt losses			3,548				3,440
Deferred income tax			4,083				1,994
Pension curtailment gain			(7,880	)			—
Partnership income			(1,076	)			(2,027	)
Non-cash stock compensation			7,244				—
Minority interest in net income of subsidiary			433				290
Amortization of deferred financing costs			4,525				5,029
Changes in operating assets and liabilities:
Accounts receivable			(7,449	)			3,658
Inventories			422				560
Other assets			(5,296	)			(4,170	)
Accounts payable			66				(718	)
Accrued expenses and other liabilities			(36	)			14,979
Net cash provided by operating activities			47,071				65,663
INVESTING ACTIVITIES
Capital expenditures			(21,596	)			(17,272	)
Acquisition, net of cash acquired			—				(524,090	)
Net cash used in investing activities			(21,596	)			(541,362	)
FINANCING ACTIVITIES
Proceeds from issuance of stock			67,798				89,058
Proceeds from long-term obligations			5,688				637,000
Payments made on long-term obligations			(75,109	)			(186,316	)
Payment of deferred financing costs			(4,737	)			(18,956	)
Purchase of treasury shares			(12	)			—
Distribution to preferred shareholders			(37,500	)			—
Net cash provided by (used in) financing activities			(43,872	)			520,786
Net increase (decrease) in cash and cash equivalents			(18,397	)			45,087
Cash and cash equivalents at beginning of period			52,084				10,142
Cash and cash equivalents at end of period		$	33,687			$	55,229

See accompanying notes

Consolidated Communications Holdings, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2005
(Dollars in thousands)
(Unaudited)

																		Accumulated
																		Other
		Common Stock												Accumulated				Comprehensive
		Shares				Amount				Paid in Capital				Deficit				Income				Total
Balance, January 1, 2005			10,000,000			$	—			$	58			$	(19,111	)		$	258			$	(18,795	)
Net loss			—				—				—				(2,365	)			—				(2,365	)
Dividends on redeemable preferred shares			—				—				—				(10,263	)			—				(10,263	)
Reorganization and conversion of redeemable preferred shares to common stock in connection with initial public offering			13,692,510				237				177,997				—				—				178,234
Issuance of common stock			6,000,000				60				67,738				—				—				67,798
Non-cash stock compensation			—				—				7,244				—				—				7,244
Purchase and retirement of treasury shares			(5,000	)			—				(12	)			—				—				(12	)
Change in fair value of cash flow hedges, net of tax			—				—				—				—				1,764				1,764
Balance, September 30, 2005			29,687,510			$	297			$	253,025			$	(31,739	)		$	2,022			$	223,605

See accompanying notes

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousand, except share and per share amounts)

     1. Description of Business

     Consolidated Communications Holdings, Inc. and its wholly owned subsidiaries (the “Company”) operates 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. Each of the operating companies has been operating in their local markets for over 100 years. With approximately 245,000 local access lines and approximately 36,000 digital subscriber lines (“DSL”), 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, carrier access, telephone directories and billing and collection services. The Company also provides operator services, telecommunications services to state prison facilities, telecommunications equipment sales and maintenance, inbound/outbound telemarketing and fulfillment services, and paging 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 $67,798. 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, 2004, which were included in our registration statement on Form S-1 (File No. 333-121086) previously filed with the SEC. Certain amounts in the prior year financial statements have been reclassified to conform to the 2005 presentation.

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     4. Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 Revised, “Share Based Payment” (“SFAS 123R”), which replaced SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and superseded Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning January 1, 2006, with early adoption encouraged. SFAS 123R was adopted by the Company effective July 1, 2005 using the modified-prospective transition method. Under the guidelines of SFAS 123R, the Company recognized non-cash stock compensation expense of $7,244 during the three months ended September 30, 2005. See Note 12 (Restricted Share Plan).

     In May 2005, the FASB issued SFAS Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), a replacement of APB Opinion No. 20, “Accounting Changes”, and SFAS Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). SFAS 154 replaces the provisions of SFAS 3 with respect to reporting accounting changes in interim financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after June 1, 2005. Issuers that apply SFAS 154 in an interim period should provide the applicable disclosures specified in SFAS 154. The Company does not expect SFAS 154 will significantly impact its financial statements upon its adoption on January 1, 2006.

     5. Acquisition

     On April 14, 2004, the Company, through its wholly owned subsidiary Consolidated Communications Acquisition Texas, Inc. (“Texas Acquisition”), acquired all of the capital stock of TXU Communications Ventures Company (“TXUCV”) from Pinnacle One Partners L.P. By acquiring all of the capital stock of TXUCV, the Company acquired substantially all of the telecommunications assets of TXU Corp., including two RLECs, that together serve markets in Conroe, Katy and Lufkin, Texas, a directory publishing business, a transport services business that provides connectivity within Texas and minority interests in two cellular partnerships.

     The Company accounted for the TXUCV acquisition using the purchase method of accounting. Accordingly, the financial statements reflect the allocation of the total purchase price to the net tangible and intangible assets acquired based on their respective fair values. The purchase price, including acquisition costs and net of $9,897 of cash acquired, was allocated to assets acquired and liabilities assumed as follows:

Current assets		$	27,478
Property, plant and equipment			264,576
Customer list			108,200
Goodwill			235,032
Other assets			43,291
Liabilities assumed			(154,487	)
Net purchase price		$	524,090

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     The aggregate purchase price was derived from a competitive bidding process and negotiations and was influenced by the Company’s assessment of the value of the overall TXUCV business. The significant goodwill value reflects the Company’s view that the TXUCV business can generate strong cash flow and sales and earnings following the acquisition. In accordance with SFAS 142 “Goodwill and Other Intangible Assets”, the $235,032 in goodwill recorded as part of the TXUCV acquisition will not be amortized and will be tested for impairment at least annually. The customer list will be amortized over its estimated useful life of thirteen years. The goodwill and other intangibles associated with this acquisition did not qualify under the Internal Revenue Code as deductible for tax purposes.

     The Company’s consolidated financial statements include the results of operations for the TXUCV acquisition since the April 14, 2004, acquisition date. Unaudited pro forma results of operations data for the nine months ended September 30, 2004 as if the acquisition had occurred as of January 1, 2004 are as follows:

Total revenues		$	244,865
Income from operations		$	37,282
Proforma net income		$	2,698

     6. Goodwill and Customer Lists

     The following table summarizes the change in the carrying amount of goodwill by segment from December 31, 2004 through September 30, 2005:

		Telphone				Other
		Operations				Operations				Total
Balance at December 31, 2004		$	309,527			$	8,954			$	318,481
Finalization of TXUCV purchase accounting			6,240				—				6,240
Balance at September 30, 2005		$	315,767			$	8,954			$	324,721

     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:

		September 30,				December 31,
		2005				2004
Gross carrying amount		$	167,633			$	167,633
Less: accumulated amortization			(28,536	)			(17,828	)
Net carrying amount		$	139,097			$	149,805

     The aggregate amortization expense associated with customer lists was $3,569 and $3,584 for the three months ended September 30, 2005 and 2004, respectively and was $10,708 and $8,286 for the nine months ended September 30, 2005 and 2004, respectively. Customer lists are being amortized using a weighted average life of 11.7 years.

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     7. Investments

     The Company has a 17.02% ownership of GTE Mobilnet of Texas RSA #17 Limited Partnership (the “Mobilnet RSA Partnership”), which was obtained in connection with the TXUCV acquisition. The principal activity of the Mobilnet RSA Partnership is providing cellular service to a limited rural area in Texas. The Company accounts for this investment on the equity basis. Unaudited summarized financial information for the Mobilnet RSA Partnership was as follows:

For the three months ended September 30, 2005:
Total revenues		$	10,537
Income from operations			2,420
Income before income taxes			2,506
Net income			2,506
For the nine months ended September 30, 2005:
Total revenues		$	29,520
Income from operations			7,113
Income before income taxes			7,332
Net income			7,332
As of September 30, 2005:
Current assets		$	10,685
Non-current assets			25,626
Current liabilities			1,775
Non-current liabilities			—
Partnership equity			34,536

     8. 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 either 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.

     The following tables present the components of net periodic benefit cost for the three and nine months ended September 30, 2005 and 2004:

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

		Pension Benefits								Other Benefits
		2005				2004				2005				2004
Three months ended September 30,
Service cost		$	748			$	931			$	146			$	327
Interest cost			2,517				1,743				334				502
Expected return on plan assets			(2,773	)			(1,859	)			—				—
Other, net			11				—				(214	)			(13	)
Net periodic benefit cost		$	503			$	815			$	266			$	816
Nine months ended September 30,
Service cost		$	2,824			$	1,999			$	697			$	661
Interest cost			7,662				4,160				1,226				1,078
Expected return on plan assets			(8,376	)			(4,575	)			—				—
Curtailment Gain			—				—				(7,880	)			—
Other, net			37				(1	)			(360	)			(13	)
Net periodic benefit cost		$	2,147			$	1,583			$	(6,317	)		$	1,726

     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.

     For the nine months ended September 30, 2005, the Company made $5,267 in pension contributions and $1,288 in other postretirement contributions. The Company does not expect to contribute any additional funds to its pension plans during the remainder of 2005 and expects to contribute $532 to its other postretirement plans during the remainder of 2005.

     9. Long-Term Debt

     In connection with the IPO, the borrowers and lenders under the Company’s existing credit facilities amended and restated the credit agreement to enable the Company to pay dividends on its common stock and to provide aggregate financing of up to $455,000 consisting of:

	•		a new term loan D facility of $425,000 available as of July 27, 2005 and maturing on October 14, 2011; and
	•		a $30,000 revolving credit facility maturing on April 14, 2010.

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     The amended revolving credit facility did not change materially from the previous revolving credit facility and continues to include a subfacility for letters of credit as well as a swingline subfacility. The amended revolving credit facility was undrawn as of September 30, 2005 and remained available for general corporate purposes.

     Proceeds from the IPO were used primarily to redeem 32.5%, or $65,000, of the aggregate principal amount of the 9.75% senior notes due 2012 (including a redemption premium of 9.75% of the principal amount to be redeemed).

     Long-term debt consists of the following:

		September 30,				December 31,
		2005				2004
Senior Secured Credit Facility
Revolving loan		$	—			$	—
Term loan A			—				115,333
Term loan C			—				312,900
Term loan D			425,000				—
Senior notes			135,000				200,000
Capital leases			—				1,188
			560,000				629,421
Less: current portion			—				(41,079	)
		$	560,000			$	588,342

     10. 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 September 30, 2005, the Company had interest rate swap agreements covering $260,506 in aggregate principal amount of its variable rate debt at fixed LIBOR rates ranging from 3.03% to 4.57%. 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 $3,037 and $1,060 at September 30, 2005 and December 31, 2004, respectively. The fair value is included in other assets. The Company recognized a net loss of $46 and zero in interest expense during the three months ended September 30, 2005 and 2004, respectively, related to its derivative instruments and recognized a net loss of $96 and zero in interest expense during the nine months ended September 30, 2005 and 2004, 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 (loss) / income of $855 and ($1,438) during the three months ended September 30, 2005 and 2004, respectively and $1,764 and ($150) during the nine months ended September 30, 2005 and 2004, respectively. See Note 17 (Subsequent Events).

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     11. Redeemable Preferred Shares

     On June 7, 2005, the Company made a $37,500 cash distribution to holders of its redeemable preferred shares.

     On July 27, 2005, all of the outstanding redeemable preferred shares, with a liquidation preference totaling approximately $178,234, were exchanged for 13,710,318 shares of the Company’s common stock which was computed based upon the initial offering price of $13.00 per common share.

     12. Restricted Share Plan

     In connection with the IPO, the Company amended and restated its Restricted Share Plan. The vesting schedule of outstanding awards was modified such that an additional 25% of the outstanding restricted shares granted became vested. The amendment and restatement also removed a call provision contained within the original plan. As a result, the accounting treatment changed from a liability plan, for which expense was recognized based on a formula, to an equity plan for which expense is recognized based upon fair value at the measurement date under the guidelines of SFAS 123R. The amendment and restatement represented a modification to the terms of the equity awards, resulting in a new measurement date and non-cash compensation expense of $6,391 as of July 27, 2005. The $6,391 represents the fair value of the vested shares as of the new measurement date. The fair value was determined based upon the IPO price of $13.00 per share. An additional $853 was recognized as non-cash compensation expense during the period from July 28, 2005 through September 30, 2005. The measurement date value of remaining unvested shares is expected to be recognized as non-cash compensation expense over the remaining three-year vesting period, less a provision for estimated forfeitures. No expense had been recognized prior to the amendment because the formula calculation was negative.

     The shares granted under the Restricted Share Plan are considered outstanding at the date of grant, as the recipients are entitled to dividends and voting rights. The following table presents the restricted stock activity for the nine months ended September 30, 2005:

Restricted shares outstanding, January 1, 2005			750,000
Shares vested			(241,617	)
IPO conversion adjustment			(1,773	)
Shares forfeited or retired			(5,000	)
Restricted shares outstanding, September 30, 2005			501,610

     13. Life Insurance Proceeds

     In June 2005, the Company recognized $2,800 of net proceeds in other income due to the receipt of key man life insurance proceeds relating to the passing of a former TXUCV employee.

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     14. Net Loss per Common Share

     The following table sets forth the computation of net loss per common share for the three and nine months ended September 30, 2005 and 2004:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Basic and diluted:
Net loss applicable to common stockholders		$	(11,367	)		$	(843	)		$	(12,628	)		$	(5,479	)
Weighted average number of common shares outstanding			23,328,524				9,000,000				13,990,267				9,000,000
Net loss per common share		$	(0.49	)		$	(0.09	)		$	(0.90	)		$	(0.61	)

     Non-vested shares issued pursuant to the Restricted Share Plan (Note 12) were not considered outstanding for the computation of basic and diluted net loss per share as their effect was anti-dilutive.

     15. Other Comprehensive Income (Loss)

     The following table presents the components of comprehensive income for the three and nine months ended September 30, 2005 and 2004:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net income (loss)		$	(10,225	)		$	3,487			$	(2,365	)		$	5,144
Other comprehensive income (loss):
Change in fair value of cash flow hedges, net of tax			855				(1,438	)			1,764				(150	)
Unrealized loss on marketable securities, net of tax			—				—				—				(49	)
Total comprehensive income (loss)		$	(9,370	)		$	2,049			$	(601	)		$	4,945

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

     16. 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 local telephone, long-distance and network access services, telephone directories and data and Internet products provided to both residential and business customers. All other business activities comprise “Other Operations”, including operator services products, telecommunications services to state prison facilities, equipment sales and maintenance, inbound/outbound telemarketing and fulfillment services, and paging services. Management evaluates the performance of these business segments based upon revenue, gross margins, and net operating income.

     The business segment reporting information is as follows:

		Telephone				Other
		Operations				Operations				Total
Three months ended September 30, 2005:
Operating revenues		$	72,041			$	10,127			$	82,168
Cost of services and products			19,465				6,488				25,953
			52,576				3,639				56,215
Operating expenses			29,855				2,564				32,419
Depreciation and amortization			15,630				1,290				16,920
Operating income (loss)		$	7,091			$	(215	)		$	6,876
Three months ended September 30, 2004:
Operating revenues		$	75,296			$	9,109			$	84,405
Cost of services and products			17,526				5,697				23,223
			57,770				3,412				61,182
Operating expenses			25,076				2,692				27,768
Depreciation and amortization			15,599				1,343				16,942
Operating income (loss)		$	17,095			$	(623	)		$	16,472
Nine months ended September 30, 2005:
Operating revenues		$	211,604			$	28,600			$	240,204
Cost of services and products			56,444				18,279				74,723
			155,160				10,321				165,481
Operating expenses			67,945				7,572				75,517
Depreciation and amortization			47,009				3,843				50,852
Operating income (loss)		$	40,206			$	(1,094	)		$	39,112

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Three and nine months ended September 30, 2005 and 2004
(Dollars in thousands, except share and per share amounts)

		Telephone				Other
		Operations				Operations				Total
Nine months ended September 30, 2004:
Operating revenues		$	161,155			$	29,855			$	191,010
Cost of services and products			39,861				18,137				57,998
			121,294				11,718				133,012
Operating expenses			52,753				8,045				60,798
Depreciation and amortization			33,453				4,031				37,484
Operating income (loss)		$	35,088			$	(358	)		$	34,730
As of September 30, 2005:
Goodwill		$	315,767			$	8,954			$	324,721
Total assets		$	928,602			$	43,783			$	972,385
As of December 31, 2004:
Goodwill		$	309,527			$	8,954			$	318,481
Total assets		$	936,545			$	69,554			$	1,006,099

     17. Subsequent Events

          On October 5, 2005, the Company announced that its board of directors declared an initial dividend of $0.4089 per share on the Company’s common stock. The dividend was paid on November 1, 2005 to stockholders of record at the close of business on October 15, 2005.

          On October 13, 2005, the Company made a $2,500 cash payment to Michael F. Hinds (“Hinds”) pursuant to a Settlement Agreement and Mutual Release (the “ Settlement Agreement”) among the Company and certain of its equity investors, (collectively the “Company Parties”) and Ono Albany, Inc. (“Ono Albany”). Without admitting any liability, the Company Parties agreed to settle Hinds’ causes of action against the Company Parties in the United States District Court for the Southern Division of Texas, Galveston Division (the “Litigation”), as well as any claims that Hinds or Ono Albany could have brought against the Company Parties in the Litigation, for a cash payment of $2,500. The Litigation arises out of Hinds’ work as a consultant to the Company Parties in connection with the Company’s acquisition of TXUCV. The Settlement Agreement also includes a complete release of the Company Parties. The Company believed that, although it had meritorious defenses to Hinds’ claims, it was in the Company’s best interests to settle the Litigation given the costs of defending the matter and the diversion of the Company’s management’s personnel. In connection with the Settlement Agreement, the Company incurred total charges of approximately $3,100, including legal fees and expenses. Approximately $400 of the charges were recognized during the first half of 2005 and the remaining $2,700 were recognized during the Company’s third quarter ended September 30, 2005.

          On October 12, 2005, the Company entered into agreements to hedge an additional $100,000 of variable rate debt with swaps that will be effective as of January 3, 2006. Had these swaps been in place on September 30, 88.5% of the Company’s long-term obligations would have been fixed rate and 11.5% would have been variable rate.

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”, the “Company” or “CCHI”) on a consolidated basis. The following discussion should be read in conjunction with the Company’s historical financial statements 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 the integration of TXUCV;
	•		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; and
	•		liability and compliance costs regarding environmental regulations.

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 RLEC that provides communications services to residential and business customers in Illinois and in Texas. As of September 30, 2005, we estimate that based on industry sources we were the 15^th largest local telephone company in the United States, with 244,902 local access lines and 36,051 DSL subscribers. Our main sources of revenue 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, carrier access, telephone directories and billing and collection services. In Illinois, we provide additional services such as telephone service to county jails and state prisons, operator and national directory assistance and telemarketing and order fulfillment services and we began publishing telephone directories in the third quarter of 2005. In Texas, we also offer wholesale transport services on a fiber optic network.

     Acquisitions

          The Company began operations in Illinois with the acquisition of ICTC from McLeodUSA on December 31, 2002, and in Texas with the acquisition of TXUCV from TXU Corp. on April 14, 2004 for $524.1 million in cash, net of cash acquired and including transaction costs. As a result of the foregoing, period-to-period comparisons of our financial results to date are not necessarily meaningful and should not be relied upon as an indication of future performance due to the following factors:

	•		Revenues and expenses for the three and nine months ended September 30, 2004 include the results of CCI Texas only from April 14, 2004, the date of the TXUCV acquisition. For all periods prior to April 14, 2004, our financial results only included CCI Illinois. For all periods subsequent to April 14, 2004, our financial statements include CCI Illinois and CCI Texas on a consolidated basis.
	•		In connection with the TXUCV acquisition, we currently expect to incur approximately $14.5 million in operating expenses associated with the integration and restructuring process in 2004 and 2005. As of September 30, 2005, $12.4 million had been spent on integration and restructuring, including $0.8 million and $5.4 million for the three and nine months ended September 30, 2005, respectively. These one-time integration and restructuring costs will be in addition to certain ongoing expenses we expect to incur to expand certain administrative functions, such as those related to SEC reporting and compliance, and do not take into account other potential cost savings and expenses of the TXUCV acquisition.

•

Expenses for the three-month periods ended September 30, 2004 and 2005 contain $1.3 million and $0.4 million and for each of the nine month periods ended September 30, 2004 and 2005 contain $2.9 million in aggregate professional service fees paid to our existing equity investors. In connection with the acquisition of ICTC and then TXUCV, the Company and certain of its subsidiaries entered into professional service agreements with our equity investors for consulting, advisory and other professional services. These arrangements and the rights of our existing equity investors to earn these fees terminated with the closing of the IPO described below.

     Initial Public Offering

          On July 27, 2005, we completed 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 to the Company of $67.8 million. 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.

          Expenses related to our IPO that have been recorded in the three months ended September 30, 2005 include:

	•		$10.2 million in direct costs of issuing the equity that were recorded as a reduction to paid in capital;
	•		approximately $3.6 million in one-time fees and expenses related to the amendment and restatement of the credit facility that were recorded as deferred financing costs and will be amortized over the life of the term loan D facility;
	•		a redemption premium of $6.3 million and the write-off of $2.3 million of deferred financing costs both in connection with the redemption of $65.0 million of our senior notes;
	•		$7.2 million of non-cash compensation expense as a result of the amendment of our restricted share plan.

     As a result of the dividend policy that our board of directors adopted effective upon closing of the IPO, we currently intend to pay quarterly dividends at an annual rate of $1.5495 per share for the first year following the consummation of the IPO, subject to various restrictions on our ability to do so. We currently expect to pay aggregate dividends of $46.1 million in the year following the closing of the IPO. On November 1, 2005 we paid an initial dividend of $0.4089 per share (representing a pro rata portion of the expected dividend for the first year following the closing of the IPO) to stockholders of record as of October 15, 2005.

     Although it is our current intention to pay quarterly dividends according to the dividend policy described in the preceding paragraph, stockholders may not receive any dividends as a result of several factors, which are summarized in the prospectus we filed with the SEC on July 25, 2005. We have no history of paying dividends out of our cash flow. Dividends on our common stock will not be cumulative. In addition, our dividend policy may limit our ability to pursue growth opportunities, such as to fund a material expansion of our business, including any significant acquisitions or to increase capital spending to expand our business materially. However, we will evaluate potential growth opportunities and capital expenditures as they arise and, if our board of directors determines that it is in our best interest to use cash that would otherwise be available for dividends to pursue an acquisition opportunity, to materially increase capital spending or for some other purposes, the board would be free to depart from our dividend polity at any time.

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.

          Telephone Operations added revenues for the nine months ended September 30, 2005, primarily because of the inclusion of the results from our Texas Telephone Operations. In 2004, Telephone Operations included revenues from our Texas Telephone Operations only for periods after the April 14, 2004 acquisition of TXUCV. We do not anticipate significant growth in revenues from our current Telephone Operations due to its primarily rural service area, but we do expect relatively consistent cash flow from year-to-year due to stable customer demand, limited competition and a generally supportive regulatory environment.

          Other Operations revenues for the nine months ended September 30, 2005 were lower than the same period in 2004 due primarily to losing the telemarketing and fulfillment contract with the Illinois Toll Highway Authority in mid-2004.

          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 tables below, we had 244,902 local access lines in service as of September 30, 2005, which is a decrease of 10,306 from the 255,208 local access lines we had on December 31, 2004.

          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. Excluding the effect of the TXUCV acquisition, we have lost access lines in each of the last two years. 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. Since December 31, 2004, one-third of our residential line loss is attributed to the disconnection of second lines.

          A significant portion of our line loss in Texas in the first nine months of 2005 is 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, our Texas Telephone Operations experienced a loss of approximately 4,708 lines during the first nine months of 2005. Without the effect of the MCI Metro regrooming in Texas, total connections for the Company would have increased by 3,550. In total, the MCIMetro regrooming in our Texas Telephone Operations represented 32% of our access line loss on a year-to-year basis. Because these lines did not generate long distance, access or subsidy revenue, the revenue loss associated with the migration is expected to be approximately one-fifth what it would have been if we had lost an equivalent number of commercial access lines. In other words, the loss of 4,708 ISP lines has a revenue impact that is comparable to the loss of 861 commercial lines. The migration of MCIMetro’s ISP traffic in Texas is complete, and we have no remaining MCIMetro ISP lines in Texas. However, we have approximately 672 MCIMetro ISP lines remaining in Illinois. We have received notice that the Illinois lines are expected to be migrated in the fourth quarter of 2005

          We have mitigated the decline in local access lines with increased average revenue per customer 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 (introduced in Illinois in July 2004 and in Katy, Texas in March 2005), digital video service (introduced in Illinois in January 2005) and promotional offers like discounted second lines. In addition, 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 for the three and nine months ended September 30, 2005. The number of DSL subscribers we serve increased by 31.4% to approximately 36,051 lines as of September 30, 2005 from approximately 27,445 lines as of December 31, 2004. Currently over 90% of our rural telephone companies’ local access lines are DSL capable. The penetration rate for DSL lines in service was approximately 14.8% of our local access lines at September 30, 2005.

          We have also been successful in generating revenues in Telephone Operations by bundling combinations of local service, custom calling features, voicemail and Internet access. The number of these bundles, which we refer to as service bundles, increased 15.8% to approximately 35,100 service bundles at September 30, 2005 from approximately 30,300 service bundles at December 31, 2004.

          Our strategy is to continue to execute the plan we have had for the past two years and to continue to implement the plan in Texas (where we acquired our rural telephone operations in April 2004). 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 sets forth several key metrics as of the end of the periods presented:

CCI Illinois		September 30,				December 31,				September 30,
		2005				2004				2004
Local access lines in service
Residential			53,538				55,627				56,641
Business			30,549				31,255				31,613
Total local access lines			84,087				86,882				88,254
DSL subscribers			13,528				10,794				10,109
Total connections			97,615				97,676				98,363
Video subscribers			1,053				101				—
Long distance lines			55,803				54,345				53,713
Dial-up subscribers			6,891				7,851				8,038
Service bundles			10,199				9,175				8,595

CCI Texas		September 30,				December 31,				September 30,
		2005				2004				2004
Local access lines in service
Residential			110,504				113,151				114,292
Business			50,311				55,175				55,180
Total local access lines			160,815				168,326				169,472
DSL subscribers			22,523				16,651				14,276
Total connections			183,338				184,977				183,748
Video subscribers			—				—				—
Long distance lines			86,508				84,332				84,248
Dial-up subscribers			9,817				13,333				14,791
Service bundles (approximate)			24,964				21,300				20,267

Total Company		September 30,				December 31,				September 30,
		2005				2004				2004
Local access lines in service
Residential			164,042				168,778				170,933
Business			80,860				86,430				86,793
Total local access lines			244,902				255,208				257,726
DSL subscribers			36,051				27,445				24,385
Total connections			280,953				282,653				282,111
Video subscribers			1,053				101				—
Long distance lines			142,311				138,677				137,961
Dial-up subscribers			16,708				21,184				22,829
Service bundles (approximate)			35,163				30,475				28,862

     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 McLeodUSA and other 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 affects 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 professional service fees.

          Our Telephone Operations segment incurs selling, marketing and customer care expenses from its customer 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 are in the process of migrating 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 nine months ended September 30, 2005 we spent $5.4 million on integration and restructuring expenses and expect to spend $2.1 million during the remainder of 2005 for these expenses.

     Depreciation and Amortization Expenses

          We recognize depreciation expenses for our regulated telephone plant using rates and lives approved by the Illinois Commerce Commission (“ICC”) in Illinois and the Public Utility Commission (“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:

		Years
Buildings			15-35
Network and outside plant facilities			5-30
Furniture, fixtures and equipment			3-17

          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. Software and customer relationships are amortized over their useful lives of five and ten years, respectively.

     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 the consolidated results of CCHI.

Results of Operations

     Three and Nine months Ended September 30, 2005 Compared to Three and Nine months Ended September 30, 2004

     Revenues

          The following charts summarize, for the periods presented, the revenues and percentage of revenues for CCHI as well as for TXUCV prior to the acquisition.

		Consolidated Communications Holdings, Inc.
		Three months ended September 30,																Nine months ended September 30,
						% of								% of																% of
						Total								Total								% of Total								Total
$ (millions)		2004				Revenues				2005				Revenues				2004				Revenues				2005				Revenues
Revenues
Telephone Operations
Local calling services		$	22.7				26.9	%		$	22.1				26.9	%		$	52.5				27.5	%		$	67.1				27.9	%
Network access services			16.7				19.8				16.3				19.8				38.1				20.0				48.0				20.0
Subsidies			17.4				20.6				14.7				17.9				29.8				15.6				40.5				16.9
Long distance services			4.3				5.1				4.1				5.0				10.4				5.4				12.3				5.1
Data and Internet services			6.3				7.4				6.4				7.8				14.5				7.6				19.2				8.0
Other services			7.9				9.4				8.5				10.3				15.9				8.3				24.5				10.2
Total Telephone Operations			75.3				89.2				72.1				87.7				161.2				84.4				211.6				88.1
Other Operations			9.1				10.8				10.1				12.3				29.8				15.6				28.6				11.9
Total operating revenues		$	84.4				100.0	%		$	82.2				100.0	%		$	191.0				100.0	%		$	240.2				100.0	%

		Predecessor to CCI Texas
		January 1 -				% of
		April 13,				Total
$ (millions)		2004				Revenues
Revenues
Telephone Operations
Local calling services		$	16.9				31.4	%
Network access services			10.6				19.7
Subsidies			11.0				20.4
Long distance services			3.5				6.5
Data and Internet services			3.9				7.2
Other services			8.0				14.8
Total Telephone Operations			53.9				100.0
Other Operations			—				—
Total operating revenues		$	53.9				100.0	%

          Our revenues decreased by 2.6%, or $2.2 million, to $82.2 million for the three months ended September 30, 2005, from $84.4 million during the same period in 2004.

          Our revenues increased by 25.8%, or $49.2 million, to $240.2 million for the nine months ended September 30, 2005, from $191.0 million during the same period in 2004. Had our Texas Telephone Operations been included for the entire period, we would have had an additional $53.9 million of revenues for the nine months ended September 30, 2004, which would have resulted in a $4.7 million decrease in our revenues between 2004 and 2005.

     Telephone Operations Revenues

          Local calling services revenues decreased by 2.6%, or $0.6 million, to $22.1 million for the three months ended September 30, 2005 compared to $22.7 million during the same period in 2004.

          For the nine months ended September 30, 2005, local calling services revenues increased by 27.8%, or $14.6 million, to $67.1 million compared to $52.5 million during the same period in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $16.9 million of revenues, which would have resulted in a $2.3 million decrease in our local calling services revenues between 2004 and 2005.

          In each period, the decrease is primarily due to the continued decline in local access lines.

          Network access services revenues decreased by 2.4%, or $0.4 million, to $16.3 million for the three months ended September 30, 2005 compared to $16.7 million during the same period in 2004. Prior to our July 2004 interstate interstate tariff filing being approved in Texas, we had temporary rates in effect for approximately one month during the third quarter of 2004. These temporary rates generated $0.4 million of incremental revenue in 2004 that was not repeated in 2005.

          For the nine months ended September 30, 2005, network access services revenues increased by 26.0%, or $9.9 million to $48.0 million compared to $38.1 million during the same period in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $10.6 million of revenues, which would have resulted in a $0.7 million decrease in network access services revenues between 2004 and 2005. In addition to the incremental revenue received while under temporary tariff rates, as described above, we also experienced a decline in our fixed switched access rates. Both our Illinois and Texas operations are under rate of return regulation for the interstate jurisdiction. The FCC requires us, on a biannual basis, to update our interstate access rates and tariff. These are rates being charged to other carriers for access to our network. Upon filing our tariff during 2004, we reviewed the rates we were charging other carriers, which resulted in the decline in our switched access rates.

          Subsidies revenues decrease by 15.5%, or $2.7 million, to $14.7 million for the three months ended September 30, 2005 compared to $17.4 million during the same period in 2004. The decrease is primarily due to a $3.1 million difference in the amount subsidies received for out-of-period settlements in 2004 compared to 2005.

          For the nine months ended September 30, 2005, subsidy revenues increased by 35.9%, or $10.7 million, to $40.5 million from $29.8 million during the same period in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $11.0 million of revenues, which would have resulted in a $0.3 million decrease in subsidies revenues between 2004 and 2005. In 2004, our Illinois rural telephone company analyzed its regulated assets and associated expenses and reclassified some of these for purposes of its regulatory filings. Due to this reclassification, our Illinois

rural telephone company received additional subsidy payments in 2005, which were offset by the timing of prior period subsidy receipts in both 2004 and 2005.

          Long distance services revenues decreased by 4.7%, or $0.2 million, to $4.1 million for the three months ended September 30, 2005 compared to $4.3 million during the same period in 2004.

          Long distance services revenues for the nine months ended September 30, 2005 increased by 18.3%, or $1.9 million, to $12.3 million compared to $10.4 million in the same period of 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $3.5 million of revenues, which would have resulted in a decrease of $1.6 million in our long distance revenues between 2004 and 2005.

          In each period presented, the decrease in long distance revenues was 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. While these plans are helpful in attracting new customers, 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 1.6%, or $0.1 million, to $6.4 million for the three months ended September 30, 2005 compared to $6.3 million for the same period in 2004.

          For the nine months ended September 30, 2005, data and Internet revenues increased by 32.4%, or $4.7 million, to $19.2 million from $14.5 million during the same period in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $3.9 million of revenues, which would have resulted in a $0.8 million increase in our data and Internet revenues between 2004 and 2005.

          In each period presented, the revenue increase is due to increased DSL penetration. The number of DSL lines in service increased from 24,385 at September 30, 2004 to 36,051 as of September 30, 2005. The increase in DSL subscriber revenue is partially offset by a portion of our residential customers substituting other DSL or cable modem services for our dial-up Internet service as well as a decrease in private line revenue.

          Other Services revenues increased by 7.6%, or $0.6 million, to $8.5 million for the three months ended September 30, 2005 compared to $7.9 million during the same period in 2004.

          For the nine months ended September 30, 2005, revenue from other services increased by 54.1%, or $8.6 million, to $24.5 million from $15.9 million during the same period in 2004. Had our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $8.0 million of revenues, which would have resulted in a $0.6 million increase in our other services revenue between 2004 and 2005.

          In each period the increase is due to revenue from our new Illinois directory publishing unit which was started-up in 2005.

     Other Operations Revenue

          Other Operations revenues increased by 11.0%, or $1.0 million, to $10.1 million for the three months ended September 30, 2005 compared to $9.1 million during the same period in 2004. Equipment and wiring sales increased by $0.5 million, while our prison systems unit and telemarketing unit both contributed to the remainder of the net increase in revenue between the two quarterly periods.

     Revenues for the nine months ended September 30, 2005 decreased by 4.0%, or $1.2 million, to $28.6 million compared to $29.8 million during the same period of 2004. Because of the additional sites being served, our prison systems unit generated a revenue increase of $0.5 million for the period, while increased business system sales produced $0.4 million of increased revenue. However, our telemarketing

and fulfillment unit lost $2.4 million in revenue from the non-renewal of the Illinois State Toll Highway agreement, of which approximately $1.0 million has been recovered through new customers. Decreased customer usage and competitive price adjustments in our operating services unit accounted for the remainder of the loss.

     Operating Expenses

          The following charts summarize, for the periods presented, the operating expenses and percentage of revenues from continuing operations for CCHI as well as for TXUCV prior to the acquisition.

		Consolidated Communications Holdings, Inc.
		Three months ended September 30,																Nine months ended September 30,
						% of Total								% of Total								% of Total								% of Total
$ (millions)		2004				Revenues				2005				Revenues				2004				Revenues				2005				Revenues
Operating Expenses
Telephone Operations operating expense		$	42.6				50.5	%		$	49.3				60.0	%		$	92.6				48.5	%		$	124.3				51.7	%
Other Operations operating expense			8.4				10.0				9.1				11.1				26.2				13.7				25.9				10.8
Depreciation and amortization			16.9				20.0				16.9				20.5				37.5				19.6				50.9				21.2
Total Operating expense		$	67.9				80.5	%		$	75.3				91.6	%		$	156.3				81.8	%		$	201.1				83.7	%

		Predecessor to CCI Texas
		January 1 -				% of
		April 13,				Total
$ (millions)		2004				Revenues
Operating Expenses
Telephone Operations operating expense		$	39.4				73.1	%
Other Operations operating expense			—				—
Depreciation and amortization			8.1				15.0
Total Operating expense		$	47.5				88.1	%

          CCIH operating expenses increased by 10.9%, or $7.4 million, to $75.3 million for the three months ended September 30, 2005 from $67.9 million during the same period in 2004.

          CCIH operating expenses increased by 28.7%, or $44.8 million, to $201.1 million for the nine months ended September 30, 2005 from $156.3 million during the same period in 2004. Had our Texas Telephone Operations operating expenses been included for the entire period in 2004, we would have had an additional $47.5 million of operating expenses, which would have resulted in a decrease of $2.7 million during the period.

          The third quarter results contain $7.2 million of non-cash compensation expense, which we began recognizing upon completion of the IPO and related transactions. Of the total non-cash compensation expense, $7.1 million was attributed to Telephone Operations. In addition, we recognized $2.7 million of expense in the third quarter and $3.1 million during the nine months ending September 30, 2005 in connection with a lawsuit that had been brought against the Company.

     Telephone Operations Operating Expense

          Operating expenses for Telephone Operations increased by 15.7%, or $6.7 million, to $49.3 million for the three months ending September 30, 2005 compared to $42.6 million during the same period in 2004. As described above, the increase was driven by the recognition of $7.1 million of non-cash compensation expense associated with the amendment of our Restricted Share Plan and $2.7 million associated with a one-time litigation settlement. During the period we recognized savings of $0.9 million due to the termination of the professional services agreements with our previous equity investors and a decline of $0.4 million in integration expenditures and cost structure

improvements associated with changes to the pension plan, closing our Irving, TX office and staffing reductions.

          For the nine months ended September 30, 2005, operating expenses for Telephone Operations increased by 34.2%, or $31.7 million, to $124.3 million compared to $92.6 million during same period in 2004. Had our Texas Telephone Operations operating expenses been included for the entire period in 2004, we would have had an additional $39.4 million of Telephone Operations operating expenses, which would have resulted in a $7.7 million decrease in our operating expenses between 2004 and 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 a $7.9 million curtailment gain and additional ongoing annual savings of $2.0 million. In addition, due to the termination of the professional services agreement we saved $0.9 million in 2005. The 2004 results contained sale related costs of $8.2 million for severance, transaction and other costs that did not recur in 2005. Offsetting these savings are increased expenses of $7.1 million associated with the amendment of our Restricted Share Plan as well as $0.6 million of legal fees and a payment of $2.5 million both in connection with the litigation settlement.

     Other Operations Operating Expenses

          Operating expenses for Other Operations increased by 8.3%, or $0.7 million, to $9.1 million for the three months ended September 30, 2005 compared to $8.4 million during same period in 2004. The increase was due to increased cost of sales associated with higher revenues from equipment and wiring sales as well as increased telemarketing and fulfillment sales.

          Other Operations operating expenses decreased by 1.1%, or $0.3 million, to $25.9 million for the nine months ended September 30, 2005 compared to $26.2 million during the same period in 2004. Decreased sales volumes in operator services unit led to decreased cost of sales.

     Depreciation and Amortization

          Depreciation and amortization expense was $16.9 million for the three months ended September 30, 2005 and 2004.

          For the nine months ended September 30, 2005, depreciation and amortization expense increased by 35.7%, or $13.4 million, to $50.9 million compared to $37.5 million during the same period in 2004. Had our Texas Telephone Operations depreciation and amortization expenses been included for the entire period in 2004, we would have had an additional $8.1 million of depreciation and amortization expenses, which would have resulted in a $5.3 million increase in our depreciation and amortization expenses between 2004 and 2005. As a result of the purchase price allocation, the value of most of CCI Texas’ tangible and intangible assets increased, which resulted in higher depreciation and amortization expense

     Non-Operating Income (Expense)

          The following charts summarize, for the periods presented, the non-operating expenses and percentage of revenues from continuing operations for CCHI as well as for TXUCV prior to the acquisition.

		Consolidated Communications Holdings, Inc.
		Three months ended September 30,																Nine months ended September 30,
						% of								% of								% of								% of
						Total								Total								Total								Total
$ (millions)		2004				Revenues				2005				Revenues				2004				Revenues				2005				Revenues
Other income (expense)
Interest expense, net		$	(11.5	)			(13.6	%)		$	(19.8	)			(24.1	%)		$	(28.1	)			(14.7	%)		$	(42.8	)			(17.8	%)
Other income, net			1.3				1.5				1.4				1.7				2.1				1.1				5.0				2.1
Income tax (expense) benefit			(2.8	)			(3.3	)			1.3				1.6				(3.6	)			(1.9	)			(3.7	)			(1.5	)
Total other income (expense)		$	(13.0	)			(15.4	%)		$	(17.1	)			(20.8	%)		$	(29.6	)			(15.5	%)		$	(41.5	)			(17.3	%)

		Predecessor to CCI Texas
		January 1 -				% of Total
$ (millions)		April 13, 2004				Revenues
Other income (expense)
Interest expense, net		$	(3.2	)			(5.9	%)
Other income, net			1.1				2.0
Income tax (expense) benefit			2.5				4.6
Total other income (expense)		$	0.4				0.7	%

     Interest Expense, Net

          Interest expense increased by 72.2%, or $8.3 million, to $19.8 million for the three months ended September 30, 2005 compared to $11.5 million during the same period in 2004. The increase is due in part to a redemption premium of $6.3 million that was incurred and deferred financing cost write-off of $2.3 million, each incurred upon redeeming $65.0 million of our senior notes in August 2005. The increase was partially offset by lower interest expense due to the redemption of $65.0 million of senior notes in August 2005.

          For the nine months ended September 30, 2005, interest expense increased by 52.3%, or $14.7 million, to $42.8 million from $28.1 million during the same period in 2004. Had the results of our Texas Telephone Operations been included for the entire period in 2004, we would have had an additional $3.2 million of interest expense, which would have resulted in an increase of $11.5 million in our interest expense, net between 2004 and 2005. As described above, $8.6 million of interest expense was incurred in 2005 in connection with the redemption of $65.0 million of our senior notes. In addition, the additional debt incurred in connection with the TXUCV acquisition was included for the entire period in 2005 but only for the period after the April 14, 2004 acquisition date. The increase in 2005 interest expense is partially offset by a $4.2 million write-off of deferred financing costs in 2004 and a $1.9 million pre-payment penalty, which were incurred in connection with the acquisition in 2004.

     Other Income (Expense)