CHARLOTTE, N.C., Aug. 5 /PRNewswire-FirstCall/ -- FairPoint Communications, Inc. ("FairPoint" or the "Company"), a leading provider of communications services to communities across the country, today announced its financial results for the three and six months ended June 30, 2009.
Highlights -- Successfully completed an exchange offer for nearly 83 percent of outstanding senior notes enabling the Company to reduce cash interest expense for the second quarter of 2009 by approximately $14.4 million. -- After giving effect to the conversion of a portion of the Company's cash interest expense to non-cash as a result of the exchange offer, the Company maintained compliance with all financial covenants contained in the Company's senior secured credit facility. -- Access line equivalents declined by 3.0 percent during the second quarter of 2009 to 1,650,372 compared to 1,700,673 at March 31, 2009. -- Revenue totaled $299.6 million for the second quarter of 2009, a 3.9 percent decline compared with $311.6 million in the first quarter of 2009. -- Operating expenses, excluding depreciation, declined by $16.9 million, or 7.1 percent, to $220.7 million during the second quarter of 2009 compared to the first quarter of this year. -- Adjusted EBITDA (a non-GAAP financial measure as defined herein) totaled $99.9 million for the second quarter of 2009, compared with $123.2 million in the first quarter of 2009.
"Operationally, we continued to make steady progress during the second quarter," stated David Hauser, Chairman and CEO of FairPoint. "The issues experienced with the systems cutover are continuing to improve and most of them are behind us. Going forward, we will be focusing on three primary areas: improving customer service, growing business and broadband revenue and reducing costs."
"Financially, while we were pleased with the successful completion of the exchange offer with our bondholders in July, this represented only the first step in a more comprehensive debt restructuring. While the exchange offer provides us with additional time, we remain fully committed to permanently deleveraging our current capital structure. Once completed, we will be able to focus all of our attention toward profitably growing the business," concluded Hauser.
Second Quarter Results
Revenue for the second quarter of 2009 totaled $299.6 million, a decline of $12.0 million, or 3.9%, compared to the first quarter of 2009 reflecting the continued decrease in access line equivalents and the weak economic environment. Operating expenses, excluding depreciation, for the second quarter of 2009 totaled $220.7 million, a decline of $16.9 million, or 7.1%, compared to the first quarter of 2009. Cutover related costs totaled $8.7 million in the second quarter of 2009, a decline of $26.6 million from the first quarter which included costs under the transition services agreement with Verizon. Excluding cutover related costs, operating expenses increased by $9.7 million in the second quarter of 2009.
Adjusted EBITDA totaled $99.9 million for the three months ended June 30, 2009, compared with $123.2 million for the first quarter of 2009. The decline in Adjusted EBITDA primarily reflects the reduced level of revenue and higher operating expenses incurred for services that were previously covered under the transition services agreement with Verizon, as well as higher bad debt expenses and costs related to the exchange offer.
Operating Metrics
Total access line equivalents were 1,650,372 at June 30, 2009, compared with 1,820,307 at June 30, 2008, a decline of 9.3%. During the second quarter, total access line equivalents declined by 3.0% compared with a decline of 1.6% during the first quarter of 2009 (normalizing for a previously reported one-time first quarter adjustment to access lines identified during the systems cutover).
HSD subscribers totaled 296,107 as of June 30, 2009, a decrease of 1.6% compared with 300,882 at March 31, 2009 and an increase of 0.6% compared with 294,412 at June 30, 2008. HSD subscribers increased by 3.4% in Legacy FairPoint during the second quarter, while declining by 3.3% in the northern New England operations. We believe the decline in northern New England reflects the absence of promotional activity during the first half of 2009 as a result of cutover related issues. Total HSD penetration was 21.9% as of June 30, 2009, compared with 21.5% at March 31, 2009 and 19.3% at June 30, 2008.
Long distance subscribers totaled 605,468 at June 30, 2009, down 2.9% from 623,497 as of March 31, 2009 and down 7.8% compared with a year ago. Long distance penetration was 44.7% at June 30, 2009, compared with 44.5% as of March 31, 2009 and 43.0% a year ago.
Access Line Equivalents % change % change 6/30/08 to 3/31/09 to 6/30/2009 3/31/2009 6/30/2008 6/30/09 6/30/09 --------- --------- --------- ---------- --------- Residential access lines ------------------ Legacy FairPoint 160,065 162,059 176,891 (9.5%) (1.2%) Northern New England 709,633 741,906 819,640 (13.4%) (4.4%) --------- --------- --------- 869,698 903,965 996,531 (12.7%) (3.8%) Business access lines ------------------ Legacy FairPoint 51,235 51,344 54,619 (6.2%) (0.2%) Northern New England 331,169 339,074 358,014 (7.5%) (2.3%) --------- --------- --------- 382,404 390,418 412,633 (7.3%) (2.1%) Wholesale access lines 102,163 105,408 116,731 (12.5%) (3.1%) Total voice access lines 1,354,265 1,399,791 1,525,895 (11.2%) (3.3%) --------- --------- --------- HSD subscribers --------------- Legacy FairPoint 79,210 76,619 73,326 8.0% 3.4% Northern New England 216,897 224,263 221,086 (1.9%) (3.3%) --------- --------- --------- Total HSD subscribers 296,107 300,882 294,412 0.6% (1.6%) Total access line equivalents 1,650,372 1,700,673 1,820,307 (9.3%) (3.0%) ========= ========== ========= Long distance subscribers 605,468 623,497 656,599 (7.8%) (2.9%) ========= ========== ========= Cash Flow and Liquidity
For the six months ended June 30, 2009, operating cash flow totaled $28.1 million. Cash flow from operations for the first six months of 2009 was negatively impacted by $43.9 million of expenses related to the systems cutover activities and an increase in accounts receivable, before allowance for uncollectibles, of $29.1 million, largely resulting from cutover related issues. Excluding the impact of these cutover related items, cash flow from operations would have been $101.1 million. The Company also made cash interest payments totaling $107.3 million during the six months ended June 30, 2009 which reduced cash flow from operations. Capital expenditures totaled $90.5 million for the first half of 2009.
During the second quarter, the Company repurchased $12.0 million aggregate principal amount of its senior notes for $4.2 million in cash.
The Company has a highly leveraged capital structure and has essentially fully drawn all borrowings available under its credit facility. In the future, the Company expects that the primary sources of liquidity will be cash flow from operations and cash on hand. Because of systems cutover issues that have prevented the Company from executing fully on its operating plan for 2009, revenue has continued to decline. In addition, cash collections have remained below pre-cutover levels and the Company has incurred significant incremental costs as a result of the cutover issues in its northern New England operations, causing further stress on the Company's liquidity position.
Cash and cash equivalents at June 30, 2009 totaled $81.0 million and $2.4 million remained available under the Company's revolving credit facility. As of June 30, 2009, after giving effect to the conversion of a portion of the Company's cash interest expense to non-cash as a result of the exchange offer, the Company was in compliance with all of the financial covenants contained in its credit facility.
The Company currently believes that the reduction in its cash interest expense resulting from the consummation of the exchange offer may not be sufficient to prevent a breach of the interest coverage ratio maintenance covenant for the measurement period ending September 30, 2009. In addition, the Company currently expects that it may exceed the leverage ratio maintenance covenant limit contained in its credit facility as early as the measurement period ending September 30, 2009. As a result, the Company has initiated discussions with its bondholders regarding a more comprehensive and permanent restructuring of its current capital structure to reduce its indebtedness and debt service obligations.
Conference Call and Webcast
As previously announced, FairPoint will host a conference call and simultaneous webcast to discuss its second quarter results at 8:30 a.m. (EDT) on August 6, 2009. Participants should call (888) 562-3356 (US/Canada) or (973) 582-2700 (international) at 8:20 a.m. (EDT) and request the FairPoint Communications Second Quarter 2009 Earnings Call or Conference ID# 22824129. A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call (800) 642-1687 (US/Canada) or (706) 645-9291 (international) and enter confirmation code 22824129. The recording will be available from Thursday, August 6, 2009 at 11:30 a.m. (EDT) through Thursday, August 13, 2009 at 11:59 p.m. (EDT).
A live broadcast of the earnings conference call will be available via the Internet at http://www.fairpoint.com/ under the Investors section. An online replay will be available beginning later in the morning on August 6, 2009 and will remain available for one year.
During the conference call, representatives of the Company may discuss and answer one or more questions concerning the Company's business and financial matters. The responses to these questions may contain information that has not been previously disclosed.
The information in this press release should be read in conjunction with the financial statements and footnotes contained in FairPoint's Quarterly Report on Form 10-Q which will be filed with the Securities and Exchange Commission ("SEC"). FairPoint's results for the quarter ended June 30, 2009 are subject to the completion and filing with the SEC of its Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
Adjusted EBITDA (including Adjusted EBITDA as calculated under FairPoint's credit facility) is a non-GAAP financial measure (i.e., it is not a measure of financial performance under generally accepted accounting principles) and should not be considered in isolation or as a substitute for consolidated statements of operations and cash flow data prepared in accordance with GAAP. In addition, the non-GAAP financial measures used by FairPoint may not be comparable to similarly titled measures of other companies. For a definition of and additional information regarding Adjusted EBITDA, and a reconciliation of such measure to the most comparable financial measure calculated in accordance with GAAP, please see the attachments to this press release.
FairPoint believes Adjusted EBITDA is useful to investors because Adjusted EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance, liquidity and leverage. FairPoint believes Adjusted EBITDA allows a standardized comparison between companies in the industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies. In addition, certain covenants in FairPoint's credit facility and the indenture governing its senior notes as well as the regulatory orders issued in connection with the acquisition of the Northern New England business contain ratios based on Adjusted EBITDA. The restricted payment covenants in such agreements and orders regulating the payment of dividends on FairPoint's common stock are also based on Adjusted EBITDA. If FairPoint's Adjusted EBITDA were to decline below certain levels, covenants in FairPoint's credit facility that are based on Adjusted EBITDA may be violated and could cause, among other things, a default under such credit facility.
While FairPoint uses Adjusted EBITDA in managing and analyzing its business and financial condition and believes it is useful to its management and investors for the reasons described above, Adjusted EBITDA has certain shortcomings. In particular, Adjusted EBITDA does not represent the residual cash flows available for discretionary expenditures, since items such as debt repayment and interest payments are not deducted from such measure. FairPoint's management compensates for the shortcomings of Adjusted EBITDA by utilizing it in conjunction with its comparable GAAP financial measures.
About FairPoint
FairPoint Communications, Inc. is an industry leading provider of communications services to communities across the country. Today, FairPoint owns and operates local exchange companies in 18 states offering advanced communications with a personal touch, including local and long distance voice, data, Internet, television and broadband services. FairPoint is traded on the New York Stock Exchange under the symbols FRP and FRP.BC. Learn more at http://www.fairpoint.com/
This press release may contain forward-looking statements by FairPoint that are not based on historical fact, including, without limitation, statements containing the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions and statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements. Such factors include those risks described from time to time in FairPoint's filings with the SEC, including, without limitation, the risks described in FairPoint's most recent Annual Report on Form 10-K on file with the SEC. These factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. All information is current as of the date this press release is issued, and FairPoint undertakes no duty to update this information.
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets June 30, December 31, 2009 2008 ---- ---- (Dollars in thousands) Assets Current assets: Cash $80,964 $70,325 Restricted cash 1,981 8,144 Accounts receivable, net 190,551 173,589 Materials and supplies 36,871 38,694 Other 30,268 28,747 Deferred income tax, net 29,241 31,418 ------ ------ Total current assets 369,876 350,917 ------- ------- Property, plant and equipment, net 1,996,335 2,013,515 Intangibles assets, net 223,105 234,481 Prepaid pension asset 9,741 8,708 Debt issue costs, net 23,617 26,047 Restricted cash 1,378 60,359 Other assets 16,432 21,094 Goodwill 595,120 619,372 ------- ------- Total assets $3,235,604 $3,334,493 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long term debt $45,000 $45,000 Current portion of capital lease obligations 2,046 2,231 Accounts payable 158,863 147,778 Dividends payable - 23,008 Accrued interest payable in cash 3,834 18,844 Interest rate swaps 43,438 41,274 Other non-operating accrued liability - 19,000 Other accrued liabilities 68,234 70,887 ------ ------ Total current liabilities 321,415 368,022 ------- ------- Long term liabilities: Capital lease obligations 6,584 7,522 Accrued pension obligation 49,507 46,801 Employee benefit obligations 239,152 225,840 Deferred income taxes 117,184 154,757 Unamortized investment tax credits 5,068 5,339 Accrued interest payable in kind 14,423 - Other long term liabilities 18,006 35,492 Long term debt, net of current portion 2,443,647 2,425,253 Interest rate swap agreements 19,386 41,681 ------ ------ Total long term liabilities 2,912,957 2,942,685 --------- --------- Stockholders' equity: Common stock 895 890 Additional paid-in capital 736,469 735,719 Retained earnings (deficit) (604,914) (578,319) Accumulated other comprehensive loss (131,218) (134,504) -------- -------- Total stockholders' equity 1,232 23,786 ----- ------ Total liabilities and stockholders' equity $3,235,604 $3,334,493 ========== ========== FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Operations Three months ended Six months ended June 30, June 30, -------- -------- 2009 2008 2009 2008 (1) ---- ---- ---- -------- (Dollars in thousands) Revenues $299,611 $344,690 $611,241 $627,104 -------- -------- -------- -------- -------- Operating expenses: Cost of services and sales, excluding depreciation and amortization 122,707 133,900 267,854 269,737 Selling, general and administrative expense, excluding depreciation and amortization 97,986 102,290 190,398 165,406 Depreciation and amortization 68,629 69,741 136,496 123,666 ------------------ ------ ------ ------- ------- Total operating expenses 289,322 305,931 594,748 558,809 --------------- ------- ------- ------- ------- Income from operations 10,289 38,759 16,493 68,295 ----------- ------ ------ ------ ------ Other income (expense): Interest expense (54,809) (45,123) (108,288) (59,645) Gain on derivative instruments 7,233 43,123 20,131 43,123 Gain on early retirement of debt 7,494 - 12,357 - Other (58) 264 15,857 1,250 ------- --- --- ------ ----- Total other expense (40,140) (1,736) (59,943) (15,272) ------------------- ------- ------ ------- ------- Income (loss) before income taxes (29,851) 37,023 (43,450) 53,023 Income tax (expense) benefit 12,033 (13,909) 16,855 (20,366) -------------------- ------ ------- ------ ------- Net income (loss) $(17,818) $23,114 $(26,595) $32,657 ----------------- -------- ------- -------- ------- Weighted average shares outstanding: Basic 89,364 88,725 89,168 62,077 ----- ------ ------ ------ ------ Diluted 89,364 89,190 89,168 62,483 ------- ------ ------ ------ ------ Earnings per share: Basic $(0.20) $0.26 $(0.30) $0.53 ----- ------ ----- ------ ----- Diluted (0.20) 0.26 (0.30) 0.52 ------- ----- ---- ----- ---- (1) FairPoint completed its acquisition of Verizon Communication's wireline and related operations in Maine, New Hampshire and Vermont (the "Northern New England business") on March 31, 2008. As a result of that transaction, which was treated as a "reverse acquisition" for accounting purposes, the statement of operations for the six months ended June 30, 2008 reflects the operating results of the Northern New England business for the three month period ending March 31, 2008 and the combined operating results of Spinco and Legacy FairPoint for the three month period ended June 30, 2008. FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows Six months ended June 30, -------- 2009 2008 ---- ---- (Dollars in thousands) Cash flows from operating activities: Net income (loss) $(26,595) $32,657 -------- ------- Adjustments to reconcile net income to net cash provided by operating activities excluding impact of acquisitions: Deferred income taxes (18,970) 24,489 Provision for uncollectible revenue 14,314 7,543 Depreciation and amortization 136,496 123,666 Non-cash interest expense 14,423 - SFAS 106 post-retirement accruals 15,908 29,103 Gain on derivative instruments (20,131) (43,123) Gain on early retirement of debt, net of cash fees (12,477) - Other non-cash items 6,429 (26,406) Changes in assets and liabilities arising from operations: Accounts receivable (29,094) (24,287) Prepaid and other assets (3,350) (40,750) Accounts payable and other accrued liabilities (31,286) (38,965) Accrued interest payable (15,011) 18,476 Other assets and liabilities, net (2,585) 4,113 Other - (16,221) ------- ------- Total adjustments 54,666 17,638 ------ ------ Net cash provided by operating activities 28,071 50,295 ------ ------ Cash flows from investing activities: Acquired cash balance, net - 11,552 Net capital additions (90,493) (98,348) Net proceeds from sales of investments and other assets 1,230 235 ----- --- Net cash used in investing activities (89,263) (86,561) ------- ------- Cash flows from financing activities: Loan origination costs (521) (29,238) Proceeds from issuance of long term debt 50,000 1,676,000 Repayments of long term debt (18,673) (687,491) Contributions from Verizon - 344,629 Restricted cash 65,143 (80,886) Repayment of capital lease obligations (1,122) (1,637) Dividends paid to stockholders (22,996) (1,173,961) ------- ---------- Net cash provided by financing activities 71,831 47,416 ------ ------ Net increase in cash 10,639 11,150 Cash, beginning of period 70,325 - ------ ------ Cash, end of period $80,964 $11,150 ======= ======= FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Revenue and Operating Metrics (unaudited) (Dollars in thousands) Three Months Ended ------------------ June 30, March 31, December 31, September 30, June 30, 2009 2009 2008 2008 2008 -------- --------- ------------ ------------- -------- Revenues: --------- Local calling services $126,017 $129,032 $135,610 $143,415 $149,591 Network access (1) (2) 98,515 97,038 96,295 94,094 101,402 Long distance services 34,754 45,375 46,312 50,161 49,090 Data and Internet services 29,062 28,405 29,461 32,873 30,552 Other services (2) 11,263 11,780 11,582 7,712 14,055 -------- -------- -------- -------- -------- Total revenue $299,611 $311,630 $319,260 $328,255 $344,690 ======== ======== ======== ======== ======== Operating Metrics: --------- Residential voice access lines 869,698 903,965 926,610 958,324 996,531 Business voice access lines 382,404 390,418 392,496 403,939 412,633 Wholesale Access lines 102,163 105,408 107,243 112,131 116,731 ------- ------- ------- ------- ------- Total voice access lines 1,354,265 1,399,791 1,426,349 1,474,394 1,525,895 HSD subscribers 296,107 300,882 295,360 294,134 294,412 ------- ------- ------- ------- ------- Total access line equivalents 1,650,372 1,700,673 1,721,709 1,768,528 1,820,307 ========= ========= ========= ========= ========= Long distance subscribers 605,468 623,497 631,458 643,844 656,599 ======= ======= ======= ======= ======= (1) During the first quarter of 2009, the Company reclassified certain revenues from network access revenues to local calling services revenue. Prior period revenues were also reclassified for comparison purposes. (2) During the third and fourth quarters of 2008, the Company recorded certain revenue adjustments/reclassifications that related to prior periods. The table below shows the revenue for the affected category as if the adjustments were reflected in the appropriate period: Three Months Ended ------------------ Normalized Normalized Normalized December 31, September 30, June 30, 2008 2008 2008 ------------ ------------- -------------- Revenues: Local calling services $135,610 $143,415 $149,591 Network access 96,295 96,094 99,402 Long distance services 46,312 50,161 49,090 Data and Internet services 30,814 31,520 30,552 Other services 11,582 10,994 10,773 -------- -------- -------- Total revenue $320,613 $332,184 $339,408 ======== ======== ======== FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Unaudited Reconciliation of Net Income under GAAP to Adjusted EBITDA (Non-GAAP) (Dollars in thousands) Three Months Ended ------------------ June 30, March 31, Dec. 31, Sept. 30, June 30, 2009 2009 2008 2008 2008 ---- ---- ---- ---- ---- Net Income $(17,818) $(8,777) $(76,072) $(25,109) $23,114 Depreciation and amortization 68,629 67,867 70,598 60,768 69,741 Interest expense 54,809 53,479 52,730 49,665 45,123 Income taxes (12,033) (4,822) (46,598) (17,176) 13,909 ------ ----- ----- ----- ----- 93,587 107,747 658 68,148 151,887 ------ ----- ----- ----- ----- Non-cash (gain) loss on derivatives (7,233) (12,898) 49,909 5,014 (43,123) Non-cash gain on repurchase of debt (7,614) (4,863) - - - Transition services agreement - 15,895 49,597 49,550 49,476 Other merger and cutover related costs (1) - 9,618 26,871 15,191 10,095 Other non-cash items (2) 12,152 9,589 9,128 5,723 5,723 ------ ----- ----- ----- ----- Adjusted EBITDA (Covenant) (3) $90,892 $125,088 $136,163 $143,626 $174,058 ===== ===== ===== ===== ===== Other adjustments to EBITDA: Cutover costs in excess of cumulative cap (4) 8,653 9,743 - - - Restructuring and severance costs 1,330 451 - - - Non-cash accrual for compensated absences (5) (989) 2,966 - - - Revenue and expense adjustments related to prior periods (6) - - 1,353 4,956 (6,309) Other income (7) - (15,000) - - - ------ ----- ----- ----- ----- Adjusted EBITDA $99,886 $123,248 $137,516 $148,582 $167,749 ===== ===== ===== ===== ===== (1) Other one-time items related to the merger and systems cutover primarily include training costs, recruiting and relocation costs, brand and promotional marketing costs, systems development costs and travel costs. (2) Includes non-cash pension, OPEB and stock based compensation expenses. (3) Adjusted EBITDA is defined in FairPoint's credit facility as net income (loss) before interest expense and provision (benefit) for income taxes and depreciation and amortization, excluding unusual or one-time non-recurring items (including costs related to the use of Verizon's systems and services under the transition services agreement as well as other costs related to the cutover to FairPoint's newly developed systems platform), non-cash items related to pension and OPEB, stock based compensation and other costs and adjustments related to the acquisition of the Northern New England business. (4) Represents one-time costs incurred in connection with the systems cutover which exceeded the cumulative cap of $61 million for allowed cutover related add-backs as provided in the Company's credit facility. (5) Reflects a non-cash accrual recorded in the first quarter of 2009 for vacation pay for the full year 2009 for employees of the northern New England operations which fully vested on January 1, 2009. The non- cash accrual will be relieved throughout 2009 as employees use their accrued vacation. (6) Includes certain revenue and expense adjustments related to prior quarters. (7) Other income for the three months ended March 31, 2009 represents a gain resulting from the one-time payment made by Verizon to the Company pursuant to the transition agreement entered into on January 30, 2009. FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES Unaudited Pro Forma Combined Statement of Operations (Non-GAAP) For the Six Months Ended June 30, 2008 (in thousands, except per share data) Pro Forma Results of Results Operations Legacy Merger for Under GAAP FairPoint Related Pro Forma Combined (a) (b) Costs(c) Adjustments Businesses ---------- --------- --------- ----------- ---------- Revenues $627,104 67,927 - (923)(e) $694,108 -------- ------ --- ---- -------- Operating expenses: Cost of services and sales, excluding depreciation and amortization 269,737 27,511 - (10,131)(d)(e) 287,117 Selling, general and administrative expense 165,406 59,010 - (50,286)(e)(f) 174,130 Depreciation and amortization 123,666 13,299 - 5,436(g) 142,401 Gain on sale of operating assets - - - - - --- --- --- --- --- Total operating expenses 558,809 99,820 - (54,981) 603,648 -------- ------ --- ------- ------- Income from operations 68,295 (31,893) - 54,058 90,460 -------- ------ --- ------ ------ Other income (expense): Interest expense (59,645) (11,083) - (21,510)(h)(i) (92,238) Interest and dividend income - 713 - - 713 Gain (loss) on derivative instruments 43,123 (22,259) - - 20,864 Other nonoperating, net 1,250 (32,419) - 32,419(j) 1,250 ----- ------- --- ------ ----- Total other expense (15,272) (65,048) - 10,909 (69,411) ------- ------- --- ------ ------- Income before income taxes 53,023 (96,941) - 64,967 21,049 Income tax (expense) benefit (20,366) 31,567 - (18,650)(k) (7,449) ------- ------ --- ------- ------ Net income $32,657 (65,374) - 46,317 $13,600 ======= ======= === ====== ======= Basic weighted average shares outstanding 62,077.0 88,669.0 Diluted weighted average shares outstanding 62,483.0 89,539.0 Basic earnings per common share $0.53 $0.15 Diluted earnings per common share $0.52 $0.15 Note: The unaudited pro forma combined financial statements have been prepared using the purchase method of accounting as if the transaction with Verizon had been completed as of January 1, 2008. The unaudited pro forma combined financial statements give effect to (1) the contribution by Verizon of assets comprising its local exchange business in Maine, New Hampshire and Vermont to Spinco, a subsidiary of Verizon, (2) the spin-off of Spinco to Verizon stockholders and (3) the merger of Spinco with FairPoint accounted for as a reverse acquisition of FairPoint by Spinco, with Spinco considered the accounting acquirer. The accompanying notes are an integral part of these unaudited pro forma combined condensed financial statements. (a) Reflects the GAAP results of FairPoint Communications, Inc. and subsidiaries for the six months ended June 30, 2008. (b) Reflects the standalone results for the Legacy FairPoint business for the quarter ended March 31, 2008. (c) Reflects nonrecurring transition and transaction costs incurred by FairPoint prior to the closing of the merger. (d) This adjustment reflects revenues and related expenses associated with VoIP and wireless directory assistance services which were not transferred to Spinco. For the three months ended March 31, 2008, the Northern New England business recorded approximately $923 thousand in revenue and $847 thousand in expenses associated with VoIP and wireless directory assistance services. In addition, it reflects certain revenues and related expenses associated with customers of VSSI-CPE that were not transferred to Spinco. (e) This adjustment reflects the reduction in pension and OPEB expense of $11,905 thousand for the three months ended March 31, 2008 for the Northern New England business, determined using an actuarial study of employees to eliminate the pension and OPEB expenses that were not transferred to Spinco. Of the $11,905 thousand adjustment, $9,284 thousand was included in cost of services and sales and $2,621 thousand was included in selling, general and administrative expenses. (f) This adjustment is to eliminate merger related costs of $47,665 thousand incurred by Legacy FairPoint prior to the consummation of the merger during the three months ended March 31, 2008 which are directly related to the merger and related transactions. (g) This adjustment reflects the amortization of the finite-lived identifiable intangible assets recorded in this transaction. The weighted average estimated life of FairPoint's customer relationships is estimated to be 9.7 years and amortization expense is $5,436 thousand for the three months ended March 31, 2008. (h) This adjustment reflects the removal of allocated interest expense of $14,522 thousand recorded by the Northern New England business during the three month period ended March 31, 2008 associated with affiliate notes payables and long term debts held by Verizon. (i) This adjusts reported interest expense to the pro forma interest expense to be recognized on the debt structure of the combined company following the spin-off and merger. The adjustment considers (1) the interest expense for the three months ended March 31, 2008 recognized on the newly issued debt of the combined company, (2) the amortization of capitalized debt issuance costs associated with the newly issued debt, and (3) the elimination of interest expense and amortization of debt issuance costs related to the debt of Legacy FairPoint that was repaid upon consummation of the merger. (j) This adjustment consists of fees and charges incurred in connection with the closing of the spin-off and merger, principally including investment banking fees, write-off of debt issuance costs on Legacy FairPoint's old credit facility and other costs incurred at the closing of the merger. (k) This adjustment reflects the income tax impact on adjustments described above.
FairPoint Communications, Inc.
CONTACT: Investor Contact: Brett Ellis, +1-866-377-3747,
bellis@fairpoint.com, or Media Contact: Rose Cummings, +1-704-602-7304;
rcummings@fairpoint.com, both of FairPoint Communications, Inc.
Web Site: http://www.fairpoint.com/
