Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-Q**

# ** **

| **x**                                                                                                                                                                                                                 | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                  |                                                                                                     |
| **for the  quarterly period ended March 31, 2010**                                                                                                                                                               |
| ** **                                                                                                                                                                                                            | ** **                                                                                               |
| **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 COMMUNICATIONSHOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **02-0636095**                    |
|---------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of |       | (IRS Employer Identification No.) |
| incorporation or organization)  |       |                              |

 

| **121 South 17****th**** Street**   | ** ** | ** **     |
|------------------------------------------|------------|----------------|
| **Mattoon, Illinois**                    | ** ** | **61938-3987** |
| (Address of Principal Executive Offices) |       | (Zip Code)     |

 

**(217) 235-3311**

(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

YES x   NO o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).

YES o   NO o

 

Indicate by checkmark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  Seedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o           |   | Accelerated filer  x         |
|------------------------------------------------|--------|----------------------------------------|
|                                           |   |                                   |
| Non-accelerated filer  o             |   | Smaller reporting company  o |
| (Do not check if a smaller  reporting company) |   |                                   |

 

Indicate by checkmark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES o   NO x

 

Indicate the number of shares outstanding of each classof Common Stock, as of the latest practicable date

 
| **Class**                     | ** ** | **Outstanding as of May 5,  2010** |
|-------------------------------|------------|-----------------------------------------|
| Common Stock, $0.01 Par Value |       | 29,822,604 Shares                       |

 

 

 

----

# **Table of Contents**

 

# **FORM 10-Q**

# ** **

**QUARTERLY REPORT**

 

***TABLE OF CONTENTS***

 
| ** **   | ** **                                                                                                                          | **Page No.** |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|         |                                                                                                                                |              |
| PART I  |
|         |                                                                                                                                |              |
| Item 1.      | Financial  Statements                                                                                                               |              |
|         | Condensed Consolidated Statements of Operations  (Unaudited) - Three month periods ended March 31, 2010 and 2009               | 1                 |
|         | Condensed Consolidated Balance Sheets – March 31,  2010 (Unaudited) and December 31, 2009                            | 2                 |
|         | Condensed Consolidated Statement of Changes in  Stockholders’ Equity (Unaudited) – Three months ended March 31, 2010 | 3                 |
|         | Condensed Consolidated Statements of Cash Flows  (Unaudited) - Three month periods ended March 31, 2010 and 2009               | 4                 |
|         | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                     | 5                 |
|         |                                                                                                                                |              |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                         | 19                |
|         |                                                                                                                                |              |
| Item  3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                         | 31                |
|         |                                                                                                                                |              |
| Item 4.      | Controls and  Procedures                                                                                                            | 31                |
|         |                                                                                                                                |              |
| PART II |
|         |                                                                                                                                |              |
| Item 1.      | Legal Proceedings                                                                                                                   | 32                |
|         |                                                                                                                                |              |
| Item 1A.     | Risk Factors                                                                                                                        | 32                |
|         |                                                                                                                                |              |
| Item  2.     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                        | 32                |
|         |                                                                                                                                |              |
| Item  3.     | Defaults  Upon Senior Securities                                                                                                    | 32                |
|         |                                                                                                                                |              |
| Item 4.      | [Removed and  Reserved]                                                                                                             | 32                |
|         |                                                                                                                                |              |
| Item 5.      | Other  Information                                                                                                                  | 32                |
|         |                                                                                                                                |              |
| Item 6.      | Exhibits                                                                                                                            | 33                |

 

----

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Consolidated Communications Holdings, Inc.and Subsidiaries**

**Condensed Consolidated Statements of Operations**

(Unaudited)

** **
| ** **                                                                                         | ** **   | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|--------------|----------------------------------------|------------|
| **(In thousands except per share amounts)**                                                        | ** **   | **2010**                               | ** ** | **2009** | ** ** |
| * *                                                                                           | *** *** | *** ***                           | * *   | * * | * * |
| Net revenues                                                                                       | ** **   | **$**                                  | **98,302** |   | $ | 101,710 |   |
| Operating expense:                                                                                 | ** **   | ** **                             |       |   |   |
| Cost of services and products (exclusive of  depreciation and amortization shown separately below) | ** **   | **35,940**                             |       | 36,100 |   |
| Selling, general and administrative expenses                                                       | ** **   | **22,803**                             |       | 27,877 |   |
| Depreciation and amortization                                                                      | ** **   | **21,542**                             |       | 21,677 |   |
| Operating income                                                                                   | ** **   | **18,017**                             |       | 16,056 |   |
| Other income (expense):                                                                            |         |                                   |       |   |   |
| Interest income                                                                                    | ** **   | **16**                                 |       | 22 |   |
| Interest expense                                                                                   | ** **   | **(12,921**                            | **)**      | (14,492 | ) |
| Investment income                                                                                  | ** **   | **6,302**                              |       | 5,048 |   |
| Other, net                                                                                         | ** **   | **64**                                 |       | (551 | ) |
| Income before income taxes                                                                         | ** **   | **11,478**                             |       | 6,083 |   |
| Income tax expense                                                                                 | ** **   | **4,427**                              |       | 2,386 |   |
| Net income                                                                                         | ** **   | **7,051**                              |       | 3,697 |   |
| Less: net income attributable to noncontrolling  interest                                          | ** **   | **131**                                |       | 407 |   |
| Net income attributable to common stockholders                                                     | ** **   | **$**                                  | **6,920**  |   | $ | 3,290 |   |
|                                                                                               | ** **   | ** **                             |       |   |   |
|                                                                                               | ** **   | ** **                             |       |   |   |
| Net income per common share—basic                                                             | ** **   | **$**                                  | **0.23**   |   | $ | 0.11 |   |
|                                                                                               | ** **   | ** **                             |       |   |   |
| Net income per common share—diluted                                                           | ** **   | **$**                                  | **0.23**   |   | $ | 0.11 |   |
|                                                                                               | ** **   | ** **                             |       |   |   |
| Cash dividends per common share                                                                    | ** **   | **$**                                  | **0.39**   |   | $ | 0.39 |   |

 

*The accompanyingnotes are an integral part of these condensed consolidated financialstatements.*

 

1

----

Table of Contents

 

**Consolidated Communications Holdings, Inc.and Subsidiaries**

**Condensed Consolidated BalanceSheets**

 
| **(In thousands except share and per share amounts)**                                                                                                   | ** ** | **March 31,********2010********(Unaudited)** | ** **    | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|---------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                 | ** ** | ** **                                        |          |                        |       |
| Current assets:                                                                                                                                                                            | ** ** | ** **                                        |          |                        |       |
| Cash and equivalents                                                                                                                                                                       | ** ** | **$**                                             | **44,339**    |                        | $          | 42,758 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,894 in 2010 and $1,796 in 2009                                                                                          | ** ** | **42,635**                                        |          | 42,125                      |       |
| Inventories                                                                                                                                                                                | ** ** | **7,582**                                         |          | 6,874                       |       |
| Deferred income taxes                                                                                                                                                                      | ** ** | **5,970**                                         |          | 5,970                       |       |
| Prepaid expenses and other current assets                                                                                                                                                  | ** ** | **8,770**                                         |          | 6,639                       |       |
| Total current assets                                                                                                                                                                       | ** ** | **109,296**                                       |          | 104,366                     |       |
|                                                                                                                                                                                       | ** ** | ** **                                        |          |                        |       |
| Property, plant and equipment, net                                                                                                                                                         | ** ** | **371,622**                                       |          | 377,200                     |       |
| Investments                                                                                                                                                                                | ** ** | **97,912**                                        |          | 98,748                      |       |
| Goodwill                                                                                                                                                                                   | ** ** | **520,562**                                       |          | 520,562                     |       |
| Customer lists, net                                                                                                                                                                        | ** ** | **96,553**                                        |          | 102,088                     |       |
| Tradenames                                                                                                                                                                                 | ** ** | **13,446**                                        |          | 13,446                      |       |
| Deferred debt issuance costs, net and other assets                                                                                                                                         | ** ** | **6,243**                                         |          | 6,633                       |       |
| Total assets                                                                                                                                                                               | ** ** | **$**                                             | **1,215,634** |                        | $          | 1,223,043 |   |
| ** **                                                                                                                                                                                 | ** ** | ** **                                        |          |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                             | ** ** | ** **                                        |          |                        |       |
| Current liabilities:                                                                                                                                                                       | ** ** | ** **                                        |          |                        |       |
| Accounts payable                                                                                                                                                                           | ** ** | **$**                                             | **12,530**    |                        | $          | 13,482 |   |
| Advance billings and customer deposits                                                                                                                                                     | ** ** | **22,731**                                        |          | 20,025                      |       |
| Dividends payable                                                                                                                                                                          | ** ** | **11,553**                                        |          | 11,476                      |       |
| Accrued expense                                                                                                                                                                            | ** ** | **20,410**                                        |          | 26,268                      |       |
| Current portion of capital lease obligations                                                                                                                                               | ** ** | **103**                                           |          | 344                         |       |
| Current portion of derivative liability                                                                                                                                                    | ** ** | **4,926**                                         |          | 6,074                       |       |
| Current portion of pension and postretirement  benefit obligations                                                                                                                         | ** ** | **2,908**                                         |          | 2,908                       |       |
| Total current liabilities                                                                                                                                                                  | ** ** | **75,161**                                        |          | 80,577                      |       |
| Senior secured long-term debt                                                                                                                                                              | ** ** | **880,000**                                       |          | 880,000                     |       |
| Deferred income taxes                                                                                                                                                                      | ** ** | **74,791**                                        |          | 74,711                      |       |
| Pension and other postretirement obligations                                                                                                                                               | ** ** | **80,985**                                        |          | 80,298                      |       |
| Other long-term liabilities                                                                                                                                                                | ** ** | **27,835**                                        |          | 26,740                      |       |
| Total liabilities                                                                                                                                                                          | ** ** | **1,138,772**                                     |          | 1,142,326                   |       |
|                                                                                                                                                                                       | ** ** | ** **                                        |          |                        |       |
| Stockholders’ equity:                                                                                                                                                                 | ** ** | ** **                                        |          |                        |       |
| Common stock, par value $0.01 per share; 100,000,000  shares authorized, 29,822,604 and 29,608,653, shares outstanding as of  March 31, 2010 and December 31, 2009, respectively | ** ** | **298**                                           |          | 296                         |       |
| Additional paid-in capital                                                                                                                                                                 | ** ** | **105,621**                                       |          | 109,746                     |       |
| Retained earnings                                                                                                                                                                          | ** ** | **—**                                        |          | —                      |       |
| Accumulated other comprehensive loss, net                                                                                                                                                  | ** ** | **(35,403**                                       | **)**         | (35,540                     | )          |
| Noncontrolling interest                                                                                                                                                                    | ** ** | **6,346**                                         |          | 6,215                       |       |
| Total stockholders’ equity                                                                                                                                                            | ** ** | **76,862**                                        |          | 80,717                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                            | ** ** | **$**                                             | **1,215,634** |                        | $          | 1,223,043 |   |

 

*The accompanying notes are an integral part ofthese condensed consolidated financial statements.*

 

2

----

Table of Contents

 

**ConsolidatedCommunications Holdings, Inc. and Subsidiaries**

**Consolidated Statement of Changes in Stockholders’ Equity**

(Unaudited)

** **
| ** **                                                    | ** ** | ** **        | ** ** | ** **              | ** ** | ** **   | ** ** | ** **               | ** ** | **Accumulated**     | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------|------------|--------------------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **                                                    | ** ** | **Common  Stock** | ** ** | **Additional  Paid in** | ** ** | **Retained** | ** ** | **Other  Comprehensive** | ** ** | **Non-controlling** | ** ** | ** **   | ** ** |
| **(In  thousands, except share amounts)**                     | ** ** | **Shares**        | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**             | ** ** | **Loss, net**       | ** ** | **Interest** | ** ** | **Total**  | ** ** |
|                                                          |       |              |       |                    |       |         |       |                     |       |                |       |         |       |       |       |
| Balance  - December 31, 2009                             |       | 29,608,653        |       | $                       | 296        |         | $          | 109,746                  |       | $                   | —     |         | $          | (35,540    | )          | $ | 6,215 |   | $ | 80,717 |   |
|                                                          |       |              |       |                    |       |         |       |                     |       |                |       |         |       |       |       |
| Dividends  on common stock                                    |       | —            |       | —                  |       | (4,626       | )          | (6,920                   | )          | —              |       | —       |       | (11,546    | )          |
| Shares  issued under employee plan, net of forfeitures        |       | 213,951           |       | 2                       |       | (2           | )          | —                   |       | —              |       | —       |       | —     |       |
| Non-cash,  stock-based compensation                           |       | —            |       | —                  |       | 503          |       | —                   |       | —              |       | —       |       | 503        |       |
| Comprehensive  income:                                        |       |              |       |                    |       |         |       |                     |       |                |       |         |       |       |       |
| Net  income                                                   |       | —            |       | —                  |       | —       |       | 6,920                    |       | —              |       | 131          |       | 7,051      |       |
| Change  in prior service cost and net loss, net of tax of $26 |       | —            |       | —                  |       | —       |       | —                   |       | 47                  |       | —       |       | 47         |       |
| Change  in fair value of cash flow hedges, net of tax of $54  |       | —            |       | —                  |       | —       |       | —                   |       | 90                  |       | —       |       | 90         |       |
| Total  comprehensive income                                   |       |              |       |                    |       |         |       |                     |       |                |       |         |       | 7,188      |       |
| Balance  - March 31, 2010                                |       | 29,822,604        |       | $                       | 298        |         | $          | 105,621                  |       | $                   | —     |         | $          | (35,403    | )          | $ | 6,346 |   | $ | 76,862 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements.*

 

3

----

Table of Contents

 

**Consolidated Communications Holdings, Inc.and Subsidiaries**

**Condensed Consolidated Statementsof Cash Flows**

(Unaudited)

 
| ** **                                                                         | ** ** | **Three-months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Operating Activities**                                                           | ** ** | ** **                             |       |   |   |
| Net income                                                                         | ** ** | **$**                                  | **7,051**  |   | $ | 3,697 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: | ** ** | ** **                             |       |   |   |
| Depreciation and amortization                                                      | ** ** | **21,542**                             |       | 21,677 |   |
| Deferred income taxes                                                              | ** ** | **80**                                 |       | (1,944 | ) |
| Loss on disposal of assets                                                         | ** ** | **4**                                  |       | — |   |
| Cash distributions from wireless partnerships in  excess of earnings               | ** ** | **705**                                |       | 169 |   |
| Stock-based compensation expense                                                   | ** ** | **503**                                |       | 433 |   |
| Amortization of deferred financing costs                                           | ** ** | **324**                                |       | 332 |   |
| Changes in operating assets and liabilities:                                       | ** ** | ** **                             |       |   |   |
| Accounts receivable, net                                                           | ** ** | **(510**                               | **)**      | (797 | ) |
| Inventories                                                                        | ** ** | **(708**                               | **)**      | 109 |   |
| Other assets                                                                       | ** ** | **(2,126**                             | **)**      | 974 |   |
| Accounts payable                                                                   | ** ** | **(952**                               | **)**      | (2,183 | ) |
| Accrued expenses and other liabilities                                             | ** ** | **(2,124**                             | **)**      | (3,113 | ) |
| Net cash provided by operating activities                                          | ** ** | **23,789**                             |       | 19,354 |   |
| **Investing Activities**                                                           | ** ** | ** **                             |       |   |   |
| Additions to property, plant and equipment, net                                    | ** ** | **(10,935**                            | **)**      | (10,157 | ) |
| Proceeds from the sale of investments                                              | ** ** | **514**                                |       | 300 |   |
| Net cash used for investing activities                                             | ** ** | **(10,421**                            | **)**      | (9.857 | ) |
| **Financing Activities**                                                           | ** ** | ** **                             |       |   |   |
| Payment of capital lease obligation                                                | ** ** | **(241**                               | **)**      | (224 | ) |
| Repurchase and retirement of common stock                                          | ** ** | **—**                             |       | (9 | ) |
| Dividends on common stock                                                          | ** ** | **(11,546**                            | **)**      | (11,388 | ) |
| Net cash used for financing activities                                             | ** ** | **(11,787**                            | **)**      | (11,621 | ) |
| Net increase (decrease) in cash and equivalents                                    | ** ** | **1,581**                              |       | (2,124 | ) |
| Cash and equivalents at beginning of year                                          | ** ** | **42,758**                             |       | 15,471 |   |
| Cash and equivalents at end of year                                                | ** ** | **$**                                  | **44,339** |   | $ | 13,347 |   |

 

*The accompanying notes are an integral part ofthese condensed consolidated financial statements.*

 

4

----

Table of Contents

 

**Consolidated CommunicationsHoldings, Inc.****and Subsidiaries**

# **Notes to ConsolidatedFinancial Statements**

# ** **

**1.            ****Nature of Operations**

 

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Consolidated CommunicationsHoldings, Inc. and its subsidiaries, which are collectively referred to as“Consolidated”,  the “Company”, “we”, “our”or “us”, unless the context otherwise requires. All significant intercompany transactions have been eliminated inconsolidation.

 

Wehave prepared the unaudited condensed consolidated financial statementsincluded herein pursuant to the rules and regulations of the Securitiesand Exchange Commission.  Certaininformation and footnote disclosures normally included in statements preparedin accordance with generally accepted accounting principles have been omittedpursuant to such rules and regulations, although we believe that thedisclosures are adequate to make the information presented not misleading.  These financial statements should be read inconjunction with the financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 2009.

 

The accompanying unaudited condensed consolidatedfinancial statements presented herewith reflect all adjustments (consisting ofonly normal and recurring adjustments) which, in the opinion of management, arenecessary for a fair presentation of the results of operations for the threemonth periods ended March 31, 2010 and 2009.  The results of operations for interim periodsare not necessarily indicative of results to be expected for an entire year.

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ materially fromthose estimates.

 

Asof March 31, 2010, the Company’s Summary of Critical Accounting Policiesfor the year ended December 31, 2009, which are detailed in the Company’sAnnual Report on Form 10-K, have not changed.

 

TheCompany has evaluated subsequent events and transactions for potentialrecognition or disclosure in the financial statements through the day thefinancial statements are issued.

 

Certainprior year amounts have been reclassified to conform to the current year’spresentation.  These reclassificationshad no effect on total assets, total stockholders’ equity, total revenue,income from operations or net income

 

**2.****                                     ****Recent Accounting Pronouncements**

 

EffectiveJanuary 1, 2010, we adopted the Financial Accounting Standards Board’s (“FASB”)updated guidance related to fair value measurements and disclosures, whichrequires a reporting entity to disclose separately the amounts of significanttransfers in and out of the Level 1 and Level 2 fair value measurements and todescribe the reasons for the transfers. In addition, in the reconciliation for fair value measurements usingsignificant unobservable inputs, or Level 3, a reporting entity should discloseseparately information about purchases, sales, issuances and settlements (thatis, on a gross basis rather than one net number).  The updated guidance also requires that anentity provide fair value 

 

5

----

Table of Contents

 

measurement disclosures for each class of assets and liabilities anddisclosures about the valuation techniques and inputs used to measure fairvalue for both recurring and non-recurring Level 2 and Level 3 fair valuemeasurements.  The guidance was effectivefor interim or annual financial reporting periods beginning after December 15,2009, except for the disclosures about purchases, sales, issuances andsettlements in the roll forward activity in Level 3 fair value measurements,which are effective for fiscal years beginning after December 15,2010.  Therefore, we have not yet adoptedthe guidance with respect to the roll forward activity in Level 3 fair valuemeasurements.  We have updated ourdisclosures to comply with the updated guidance.  Adoption of the updated guidance did not havean impact on our consolidated results of operations or financial condition.

 

**3.             Prepaid and othercurrent assets**

 

Prepaid and other current assets are as follows:

 
| **(In  thousands)**            | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                           | ** ** | ** **               |       |                        |       |
| Prepaid maintenance            | ** ** | **$**                    | **2,732**  |                        | $          | 3,152 |   |
| Prepaid taxes                  | ** ** | **1,640**                |       | 43                          |       |
| Deferred charges               | ** ** | **1,025**                |       | 718                         |       |
| Prepaid insurance              | ** ** | **685**                  |       | 471                         |       |
| Prepaid expense - other        | ** ** | **2,569**                |       | 2,200                       |       |
| Current portion of swap assets | ** ** | **44**                   |       | —                      |       |
| Other current assets           | ** ** | **75**                   |       | 55                          |       |
| Total                          | ** ** | **$**                    | **8,770**  |                        | $          | 6,639 |   |

 

**4.             Property, plant andequipment**

 

Property, plant and equipment are as follows:

 
| **(In  thousands)**                  | ** ** | **March 31,  2010** | ** **  | **December 31,  2009** | ** ** |
|--------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
|                                 | ** ** | ** **               |        |                        |       |
| Land and buildings                   | ** ** | **$**                    | **66,703**  |                        | $          | 66,700 |   |
| Network and outside plant facilities | ** ** | **836,351**              |        | 833,879                     |       |
| Furniture, fixtures and equipment    | ** ** | **80,415**               |        | 80,315                      |       |
| Assets under capital lease           | ** ** | **5,144**                |        | 5,144                       |       |
| Less: accumulated depreciation       | ** ** | **(631,104**             | **)**       | (617,141                    | )          |
|                                 | ** ** | **357,509**              |        | 368,897                     |       |
| Construction in progress             | ** ** | **14,113**               |        | 8,303                       |       |
| Totals                               | ** ** | **$**                    | **371,622** |                        | $          | 377,200 |   |

 

Depreciation expense totaled $16.0 million and $16.1million for the three month periods ended March 31, 2010 and 2009,respectively.

 

**7.             Investments**

 

We own 2.34% of GTE Mobilnet of South Texas LimitedPartnership (the “Mobilnet South Partnership”). The principal activity of the Mobilnet South Partnership is providingcellular service in the Houston, Galveston, and Beaumont, Texas metropolitanareas.  We also own 3.60% of PittsburghSMSA Limited Partnership (“Pittsburgh SMSA”), which provides cellular servicein and around the Pittsburgh metropolitan area. Because of our limited influence over these partnerships, we use thecost method to account for both of these investments.  For the three months ended March 31,2010 and 

 

6

----

Table of Contents

 

2009, we received cash distributions from these partnerships totaling$3.0 million and $2.4 million, respectively.

 

We also own 17.02% of GTE Mobilnet of Texas RSA #17Limited Partnership (“RSA 17”), 16.6725% of Pennsylvania RSA 6(I) LimitedPartnership (“RSA 6(I)”), and 23.67% of Pennsylvania RSA 6(II) LimitedPartnership (“RSA 6(II)”).  RSA #17provides cellular service to a limited rural area in Texas.  RSA 6(I) and RSA 6(II) providecellular service in and around our Pennsylvania service territory.  In addition, we have a 50% ownership interestin Boulevard Communications LLP, a competitive access provider in westernPennsylvania.  Because we have someinfluence over the operating and financial policies of these four entities, weaccount for the investments using the equity method.  For the three months ended March 31,2010 and 2009, we received cash distributions from these partnerships totaling$3.9 million and $2.7 million, respectively.

 

Our investments are as follows:

 
| **(In  thousands)**                                                  | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                 | ** ** | ** **               |       |                        |       |
| Cash surrender value of life insurance policies                      | ** ** | **$**                    | **1,605**  |                        | $          | 1,797 |   |
| Cost method investments:                                             | ** ** | ** **               |       |                        |       |
| GTE Mobilnet of South Texas Limited Partnership  (2.34%)             | ** ** | **21,450**               |       | 21,450                      |       |
| Pittsburgh SMSA Limited Partnership (3.60%)                          | ** ** | **22,950**               |       | 22,950                      |       |
| CoBank, ACB Stock                                                    | ** ** | **2,963**                |       | 2,902                       |       |
| Other                                                                | ** ** | **60**                   |       | 60                          |       |
| Equity method investments:                                           | ** ** | ** **               |       |                        |       |
| GTE Mobilnet of Texas RSA #17 Limited Partnership  (17.02% interest) | ** ** | **18,900**               |       | 19,080                      |       |
| Pennsylvania RSA 6(I) Limited Partnership  (16.6725% interest)  | ** ** | **6,977**                |       | 7,301                       |       |
| Pennsylvania RSA 6(II) Limited Partnership (23.67%  interest)   | ** ** | **22,850**               |       | 23,049                      |       |
| Boulevard Communications, LLP (50% interest)                         | ** ** | **157**                  |       | 159                         |       |
| Total                                                                | ** ** | **$**                    | **97,912** |                        | $          | 98,748 |   |

 

CoBank is a cooperative bank owned by itscustomers.  Annually, CoBank distributes patronage in the form of cash andstock in the cooperative based on the Company’s outstanding loan balance withCoBank, who has traditionally been a significant lender in the Company’s creditfacility.   The investment in CoBankrepresents the accumulation of the equity patronage paid by CoBank to theCompany.

 

Because the income from our investment inPennsylvania RSA 6(II) for the first quarter of 2010 exceeds 10% of ourpretax income, below is a summary of unaudited summarized income statementinformation of Pennsylvania RSA 6(II):

 
| ** **              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|
| **(In  thousands)**     | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                    | ** ** | ** **                            |       |   |   |
| Total revenues          | ** ** | **$**                                 | **28,973** |   | $ | 27,707 |   |
| Income from operations  | ** ** | **7,871**                             |       | 6,384 |   |
| Net income before taxes | ** ** | **8,045**                             |       | 6,520 |   |
| Net income              | ** ** | **8,045**                             |       | 6,520 |   |
|                         |            |                                       |            |  |  |  |  |

 

7

----

Table of Contents

 

**8.             Fair ValueMeasurements**

 

The Company’s derivative instruments related tointerest rate swap agreements are required to be measured at fair value on arecurring basis.  The fair values of theinterest rate swaps are determined using an internal valuation model whichrelies on the expected LIBOR based yield curve and estimates of counterpartyand Consolidated’s non-performance risk as the most significant inputs.  Because each of these inputs are directlyobservable or can be corroborated by observable market data, we havecategorized these interest rate swaps as Level 2 within the fair valuehierarchy.

 

The Company’s swap assets and liabilities measuredat fair value on a recurring basis subject to disclosure requirements at March 31,2010 were as follows:

 
| ** **                               | ** ** | ** **              | ** ** | **Fair Value Measurements at  Reporting Date Using**                   | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------------------------------------------------------|------------|
| **(In  thousands)**                      | ** ** | **March 31, 2010** | ** ** | **Quoted Prices  In Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                                     |       |                    |       |                                                                   |       |   |   |   |   |
| Current interest rate swap assets        |       | $                       | 44         |                                                                   | —     |   | 44 |   | — |   |
| Long-term interest rate swap assets      |       | 52                      |       | —                                                                 |       | 52 |   | — |   |
| Current interest rate swap liabilities   |       | (4,926                  | )          | —                                                                 |       | (4,926 | ) | — |   |
| Long-term interest rate swap liabilities |       | (27,233                 | )          | —                                                                 |       | (27,233 | ) | — |   |
| Totals                                   |       | $                       | (32,063    | )                                                                      | $          | — |   | $ | (32,063 | ) | $ | — |   |
|                                          |            |                         |            |                                                                        |            |  |  |  |  |  |  |  |  |

 

The change in the fair valueof the derivatives is primarily a result of a change in market expectations forfuture interest rates.

 

We have not elected the fairvalue option for any of our financial assets or liabilities.  The carrying value of other financialinstruments, including cash, accounts receivable, accounts payable and accruedliabilities approximate fair value due to their short maturities or variable-ratenature of the respective balances.  The following table presents the otherfinancial instruments that are not carried at fair value but which require fairvalue disclosure as of March 31, 2010 and December 31, 2009.

 
| ** **                | ** ** | **As of March 31, 2010** | ** **  | **As of December 31, 2009** | ** ** |
|---------------------------|------------|-------------------------------|-------------|----------------------------------|------------|
| **(In  thousands)**       | ** ** | **Carrying Value**            | ** **  | **Fair Value**                   | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Investments, equity basis | ** ** | **$**                         | **48,884**  | ** **                       | **n/a**    |   | $ | 49,589 |   | n/a |   |
| Investments, at cost      | ** ** | **$**                         | **47,423**  | ** **                       | **n/a**    |   | $ | 47,362 |   | n/a |   |
| Long-term debt            | ** ** | **$**                         | **880,000** | ** **                       | **$**      | **880,000** |   | $ | 880,000 |   | $ | 880,000 |   |
|                           |            |                               |             |                                  |            |  |  |  |  |  |  |  |  |

 

The Company’s investments at March 31, 2010 andDecember 31, 2009 accounted for under both the equity and cost methodsconsist of minority positions in various cellular telephone limitedpartnerships.  These investments are recorded using either the equity orcost methods, and it is not practical to estimate a fair value for thesenon-publicly traded entities.

 

Our long-term debt allows us to select a one monthLIBOR repricing option, which we have elected. As such, the fair value of this debt approximates its carrying value.

 

8

----

Table of Contents

 

**9.             Goodwill and OtherIntangible Assets**

 

In accordance with the applicable accountingguidance, goodwill and tradenames are not amortized but are subject toimpairment testing—no less than annually or more frequently if circumstancesindicate potential impairment.

 

The following table presents the carrying amount ofgoodwill by segment:

 
| **(In  thousands)**  | ** ** | **March 31,   2010** | ** **  | **December 31,   2009** | ** ** |
|----------------------|------------|---------------------------|-------------|------------------------------|------------|
|                 | ** ** | ** **                |        |                         |       |
| Telephone Operations | ** ** | **$**                     | **519,541** |                         | $          | 519,541 |   |
| Other Operations     | ** ** | **1,021**                 |        | 1,021                        |       |
| Totals               | ** ** | **$**                     | **520,562** |                         | $          | 520,562 |   |

 

Our most valuable tradename is the federallyregistered mark CONSOLIDATED, which is used in association with our telephonecommunication services and is a design of interlocking circles.  The Company’s corporate branding strategyleverages a CONSOLIDATED naming structure. All of the Company’s business units and several of our products andservices incorporate the CONSOLIDATED name. These tradenames are indefinitely renewable intangibles.  The carrying value of the tradenames was$13.4 million at both March 31, 2010 and December 31, 2009.

 

The Company’s customer lists consist of anestablished base of customers that subscribe to its services.  The carrying amount of customer lists is asfollows:

 
| ** **                     | ** ** | **Telephone Operations** | ** **  | **Other Operations**        | ** ** |
|--------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| **(In  thousands)**            | ** ** | **March 31,  2010** | ** **  | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|                           | ** ** | ** **               |        |                        | ** ** | ** ** |   |   |   |
| Gross carrying amount          | ** ** | **$**                    | **193,124** |                        | $          | 193,124 | ** ** | **$** | **11,712** |   | $ | 11,712 |   |
| Less: accumulated amortization | ** ** | **(97,783**              | **)**       | (92,358                     | )          | **(10,500** | **)** | (10,390 | ) |
| Net carrying amount            | ** ** | **$**                    | **95,341**  |                        | $          | 100,766 | ** ** | **$** | **1,212** |   | $ | 1,322 |   |

 

Amortization associated with customer lists totaled approximately$5.5 million in each of the three month periods ended March 31, 2010 and2009.

 

**10.          Deferred DebtIssuance Costs, Net and Other Assets**

 

Deferred financing costs, net and other assets areas follows:

 
| **(In  thousands)**               | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                              | ** ** | ** **               |       |                        |       |
| Deferred debt issuance costs, net | ** ** | **$**                    | **6,140**  |                        | $          | 6,464 |   |
| Long-term swap assets             | ** ** | **52**                   |       | —                      |       |
| Other assets                      | ** ** | **51**                   |       | 169                         |       |
| Total                             | ** ** | **$**                    | **6,243**  |                        | $          | 6,633 |   |

 

Deferred debt issuance costs are subject toamortization.  Remaining deferred debtissuance costs of $6.1 million at March 31, 2010 related to our securedcredit facility will be amortized utilizing a method which approximates theeffective interest method over the remaining life of 4.75 years, resulting inamortization expense of $1.3 million yearly unless the facility is extinguishedearlier.

 

9

----

Table ofContents

 

**11.          AccruedExpenses**

 

Accrued expenses are as follows:

 
| **(In  thousands)**            | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                           |       |                     |       |                        |       |
| Salaries and employee benefits | ** ** | **$**                    | **10,242** |                        | $          | 11,727 |   |
| Taxes payable                  | ** ** | **2,774**                |       | 7,766                       |       |
| Accrued interest               | ** ** | **1,314**                |       | 1,177                       |       |
| Other accrued expenses         | ** ** | **6,080**                |       | 5,598                       |       |
| Total accrued expenses         | ** ** | **$**                    | **20,410** |                        | $          | 26,268 |   |

 

**12.          Debt**

 

Long-term debt consists of the following:

 
| **(In  thousands)**                             | ** ** | **March 31,  2010** | ** **  | **December 31,  2009** | ** ** |
|-------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
|                                            | ** ** | ** **               |        |                        |       |
| Senior secured credit facility - revolving loan | ** ** | **$**                    | **—**  |                        | $          | — |   |
| Senior secured credit facility - term loan      | ** ** | **880,000**              |        | 880,000                     |       |
| Obligations under capital lease                 | ** ** | **103**                  |        | 344                         |       |
|                                            | ** ** | **880,103**              |        | 880,344                     |       |
| Less: current portion                           | ** ** | **(103**                 | **)**       | (344                        | )          |
| Total long-term debt                            | ** ** | **$**                    | **880,000** |                        | $          | 880,000 |   |

 

##### ***Credit Agreement***

##### ** **

The Company, through certainof its wholly owned subsidiaries, has outstanding a credit agreement withseveral financial institutions, which consists of a $50 million revolvingcredit facility (including a $10 million sub-limit for letters of credit) and a$880 million term loan facility. Borrowings under the credit facility are secured by substantially all ofthe assets of the Company with the exception of Illinois Consolidated TelephoneCompany.  The term loan requires noprincipal reductions prior to maturity and thus matures in full on December 31,2014.  The revolving credit facilitymatures on December 31, 2013.  Therewere no borrowings outstanding under the revolving credit facility as of March 31,2010.

 

At our election, borrowings under the creditfacilities bear interest at a rate equal to an applicable margin plus either a “baserate” or LIBOR.  As of March 31, 2010,the applicable margin for interest rates was 2.50% per year for the LIBOR-basedterm loans and 1.50% for alternative base rate loans.  The applicable margin for our $880 millionterm loan is fixed for the duration of the loan.  The applicable margin for borrowings on therevolving credit facility is determined via a pricing grid.  Based on our leverage ratio of 4.67:1 at March 31,2010, borrowings under the revolving credit facility will be priced at a marginof 2.50% for LIBOR-based borrowings and 1.50% for alternative base rateborrowings for the three month period ending June 30, 2010.  The applicable borrowing margin for therevolving credit facility is adjusted quarterly to reflect the leverage ratiofrom the prior quarter-end.

 

The weighted-average interest rate incurred on ourcredit facilities during the three month periods ended March 31, 2010 and2009, including amounts paid on our interest rate swap agreements 

 

10

----

Tableof Contents

 

and the applicable margin, was 5.57% and 6.31% per annum,respectively.  Interest is payable atleast quarterly.

 

The credit agreement contains various provisions andcovenants, including, among other items, restrictions on the ability to paydividends, incur additional indebtedness, issue capital stock, and commit tofuture capital expenditures.  We haveagreed to maintain certain financial ratios, including interest coverage, andtotal net leverage ratios, all as defined in the credit agreement.  As of March 31, 2010, we were incompliance with the credit agreement covenants.

 

**13.****                              ****Derivatives**

 

In order to manage the risk associated with changesin interest rates, we maintain interest rate swap agreements that effectivelyconvert a portion of our floating-rate debt to a fixed-rate basis, therebyreducing the impact of interest rate changes on future cash interestpayments.  We account for thesetransactions as cash flow hedges under the FASB’s Accounting StandardsCodification Topic 815 (“ASC 815”), *Derivatives and Hedging*.  The swaps are designated as cash flow hedgesof our expected future interest payments. In a cash flow hedge, the effective portion of the change in the fairvalue of the hedging derivative is recorded in accumulated other comprehensiveloss and is subsequently reclassified into earnings during the same period inwhich the hedged item affects earnings. The change in fair value of any ineffective portion of the hedgingderivative is recognized immediately in earnings.

 

Under our interest rate swap agreements, we receive3-month LIBOR based interest payments from the swap counterparties and pay afixed rate.  In addition, we make 3-monthLIBOR-based payments, less a fixed percentage to a basis swap counterparty andreceive 1-month LIBOR.  The combinationeffectively hedges the interest payments based on 1-month LIBOR resets on ourcredit facility.  The net effect of theswaps is that we pay a weighted average fixed rate of 4.42% to our swapcounterparties on $605 million of notional amount and receive 1-month LIBORless a fixed percentage, which amounted to 0.06% for the first quarter of2010.  At both March 31, 2010 and December 31,2009, interest on 68.75% of our outstanding debt was fixed through the use ofinterest rate swap agreements.

 

The counterparties to our various swaps are 5 majorU.S. and European banks.  None of theswap agreements provide for either Consolidated or the counterparties to postcollateral nor do the agreements include any covenants related to the financialcondition of Consolidated or the counterparties.  The swaps of any counterparty that is a “Lender”as defined in our credit facility are secured along with the other creditorsunder the credit facility.  Each of theswap agreements provides that in the event of a bankruptcy filing by eitherConsolidated or the counterparty, any amounts owed between the two partieswould be offset in order to determine the net amount due between parties.  This provision allows us to partiallymitigate the risk of non-performance by a counterparty.

 

11

----

Tableof Contents

 

We report the gross fair value of our derivativesin:  (i) Prepaid expenses and othercurrent assets, (ii) Deferred debt issuance costs, net and other assets, (iii) Currentportion of derivative liability, and (iv) Other long-term liabilities onour Condensed Consolidated Balance Sheets. The table below shows the balance sheet classification and fair value ofour interest rate swaps designated as hedging instruments under ASC 815:

 
| ** **                                         | ** ** | **Fair Value**     | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **(In  thousands)**                                | ** ** | **2010**           | ** ** | **2009** | ** ** |
|                                               | ** ** | ** **         |       |   |   |
| Prepaid expenses and other current assets          | ** ** | **$**              | **44**     |   | $ | — |   |
| Deferred debt issuance costs, net and other assets | ** ** | **52**             |       | — |   |
| Current portion of derivative liability            | ** ** | **(4,926**         | **)**      | (6,074 | ) |
| Other long-term liabilities                        | ** ** | **(27,233**        | **)**      | (26,105 | ) |
|                                                    |            |                    |            |  |  |  |  |

 

Informationregarding our cash flow hedge transactions is as follows:

 
| ** **                                                                                        | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(In  thousands)**                                                                               | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
|                                                                                              | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Loss (gain) arising from ineffectiveness included in  interest expense                            | ** ** | **$**                                          | **29**     |   | $ | (22 | ) |
| Losses reclassed from accumulated other  comprehensive loss (“OCI”) to interest expense | ** ** | **$**                                          | **1,582**  |   | $ | 2,855 |   |

 
| ** **                                                     | ** ** | **March 31,**  | ** **  |
|----------------------------------------------------------------|------------|---------------------|-------------|
| **(In  thousands)**                                            | ** ** | **2010**            | ** **  | **2009** | ** ** |
|                                                           | ** ** | ** **          |        |   |   |
| Aggregate notional value of derivatives outstanding            | ** ** | **$**               | **605,000** |   | $ | 740,000 |   |
| Period through which derivative positions currently  exist     | ** ** | **March 2013** |        | March 2013 |   |
| Loss in fair value of derivatives                              | ** ** | **$**               | **32,063**  |   | $ | 46,083 |   |
| Deferred losses included in OCI (pretax)                       | ** ** | **$**               | **31,747**  |   | $ | 45,711 |   |
| Losses included in OCI to be recognized in the next  12 months | ** ** | **$**               | **3,643**   |   | $ | 9,777 |   |
| Number of months over which loss in OCI is to be  recognized   | ** ** | **36**              |        | 48 |   |

 

**14.          InterestExpense**

 

The following tablesummarizes interest expense:

 
| ** **                              | ** **   | **For the Three Months Ended   March 31,** | ** ** |
|-----------------------------------------|--------------|-------------------------------------------------|------------|
| **(In thousands)**                      | ** **   | **2010**                                        | ** ** | **2009** | ** ** |
|                                    | *** *** | *** ***                                    | * *   | * * | * * |
| Interest expense — credit facility | ** **   | **$**                                           | **6,020**  |   | $ | 6,502 |   |
| Payments on swap liabilities, net       | ** **   | **6,246**                                       |       | 7,355 |   |
| Other interest                          | ** **   | **363**                                         |       | 354 |   |
| Amortization of deferred financing fees | ** **   | **323**                                         |       | 319 |   |
| Capitalized interest                    | ** **   | **(31**                                         | **)**      | (38 | ) |
| Total interest expense                  | ** **   | **$**                                           | **12,921** |   | $ | 14,492 |   |

 

**15.          Retirement andPension Plans**

 

We have 401(k) plans covering substantially allof our employees.  We recognized expensewith respect to these plans of $0.7 million for each of the three month periodsended March 31, 2010 and 2009. Contributions made under our defined contribution plans include a match,at the Company’s discretion, of employee salaries contributed to the plans.

 

12

----

Table of Contents

 

*Qualified Retirement Plan*

 

We sponsor a defined-benefit pension plan (“RetirementPlan”) that is non-contributory covering substantially all of our hourlyemployees who fulfill minimum age and service requirements.  Certain salaried employees are also coveredby the Retirement Plan, although these benefits have previously been frozen.

 

The following table summarizes the components of netperiodic pension cost for the qualified retirement plan for the three monthsended March 31:

 
| **(In thousands)**                | ** ** | **2010**   | ** ** | **2009** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|
|                              | ** ** | ** ** |       |     |       |
| Service cost                      | ** ** | **$**      | **467**    |     | $          | 527 |   |
| Interest cost                     | ** ** | **2,784**  |       | 2,775    |       |
| Expected return on plan assets    | ** ** | **(2,546** | **)**      | (2,355   | )          |
| Net amortization loss             | ** ** | **189**    |       | 668      |       |
| Prior service credit amortization | ** ** | **(11**    | **)**      | (10      | )          |
| Net periodic pension cost         | ** ** | **$**      | **883**    |     | $          | 1,605 |   |

 

*Non-qualified Pension Plan*

 

The Company also has non-qualified supplementalpension plans (“Restoration Plans”), which we acquired as part of our NorthPittsburgh Systems, Inc. (“North Pittsburgh”) and TXU CommunicationsVenture Company (“TXUCV”) acquisitions. The Restoration Plans covers certain former employees of our NorthPittsburgh and TXUCV operations.  TheRestoration Plans restore benefits that were precluded under the RetirementPlan by Internal Revenue Service limits on compensation and benefits applicableto qualified pension plans, and by the exclusion of bonus compensation from theRetirement Plan’s definition of earnings. The Restoration Plans are unfunded and have no assets, and benefits paidunder the Restoration Plans come from the general operating funds of theCompany.

 

The following table summarizes the components of netperiodic pension cost for the Restoration Plans for the three months ended March 31:

 
| **(In thousands)**        | ** ** | **2010**   | ** ** | **2009** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|
|                      | ** ** | ** ** |       |     |       |
| Service cost              | ** ** | **$**      | **—** |     | $          | — |   |
| Interest cost             | ** ** | **15**     |       | 14       |       |
| Net amortization loss     | ** ** | **8**      |       | 8        |       |
| Net periodic pension cost | ** ** | **$**      | **23**     |     | $          | 22 |   |

 

*Other Non-qualifiedDeferred Compensation Agreements*

 

We also are liable for deferred compensation agreementswith former members of the board of directors and certain other formeremployees of a subsidiary of TXUCV, which was acquired in 2004.  The benefits are payable for up to the lifeof the participant and may begin as early as age 65 or upon the death of theparticipant.  Participants accrue no newbenefits as these plans had previously been frozen by TXUCV’s predecessorcompany prior to our acquisition of TXUCV. Payments related to the deferred compensation agreements totaledapproximately $0.1 million for the three-month periods ended March 31,2010 and 2009.  The net present value ofthe remaining obligations was approximately 

 

13

----

Tableof Contents

 

$3.0 million at March 31, 2010 and $3.1 million at December 31,2009, and is included in pension and postretirement benefit obligations in theaccompanying balance sheets.

 

We also maintain 40 life insurance policies on certainof the participating former directors and employees.  We did not recognize any proceeds in otherincome for the three-month periods ended March 31, 2010 or 2009 due to thereceipt of life insurance proceeds.  Theexcess of the cash surrender value of the remaining life insurance policiesover the notes payable balances related to these policies is determined by anindependent consultant, and totaled $1.6 million at March 31, 2010 and$1.8 million at December 31, 2009. These amounts are included in investments in the accompanying balancesheets.  Cash principal payments for thepolicies and any proceeds from the policies are classified as operatingactivities in the statements of cash flows.

 

**16.          PostretirementBenefit Obligation**

 

We sponsor a healthcare plan and life insurance planthat provides postretirement medical benefits and life insurance to certaingroups of retired employees.  Retireesshare in the cost of healthcare benefits, making contributions that are adjustedperiodically—either based upon collective bargaining agreements or becausetotal costs of the program have changed. We generally pay the covered expenses for retiree health benefits asthey are incurred.  Postretirement lifeinsurance benefits are fully insured. Our postretirement plan is unfunded and has no assets, and the benefitspaid under the postretirement plan come from the general operating funds of theCompany.

 

The following table summarizes the components of thenet periodic costs for postretirement benefits for the three months ended March 31:

 
| **(In thousands)**                       | ** ** | **2010**   | ** ** | **2009** | ** ** |
|------------------------------------------|------------|------------|------------|----------|------------|
|                                     | ** ** | ** ** |       |     |       |
| Service cost                             | ** ** | **$**      | **206**    |     | $          | 217 |   |
| Interest cost                            | ** ** | **530**    |       | 579      |       |
| Net prior service cost amortization      | ** ** | **(112**   | **)**      | (241     | )          |
| Net amortization gain                    | ** ** | **—** |       | (5       | )          |
| Net periodic postretirement benefit cost | ** ** | **$**      | **624**    |     | $          | 550 |   |

 

InMarch 2010, President Obama signed into law comprehensive health carereform legislation under the Patient Protection and Affordable Care Act and theHealth Care and Education Reconciliation Act of 2010 (the “Acts”).  Based on the our analyses to date, we do notcurrently believe the provisions within the Acts will result in a materialremeasurement of our postretirement health care liabilities.  We will continue to assess the accountingimplications of the Acts as related regulations and interpretations of the Actsbecome available.  The actual extent ofimpact cannot be actuarially determined until related regulations arepromulgated under the Acts and additional interpretations of the Acts becomeavailable.  Provisions within the Actsfor which financial impacts to our postretirement health care liabilities arepossible, but not currently determinable, include application of the excise taxon high-cost employer coverage.  We donot expect the other provisions within the Acts to materially impact our postretirementhealth care liabilities or results of operations.

 

14

----

Tableof Contents

 

**17.          Stock-basedCompensation Plans**

 

Pretax stock-based compensation expense for thethree month periods ended March 31 was as follows:

 
| **(In  millions)** | ** ** | **2010**   | ** ** | **2009** | ** ** |
|--------------------|------------|------------|------------|----------|------------|
|               | ** ** | ** ** |       |     |       |
| Restricted stock   | ** ** | **$**      | **0.3**    |     | $          | 0.3 |   |
| Performance shares | ** ** | **0.2**    |       | 0.1      |       |
| Total              | ** ** | **$**      | **0.5**    |     | $          | 0.4 |   |

 

Stock-based compensation expense is included in “selling,general and administrative expenses” in the accompanying statements ofoperations.

 

As of March 31, 2010, we had not yet recognizedcompensation expense on the following non-vested awards.

 
| **(In  millions)** | ** ** | **Non-recognized   Compensation** | ** ** | **Average Remaining   Recognition Period   (years)** | ** ** |
|--------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|
|               |       |                              |       |                                                 |       |
| Restricted stock   |       | $                                 | 2.8        |                                                 | 1.8        |   |
| Performance shares |       | 2.2                               |       | 1.6                                                  |       |
| Total              |       | $                                 | 5.0        |                                                 | 1.7        |   |

 

The following table summarizes unvested restrictedstock awards outstanding and changes during the three months ended March 31:

 
| ** **                                                      | ** ** | **2010**                    | ** ** | **2009**     | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|--------------|------------|
| ** **                                                      | ** ** | **# of   Shares** | ** ** | **Price(1)** | ** ** | **# of   Shares** | ** ** | **Price(1)** | ** ** |
| Non-vested restricted shares outstanding —  January 1 | ** ** | **82,375**                  | ** ** | **$**        | **12.08**  |   | 74,391 |   | $ | 16.62 |   |
| Shares granted                                                  | ** ** | **115,949**                 | ** ** | **18.65**    |       | 96,447 |   | 9.05 |   |
| Shares vested                                                   | ** ** | **(3,000**                  | **)**      | **13.00**    |       | (6,000 | ) | 13.45 |   |
| Non-vested restricted shares outstanding —  March 31  | ** ** | **195,324**                 | ** ** | **$**        | **15.97**  |   | 164,838 |   | $ | 12.31 |   |

 

----

(1)           Represents the weighted—averagefair value on date of grant.

 

The following table summarizes unvested performanceshare-based restricted stock awards outstanding and changes during the threemonths ended March 31:

 
| ** **                                                       | ** ** | **2010**              | ** ** | **2009**     | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|
| ** **                                                       | ** ** | **# of  Shares** | ** ** | **Price(1)** | ** ** | **# of  Shares** | ** ** | **Price(1)** | ** ** |
|                                                             | ** ** | ** **            |       |         |       |   |   |   |   |
| Non-vested performance shares outstanding —  January 1 | ** ** | **46,578**            | ** ** | **$**        | **11.72**  |   | 31,137 |   | $ | 15.68 |   |
| Shares granted                                                   | ** ** | **98,002**            | ** ** | **18.65**    |       | 61,544 |   | 9.05 |   |
| Shares vested                                                    | ** ** | **—**            | ** ** | **—**   |       | (1,202 | ) | 13.42 |   |
| Non-vested performance shares outstanding —  March 31  | ** ** | **144,580**           | ** ** | **$**        | **16.42**  |   | 91,479 |   | $ | 11.25 |   |

 

----

(1)          Represents theweighted—average fair value on date of grant.

 

**18.          Income Taxes**

 

There have been no changes to the balance of ourunrecognized tax benefits reported at December 31, 2009.  As of March 31, 2010 and December 31,2009, the amount of unrecognized tax benefits was $5.7 million.  The total amount of unrecognized benefitsthat, if recognized, would affect the effective tax rate is $5.7 million.  A decrease in unrecognized tax benefits of$5.4 million and $1.2 

 

15

----

Tableof Contents

 

million of related accrued interest is expected in the third quarter of2010 due to the expiration of the federal statute of limitation.  This decrease will significantly reduce oureffective tax rate.

 

Our practice is to recognize interest and penaltiesrelated to income tax matters in interest expense and general andadministrative expense, respectively.  Wehad $1.2 million of interest and penalties relating to unrecognized taxbenefits recorded as of March 31, 2010, of which $0.1 million wasrecorded during the three months ended March 31, 2010 and 2009.

 

The only periods subject to examination for ourfederal return are years 2006 through 2008. The periods subject to examination for our state returns are years 2005through 2008.  We are not currently underexamination by either federal or state taxing authorities.

 

Our effective tax rate was 38.6% and 39.2%, for thethree months ended March 31, 2010 and 2009, respectively.  The effective tax rate differs from thefederal and state statutory rates primarily due to non-deductible expenses.

 

During the quarter ended March 31, 2009 wesettled an IRS exam covering years 2005 through 2007.  As a result, we recorded additional incometax expense of $78 thousand.

 

**19.          AccumulatedOther Comprehensive Loss, Net**

 

Accumulated other comprehensive loss, net iscomprised of the following components at March 31, 2010 and December 31,2009:

 
| **(In  thousands)**                                           | ** ** | **2010**    | ** **  | **2009** | ** ** |
|---------------------------------------------------------------|------------|-------------|-------------|----------|------------|
|                                                          | ** ** | ** **  |        |     |       |
| Fair value of cash flow hedges                                | ** ** | **$**       | **(31,747** | **)**    | $          | (31,891 | ) |
| Prior service credits and net losses on postretirement  plans | ** ** | **(24,155** | **)**       | (24,229  | )          |
|                                                          | ** ** | **(55,902** | **)**       | (56,120  | )          |
| Deferred taxes                                                | ** ** | **20,499**  |        | 20,580   |       |
| Totals                                                        | ** ** | **$**       | **(35,403** | **)**    | $          | (35,540 | ) |

 

**20.          EnvironmentalRemediation Liabilities**

 

Environmental remediation liabilities were $0.3million at March 31, 2010 and December 31, 2009, and are included inother liabilities.  These liabilitiesrelate to anticipated remediation and monitoring costs with respect to twosmall vacant sites and are undiscounted. The Company believes the amount accrued is adequate to cover the remaininganticipated costs of remediation.

 

**21.          Litigationand Contingencies**

 

On April 15, 2008,Salsgiver Inc., a Pennsylvania-based telecommunications company, and certain ofits affiliates filed a lawsuit against us and our subsidiaries North PittsburghTelephone Company and North Pittsburgh Systems Inc. in the Court of CommonPleas of Allegheny County, Pennsylvania, alleging that we have preventedSalsgiver from connecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitivedamages as the result of alleged lost projected profits, damage to its businessreputation, and other costs.  It claimsto have sustained losses of approximately $125 million, but does not request aspecific dollar amount in damages.  Webelieve that these claims are without merit and that the alleged damages arecompletely unfounded.  We intend todefend against these claims vigorously. In the third quarter of 2008, we filed preliminary objections andresponses to Salsgiver’s complaint. However, the court ruled against our preliminary objections.  On November 3, 2008, we responded toSalsgiver’s amended complaint and filed a counter-claim for 

 

16

----

Tableof Contents

 

trespass, alleging that Salsgiver attachedcables to our poles without an authorized agreement and in an unsafemanner.  We are currently in the discovery and depositionstage.  In addition, we have asked the FCC Enforcement Bureauto address Salsgiver’s unauthorized pole attachments and safety violations onthose attachments.  We believe that theseare violations of an FCC order regarding Salsgiver’s complaint against us. We do notbelieve that these claims will have a material adverse impact on our financialresults.

 

We are from time to time involved in various otherlegal proceedings and regulatory actions arising out of our operations.  We do not believe that any of these,individually or in the aggregate, would have a material adverse effect upon ourbusiness, operating results or financial condition.

 

**22.          NetIncome per Common Share**

 

The following illustrates the earnings allocationmethod as required by the FASB’s authoritative guidance on the treatment of participatingsecurities in the calculation of earnings per share which we utilize in thecalculation of basic and diluted earnings per share.

 
| **(In  thousands, except per share amounts)**                                                             | ** ** | **2010**   | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
|                                                                                                      |       |       |       |     |       |
| Basic Earnings Per Share Using Two-class Method:                                                          |       |       |       |     |       |
| Net income                                                                                                | ** ** | **$**      | **7,051**  |     | $          | 3,697 |   |
| Less: net income attributable to noncontrolling  interest                                                 | ** ** | **131**    |       | 407      |       |
| Net income attributable to common shareholders  before allocation of earnings to participating securities | ** ** | **6,920**  |       | 3,290    |       |
| Less: earnings allocated to participating securities                                                      | ** ** | **43**     |       | 35       |       |
| Net income attributable to common stockholders                                                            | ** ** | **$**      | **6,877**  |     | $          | 3,255 |   |
|                                                                                                      | ** ** | ** ** |       |     |       |
| Weighted-average number of common shares outstanding                                                      | ** ** | **29,483** |       | 29,386   |       |
|                                                                                                      | ** ** | ** ** |       |     |       |
| Net income per common share attributable to common  stockholders - basic                                  | ** ** | **$**      | **0.23**   |     | $          | 0.11 |   |
|                                                                                                      | ** ** | ** ** |       |     |       |
| Diluted Earnings Per Share Using Two-class Method:                                                        | ** ** | ** ** |       |     |       |
| Net income                                                                                                | ** ** | **$**      | **7,051**  |     | $          | 3,697 |   |
| Less: net income attributable to noncontrolling  interest                                                 | ** ** | **131**    |       | 407      |       |
| Net income attributable to common shareholders  before allocation of earnings to participating securities | ** ** | **6,920**  |       | 3,290    |       |
| Less: earnings allocated to participating securities                                                      | ** ** | **43**     |       | 35       |       |
| Net income attributable to common stockholders                                                            | ** ** | **$**      | **6,877**  |     | $          | 3,255 |   |
|                                                                                                      | ** ** | ** ** |       |     |       |
| Weighted-average number of common shares outstanding                                                      | ** ** | **29,483** |       | 29,386   |       |
|                                                                                                      |       |       |       |     |       |
| Net income per common share attributable to common  stockholders - diluted                                | ** ** | **$**      | **0.23**   |     | $          | 0.11 |   |

 

We had additional potential dilutive securitiesincluding unvested restricted shares and performance shares outstandingrepresenting 0.3 million and 0.2 million common shares that were not includedin the computation of potentially dilutive securities at March 31, 2010and 2009, respectively, because they were anti-dilutive or the achievement ofperformance conditions had not been met at the end of the period.

 

**23.          BusinessSegments**

 

The Company is viewed and managed as two separate,but highly integrated, reportable business segments: “Telephone Operations” and“Other Operations.”  Telephone Operationsconsists of 

 

17

----

Tableof Contents

 

a wide range of telecommunications services, including local andlong-distance service, VOIP service, custom calling features, private lineservices, dial-up and DSL Internet access, IPTV, carrier access services,network capacity services over a regional fiber optic network, mobile servicesand directory publishing.  The Companyalso operates a number of complementary non-core businesses that comprise “OtherOperations,” including telephone services to county jails and state prisons,equipment sales and operator services. Management evaluates the performance of these business segments basedupon net revenue, operating income, and income before extraordinary items.

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(In thousands)**                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                                               | ** ** | ** **                             |       |   |   |
| Telephone operations                                               | ** ** | **$**                                  | **88,783** |   | $ | 91,695 |   |
| Other operations                                                   | ** ** | **9,519**                              |       | 10,015 |   |
| Total net revenue                                                  | ** ** | **98,302**                             |       | 101,710 |   |
|                                                               | ** ** | ** **                             |       |   |   |
| Operating expense – telephone operations                      | ** ** | **49,974**                             |       | 54,308 |   |
| Operating expense – other operations                          | ** ** | **8,769**                              |       | 9,669 |   |
| Total operating expense                                            | ** ** | **58,743**                             |       | 63,977 |   |
|                                                               | ** ** | ** **                             |       |   |   |
| Depreciation and amortization expense – telephone  operations | ** ** | **21,326**                             |       | 21,359 |   |
| Depreciation and amortization expense – other  operations     | ** ** | **216**                                |       | 318 |   |
| Total depreciation expense                                         | ** ** | **21,542**                             |       | 21,677 |   |
|                                                               | ** ** | ** **                             |       |   |   |
| Operating income – telephone operations                       | ** ** | **17,483**                             |       | 16,028 |   |
| Operating income - other operations                                | ** ** | **534**                                |       | 28 |   |
| Total operating income                                             | ** ** | **18,017**                             |       | 16,056 |   |
|                                                               | ** ** | ** **                             |       |   |   |
| Interest income                                                    | ** ** | **16**                                 |       | 22 |   |
| Interest expense                                                   | ** ** | **(12,921**                            | **)**      | (14,492 | ) |
| Investment income                                                  | ** ** | **6,302**                              |       | 5,048 |   |
| Other, net                                                         | ** ** | **64**                                 |       | (551 | ) |
| Income before taxes                                                | ** ** | **$**                                  | **11,478** |   | $ | 6,083 |   |
|                                                               | ** ** | ** **                             |       |   |   |
| Capital expenditures:                                              | ** ** | ** **                             |       |   |   |
| Telephone operations                                               | ** ** | **$**                                  | **10,912** |   | $ | 10,155 |   |
| Other operations                                                   | ** ** | **23**                                 |       | 2 |   |
| Total                                                              | ** ** | **$**                                  | **10,935** |   | $ | 10,157 |   |

 
| ** **               | ** ** | **March 31,** | ** **    | **December 31,** | ** ** |
|--------------------------|------------|--------------------|---------------|-----------------------|------------|
| ** **               | ** ** | **2010**           | ** **    | **2009**              | ** ** |
| Goodwill:                | ** ** | ** **         |          |                  |       |
| Telephone operations     | ** ** | **$**              | **519,541**   |                  | $          | 519,541 |   |
| Other operations         | ** ** | **1,021**          |          | 1,021                 |       |
| Total                    | ** ** | **$**              | **520,562**   |                  | $          | 520,562 |   |
|                     | ** ** | ** **         |          |                  |       |
| Total assets:            | ** ** | ** **         |          |                  |       |
| Telephone operations (1) | ** ** | **$**              | **1,204,602** |                  | $          | 1,210,765 |   |
| Other operations         | ** ** | **11,032**         |          | 12,278                |       |
| Total                    | ** ** | **$**              | **1,215,634** |                  | $          | 1,223,043 |   |

 

----

(1)  Included withinthe telephone operations segment assets are our equity method investmentstotaling $48.9 million and $49.6 million at March 31, 2010 and December 31,2009, respectively.

 

18

----

Table of Contents

 

**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

The following discussion of our consolidatedoperating results and financial condition for the three month periods ended March 31,2010 and 2009 should be read in conjunction with the consolidated financialstatements and related notes contained elsewhere in this report.

 

*“Consolidated Communications” or the “Company” refers to ConsolidatedCommunications Holdings, Inc. alone or with its wholly owned subsidiariesas the context requires.  When thisreport uses the words “we,” “our,” or “us,” they refer to the Company and itssubsidiaries.*

 

**Forward-Looking Statements**

 

Any statements contained in this Report that are notstatements of historical fact, including statements about our beliefs andexpectations, 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 andexpressions are intended to identify forward-looking statements.  These forward-looking statements arecontained throughout this Report, including, but not limited to, statementsfound in this Part I — Item 2 — “Management’s Discussion and Analysisof Financial Condition and Results of Operations”, Part I — Item 3 — “Quantitativeand Qualitative Disclosures about Market Risk” and Part II — Item 1 — “LegalProceedings”.  Such forward-lookingstatements reflect, among other things, our current expectations, plans,strategies, and anticipated financial results and involve a number of known andunknown risks, uncertainties, and factors that may cause our actual results todiffer materially from those expressed or implied by these forward-lookingstatements, including but not limited to:

 

·                  various risksto stockholders of not receiving dividends and risks to our ability to pursuegrowth opportunities if we continue to pay dividends according to our currentdividend policy;

·                  the currentvolatility in economic conditions and the financial markets;

·                  adverse changesin the value of assets or obligations associated with our employee benefitplans;

·                  various risksto the price and volatility of our common stock;

·                  our substantialamount of debt and our ability to incur additional debt in the future;

·                  our need for asignificant amount of cash to service and repay our debt and to pay dividendson our common stock;

·                  restrictionscontained in our debt agreements that limit the discretion of our management inoperating our business;

·                  the ability torefinance our existing debt as necessary;

·                  rapiddevelopment and introduction of new technologies and intense competition in thetelecommunications industry;

·                  risksassociated with our possible pursuit of future acquisitions;

·                  the length andseverity of weakened economic conditions in our service areas in Illinois,Texas and Pennsylvania;

·                  systemfailures;

·                  loss of largecustomers or government contracts;

·                  risksassociated with the rights-of-way for our network;

·                  disruptions inour relationship with third party vendors;

·                  loss of keymanagement personnel and the inability to attract and retain highly qualifiedmanagement and personnel in the future;

 

19

----

Tableof Contents

 

·                  changes in theextensive governmental legislation and regulations governing telecommunicationsproviders, the provision of telecommunications services and access chargesand  subsidies, which are a material partof our revenues;

·                  telecommunicationscarriers disputing and/or avoiding their obligations to pay network accesscharges for use of our network;

·                  high costs ofregulatory compliance;

·                  the competitiveimpact of legislation and regulatory changes in the telecommunicationsindustry;

·                  liability andcompliance costs regarding environmental regulations; and

·                  the additionalrisk factors outlined in Part I — Item 1A — “Risk Factors”in our Annual Report on Form 10-K for the fiscal year ended December 31,2009, and the other documents that we file with the SEC from time to time thatcould cause our actual results to differ from our current expectations and fromthe forward-looking statements discussed in this Report.

 

Many of these risks are beyond our ability tocontrol or predict.  All forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the cautionary statements contained throughoutthis Report.  Because of these risks,uncertainties, and assumptions, you should not place undue reliance on these forward-lookingstatements.  Furthermore, forward-lookingstatements speak only as of the date they are made.   Except as required under the federalsecurities laws or the rules and regulations of the SEC, we do notundertake 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 companythat provides communications services to residential and business customers inIllinois, Texas, and Pennsylvania. We offer a wide range of telecommunicationsservices, including local and long-distance service, digital telephone (“VOIP”),custom calling features, private line services, dial-up and high-speedbroadband Internet access (“DSL”), internet protocol digital television (“IPTV”),carrier access services, network capacity services over our regional fiberoptic network, directory publishing and competitive local exchange carrier (“CLEC”)calling services.  We also operate anumber of non-core complementary businesses, including providing telephoneservices to county jails and state prisons and equipment sales.

 

**Executive Summary**

 

We generated net income attributable to commonstockholders of $6.9 million, or $0.23 per diluted share in the first threemonths of 2010, as compared to net income attributable to common stockholdersof $3.3 million, or $0.11 per diluted share, in the first three months of2009.  Net income in the first threemonths of 2010 benefited from increased earnings from our wireless partnershipsand significantly lower operating expenses. Operating expenses declined principally due to lower salary and benefitexpenses as a result of workforce reductions taken at the end of the firstquarter of 2009, lower pension expense and professional fees, and lower integrationand restructuring costs.  Operatingexpenses in the first quarter of 2010 were higher due to increased videoprogramming costs.  Operating expenses inthe first quarter of 2009 were higher due to $2.4 million of integration andrestructuring expense for which we are receiving cost savings on an ongoingbasis.

 

Revenue in the first quarter of 2010 decreased to$98.3 million as compared to $101.7 million in the first quarter of 2009.  Decreased revenue in the first three monthsof 2010 resulted primarily from local access line loss, offset partially byincreases in DSL and IPTV subscriptions.

 

20

----

Table of Contents

 

We completed the sale of our telemarketing businesslate in the first quarter of 2010, the assets and revenues of which wereimmaterial to our overall results of operations.

 

**General**

 

The following general factors should be consideredin analyzing our results of operations:

 

***Revenues***

 

*Telephone Operations and OtherOperations.*  Our revenuesare derived primarily from the sale of voice and data communication services toresidential and business customers in our rural telephone companies’ serviceareas.  Because we operate primarily inrural service areas, we do not anticipate significant growth in revenues in ourTelephone Operations segment except through acquisitions.  However, we do expect relatively consistentcash flow from year to year because of stable customer demand, and a generallysupportive regulatory environment.

 

*Local access lines and bundledservices.* An “access line” is the telephone line connecting ahome or business to the public switched telephone network.  The number of local access lines in servicedirectly affects the monthly recurring revenue we generate from end users, theamount of traffic on our network, the access charges we receive from othercarriers, the federal and state subsidies we receive, and most other revenuestreams.  We had 244,696, 247,235 and259,787 local access lines, respectively, in service as of March 31, 2010,December 31, 2009 and March 31, 2009.

 

Most wireline telephone companies have experienced aloss of local access lines due to challenging economic conditions and increasedcompetition from wireless providers, competitive local exchange carriers and,in some cases, cable television operators. We have not been immune to these conditions.  Cable competitors in all of our markets offera competing voice product.  We estimatethat cable companies offer voice service to all of their addressable customers,covering 85% of our entire service territory.

 

In addition, since we began to more aggressivelypromote our VOIP service, we estimate that approximately one-half of our VOIPtelephone subscriber additions are switching from one of our traditional accesslines.  We expect to continue toexperience modest erosion in access lines both due to market forces and throughour own cannibalization.

 

We have been able in some instances to offset thedecline in local access lines with increased average revenue per access lineby:

 

·                  Aggressivelypromoting DSL service, including selling DSL as a stand-alone offering;

·                  Value bundlingservices, such as DSL or IPTV, with a combination of local service and customcalling features;

·                  Maintainingexcellent customer service standards; and

·                  Keeping astrong local presence in the communities we serve.

 

We have implemented a number of initiatives to gainnew local access lines and retain existing lines by making bundled servicepackages more attractive (for example, by adding unlimited long-distance) andby announcing special promotions, like discounted second lines.  We also market a “triple play” bundle, whichincludes local telephone service, DSL, and IPTV.  As of March 31, 2010, IPTV was availableto approximately 194,000 homes in our markets. Our IPTV subscriber base continues to 

 

21

----

Tableof Contents

 

grow and totaled 24,898, 23,127 and 18,207 subscribers at March 31,2010, December 31, 2009 and March 31, 2009, respectively.

 

We also continue to experience growth in the numberof DSL subscribers we serve.  We had102,132, 100,122 and 94,554 DSL lines in service as of March 31, 2010, December 31,2009 and March 31, 2009, respectively. Currently over 95% of our rural telephone companies’ local access linesare DSL-capable.

 

In addition to our access line, DSL and videoinitiatives, we intend to continue to integrate best practices across ourmarkets. We also continue to look for ways to enhance current products andintroduce new services to ensure that we remain competitive and continue tomeet our customers’ needs. These initiatives have included:

 

·                  Hosted VOIPservice in all of our markets to meet the needs of small- to medium-sizedbusiness customers that want robust functionality without having to purchase atraditional key or PBX phone system;

·                  VOIP servicefor residential customers, which is being offered to our customers as a growthopportunity and as an alternative to the traditional phone line for customerswho are considering a switch to a cable competitor.  Since we began to more aggressively promoteour VOIP service in situations in which we are attempting to save or win backcustomers, we estimate that the product has allowed us to reduce ourresidential customer loss by 10%;

·                  DSLservice—even to users who do not have our access line—which expands ourcustomer base and creates additional revenue-generating opportunities;

·                  Metro-Ethernetservices delivered over our copper infrastructure with speeds of 25 mbps to 40mbps;

·                  DSL productwith speeds up to 20 mbps for those customers desiring greater Internet speed;and

·                  High definitionvideo service and digital video recorders in all of our IPTV markets.

 

These efforts may mitigate the financial impact ofany access line loss we experience.

 

As noted above, we also utilize service bundles togenerate revenue and retain customers. Our service bundles totaled 56,522, 56,856 and 41,415 at March 31,2010, December 31, 2009 and March 31, 2009, respectively.

 

***Expenses***

 

Our primary operating expenses consist of the costof services; selling, general and administrative expenses; and depreciation andamortization expenses.

 

*Cost of services and products.*  Our cost of servicesincludes the following:

 

·                  Operatingexpenses relating to plant costs, including those related to the network andgeneral support costs, central office switching and transmission costs, andcable and wire facilities;

·                  General plantcosts, such as testing, provisioning, network, administration, power, andengineering; and

·                  The cost oftransport and termination of long-distance and private lines outside our ruraltelephone companies’ service area.

·                  Videoprogramming costs

 

22

----

Tableof Contents

 

We have agreements withvarious carriers to provide long-distance transport and terminationservices.   We believe we will meet allof our commitments in these agreements and will be able to procure services forperiods after our current agreements expire. We do not expect any material adverse effects from any changes in anynew service contract.

 

*Selling, general andadministrative expenses*.  Selling, general and administrativeexpenses include expenses associated with customer care; billing and otheroperating support systems; and corporate expenses, such as professional servicefees and non-cash, stock-based compensation.

 

Our operating support and back-office systems enter,schedule, provision, and track customer orders; test services and interfacewith trouble management; and operate inventory, billing, collections, andcustomer care service systems for the local access lines in our operations.  We have migrated most key business processesonto a single company-wide system and platform. We hope to improve profitability by reducing individual company coststhrough centralizing, standardizing, and sharing best practices.  We incurred $2.4 million of integration andrestructuring expenses during the first three months of 2009 related to movingthe North Pittsburgh accounting, payroll and ILEC billings functions to ourexisting legacy systems.

 

*Depreciation and amortizationexpenses.*  Theprovision for depreciation on property and equipment is recorded using thestraight-line method based upon the following useful lives:

 
| **Years**                             |   |    |   |
|---------------------------------------|--------|---------|--------|
| Buildings                             |   | 18 - 40 |   |
| Network and outside plant  facilities |   | 3 - 50  |   |
| Furniture, fixtures and  equipment    |   | 3 - 15  |   |
| Capital Leases                        |   | 11      |   |

 

Amortization expenses are recognized primarily forour intangible assets considered to have finite useful lives on a straight-linebasis. In accordance with the applicable authoritative guidance, goodwill andintangible assets that have indefinite useful lives are not amortized butrather are tested at least annually for impairment.  Because tradenames have been determined tohave indefinite lives, they are not amortized. Customer relationships are amortized over their useful life.  The net carrying value of customer lists at March 31,2010 is being amortized at a weighted-average life of approximately 3.2 years.

 

**Results of Operations**

 

#### ***Segments***

#### ** **

We have two reportable business segments, TelephoneOperations and Other Operations.  Theresults of operations discussed below reflect our consolidated results.

 

23

----

Tableof Contents

 

***For the Three Months Ended March 31,2010  Compared to March 31, 2009***

 

The following summarizes our revenues and operatingexpenses on a consolidated basis for the three months ended March 31, 2010and 2009:

 
| ** **                                         | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| **(In  millions, except for percentages)**         | ** ** | **$**      | ** ** | **%**      | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                            |       |       |       |       |       |   |   |   |   |
| Telephone operations                               |       |       |       |       |       |   |   |   |   |
| Local calling services                             | ** ** | **$**      | **23.8**   | ** ** | **24.2**   |   | $ | 24.7 |   | 24.3 |   |
| Network access services                            | ** ** | **21.2**   | ** ** | **21.6**   |       | 22.0 |   | 21.6 |   |
| Subsidies                                          | ** ** | **12.2**   | ** ** | **12.4**   |       | 14.1 |   | 13.9 |   |
| Long-distance services                             | ** ** | **4.6**    | ** ** | **4.7**    |       | 5.5 |   | 5.4 |   |
| Data and Internet services                         | ** ** | **18.0**   | ** ** | **18.3**   |       | 16.4 |   | 16.1 |   |
| Other services                                     | ** ** | **9.0**    | ** ** | **9.1**    |       | 9.0 |   | 8.9 |   |
| Total telephone operations                         | ** ** | **88.8**   | ** ** | **90.3**   |       | 91.7 |   | 90.2 |   |
| Other operations                                   | ** ** | **9.5**    | ** ** | **9.7**    |       | 10.0 |   | 9.8 |   |
|                                               | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Total operating revenue                            | ** ** | **98.3**   | ** ** | **100.0**  |       | 101.7 |   | 100.0 |   |
|                                               | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Expenses                                           | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Telephone operations                               | ** ** | **50.0**   | ** ** | **50.9**   |       | 54.3 |   | 53.4 |   |
| Other operations                                   | ** ** | **8.8**    | ** ** | **8.9**    |       | 9.7 |   | 9.5 |   |
| Depreciation and amortization                      | ** ** | **21.5**   | ** ** | **21.9**   |       | 21.6 |   | 21.3 |   |
| Total operating expense                            | ** ** | **80.3**   | ** ** | **81.7**   |       | 85.6 |   | 84.2 |   |
|                                               | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Income from operations                             | ** ** | **18.0**   | ** ** | **18.3**   |       | 16.1 |   | 15.8 |   |
|                                               | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Interest expense, net                              | ** ** | **12.9**   | ** ** | **13.1**   |       | 14.5 |   | 14.2 |   |
| Other income                                       | ** ** | **6.3**    | ** ** | **6.4**    |       | 4.5 |   | 4.4 |   |
| Income tax expense                                 | ** ** | **4.4**    | ** ** | **4.5**    |       | 2.4 |   | 2.4 |   |
|                                               | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Net income                                         | ** ** | **7.0**    | ** ** | **7.1**    |       | 3.7 |   | 3.6 |   |
| Net income attributable to noncontrolling interest | ** ** | **0.1**    | ** ** | **0.1**    |       | 0.4 |   | 0.4 |   |
|                                               | ** ** | ** ** | ** ** | ** ** |       |   |   |   |   |
| Net income attributable to common stockholders     | ** ** | **$**      | **6.9**    | ** ** | **7.0**    |   | $ | 3.3 |   | 3.2 |   |

 

*Revenue*

 

Revenue in the first three months of 2010 declinedby $3.4 million, or 3.3%, to $98.3 million from $101.7 million in the firstthree months of 2009.  Overall, thedecline in revenue was principally the result of year-over-year declines in thenumber of access lines, which impacted revenue for local calling services,network access services, subsidies and long-distance services, as well as fromthe sale in the first quarter of 2010 of our telemarketing business.  Access line loss continues to moderate and isbeing partially offset by growth in our number of broadband connections.  VOIP, DSL and IPTV connections all increasedduring the first three months of 2010 as compared to 2009.  Connections by type are as follows:

 
| ** **                          | ** ** | **March 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2010**           | ** ** | **2009** | ** ** |
|                                | ** ** | ** **         |       |   |   |
| Residential access lines in service | ** ** | **144,855**        |       | 156,935 |   |
| Business access lines in service    | ** ** | **99,841**         |       | 102,852 |   |
| Total local access lines in service | ** ** | **244,696**        |       | 259,787 |   |
|                                | ** ** | ** **         |       |   |   |
| IPTV subscribers                    | ** ** | **24,898**         |       | 18,207 |   |
| ILEC DSL subscribers                | ** ** | **102,132**        |       | 94,554 |   |
| Total broadband connections         | ** ** | **127,030**        |       | 112,761 |   |
|                                | ** ** | ** **         |       |   |   |
| VOIP subscribers                    | ** ** | **8,529**          |       | 7,141 |   |
| CLEC access line equivalents (1)    | ** ** | **73,413**         |       | 73,737 |   |
|                                | ** ** | ** **         |       |   |   |
| Total connections                   | ** ** | **453,668**        |       | 453,426 |   |
|                                | ** ** | ** **         |       |   |   |
| Long-distance lines (2)             | ** ** | **170,765**        |       | 165,892 |   |
| Dial-up subscribers                 | ** ** | **2,205**          |       | 3,612 |   |

 

----

(1) CLEC access line equivalents represent a combination of voice services and datacircuits.  The calculations represent aconversion of data circuits to an access line basis.  Equivalents are calculated by converting datacircuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 andEthernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalentof an access line.

 

(2) Reflectsthe inclusion of long-distance service provided as part of our VOIP offeringwhile excluding CLEC long-distance subscribers.

 

24

----

Table of Contents

 

Telephone Operations Revenue

 

*Local calling services* revenuedecreased by $0.9 million, or 3.6%, to $23.8 million in the first three monthsof 2010 compared to $24.7 million in the first three months of 2009.  The decrease is primarily due to the declinein local access lines.

 

*Network access services* revenuedecreased by $0.8 million, or 3.6%, to $21.2 million in the first three monthsof 2010 compared to $22.0 million in the first three months of 2009.  The decrease is primarily due to a decline inswitched access minutes of use, and to a lesser extent, a decline in specialaccess revenue.

 

*Subsidy* revenuedecreased by $1.9 million, or 13.5%, to $12.2 million in the first three monthsof 2010 compared to $14.1 million in the first three months of 2009.  The decrease is principally the result of anincrease in the national average cost per loop component of the federal highcost fund as well as access line erosion.

 

*Long-distance services* revenuedecreased by $0.9 million, or 16.4%, to $4.6 million in the first three monthsof 2010 as compared to $5.5 million in the first three months of 2009.  The decrease is primarily due to a decline inbillable minutes, primarily due to customers moving to unlimited long-distanceplans.

 

*Data and Internet* revenueincreased by $1.6 million, or 9.8%, to $18.0 million in the first three monthsof 2010 as compared to $16.4 million in the first three months of 2009.  The increase is primarily due to an increasein the number of DSL and IPTV subscribers.

 

*Other services* revenue wasflat, at $9.0 million in the first three months of both 2010 and 2009.

 

Other Operations Revenue

 

Other Operations revenue decreased by $0.5 million,or 5.0%, to $9.5 million in the first three months of 2010 as compared to $10.0million in the first three months of 2009. Declines in revenue resulting from the sale of our telemarketingbusiness and from a decrease in incoming calls in our operator servicesbusiness was offset by increases in our prison systems and equipment salesbusinesses.

 

25

----

Tableof Contents

 

*Operating Expenses*

 

Operating expenses decreased in the first threemonths of 2010 by $5.2 million, or 8.1%, to $58.8 million as compared to $64.0million in the first three months of 2009. Reductions in operating expenses by segment are discussed below.

 

Telephone Operations Operating Expenses

 

Operating expenses for Telephone Operationsdecreased by $4.3 million, or 7.9%, to $50.0 million in the first three monthsof 2010 as compared to $54.3 million in the first three months of 2009.  The overall decrease in operating expenseswas principally driven by a reduction in salaries and benefits as a result of aworkforce reduction implemented late in the first quarter of 2009, lowerpension expense and professional fees, and lower integration and restructuringcosts.  These were offset somewhat byhigher video programming fees.

 

Other Operations Operating Expenses

 

Operating expenses for Other Operations decreased by$0.9 million, or 9.3%, to $8.8 million in the first three months of 2010 ascompared to $9.7 million in the first three months of 2009.  Operating expenses in our other OperationsSegment declined as a result of lower costs related to the disposition of ourtelemarketing business.

 

*Depreciation and Amortization*

 

Depreciation and amortization expense was flat,totaling $21.5 million for the first three months of 2010 as compared to $21.6million for the first three months of 2009.

 

*Interest Expense, Net*

 

Interest expense, net of interest income, declinedby $1.6 million, or 11.0%, to $12.9 million for the first three moths of 2010as compared to $14.5 million for the first three months of 2009.  Interest expense in the first quarter of 2010benefited from the expiration of $135 million of floating to fixed interestrate swaps during 2009, as the fixed rates paid on the swaps were at asignificantly higher rate than the LIBOR rates we received in return.  Interest expense also benefited in the first quarterof 2010 from lower interest rates in general.

 

*Other Income (Expense)*

 

Other income increased $1.8 million to $6.3 millionin the first three months of 2010 compared to $4.5 million in the first threemonths of 2009.  The increase wasprincipally due to improved earnings from our wireless partnership interests.

 

*Income Taxes*

 

Our provision for income taxes was $4.4 millionin 2010 compared to $2.4 million in 2009. Our effective tax rate was 38.6% for the three months ended March 31,2010 compared to 39.2% for the three months ended March 31, 2009.  Our effective tax rate differs from thefederal and state statutory rates primarily due to non-deductible expenses.

 

26

----

Table of Contents

 

*Net Income Attributable toNoncontrolling Interest*

 

The net income attributableto noncontrolling interest totaled $0.1 million in the first three months of2010 versus $0.4 million in the first three months of 2009.  The income for our East Texas Fiber Line, Inc.subsidiary (a joint venture owned 63% by the Company and 37% by Eastex Celco)declined slightly period over period.

 

# **Liquidity and Capital Resources**

# ** **

# ***Outlook and Overview***

# ** **

Thefollowing table sets forth selected information concerning our financialcondition.

 
| **(In  thousands)**       | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Cash and cash equivalents | ** ** | **$**                    | **44,339** |                        | $          | 42,758 |   |
| Working capital           | ** ** | **34,135**               |       | 23,789                      |       |
| Total debt                | ** ** | **880,103**              |       | 880,344                     |       |
| Current ratio             | ** ** | **1.45**                 |       | 1.30                        |       |
|                           |            |                          |            |                             |            |  |  |

 

Ouroperating requirements have historically been funded from cash flows generatedfrom our business and borrowings under our credit facilities.  We expect that our future operatingrequirements will continue to be funded from cash flows generated from ourbusiness and, if needed, from borrowings under our revolving credit facility.

 

Asa general matter, we expect that our liquidity needs for the remainder of 2010will arise primarily from: (i) dividend payments of between $33.0 millionand $34.0 million; (ii) interest payments on our indebtedness of between$38.0 million and $41.0 million; (iii) capital expenditures of between$29.0 million and $31.0 million; (iv) cash income tax payments; (v) pension,401(k) and other post retirement contributions of approximately $4.0million; and (vi) certain other costs. In addition, we may use cash and incur additional debt to fund selectiveacquisitions.  However, our ability touse cash may be limited by our other expected uses of cash, including ourdividend policy, and our ability to incur additional debt will be limited byour existing and future debt agreements.

 

Webelieve that cash flows from operating activities, together with our existingcash and borrowings available under our revolving credit facility, will besufficient for approximately the next twelve months to fund our currentlyanticipated uses of cash.  After that,our ability to fund these expected uses of cash and to comply with thefinancial covenants under our debt agreements will depend on the results offuture operations, performance and cash flow. Our ability to do so will be subject to prevailing economic conditionsand to financial, business, regulatory, legislative and other factors, many ofwhich are beyond our control.

 

Wemay be unable to access the cash flows of our subsidiaries since certain of oursubsidiaries are parties to credit or other borrowing agreements, or subject tostatutory or regulatory restrictions, that restrict the payment of dividends ormaking intercompany loans and investments, and those subsidiaries are likely tocontinue to be subject to such restrictions and prohibitions for theforeseeable future.  In addition, futureagreements that our subsidiaries may enter into governing the terms ofindebtedness may restrict our subsidiaries’ ability to pay dividends or advancecash in any other manner to us.

 

Tothe extent that our business plans or projections change or prove to beinaccurate, we may require additional financing or require financing soonerthan we currently anticipate.  Sources ofadditional financing may include commercial bank borrowings, other strategicdebt financing, sales of

 

27

----

Tableof Contents

 

nonstrategicassets, vendor financing or the private or public sales of equity and debtsecurities.  There can be no assurancethat we will be able to generate sufficient cash flows from operations in thefuture, that anticipated revenue growth will be realized, or that futureborrowings or equity issuances will be available in amounts sufficient toprovide adequate sources of cash to fund our expected uses of cash.  Failure to obtain adequate financing, ifnecessary, could require us to significantly reduce our operations or level ofcapital expenditures which could have a material adverse effect on ourfinancial condition and the results of operations.

 

Asdiscussed below, our term loan has been fully funded at a fixed spread aboveLIBOR and we have $50 million available under our revolving creditfacility.   Based on our discussion withbanks participating in the bank group, we expect that the funds will beavailable under the revolving credit facility if necessary.

 

*Sourcesof Liquidity*

 

Ourcurrent principal sources of liquidity are cash, cash equivalents, workingcapital, cash available under our secured revolving credit facility, and cashprovided by operations.

 

*Cash and cash equivalents*.  For the first quarter of 2010, cash and cashequivalents increased by $1.5 million.

 

*Cash provided by operations*.  Net cash provided by operating activities inthe first quarter of 2010 was $23.8 million, as compared to cash provided byoperating activities of $19.4 million in the first quarter of 2009.  Cash provided by operations in 2010 increasedprimarily as a result of increased cash provided from our wirelesspartnerships, and improved operating performance.

 

*Working capital*.  Ournet working capital position increased $10.2 million in the first quarter of2010 over the fourth quarter of 2009 as a result of improved cash provided fromoperations.

 

*Cash available under our secured revolving credit facility*.  At March 31, 2010, we had no borrowingsoutstanding under our secured revolving credit facility and $50 million ofavailability.

 

*Uses ofLiquidity*

 

Ourprincipal uses of liquidity are dividend payments, interest expense and otherpayments on our debt, capital expenditures and payments made to fund ourpension and other postretirement obligations.

 

*Dividend payments*. During the first quarter of 2010, we used $11.5 million of cash to makedividend payments to shareholders. During the first quarter of 2009, we used $11.4 million of cash to makedividend payments to shareholders.  Ourcurrent quarterly dividend rate is approximately $0.39 per share.

 

*Interest and other payments related to outstanding debt*.  During the first quarter of 2010, we used$12.3 million of cash to make required interest payments on our outstandingdebt.  We also used $0.2 million of cashin the first quarter of 2010 to reduce our capital lease obligations.

 

*Pension and postretirement obligations*.  In the first quarter of 2010, we used $1.5million of cash to fund pension, 401(k) and other postretirementobligations.

 

28

----

Table of Contents

 

*Capital expenditures*.  During the first quarter of 2010, we spentapproximately $10.9 million on capital projects.

 

#### ***Debt***

#### ** **

The following table summarizes our indebtedness asof March 31, 2010:

 
| **(In  thousands)**        | ** ** | **Balance** | ** ** | **Maturity Date**       | ** **              | **Rate (1)**     |
|----------------------------|------------|-------------|------------|-------------------------|-------------------------|------------------|
|                       |       |        |       |                    |                    |             |
| Capital lease              |       | $           | 103        |                    | April 12,  2010    |             | 7.4% |
| Revolving credit  facility |       | —      |       | December 31,  2013 |                    | LIBOR plus 2.50% |
| Term loan                  |       | $           | 880,000    |                    | December 31,  2014 |             | LIBOR plus 2.50% |

 

----

(1)          As of March 31, 2010, the 1-monthLIBOR rate in effect on our borrowings was 0.23%.

 

##### ***Credit Facilities***

##### ** **

Borrowings under our credit agreement are secured bysubstantially all of our assets (other than our Illinois Consolidated TelephoneCompany subsidiary, and certain future subsidiaries).  The credit agreement contains customaryaffirmative covenants, which require us and our subsidiaries to furnish specifiedfinancial information to the lenders, comply with applicable laws, maintain ourproperties and assets and maintain insurance on our properties, among others,and contains customary negative covenants which restrict our and oursubsidiaries’ ability to incur additional debt and issue capital stock, createliens, repay other debt, sell assets, make investments, loans, guarantees oradvances, pay dividends, repurchase equity interests or make other restrictedpayments, engage in affiliate transactions, make capital expenditures, engagein mergers, acquisitions or consolidations, enter into sale-leasebacktransactions, amend specified documents, enter into agreements that restrictdividends from subsidiaries and change the business we conduct.  In addition, the credit agreement requires usto comply with specified financial ratios that are summarized below under “—CovenantCompliance”.

 

As of March 31, 2010, we had no borrowingsoutstanding under the revolving credit facility.  Borrowings under our credit facilities bearinterest at a rate equal to an applicable margin plus, at the borrowers’election, either a “base rate” or LIBOR. As of March 31, 2010, the applicable margin for interest rates was2.50% per year for both the LIBOR based term loan and the revolving creditfacility.  The applicable margin foralternative base rate loans was 1.50% per year for both the term loan and therevolving credit facility.  For thequarter ended March 31, 2010, the weighted average interest rate incurredon our credit facilities, including payments made under our interest rate swapagreement, was 5.57% per annum.

 

##### ***Derivative Instruments***

##### ** **

As of March 31, 2010, we had $605 millionnotional amount of floating to fixed interest rate swap agreements outstandingand $605 million notional amount of basis swaps outstanding.  Under the floating to fixed swap agreements,we receive 3-month LIBOR-based interest payments from the swap counterpartiesand pay a fixed rate.  Under the basisswaps, we pay 3-month LIBOR-based payments less a fixed percentage to the basisswap counterparties, and receive 1-month LIBOR. Concurrent with the execution of the basis swaps, we began electing1-month LIBOR resets on our credit facility. The swaps are in place to hedge the change in overall cash flows relatedto our term loan, the driver of which is changes in the underlying variableinterest rate.  The terms of our creditagreement require us to maintain a minimum floating to fixed ratio of 50%.  During the first quarter of 2010, thepercentage of our floating-rate term debt that was fixed as a result of theinterest rate swap agreements averaged 68.75%. The maturity dates of these swaps are laddered to minimize any potentialexposure to

 

29

----

Table of Contents

 

unfavorablerates when an individual swap expires. The swaps expire at various times through March 31, 2013.   The net effect of the swaps is that we pay aweighted-average fixed rate of 4.42% to our swap counterparties on $605 millionnotional amount and receive 1-month LIBOR less a fixed percentage, whichamounted to 0.06% for the first quarter of 2010.

 

*Covenant Compliance*

 

In general, our credit agreement restricts our abilityto pay dividends to the amount of our Available Cash accumulated after October 1,2005, plus $23.7 million and minus the aggregate amount of dividends paid afterJuly 27, 2005.  Available Cash forany period is defined in our credit facility as Consolidated EBITDA (a) minus,to the extent not deducted in the determination of Consolidated EBITDA, (i) non-cashdividend income for such period; (ii) consolidated interest expense forsuch period net of amortization of debt issuance costs incurred (A) in connectionwith or prior to the consummation of the acquisition of North Pittsburgh or (B) inconnection with the redemption of our then outstanding senior notes; (iii) capitalexpenditures from internally generated funds; (iv) cash income taxes forsuch period; (v) scheduled principal payments of Indebtedness, if any; (vi) voluntaryrepayments of indebtedness, mandatory prepayments of term loans and netincreases in outstanding revolving loans during such period; (vii) thecash costs of any extraordinary or unusual losses or charges; and (viii) allcash payments made on account of losses or charges expensed prior to suchperiod (b) plus, to the extent not included in Consolidated EBITDA, (i) cashinterest income; (ii) the cash amount realized in respect of extraordinaryor unusual gains; and (iii) net decreases in revolving loans.  Based on the results of operations from October 1,2005 through March 31, 2010, and after taking into consideration dividendpayments (including the $11.6 million dividend declared in March 2010 andpaid on May 1, 2010), we continue to have $116.8 million in dividendavailability under the credit facility covenant.

 

Under our credit agreement,if our total net leverage ratio (as such term is defined in the creditagreement), as of the end of any fiscal quarter, is greater than 5.10:1.00, wewill be required to suspend dividends on our common stock unless otherwisepermitted by an exception for dividends that may be paid from the portion ofproceeds of any sale of equity not used to make mandatory prepayments of loansand not used to fund acquisitions, capital expenditures or make otherinvestments.  During any dividendsuspension period, we will be required to repay debt in an amount equal to 50.0%of any increase in available cash (as such term is defined in our creditagreement) during such dividend suspension period, among other things.  In addition, we will not be permitted to paydividends if an event of default under the credit agreement has occurred and iscontinuing.  Among other things, it willbe an event of default if our interest coverage ratio as of the end of anyfiscal quarter is below 2.25:1.00. As of March 31, 2010, our total netleverage ratio was 4.67:1.00 and our interest coverage ratio was 3.38:1.00.

 

The descriptions of the covenants above and of ourcredit agreement 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 intheir entirety by these documents, which are filed as exhibits to our AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q and CurrentReports on Form 8-K.

 

##### ***Dividends***

##### ** **

Thecash required to fund dividend payments is in addition to our other expectedcash needs, which we expect to be fund with cash flows from ouroperations.  In addition, we expect wewill have sufficient availability under our revolving credit facility to funddividend payments in addition to any

 

30

----

Tableof Contents

 

expected fluctuations inworking capital and other cash needs, although we do not intend to borrow underthis facility to pay dividends.

 

Webelieve that our dividend policy will limit, but not preclude, our ability togrow.  If we continue paying dividends atthe level currently anticipated under our dividend policy, we may not retain asufficient amount of cash, and may need to seek refinancing, to fund a materialexpansion of our business, including any significant acquisitions or to pursuegrowth opportunities requiring capital expenditures significantly beyond ourcurrent expectations.  In addition,because we expect a significant portion of cash available will be distributedto holders of common stock under our dividend policy, our ability to pursue anymaterial expansion of our business will depend more than it otherwise would onour ability to obtain third-party financing.

 

*Surety Bonds*

 

In the ordinary course of business, we enter intosurety, performance, and similar bonds. As of March 31, 2010, we had approximately $2.1 million of thesebonds outstanding.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

We are exposed to market risk from changes ininterest rates.  Market risk is thepotential loss arising from adverse changes in market interest rates on ourvariable rate obligations.  We calculatethe potential change in interest expense caused by changes in market interestrates by determining the effect of the hypothetical rate increase on theportion of our variable rate debt that is not hedged through the interest rateswap agreements.

 

During the first three months of 2010, the interestrate on approximately $275.0 million of our floating rate debt was not fixedthrough the use of interest rate swaps, thereby subjecting this portion of ourdebt to potential changes in interest rates.  If market interest rates changed by 1.0% from the average rates thatprevailed during the first three-months of this year, interest expense wouldhave increased or decreased by approximately $0.7 million for this three-monthperiod.

 

As of March 31, 2010, the fair value of ourinterest rate swap agreements amounted to a net liability of $20.2 million, netof deferred taxes, which is recognized as a deferred loss within accumulatedother comprehensive loss.

 

**Item 4. Controls andProcedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed by us in ourreports that we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosures.  Our management, with the participation of ourChief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of March 31, 2010. Based upon that evaluation and subject to the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective. No change in our internal control over financial reporting (as definedin Rule 13a-15(f) under the Exchange Act) occurred during our fiscalquarter ended March 31, 2010 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

31

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On April 15, 2008, Salsgiver Inc., aPennsylvania-based telecommunications company, and certain of its affiliatesfiled a lawsuit against us and our subsidiaries North Pittsburgh TelephoneCompany and North Pittsburgh Systems Inc. in the Court of Common Pleas ofAllegheny County, Pennsylvania, alleging that we have prevented Salsgiver fromconnecting their fiber optic cables to our utility poles.  Salsgiver seeks compensatory and punitivedamages as the result of alleged lost projected profits, damage to its businessreputation, and other costs.  It claimsto have sustained losses of approximately $125 million but does not request aspecific dollar amount in damages.  Webelieve that these claims are without merit and the alleged damages arecompletely unfounded.  We intend todefend against these claims vigorously. In the third quarter of 2008, we filedpreliminary objections and responses to Salsgiver’s complaint.  However, the court ruled against ourpreliminary objections.  On November 3,2008, we responded to Salsgiver’s amended complaint and filed a counter-claimfor trespass, alleging that Salsgiver attached cables to our poles without anauthorized agreement and in an unsafe manner. Weare currently in the discovery and deposition stage.  In addition, we have askedthe FCC Enforcement Bureau to address Salsgiver’s unauthorized pole attachmentsand safety violations on those attachments. We believe that these are violations of an FCC order regarding Salsgiver’scomplaint against us.  We do notbelieve that these claims will have a material adverse impact on our financialresults.

 

We are from time to time involved in various otherlegal proceedings and regulatory actions arising out of our operations.  We do not believe that any of these,individually or in the aggregate, would have a material adverse effect upon ourbusiness, operating results or financial condition.

 

**Item 1A. Risk Factors**

 

The Company included in its Annual Report on Form 10-Kas of December 31, 2009 a description of certain risks and uncertaintiesthat could affect the Company’s business, future performance or financialcondition (“Risk Factors”).

 

**Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds**

 

**None**

 

**Item 3.    Defaults Upon Senior Securities**

 

**None**

 

**Item 4.    [Removed and Reserved]**

 

**Item 5.    Other Information**

 

**None**

 

32

----

Table of Contents

 

**Item 6. Exhibits**

 

(a)          Exhibits

 

31.1         Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2         Certificationof the Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1         Certificationof the Chief Executive Officer and Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

33

----

Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

CONSOLIDATED COMMUNICATIONS HOLDINGS, INC.

 
| May 7, 2010 | By:    |  /s/ Robert J. Currey            |
|------------------|--------|---------------------------------------|
|             |   | Robert J. Currey                      |
|             |   | President and Chief Executive Officer |
|             |   | (Principal Executive Officer)         |

 
| May 7, 2010 | By:    |  /s/ Steven L. Childers                               |
|------------------|--------|------------------------------------------------------------|
|             |   | Steven L. Childers                                         |
|             |   | Chief Financial Officer                                    |
|             |   | (Principal Financial Officer and Chief Accounting Officer) |

 

34

----