2008-08-07 15:30:00
FairPoint Communications Reports Second Quarter 2008 Results
Adjusted EBITDA Ahead of Plan Despite Higher Access Line Losses; Progress
Made on Business Sales
CHARLOTTE, N.C., Aug. 7 /EMWNews/ -- FairPoint
Communications, Inc. (NYSE: FRP) ("FairPoint" or the "Company"), a leading
provider of communications services to communities across the country,
today announced its financial results for its second quarter ended June 30,
2008. FairPoint completed its merger with Northern New England Spinco Inc.
("Spinco"), an entity that held Verizon Communications' landline and
certain related operations in Maine, New Hampshire and Vermont (the
"Northern New England business") on March 31, 2008. As a result, the GAAP
financial statements contained in this earnings release consist of the
following: (1) a statement of operations for the three months ended June
30, 2008 representing the operating results of the consolidated company;
(2) a statement of operations for the three months ended June 30, 2007
representing the operating results of the Northern New England business
only; (3) a balance sheet as of June 30, 2008 representing the consolidated
company balance sheet; and (4) the balance sheet as of December 31, 2007
representing the balance sheet of the Northern New England business only as
of such date. For comparison purposes, the Company is also reporting
combined pro forma results for the three months ended June 30, 2007
reflecting the operations of both Spinco and FairPoint prior to the merger
with Spinco ("Legacy FairPoint").
Commenting on the second quarter results, Gene Johnson, chairman and
CEO of FairPoint Communications stated, "With the merger now completed
we're pleased with the integration of two strong teams and are focused on
making progress in operating metrics. For the quarter, Adjusted EBITDA was
better than expected, primarily the result of lower expenses. The
underlying health of our balance sheet and our ability to generate
significant free cash flow enables us to continue to pay out a healthy
quarterly dividend while maintaining an appropriate leverage ratio.
Operationally, we saw particular progress this quarter in business sales
which drove increases in special access revenues. While the overall economy
has had some impact on our operational results, we are introducing new
product bundles and product offerings in our Legacy FairPoint properties,
and implementing balanced and measured win-back programs. These efforts
should provide improved operational results in the second half of 2008 and
beyond. We are executing our sales and marketing plans for the recently
acquired assets in northern New England and expect to significantly
accelerate this effort after cutover."
Johnson, concluded, "We have made significant progress on the
integration of the Verizon assets in northern New England and we are
working toward a November cutover. Since the July Cutover Monitoring Status
Report from Liberty Consulting Group was issued, we have made steady and
meaningful progress on all testing fronts and are working diligently on
closing any remaining gaps in the testing and other key areas of the
cutover."
Results for the Three Month Period Ended June 30, 2008 (presented on a
GAAP basis which compares the consolidated Company's results for the 2008
period to the results of the Northern New England business only for the
2007 period)
Revenues for the second quarter of 2008 were $344.7 million, up 15.1%
from the second quarter of 2007. The merger and resulting acquisition of
Legacy FairPoint, which closed on March 31, 2008, contributed $67.0 million
to total revenues in the three months ended June 30, 2008. Excluding the
impact of the acquisition, total revenues would have decreased $21.7
million over the prior year. The primary driver of this revenue decline was
a decline in local revenue due to increased competition and a decrease in
interstate access revenues. The rate of revenue decline is expected to
abate, but meaningful improvements will not take effect until after the
transition off of the Transition Services Agreement (the "TSA") with
Verizon, expected to occur at the end of November 2008, at which time
marketing programs and other initiatives can be fully implemented.
The Company has seen solid results from its business sales team.
Special access revenues have increased over the prior year and early
reports indicate that the anticipated opportunity to improve sales to
business customers is proceeding according to plan.
Cost of services and sales decreased $8.0 million to $133.9 million in
the second quarter of 2008 compared to the same period in 2007. Legacy
FairPoint contributed $23.7 million to cost of services and sales expenses
in the three months ended June 30, 2008. Also included in cost of services
and sales for the three months ended June 30, 2008 are $18.9 million of TSA
expenses and $5.0 million of non-cash pension and other post-employment
benefit expenses. These costs were offset by the elimination of allocated
costs from other Verizon affiliates prior to close.
Selling, general and administrative ("SG&A") expenses increased $37.1
million to $102.3 million in the second quarter of 2008 compared with the
same period in 2007. Legacy FairPoint contributed $16.6 million to SG&A
expenses in the three months ended June 30, 2008. Also included in SG&A
expenses for the three months ended June 30, 2008 are $30.6 million of TSA
expenses, $10.0 million of one-time merger related costs (which the Company
is permitted to add back to EBITDA under its credit facility) and $1.7
million of non-cash pension and other post-employment benefit expenses.
These costs were offset by the elimination of allocated costs from other
Verizon affiliates prior to close.
Total operating expenses increased $40.7 million to $305.9 million in
the second quarter of 2008 compared with the same period in 2007, primarily
due to TSA expenses and costs contributed by Legacy FairPoint partially
offset by a decrease in allocated expenses from Verizon which were no
longer incurred as of March 31, 2008.
Total other expenses during the three months ended June 30, 2008
decreased $15.4 million to $1.7 million. The primary driver of this
decrease was a non-cash gain recognized during the quarter of $43.1 million
related to derivative instruments offset by a $27.1 million increase in
interest expense. Interest expense increased as a result of the new
post-close capital structure.
Net income for the three months ended June 30, 2008 was $23.1 million,
or $0.26 per share on a fully diluted basis, compared with $10.3 million,
or $0.19 per share for the same period in 2007. The variance in the
year-over-year comparison is a result of the items discussed above.
Pro Forma Financial Results
The pro forma statement of operations for the three months ended June
30, 2007 contained in this earnings release excludes revenues or expenses
that were not transferred to FairPoint in connection with the merger,
includes the combination of Legacy FairPoint and Spinco and includes the
combined capital structure of the Company post-merger. For more information
about pro forma financial results, including certain adjustments and
assumptions, see the attachments to this press release.
Adjusted EBITDA for the Three Month Period Ended June 30, 2008
(presented on a pro forma basis)
Adjusted EBITDA (as defined herein) for the three months ended June 30,
2008 was $175 million, compared with Adjusted EBITDA of $164 million for
the same period in the prior year. The increase in Adjusted EBITDA is
primarily due to lower expenses partially offset by lower revenues.
Other Operating Metrics
High speed data (or "HSD") penetration for the combined Company
increased to 19.3% of voice access lines at June 30, 2008, compared with
16.5% at June 30, 2007. HSD penetration within Legacy FairPoint increased
to 31.7%, up from 26.3% at June 30, 2007, reflecting the continued success
and momentum Legacy FairPoint has consistently reported on a quarterly
basis for the past several years. This is partly the result of Legacy
FairPoint's significantly higher percentage of homes capable of subscribing
to the Company's HSD offerings, which is a strategy that will be replicated
in northern New England.
Voice access lines at June 30, 2008 were 1,525,895, down 10.4% from
1,703,429 reported at June 30, 2007. Legacy FairPoint's access lines
decreased at a rate of 6.4%, compared with a rate of decline of 11.1% in
northern New England.
Interstate long distance penetration for the combined company at June
30, 2008 increased to 43.0% of voice access lines compared with 42.4% at
June 30, 2007.
Total access line equivalents were 1,820,307 as of June 30, 2008. Total
access line equivalents as of June 30, 2008 decreased 8.3% compared with
June 30, 2007 and decreased 2.4% compared with March 31, 2008. Total access
line equivalents year-over-year for Legacy FairPoint declined 2.5% compared
with the 9.3% loss in northern New England.
Access Line Equivalents
% change
6/30/07 to
6/30/2008 3/31/2008 6/30/2007 6/30/08
Legacy FairPoint
Residential access
lines 176,891 178,659 190,417 (7.1%)
Business access lines 54,619 54,692 56,945 (4.1%)
Wholesale access lines - - - -
Subtotal: access lines 231,510 233,351 247,362 (6.4%)
HSD subscribers 73,326 70,168 65,132 12.6%
Total access line
equivalents 304,836 303,519 312,494 (2.5%)
Northern New England
Residential access
lines 819,640 851,961 936,766 (12.5%)
Business access lines 358,014 365,307 383,203 (6.6%)
Wholesale access lines 116,731 119,550 136,098 (14.2%)
Subtotal: access
lines 1,294,385 1,336,818 1,456,067 (11.1%)
HSD subscribers 221,086 225,410 215,454 2.6%
Total access line
equivalents 1,515,471 1,562,228 1,671,521 (9.3%)
Combined total access
line equivalents 1,820,307 1,865,747 1,984,015 (8.3%)
Conference Call and Webcast
As previously announced, FairPoint will host a conference call and
simultaneous webcast to discuss its second quarter results at 5:00 p.m. EDT
on August 7, 2008. Participants should call (888) 253-4456 (US/Canada) or
(706) 643-3201 (International) and request the FairPoint Communications
second quarter earnings call or Conference ID# 587-444-22. A telephonic
replay will be available for anyone unable to participate in the live call.
To access the replay, call (800) 642-1687 and enter the confirmation code
587-444-22. The recording will be available from August 7, 2008 at 6:00
p.m. (EDT) through August 14, 2008 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 Investor Relations section. An
online replay will be available beginning at 6:00 p.m. (EDT) on August 7,
2008 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.
Non-GAAP Financial Measures
EBITDA (as defined herein) and Adjusted EBITDA are non-GAAP financial
measures (i.e., they are not measures 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 flows 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 definitions of and additional
information regarding EBITDA and Adjusted EBITDA, and a reconciliation of
such measures to the most comparable financial measures calculated in
accordance with GAAP, please see the attachments to this press release.
FairPoint believes EBITDA is useful to investors because EBITDA is
commonly used in the communications industry to analyze companies on the
basis of operating performance, liquidity and leverage. FairPoint believes
EBITDA allows a standardized comparison between companies in the industry,
while minimizing the differences from depreciation policies, financial
leverage and tax strategies.
Certain covenants in FairPoint's credit facility and the indenture
governing its senior notes and the regulatory orders contain ratios based
on Adjusted EBITDA and the restricted payment covenants in such agreements
regulating the payment of dividends on FairPoint's common stock are 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, or result in FairPoint's inability to
pay dividends on its common stock.
While FairPoint uses these non-GAAP financial measures in managing and
analyzing its business and financial condition and believes they are useful
to its management and investors for the reasons described above, these
non-GAAP financial measures have 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 these measures by utilizing them in
conjunction with their comparable GAAP financial measures.
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 to be filed with the Securities and Exchange
Commission. FairPoint's results for the quarter ended June 30, 2008 are
subject to the completion and filing with the Securities and Exchange
Commission of its Quarterly Report on Form 10-Q for such quarter.
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 symbol FRP. 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 Securities and Exchange Commission ("SEC"), including,
without limitation, the risks described in FairPoint's most recent
Quarterly Report on Form 10-Q 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.
Investor Contact: Brett Ellis (866) 377-3747, [email protected]
Media Contact: Rose Cummings (704) 602-7304; [email protected]
Attachments:
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets Under GAAP
June 30, December 31,
2008 (A) 2007 (A)
(unaudited)
(Dollars in thousands)
Assets
Current assets:
Cash $11,150 $-
Restricted cash 13,400 -
Accounts receivable, net 181,066 160,130
Other receivables 37,931 18,579
Materials and supplies 39,749 4,229
Other 50,420 21,180
Deferred income tax, net 22,093 9,730
Short term investments - 37,090
Total current assets 355,809 250,938
Property, plant, and equipment, net 1,884,847 1,628,066
Intangibles assets, net 227,536 2,019
Prepaid pension asset 69,977 36,692
Debt issue costs, net 28,144 -
Other assets 83,071 20,457
Investments 6,938 -
Goodwill 613,945 -
Total assets $3,270,267 $1,938,172
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $9,190 $-
Current portion of capital lease
obligations 2,167 2,064
Accounts payable 188,606 175,866
Dividends payable 22,918 -
Accrued interest payable 18,758 -
Interest rate swaps 20,353 -
Other accrued liabilities 76,857 47,115
Total current liabilities 338,849 225,045
Long-term liabilities:
Capital lease obligations 8,196 9,936
Employee benefit obligations 179,882 408,863
Deferred income taxes 251,989 140,911
Unamortized investment tax credits 5,763 5,877
Other long-term liabilities 38,540 28,378
Long-term debt, net of current portion 2,206,777 -
Interest rate swap agreements 11,191 -
Total long-term liabilities 2,702,338 593,965
Minority interest 7 - Stockholders' equity:
Common stock 890 538
Additional paid-in capital 777,825 484,383
Retained Earnings (470,917) 634,241
Accumulated other comprehensive loss (78,725) -
Total stockholders' equity 229,073 1,119,162
Total liabilities and stockholders'
equity $3,270,267 $1,938,172
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations Under GAAP
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2008 (A) 2007 (A) 2008 (A) 2007 (A)
(Dollars in thousands)(Dollars in thousands)
Revenues $344,690 $299,407 $627,104 $597,356
Operating expenses:
Cost of services and sales,
excluding depreciation and
amortization 133,900 141,931 269,737 277,646
Selling, general and
administrative expense,
excluding depreciation and
amortization 102,290 65,171 165,406 129,204
Depreciation and amortization 69,741 58,103 123,666 116,001
Total operating expenses 305,931 265,205 558,809 522,851
Income from operations 38,759 34,202 68,295 74,505
Other income (expense):
Interest expense (45,123) (18,026) (59,645) (35,819)
Gain on derivative
instruments 43,123 - 43,123 -
Other 264 892 1,250 1,799
Total other expense (1,736) (17,134) (15,272) (34,020) Income before income taxes 37,023 17,068 53,023 40,485
Income tax expense (13,909) (6,757) (20,366) (15,736)
Net income $23,114 $10,311 $32,657 $24,749
Weighted average shares
outstanding:
Basic 88,725 53,761 62,077 53,761
Diluted 89,190 53,761 62,483 53,761
Earnings per share:
Basic $0.26 $0.19 $0.53 $0.46
Diluted $0.26 $0.19 $0.52 $0.46
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows Under GAAP
(Unaudited)
Six months ended
June 30,
2008 2007
(Dollars in thousands)
Cash flows from operating
activities:
Net income $32,657 $24,749 Adjustments to reconcile net income
to net cash provided by
operating activities of continuing
operations:
Deferred income taxes 24,489 (11,170)
Provision for uncollectible
revenue 7,543 10,059
Depreciation and amortization 123,666 116,001
SFAS 106 post-retirement accruals 29,103 44,993
Gain on derivative instruments (43,123) -
Other non cash items (26,406) (51,673)
Changes in assets and liabilities
arising from operations:
Accounts receivable and other
current assets (91,970) 3,599
Accounts payable and other
accrued liabilities 10,557 (19,142)
Other (16,221) -
Total adjustments 17,638 92,667
Net cash provided by operating
activities of continuing
operations 50,295 117,416
Cash flows from investing activities
of continuing operations:
Acquired cash balance, net 11,552 -
Net capital additions (98,348) (75,437)
Net proceeds from sales of
investments and other assets 235 19,489
Net cash used in investing
activities of continuing
operations (86,561) (55,948)
Cash flows from financing activities
of continuing operations:
Loan origination costs (29,238) -
Proceeds from issuance of long-term
debt 1,676,000 -
Repayments of long-term debt (687,491) -
Contributions from Verizon 344,629 (61,010)
Restricted cash (80,886) -
Repayment of capital lease
obligations (1,637) (458)
Dividends paid to stockholders (1,173,961) -
Net cash provided by (used in)
financing activities of
continuing operations 47,416 (61,468)
Net increase in cash 11,150 -
Cash, beginning of period - -
Cash, end of period $11,150 $-
Supplemental disclosure of cash flow
information:
Non-cash equity consideration $316,290 $-
Non-cash issuance of senior notes 551,000 -
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Pro Forma Combined Statement of Operations (Non-GAAP)
For the Three Months Ended June 30, 2007
(in millions, except per share data)
Northern Pro Forma
New Legacy Merger Pro Results
England Fair- Relat- Forma for
business Point ed Adjust- Combined
(A) (B) Costs ments Businesses
Revenues $299 70 - (1)(C) $368
Operating expenses:
Cost of services and sales,
excluding depreciation and
amortization 142 12 (9)(C)(D) 145
Selling, general and
administrative expense 65 32 (8) (I) (10)(D)(J) 95
Depreciation and
amortization 58 12 4 (F) 74
Total operating
expenses 265 56 8 (15) 314
Income from
operations 34 14 (8) 14 54 Other income (expense):
Interest expense (18) (10) - (22)(E)(H) (50)
Interest and dividend income - - - -
Loss on derivative
instruments - - - -
Other nonoperating, net 1 49 - (48)(G) 2
Total other expense (17) 39 - (70) (48)
Income before income
taxes 17 53 (8) (56) 6
Income tax (expense) benefit (7) (14) 3 (L) 19(L) (2)
Net income $10 39 (5) (37) $4
Basic weighted average
shares outstanding 53.8 34.8 88.6
Diluted weighted average
shares outstanding 53.8 34.9 88.7
Basic earnings per common
share:
Continuing operations $0.19 $0.05
Diluted earnings per common
share:
Continuing operations $0.19 $0.05
The accompanying notes are an integral part of these unaudited pro
forma
combined condensed financial statements.
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Reconciliation of Net Income under GAAP to Pro Forma Adjusted
EBITDA (Non-GAAP)
(in millions)
Three Months Ended
Pro Forma
June 30, June 30,
2008 2007
EBITDA (1)
Net Income 23 4
Depreciation and amortization 70 74
Interest expense 45 50
Income taxes 14 2
EBITDA 152 130
(Gain) loss on derivatives (43) -
Estimated quarterly cost savings (3) - 28
Transition services agreement 49 -
Non-cash pension and OPEB 7 6
Other one-time items 10 -
Adjusted EBITDA (2) $175 $164
(1) EBITDA is defined as net income (loss) before interest expense,
provision (benefit) for income taxes, depreciation and amortization.
(2) Adjusted EBITDA is defined as EBITDA adjusted to exclude unusual or
one-time non-recurring items, non-cash items and other adjustments and
to include anticipated cost savings related to the merger and other
adjustments.
(3) Represents the quarterly run-rate cost savings as a result of the
merger, which FairPoint expected to achieve following the termination
of the Transition Services Agreement which is expected to occur in
November 2008.
These cost savings relate to the elimination of approximately $390
million (based on full year 2007 results) in annual costs and
expenses, primarily consisting of shared corporate expenses allocated
to the Northern New England business by Verizon. FairPoint believes
that it can perform the corporate services provided by Verizon at a
cost that is substantially less than that which was historically
allocated to the Northern New England business. These costs will be
replaced by (i) certain increased costs of approximately $254 million
annually, (ii) the elimination of $18 million of annual revenue as a
result of rate adjustments in Maine and (iii) the elimination of $6
million of annual revenue as a result of anticipated reductions in
access charges in the future if a proceeding that is currently before
the New Hampshire Public Utilities commission is decided adversely.
There can be no assurances that these or any other cost savings will
actually be realized.
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Revenue Detail (unaudited)
(in thousands)
Pro Forma Pro Forma
Three months Three months
Three Months Ended Ended
Ended March 31, June 30,
June 30, 2008 2007
2008 (A) (A)
Local calling services $141,803 $145,316 $156,357
Interstate access 84,885 87,187 89,979
Intrastate access 14,613 16,007 16,989
Long distance services 49,090 48,624 51,205
Data and Internet services 30,552 30,653 28,928 Universal Service Fund high-cost
loop 9,692 9,682 10,059
Other services 14,055 12,372 14,786
Total revenue $344,690 $349,841 $368,303
(A) Pro Forma revenues for the three months ended March 31, 2008 and June
30, 2007 assume the acquisition of Legacy FairPoint occurred on
January 1, 2007. Legacy FairPoint revenues are not included in the
total revenue reported under GAAP for the three months ended March
31, 2008, which period was prior to the consummation of the merger.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND
UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
(A) On March 31, 2008, FairPoint completed a merger with Spinco,
pursuant to which Spinco merged with and into FairPoint with FairPoint
continuing as the surviving corporation for legal purposes. Spinco was a
wholly-owned subsidiary of Verizon and prior to the merger Verizon and its
subsidiaries transferred certain specified assets and liabilities of the
local exchange business of Verizon New England in Maine, New Hampshire and
Vermont and the customers of the related long distance and Internet service
provider business in those states to subsidiaries of Spinco. The merger was
accounted for as a "reverse acquisition" and, therefore, Spinco is treated
as the acquirer for accounting purposes. As a result, for the three months
ended June 30, 2008, the statement of operations and the financial
information derived from the statement of operations as reported under GAAP
reflects the financial results of FairPoint beginning April 1, 2008 and of
the Northern New England business for the six months ended June 30, 2008.
The balance sheet and financial information derived from the balance sheet
reflect the combined assets and liabilities of Legacy FairPoint and Spinco
at June 30, 2008. Certain assets and liabilities of the Northern New
England business (principally related to pension, other post-employment
benefits and associated deferred taxes) were not distributed to Spinco in
the merger and were effectively contributed back to Verizon. The statement
of operations as reported under GAAP may not be indicative of Spinco's and
FairPoint's future results (after giving effect to the merger).
All results presented herein prior to March 31, 2008 represent the
historical financial results of the Northern New England business and
represent special-purpose combined financial statements prepared to present
the balance sheets, statement of operations and cash flows of the Northern
New England business in contemplation of a proposed merger with Legacy
FairPoint and related transactions. These special-purpose combined
financial statements were prepared in accordance with U.S. generally
accepted accounting principles. Prior to March 31, 2008, these financial
statements were prepared using specific information where available and
allocations where data was not maintained on a state-specific basis within
the Northern New England business' books and records.
The special-purpose combined financial statements include the
wireline-related businesses, Internet access, long distance and customer
premises equipment services provided by the Northern New England business
to customers in the states of Maine, New Hampshire and Vermont. All
significant intercompany transactions have been eliminated. These
special-purpose combined financial statements also included the assets,
liabilities and expenses related to employees who support the Northern New
England business, some of whom remained employees of Verizon following the
merger.
(B) To reflect operating results recognized by FairPoint for the three
months ended June 30, 2007 as if the merger had occurred as of January 1,
2007.
(C) 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 June 30, 2007, the
Northern New England business recorded approximately $1 million in revenue
and $1 million 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.
(D) This adjustment reflects the reduction in pension and OPEB expense
of $10 million for the three months ended June 30, 2007 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 $10 million adjustment for the three months ended June 30,
2007, $8 million was included in cost of services and sales and $2 million
was included in selling, general and administrative expenses.
(E) This adjustment reflects the removal of allocated interest expense
of $18 million recorded by the Northern New England business during the
three month period ended June 30, 2007 associated with affiliate notes
payable and long-term debts held by Verizon.
(F) 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 $4 million for the three months
ended June 30, 2007.
(G) This adjustment to other non-operating income includes the $2
million elimination of FairPoint's equity in net earnings of investors in
the Orange County - Poughkeepsie Limited Partnership and the associated
gain on the sale of the investment. In April 2007, FairPoint sold this
investment to Verizon Wireless and another third party for $55 million.
(H) 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 June 30, 2007 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.
(I) This adjustment is to separate certain merger related costs
incurred by Legacy FairPoint prior to the merger. These costs consist of
various transition and transaction related costs required to close the
merger, hire new employees and begin the transition process.
(J) This adjustment is to eliminate the merger related costs discussed
in (I) above of $8 million incurred by Legacy FairPoint prior to the
consummation of the merger during the three months ended June 30, 2007
which were directly related to the merger and related transactions.
(K) 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.
(L) This adjustment reflects the income tax impact on adjustments
described above.
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