-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K2/X36/KlymWnev95ltzIoxwFd15fEiKUqGBvWPN0S4n6YLXwXbpFDevtxbKnHCm +mEBbLQmojp2FJEFMkLYEg== 0000912057-02-031540.txt : 20020813 0000912057-02-031540.hdr.sgml : 20020813 20020813154402 ACCESSION NUMBER: 0000912057-02-031540 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAIRPOINT COMMUNICATIONS INC CENTRAL INDEX KEY: 0001062613 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 133725229 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-56365 FILM NUMBER: 02729643 BUSINESS ADDRESS: STREET 1: 521 EAST MOREHEAD ST STREET 2: STE 250 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043448150 FORMER COMPANY: FORMER CONFORMED NAME: MJD COMMUNICATIONS INC DATE OF NAME CHANGE: 19980527 10-Q 1 a2086426z10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002. OR / / 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 333-56365 ------------------------ FAIRPOINT COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3725229 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 521 EAST MOREHEAD STREET, SUITE 250 28202 CHARLOTTE, NORTH CAROLINA (Address of Principal Executive (Zip Code) Offices)
(704) 344-8150 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of August 10, 2002, the registrant had outstanding 45,850,002 shares of Class A common stock and 4,269,440 shares of Class C common stock. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FAIRPOINT COMMUNICATIONS, INC. QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2002 INDEX
PAGE -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements........................................ 3 Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001..................................... 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001...................................................... 4 Condensed Consolidated Statements of Comprehensive Income (Losses) for the three months and six months ended June 30, 2002 and 2001......................................... 5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001.................................... 6 Notes to Condensed Consolidated Financial Statements........ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 16 Item 3A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 27 Signatures.................................................. 28 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......... 29 Item 5. Other Information........................................... 29 Item 6. Exhibits and Reports on Form 8-K............................ 29
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash...................................................... $ 4,783 3,063 Accounts receivable....................................... 24,882 30,949 Other..................................................... 8,223 7,098 Net assets of discontinued operations..................... 2,169 25,997 --------- -------- Total current assets........................................ 40,057 67,107 --------- -------- Property, plant, and equipment, net......................... 270,414 283,280 --------- -------- Other assets: Investments............................................... 47,615 48,941 Goodwill, net of accumulated amortization................. 454,306 454,306 Deferred charges and other assets......................... 19,187 21,381 --------- -------- Total other assets.......................................... 521,108 524,628 --------- -------- Total assets................................................ $ 831,579 875,015 ========= ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 15,450 18,089 Current portion of long-term debt and other long-term liabilities............................................... 6,895 6,759 Demand notes payable...................................... 436 464 Accrued interest payable.................................. 12,002 10,882 Other accrued liabilities................................. 14,562 13,971 Net liabilities of discontinued operations................ 7,579 160,376 --------- -------- Total current liabilities................................... 56,924 210,541 --------- -------- Long-term liabilities: Long-term debt, net of current portion.................... 798,204 776,279 Net liabilities of discontinued operations................ 7,587 9,735 Deferred credits and other long-term liabilities.......... 20,222 23,817 --------- -------- Total long-term liabilities................................. 826,013 809,831 --------- -------- Minority interest........................................... 16 17 --------- -------- Common stock subject to put options......................... 3,136 4,136 --------- -------- Redeemable preferred stock.................................. 80,916 -- --------- -------- Stockholders' deficit: Common stock.............................................. 499 499 Additional paid-in capital................................ 215,212 217,936 Accumulated other comprehensive loss...................... (2,023) (2,247) Accumulated deficit....................................... (349,114) (365,698) --------- -------- Total stockholders' deficit................................. (135,426) (149,510) --------- -------- Total liabilities and stockholders' deficit................. $ 831,579 875,015 ========= ========
3 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Revenues................................................ $ 56,780 57,807 115,205 114,747 -------- ------- ------- ------- Operating expenses: Network operating costs (excludes depreciation and amortization of $9,832 and $9,284 for the three months ended June 30, 2002 and 2001, respectively, and $19,865 and $18,468 for the six months ended June 30, 2002 and 2001, respectively)............... 15,390 16,549 32,413 32,132 Selling, general and administrative (excludes depreciation and amortization of $1,735 and $4,782 for the three months ended June 30, 2002 and 2001, respectively, and $3,486 and $9,437 for the six months ended June 30, 2002 and 2001, respectively)....................................... 12,424 12,583 21,727 23,246 Depreciation and amortization......................... 11,567 14,066 23,351 27,905 -------- ------- ------- ------- Total operating expenses................................ 39,381 43,198 77,491 83,283 -------- ------- ------- ------- Income from operations.................................. 17,399 14,609 37,714 31,464 -------- ------- ------- ------- Other income (expense): Net gain (loss) on investments........................ (5,671) 35 (5,316) 35 Interest and dividend income.......................... 478 692 1,091 1,265 Interest expense...................................... (20,972) (19,430) (38,508) (43,882) Other, net............................................ 1,686 1,183 3,651 2,108 -------- ------- ------- ------- Total other expense..................................... (24,479) (17,520) (39,082) (40,474) -------- ------- ------- ------- Loss from continuing operations before income taxes..... (7,080) (2,911) (1,368) (9,010) Income tax expense...................................... (144) (302) (355) (621) Minority interest in income of subsidiaries............. (1) (1) (1) (2) -------- ------- ------- ------- Loss from continuing operations......................... (7,225) (3,214) (1,724) (9,633) -------- ------- ------- ------- Discontinued operations: Income (loss) from discontinued competitive communications operations........................... 18,308 (20,635) 18,308 (73,180) -------- ------- ------- ------- Net earnings (loss)..................................... $ 11,083 (23,849) 16,584 (82,813) ======== ======= ======= =======
4 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSSES) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------------- ----------------------------------------- 2002 2001 2002 2001 ------------------- ------------------- ------------------- ------------------- (DOLLARS IN THOUSANDS) Net earnings (loss)....................... $11,083 (23,849) 16,584 (82,813) Other comprehensive income (loss): Available-for-sale securities: Unrealized holding gain (loss) arising during period......................... $(1,422) 279 (5,809) 226 Less reclassification for gain included in net earnings....................... -- -- (315) -- Reclassification for other than temporary loss included in net earnings.............................. 5,621 4,199 -- 279 5,621 (503) -- 226 ------- --- ------ ------ Cash flow hedges: Cumulative effect of a change in accounting principle.................. -- -- -- (4,664) Reclassification adjustment............. 355 355 348 348 727 727 728 (3,936) ------- ------- --- ------- ------ ------ ------ ------- Other comprehensive income (loss)......... 4,554 627 224 (3,710) ------- ------- ------ ------- Comprehensive income (loss)............... $15,637 (23,222) 16,808 (86,523) ======= ======= ====== =======
5 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------- 2002 2001 ---------- ---------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net earnings (loss)....................................... $ 16,584 (82,813) -------- -------- Adjustments to reconcile net earnings (loss) to net cash provided by operating activities of continuing operations: (Income) loss from discontinued operations.............. (18,308) 73,180 Amortization of debt issue costs........................ 1,641 2,236 Depreciation and amortization........................... 23,351 27,905 Other non cash items.................................... (1,206) 1,087 Changes in assets and liabilities arising from operations: Accounts receivable and other current assets.......... 7,490 (2,876) Accounts payable and accrued expenses................. (930) (7,767) -------- -------- Total adjustments................................... 12,038 93,765 -------- -------- Net cash provided by operating activities of continuing operations........................... 28,622 10,952 -------- -------- Cash flows from investing activities of continuing operations: Net capital additions..................................... (9,913) (17,980) Other, net................................................ 4,767 1,043 -------- -------- Net cash used in investing activities of continuing operations............................................ (5,146) (16,937) -------- -------- Cash flows from financing activities of continuing operations: Loan origination costs.................................... (42) (2,321) Proceeds from issuance of long-term debt.................. 58,455 221,175 Repayments of long-term debt.............................. (69,042) (139,131) Other, net................................................ (1,002) 1,356 -------- -------- Net cash (used in) provided by financing activities of continuing operations................................. (11,631) 81,079 -------- -------- Net cash contributed from continuing operations to discontinued operations............................... (10,125) (74,641) -------- -------- Net increase in cash.................................... 1,720 453 Cash, beginning of period................................... 3,063 4,130 -------- -------- Cash, end of period......................................... $ 4,783 4,583 ======== ======== Supplemental disclosures of noncash financing activities: Redeemable preferred stock issued in connection with long-term debt settlement............................... $ 93,861 -- ======== ======== Redeemable preferred stock dividends...................... $ 2,286 -- ======== ======== Accretion of redeemable preferred stock................... $ 241 -- ======== ======== Long-term debt issued in connection with FairPoint Solutions' interest rate swap settlement................ $ 3,003 -- ======== ======== Long-term debt issued in connection with FairPoint Solutions' Tranche B interest payment................... $ 90 -- ======== ========
6 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION AND BASIS OF FINANCIAL REPORTING In the opinion of our management, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations, financial position, and cash flows. The results of operations for the interim periods are not necessarily indicative of the results of operations which might be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the Company's 2001 Annual Report on Form 10-K. Certain amounts from 2001 have been reclassified to conform to the current period presentation. (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES In November 2001, the Company announced its plan to discontinue the competitive communications business operations of its wholly-owned subsidiary, FairPoint Communications Solutions Corp. ("FairPoint Solutions"). Prior to the Company's decision to discontinue FairPoint Solutions' competitive communication business, FairPoint Solutions entered into an agreement on October 19, 2001, to sell certain assets of its competitive communications operations relating to its business and operations in the northwest United States to Advanced TelCom, Inc., a wholly-owned subsidiary of Advance TelCom Group, Inc ("ATG"). The sale of these assets was completed on December 10, 2001. The transition of customers to ATG was completed in April 2002. On November 7, 2001, FairPoint Solutions entered into an agreement with Choice One Communications Inc. ("Choice One") and certain affiliates of Choice One to sell certain assets of its competitive communications operations relating to its business and operations in the northeast United States. The sale of these assets was completed on December 19, 2001. Included in the terms of the Choice One sales agreement was an opportunity for FairPoint Solutions to earn additional restricted shares of Choice One common stock based on the number of access lines converted to the Choice One operating platform. FairPoint Solutions earned an additional 1,000,000 restricted shares of Choice One common stock under these provisions, bringing the total shares received to 3,500,000. The 1,000,000 additional shares earned have been recognized as a gain of approximately $0.8 million within discontinued operations during the second quarter of 2002. The transition of customers to Choice One was completed in April 2002. In connection with the sale of assets to Choice One, on November 7, 2001, the Company announced the cessation of the competitive communications business of FairPoint Solutions and notified its remaining customers in the Southwest, Southeast and mid-Atlantic competitive markets to find alternative carriers. The transition of customers to alternative carriers was completed in April 2002. As a result of the adoption of the plan to discontinue the operations of the competitive communications operations, these operating results are presented as discontinued operations. The financial results of the competitive operations are presented in the condensed consolidated statements of operations as income (losses) from discontinued competitive communications operations. On November 28, 2001, FairPoint Solutions completed an amendment to the FairPoint Solutions Credit Facility, pursuant to which FairPoint Solutions' lenders waived certain restrictions with respect to the sale by FairPoint Solutions of certain of its northwest assets to ATG. On December 19, 2001, 7 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES (CONTINUED) FairPoint Solutions completed another amendment to this credit facility which provided for such lenders' consent to the sale of certain of FairPoint Solutions' northeast assets to Choice One and for the lenders' forbearance, until March 31, 2002, from exercising their remedies under the FairPoint Solutions Credit Facility for certain enumerated potential covenant breaches and potential events of default thereunder. On May 10, 2002, FairPoint Solutions entered into an Amended and Restated Credit Agreement with its lenders to restructure the obligations of FairPoint Solutions and its subsidiaries under the FairPoint Solutions Credit Facility. In connection with such restructuring, (i) FairPoint Solutions paid certain of its lenders $5.0 million to satisfy $7.0 million of the obligations under the FairPoint Solutions Credit Facility, (ii) the lenders converted approximately $93.9 million of the loans and obligations under the FairPoint Solutions Credit Facility into shares of the Company's Series A Preferred Stock having a liquidation preference equal to the amount of the loans and obligations under the FairPoint Solutions Credit Facility, and (iii) the remaining loans under the FairPoint Solutions Credit Facility and FairPoint Solutions' obligations under its swap arrangements were converted into $27.9 aggregate principal amount of new term loans. In the second quarter, the Company recorded a gain in discontinued operations of approximately $17.5 million for the extinguishment of debt and settlement of its interest rate swap agreements. The gain represents the difference between the carrying value of $128.8 million of retired debt and related swap obligations and the sum of the aggregate value of the cash paid ($5.0 million) plus principal amount of new term loans ($27.9 million) plus the estimated fair value of the Company's Series A Preferred Stock issued (approximately $78.4 million). The converted loans under the new FairPoint Solutions Amended and Restated Credit Agreement consist of two term loan facilities: (i) Tranche A Loans in the aggregate principal amount of approximately $8.7 million and (ii) Tranche B Loans in the aggregate principal amount of approximately $19.2 million, each of which matures in May, 2007. Interest on the new loans is payable monthly and accrues at a rate of 8% per annum; provided, however, that upon an event of default the interest rate shall increase to 10% per annum. Interest on the Tranche A Loans must be paid in cash and interest on Tranche B Loans may be paid, at the option of FairPoint Solutions, either in cash or in kind. The principal of the Tranche A Loans is due at maturity and the principal of the Tranche B Loans is payable as follows: (a) $2,062,000 is due on September 30, 2004; (b) $4,057,000 is due on September 30, 2005; (c) $5,372,000 is due on September 30, 2006; and (d) the remaining principal balance is due at maturity. The loans under the new FairPoint Solutions Amended and Restated Credit Agreement are guaranteed by certain of FairPoint Solutions' subsidiaries and are secured by substantially all of the assets of FairPoint Solutions and its subsidiaries. The Company has not guaranteed the debt owed to the lenders under the new FairPoint Solutions Amended and Restated Credit Agreement nor does the Company have any obligation to invest any additional funds in FairPoint Solutions. Further, our Credit Facility and the indentures governing our senior subordinated notes contain significant restrictions on the Company's ability to make investments in FairPoint Solutions. Under a tax sharing agreement, the Company is obligated to reimburse FairPoint Solutions for any tax benefits it receives from net operating losses generated by FairPoint Solutions. 8 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES (CONTINUED) Voluntary prepayments of the new loans may be made at any time without premium or penalty. FairPoint Solutions is also required to make mandatory prepayments of principal from certain sources including the net proceeds from asset sales and from excess cash flow generated by its long distance business. Upon an event of default under the new FairPoint Solutions Amended and Restated Credit Agreement and the acceleration of the loans thereunder, at the option of the relevant lender, such loans may be converted into the Company's Series A Preferred Stock pursuant to the terms of the Amended and Restated Preferred Stock Issuance and Capital Contribution Agreement dated as of May 10, 2002 (the "Preferred Stock Issuance Agreement") by and among the Company, the Administrative Agent and the lenders. The Series A Preferred Stock issued to the lenders in connection with the debt restructuring, and any Series A Preferred Stock issuable pursuant to the Preferred Stock Issuance Agreement, is non-voting, except as required by applicable law, and is not convertible into common stock of the Company. The Series A Preferred Stock provides for the payment of dividends at a rate equal to 17.428% per annum. Dividends on the Series A Preferred Stock are payable, at the option of the Company, either in cash or in additional shares of Series A Preferred Stock. The Company has the option to redeem any outstanding Series A Preferred Stock at any time. The redemption price for such shares is payable in cash in an amount equal to $1,000 per share plus any accrued but unpaid dividends thereon (the "Preference Amount"). Under certain circumstances, the Company would be required to pay a premium of up to 6% of the Preference Amount in connection with the redemption of the Series A Preferred Stock. In addition, upon the occurrence of certain events, such as (i) a merger, consolidation, sale, transfer or disposition of at least 50% of the assets or business of the Company and its subsidiaries, (ii) a public offering of the Company's common stock which yields in the aggregate at least $175.0 million, or (iii) the first anniversary of the maturity of the Company's senior subordinated notes (which first anniversary will occur in May 2011), the Company would be required to redeem all outstanding shares of the Series A Preferred Stock at a price per share equal to the Preference Amount. Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, the Company had previously reported two segments: traditional telephone operations and competitive communications operations. The traditional telephone operations provide local, long distance and other communications services to customers in rural communities in which competition is currently limited for local telecommunications services. The competitive communications operations provided local, long distance, and other communication services to customers in markets outside of the Company's traditional telephone markets. The Company's reportable segments were strategic business units that offered similar telecommunications related products and services in different markets. They were managed separately because each segment required different marketing and operational strategies related to the provision of local and long distance communications services. The Company utilized certain information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance. This information included net earnings (loss) plus interest expense, income taxes, depreciation and amortization, and non-cash stock-based compensation charges (EBITDA) and capital expenditures. 9 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES (CONTINUED) Selected information from discontinued operations for the three months and six months ended June 30, 2001 follows:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Revenue..................................................... $ -- 17,706 -- 36,604 ======= ======= ====== ======= Operating loss.............................................. $ -- (17,894) -- (64,510) ======= ======= ====== ======= Income (loss) from discontinued operations.................. $18,308 (20,635) 18,308 (73,180) ======= ======= ====== ======= EBITDA...................................................... $18,308 (12,629) 18,308 (57,144) ======= ======= ====== ======= Capital expenditures........................................ $ -- -- -- 28,768 ======= ======= ====== =======
A reconciliation of EBITDA to income (loss) from discontinued operations follows:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) EBITDA...................................................... $18,308 (12,629) 18,308 (57,144) Depreciation and amortization............................. -- (4,367) -- (6,728) Interest expense.......................................... -- (3,038) -- (9,448) Stock-based compensation.................................. -- (601) -- 140 ------- ------- ------ ------- Income (loss) from discontinued operations.................. $18,308 (20,635) 18,308 (73,180) ======= ======= ====== =======
10 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES (CONTINUED) Net asset and liabilities of discontinued operations as of June 30, 2002 and December 31, 2001 follow:
JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ (UNAUDITED) (DOLLARS IN THOUSANDS) Cash........................................................ $ 11 9,442 Accounts receivable......................................... 2,157 8,612 Prepaid and other........................................... 1 43 Investments available-for-sale.............................. -- 7,900 -------- -------- Net current assets of discontinued operations............. 2,169 25,997 -------- -------- Accounts payable............................................ (466) (8,857) Accrued liabilities......................................... (3,345) (22,308) Accrued interest payable.................................... -- (471) Restructuring accrual....................................... (3,423) (2,575) Accrued property taxes...................................... (345) (365) Current portion of long-term debt........................... -- (125,800) -------- -------- Net current liabilities of discontinued operations........ (7,579) (160,376) -------- -------- Long-term liabilities of discontinued operations............ (7,587) (9,735) -------- -------- Net liabilities of discontinued operations................ $(12,997) (144,114) ======== ========
At December 31, 2001, FairPoint Solutions' outstanding debt ($125.8 million) and the fair value of its interest rate swaps ($3.2 million) was classified in net current liabilities of discontinued operations. In connection with the FairPoint Solutions' debt restructuring, as of June 30, 2002, the converted loans of approximately $27.9 million has been classified as long-term debt as these loans will be serviced through continuing operations. Investments in marketable securities (consisting of Choice One stock) were reclassified from discontinued operations to other current assets as these investments upon liquidation will fund the debt service requirements of FairPoint Solutions' debt. On January 1, 2002, the Company adopted the provisions of SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Based on the provisions of SFAS No. 144, the assets and liabilities related to the discontinued competitive communications operations are presented separately in the asset and liability sections, respectively, on the accompanying June 30, 2002 consolidated balance sheet. The December 31, 2001 consolidated balance sheet has been reclassified for comparative purposes. There was no change to the measurement of the Company's provisions for discontinued operations as the Company initiated its plan of disposal prior to December 31, 2001. In December 2000, the Company initiated a realignment and restructuring of its competitive communications business, which resulted in the Company recording an initial charge of approximately $16.5 million. 11 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES (CONTINUED) Of the initial restructuring charge, approximately $3.3 million related to employee termination benefits and other employee termination related costs. The Company terminated approximately 360 positions in December 2000. These reductions resulted from organizational changes within the operations and sales offices of FairPoint Solutions, including closing facilities in several states. The operation centers in Birmingham, Alabama and Dallas, Texas were closed and consolidated to FairPoint Solutions' central operating facility in Albany, New York. FairPoint Solutions also closed 15 of 41 district sales offices, including all those in the southeast and southwest regions of the United States. The restructuring charge included approximately $10.3 million in contractual obligations for equipment, occupancy, and other lease terminations and other facility exit costs incurred as a direct result of this plan. The restructuring charge also included approximately $2.9 million, net of salvage value, for the write down of property, plant, and equipment. These assets primarily included leasehold improvements, furniture, and office equipment. Estimated salvage values were based on estimates of proceeds upon sale of certain of the affected assets. There were also approximately $0.1 million of other incremental costs incurred as a direct result of the restructuring plan. In the first quarter of 2001, the Company completed its plans for the restructuring of operations at FairPoint Solutions, which resulted in recording a charge of approximately $33.6 million. Of the total first quarter 2001 restructuring charge, approximately $3.4 million related to employee termination benefits and other employee termination related costs. The Company terminated approximately 365 positions in January 2001. Certain positions were eliminated at the central operating facility in Albany, New York and at the corporate office in Charlotte, North Carolina. In addition, another 11 sales offices were closed and staff at the remaining sales offices was reduced. The restructure charge in the first quarter of 2001 included approximately $12.2 million in contractual obligations for equipment, occupancy, and other lease terminations and other facility exit costs incurred as a direct result of the plan. The restructuring charge also included approximately $17.9 million, net of salvage value, for the write down of property, plant, and equipment. There were also approximately $0.1 million of other incremental costs incurred as a direct result of the restructuring plan. At December 31, 2001, the remaining restructuring liabilities were limited to contractual obligations related to equipment and lease terminations. These liabilities were re-evaluated and the original obligation of approximately $22.5 million was increased by approximately $1.9 million. The original estimates associated with the other obligations were adjusted as reflected in the following table and the obligations were satisfied as of December 31, 2001. 12 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS AND RESTRUCTURE CHARGES (CONTINUED) Selected information relating to the restructuring charge follows:
EQUIPMENT, WRITE DOWN EMPLOYEE OCCUPANCY, AND OF PROPERTY, TERMINATION OTHER LEASE PLANT, AND BENEFITS TERMINATIONS EQUIPMENT OTHER TOTAL ----------- -------------- ------------ -------- -------- (DOLLARS IN THOUSANDS) Restructure charge......................... $ 3,271 10,252 2,854 108 16,485 Write down of assets to net realizable value.................................... -- -- (2,854) -- (2,854) Cash payments.............................. (243) (45) -- -- (288) ------- ------- ------- ---- ------- Restructuring accrual as of December 31, 2000..................................... 3,028 10,207 -- 108 13,343 Restructure charge......................... 3,416 12,180 17,916 95 33,607 Write down of assets to net realizable value.................................... -- -- (16,696) -- (16,696) Adjustments from initial estimated charges.................................. (91) 1,916 (1,220) 59 664 Cash payments.............................. (6,353) (11,993) -- (262) (18,608) ------- ------- ------- ---- ------- Restructuring accrual as of December 31, 2001..................................... -- 12,310 -- -- 12,310 Cash payments.............................. -- (1,615) -- -- (1,615) ------- ------- ------- ---- ------- Restructuring accrual as of June 30, 2002..................................... $ -- 10,695 -- -- 10,695 ======= ======= ======= ==== =======
(3) INTEREST RATE SWAP AGREEMENTS The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company's outstanding or forecasted debt obligations. The Company uses variable and fixed-rate debt to finance its operations. The variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. As of June 30, 2002, the Company has seven interest rate swap agreements with a combined notional amount of $225.0 million with expiration dates ranging from May 2003 through May 2004. The change in the fair value of the interest rate swap agreements has been recorded in the statement of operations as either a non-cash increase or reduction to interest expense. Interest expense increased by approximately $0.6 million for the three months ended June 30, 2002 and approximately $1.7 million was recorded as a reduction to interest expense for the six months ended June 30, 2002. A reduction to interest expense of approximately $1.8 million was recorded for the three months ended June 30, 2001 and approximately $3.0 million was recorded as an increase to interest expense for the six months ended June 30, 2001. In addition, approximately $0.4 million and $0.7 million has been reclassified as interest expense from the transition adjustment recorded in accumulated other comprehensive income during the three month and six month periods ended June 30, 2002 and 2001. 13 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) ACQUISITIONS On September 4, 2001, the Company acquired 100% of the common stock of Marianna and Scenery Hill Telephone Company. On September 28, 2001, the Company acquired certain assets of Illinois Consolidated Telephone Company. The aggregate purchase price for these acquisitions was approximately $23.5 million. These telephone properties have historically realized stable operating results and positive cash flow margins. The acquisitions have been accounted for using the purchase method of accounting for business combinations and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the dates of acquisition, and the results of their operations have been included in the Company's consolidated financial statements from the date of acquisition. The excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was approximately $14.4 million and has been recognized as goodwill. The following unaudited pro forma information presents the combined results of operations of the Company as though the acquisitions occurred on January 1, 2001. These results include certain adjustments, including increased interest expense on debt related to the acquisitions, certain preacquisition transaction costs, and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations as if the acquisitions had been in effect at the beginning of the period or which may be attained in the future.
PRO FORMA THREE MONTHS PRO FORMA SIX MONTHS ENDED JUNE 30, 2001 ENDED JUNE 30, 2001 ---------------------- -------------------- (DOLLARS IN THOUSANDS) (UNAUDITED) Revenues...................................... $59,043 117,221 Loss from continuing operations............... (3,002) (9,209) Net loss...................................... (23,637) (82,389)
(5) ISSUANCE OF STOCK OPTIONS In January 2002, the compensation committee of the Board of Directors of the Company approved the grant of options to purchase 250,000 shares of common stock of FairPoint. These options were granted under the MJD Communications, Inc. Stock Incentive Plan and are exercisable at an exercise price of $7.00 per share, which was the estimated fair market value of FairPoint's common stock on the date of the grant. In March 2002, the compensation committee approved the grant of options to purchase 1,337,109 shares of common stock of FairPoint. These options were granted under the 2000 Employee Stock Option Plan and are exercisable at an exercise price of $7.00 per share. The options have a term of ten years. (6) AMORTIZATION OF INTANGIBLE ASSETS The Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142), as of January 1, 2002. The Company ceased amortizing goodwill and equity method goodwill on January 1, 2002. The Company performed a transitional impairment test of goodwill. In performing that test, the Company first identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including existing goodwill and intangible assets, to those reporting 14 FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (6) AMORTIZATION OF INTANGIBLE ASSETS (CONTINUED) units as of the date of adoption. The Company determined that the carrying amount of a reporting unit did not exceed its estimated fair value and, therefore, the Company did not record an impairment loss. As of the date of adoption of SFAS No. 142, the Company had unamortized goodwill of approximately $454.3 million and equity method goodwill of approximately $10.3 million. Amortization expense related to goodwill and equity method goodwill was approximately $3.0 million and approximately $0.1 million, respectively, for the three months ended June 30, 2001. Amortization expense related to goodwill and equity method goodwill was approximately $5.9 million and approximately $0.2 million, respectively, for the six months ended June 30, 2001. Following is the June 30, 2001 consolidated statement of operations, adjusted as if SFAS No. 142 had been effective as of January 1, 2001:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Reported loss from continuing operations............ $(7,225) (3,214) (1,724) (9,633) Amortization of goodwill............................ -- 3,047 -- 6,094 ------- ------ ------ ------ Adjusted loss from continuing operations............ $(7,225) (167) (1,724) (3,539) ======= ====== ====== ======
As of the date of adoption, the Company had $1.8 million in covenants not to compete that are intangible assets subject to amortization under SFAS 142. The Company recorded amortization of $0.3 million and $0.6 million for the three months and six months ending June 30, 2002. The Company will continue to amortize the covenants over their remaining estimated useful lives and expects to record amortization of $0.4 million over the remainder of 2002, $0.7 million during 2003, and $0.1 million during 2004. (7) INVESTMENTS The Company continually evaluates its investment holdings for evidence of impairment. During the three month period ended June 30, 2002, the Company determined that the decline in market value of its Choice One common stock was "other than temporary". As such, the Company recorded a non-cash charge of $5.6 million during the three month period ended June 30, 2002. This charge is classified with the net gain (loss) on investments in the condensed consolidated statements of operations. (8) LONG-TERM DEBT The Company amended its Credit Facility in July 2002 to provide for a letter of credit sub-facility. The amendment will provide the ability to request letters of credit to support obligations of the Company and/or obligations of its subsidiaries incurred in the ordinary course of business in an aggregate principal amount not to exceed $5,000,000 and subject to limitations on the aggregate amount outstanding under the Credit Facility. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of FairPoint Communications, Inc. and its subsidiaries (collectively, the "Company" or "FairPoint"). The discussion should be read in conjunction with the Company's Consolidated Financial Statements for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-K. Certain statements included in this document are forward-looking, such as statements relating to estimates of operating and capital expenditure requirements, future revenue and operating income, and cash flow and liquidity. Such forward-looking statements are based on the Company's current expectations and are subject to a number of risks and uncertainties that could cause actual results in the future to differ significantly from results expressed or implied in any forward-looking statements made by, or on behalf of, the Company. These risks and uncertainties include, but are not limited to, uncertainties relating to economic and business conditions, governmental and regulatory policies, and the competitive environment in which the Company operates. These and other risks are detailed below as well as in other documents filed by the Company with the Securities and Exchange Commission. OVERVIEW We are a provider of telecommunications services to customers in rural communities. We offer an array of services that include local voice, long distance, data and Internet. We were incorporated in February 1991 for the purpose of acquiring and operating rural telephone companies in rural markets. Since our inception, we have acquired 29 such companies, which are located in 18 states. All of our rural telephone company subsidiaries qualify as rural local exchange carriers or "RLECs" under the Telecommunications Act of 1996. RLECs are generally characterized by stable operating results, and strong cash flow margins and primarily operate in a favorable regulatory environment. In particular, pursuant to existing state and federal regulations, we are able to charge rates which enable us to recover our operating and capital costs, plus a reasonable (as determined by the relevant regulatory authority) rate of return on our invested capital. In addition, because RLECs primarily serve sparsely populated rural areas and small towns, competition from competitive local exchange carriers, or "CLECs", is typically limited due to the generally unfavorable economics of constructing and operating competitive systems in such areas. We believe these attractive characteristics of the RLEC market, combined with our ability to draw on our existing corporate resources, create the opportunity to maintain and improve our operating results and cash flows. In early 1998, we launched our CLEC enterprise through our wholly owned subsidiary, FairPoint Solutions, in an effort to extend our service offering to markets adjacent to our RLECs. In November 2001, we announced our plan to discontinue our CLEC operations. For additional information about the Company's decision to discontinue its CLEC operations, see the "Notes to the Condensed Consolidated Financial Statements". REVENUES We derive our revenues from: - Local calling services. We receive revenues from providing local exchange telephone services, including monthly recurring charges for basic service, usage charges for local calls and service charges for special calling features. - Network access charges. These revenues consist primarily of charges paid by long distance companies and other customers for access to our networks in connection with the origination and/or termination of long distance telephone calls both to and from our customers. Access charges to long distance carriers and other customers are based on access rates filed with the FCC for interstate services and state regulatory agencies for intrastate services. 16 - Long distance services. We receive revenues for long distance services to our retail and wholesale long distance customers. - Data and Internet services. We receive revenues from monthly recurring charges for services, including digital subscriber line, special access, private lines, Internet and other services. - Other services. We receive revenues from other services, including billing and collection and directory services. The following summarizes our percentage of revenues from continuing operations from these sources:
% OF REVENUE THREE SIX MONTH MONTH PERIOD PERIOD ENDED ENDED JUNE 30, JUNE 30, ------------------- ------------------- REVENUE SOURCE 2002 2001 2002 2001 - -------------- -------- -------- -------- -------- Local calling services...................................... 31% 27% 30% 26% Network access charges...................................... 43% 48% 42% 49% Long distance services...................................... 7% 9% 9% 9% Data and Internet services.................................. 11% 8% 11% 7% Other services.............................................. 8% 8% 8% 9%
OPERATING EXPENSES Our operating expenses are categorized as network operating costs; selling, general and administrative expenses; and depreciation and amortization. - Network operating costs include costs incurred in connection with the operation of our central offices and outside plant facilities and related operations. In addition to the operational costs of owning and operating our own facilities, we also purchase long distance services from the RBOCs, large independent telephone companies and third party long distance providers. - Selling, general and administrative expenses consist of expenses relating to sales and marketing, customer service and administration and corporate and personnel administration. - Depreciation and amortization includes depreciation of our communications network and equipment and, prior to January 1, 2002, amortization of goodwill related to our acquisitions. ACQUISITIONS During 2001, we acquired one RLEC and certain assets of additional telephone exchanges for an aggregate purchase price of $24.2 million, which included $0.7 million of acquired debt. At the respective dates of acquisition, these businesses served an aggregate of approximately 5,600 access lines. DISCONTINUED OPERATIONS In November 2001, we decided to discontinue the CLEC operations of FairPoint Solutions. This decision was a proactive response to the deterioration in the capital markets, the general slow-down of the economy and the slower-than-expected growth in FairPoint Solutions' CLEC operations. Prior to our decision to discontinue FairPoint Solutions' CLEC operations, FairPoint Solutions entered into an agreement on October 19, 2001 to sell certain of its assets in the Northwest to ATG. On November 7, 2001, FairPoint Solutions entered into an agreement to sell certain of its assets in the Northeast to Choice One. Included in the terms of the Choice One sales agreement was an opportunity for FairPoint Solutions to earn additional restricted shares of Choice One common stock based on the number of access lines converted to the Choice One operating platform. FairPoint Solutions earned 1,000,000 restricted shares of Choice One common stock under these provisions. These shares were 17 recognized as a gain of approximately $0.8 million within discontinued operations during the second quarter of 2002. In addition, FairPoint Solutions notified its remaining customers in the Southwest, Southeast, and Mid-Atlantic competitive markets to find alternative carriers. The transition of customers to ATG, Choice One and alternative carriers was completed in April 2002. As a result of these transactions and the transition of all FairPoint Solutions customers to other service providers, FairPoint Solutions has completed the disposition of its CLEC operations. FairPoint Solutions will continue to provide wholesale long distance services and support to our RLEC subsidiaries and other independent local exchange companies. These services allow such companies to operate their own long distance communication services and sell such services to their respective customers. The Company's long distance business is included as part of continuing operations in the accompanying financial statements. RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED WITH THREE MONTH PERIOD ENDED JUNE 30, 2001 REVENUES. Revenues from continuing operations decreased $1.0 million to $56.8 million for the three months ended June 30, 2002 compared to $57.8 million for the three months ended June 30, 2001. Operating revenues of our earlier acquired RLEC telephone companies decreased $1.4 million; in addition, we experienced a $1.1 million decrease in revenues from our wholesale long distance company. Offsetting the decreases was an increase of $1.5 million attributable to revenues from RLEC telephone companies we acquired in 2001. Local calling services increased $2.4 million, including an increase of $1.9 million primarily from an increase in the subscriber line charge ("SLC") billed to local end users, as well as an increase of $0.5 million from the companies we acquired in 2001. The SLC increase was implemented as part of the Multi Association Group Plan ("Mag plan") that took effect on January 1, 2002 and shifts revenue to local calling services and away from network access. Network access revenues decreased $3.6 million, net of an increase of $0.8 million from companies we acquired in 2001. Network access revenues of our earlier acquired RLEC telephone companies decreased $4.4 million. Network access revenue decreases are associated with rate cases and access adjustments in Maine, Kansas, Vermont and Illinois as well as the overall impact of the Mag plan. Long distance services revenues decreased $1.4 million as revenues from our wholesale long distance company decreased $1.1 million due to a loss of customers as a result from increased rates attributable to the Global Crossing bankruptcy. Long distance revenues decreased $0.3 million from our RLEC business due to lower long distance minutes of use. Data and Internet services revenues increased $2.0 million, including an increase of $0.1 million from 2001 acquisitions and an increase of $1.9 million as a result of increased service offerings to our customers of our earlier acquired RLEC telephone company businesses. Other revenues decreased by $0.4 million as a result of reductions in billing and collections revenues and non-regulated telephone services revenues. OPERATING EXPENSES OF CONTINUING OPERATIONS NETWORK OPERATING COSTS. Network operating costs from continuing operations decreased $1.1 million to $15.4 million for the three months ended June 30, 2002 from $16.5 million for the three months ended June 30, 2001. Of this decrease, $0.3 million was attributable to expenses of operation of our earlier acquired RLEC telephone companies and $1.1 million was attributable to our wholesale long distance company. The decrease was offset by a $0.3 million increase attributable to the RLEC telephone companies we acquired in 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses from continuing operations decreased $0.2 million to $12.4 million for the three months ended June 30, 2002 compared to $12.6 million for the three months ended June 30, 2001. In light of WorldCom, Inc.'s deteriorating financial condition, $1.9 million of bad debt expense was recorded for the three months 18 ended June 30, 2002. Subsequent to June 30, 2002, WorldCom, Inc. declared bankruptcy on July 21, 2002. Due to expense reduction efforts throughout the company, expenses of our earlier acquired RLEC telephone companies decreased $2.3 million. The decrease in expenses was offset by an increase of $0.1 million attributable to our wholesale long distance company and $0.1 million from the companies we acquired in 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization from continuing operations decreased $2.5 million to $11.6 million for the three months ended June 30, 2002 from $14.1 million for the three months ended June 30, 2001. The decrease of $3.0 million attributable to the discontinuance of amortizing goodwill upon the implementation of SFAS No. 142 was offset by increases in depreciation of property, plant, and equipment consisting of $0.3 million attributable to the increased investment in our communications network by our RLECs acquired prior to 2001 and $0.2 million related to the companies we acquired in 2001. INCOME FROM OPERATIONS. Income from continuing operations increased $2.8 million to $17.4 million for the three months ended June 30, 2002 from $14.6 million for the three months ended June 30, 2001. Of this increase, $2.2 million was attributable to our earlier acquired RLEC telephone companies and $0.8 million was attributable to the RLEC telephone companies we acquired in 2001. Income from operations of our wholesale long distance company decreased $0.2 million. OTHER INCOME (EXPENSE). Total other expense from continuing operations increased $7.0 million to $24.5 million for the three months ended June 30, 2002 from $17.5 million for the three months ended June 30, 2001. The net change is mainly attributable to the write-down of approximately $5.6 million in the value of our shares of Choice One stock. It was determined that the decline in market value was "other than temporary" and a non-cash charge was recorded during the three months ended June 30, 2002. Interest expense increased $1.6 million to $21.0 million for the three months ended June 30, 2002, from $19.4 million for the three months ended June 30, 2001 and the change is mainly attributable to the non-cash interest expense associated with SFAS No. 133. Due to the change in fair value of our interest rate swaps, for the three month period ended June 30, 2002, interest expense increased by $0.6 million compared to a non-cash decrease of $1.8 million for the three months ended June 30, 2001. Undistributed earnings from equity investments increased $0.5 million to $1.7 million for the three months ended June 30, 2002, from $1.2 million for the three months ended June 30, 2001. INCOME TAX EXPENSE. Income tax expense from continuing operations decreased $0.2 million to $0.1 million for the three months ended June 30, 2002 from $0.3 million for the three months ended June 30, 2001. The income tax expense relates primarily to income taxes owed in certain states. DISCONTINUED OPERATIONS. Income from discontinued operations for the three months ended June 30, 2002 was $18.3 million. $17.5 million was attributable to the gain recorded for the extinguishment of debt and settlement of interest rate swap agreements and $0.8 million was attributable to the gain recorded upon receipt of additional shares of Choice One stock as discussed in note 2 to the financial statements. Losses from discontinued operations for the three months ended June 30, 2001 were $20.6 million. NET EARNINGS (LOSS). Our net earnings were $11.1 million for the three months ended June 30, 2002, compared to a loss of $23.8 million for the three months ended June 30, 2001, as a result of the factors discussed above. SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED WITH SIX MONTH PERIOD ENDED JUNE 30, 2001 REVENUES. Revenues from continuing operations increased $0.5 million to $115.2 million for the six months ended June 30, 2002 from $114.7 million for the six months ended June 30, 2001. Of this increase, $3.0 million was attributable to revenues from RLEC telephone companies we acquired in 2001 and $0.4 million was attributable to revenues from our wholesale long distance company. Operating revenues of our earlier acquired RLEC telephone companies decreased $2.9 million. Local 19 calling services increased by $4.6 million, including an increase of $3.6 million primarily from an increase in the subscriber line charge ("SLC") billed to local end users, as well as an increase of $1.0 million from the RLEC telephone companies we acquired in 2001. The SLC increase was implemented as part of the Multi Association Group Plan ("Mag plan") that took effect on January 1, 2002 and shifts revenue to local calling services and away from network access. Network access revenues decreased $7.6 million, net of an increase of $1.6 million from RLEC telephone companies we acquired in 2001. Network access revenues of our earlier acquired RLEC telephone companies decreased $9.2 million. Network access revenue decreases are associated with rate cases and access adjustments in Maine, Kansas, Vermont and Illinois as well as the overall impact of the Mag plan. Long distance services revenues decreased $0.3 million as revenues from new long distance wholesale customers increased $0.4 million offset by a decrease of $0.7 million from our RLEC business due to lower long distance minutes of use. Data and Internet services revenues increased $4.4 million, including an increase of $0.3 million from 2001 acquisitions and an increase of $4.1 million as a result of increased service offerings to our customers of our earlier acquired RLEC telephone company businesses. Other revenues decreased by $0.6 million as a result of reductions in billing and collections revenues and non-regulated telephone services revenues. OPERATING EXPENSES OF CONTINUING OPERATIONS NETWORK OPERATING COSTS. Network operating costs from continuing operations increased $0.3 million to $32.4 million for the six months ended June 30, 2002 from $32.1 million for the six months ended June 30, 2001. The RLEC telephone companies we acquired in 2001 accounted for $0.6 million of the increase. The increase in expenses was offset by a decrease of $0.2 million attributable to our earlier acquired RLEC telephone companies and $0.1 million attributable to our wholesale long distance company. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses from continuing operations decreased $1.5 million to $21.7 million for the six months ended June 30, 2002 compared to $23.2 million for the six months ended June 30, 2001. In light of WorldCom, Inc.'s deteriorating financial condition, $1.9 million of bad debt expense was recorded for the six months ended June 30, 2002. Subsequent to June 30, 2002, WorldCom, Inc. declared bankruptcy on July 21, 2002. Due to expense reduction efforts throughout the company, expenses of our earlier acquired RLEC telephone companies decreased $3.9 million. The decrease in expenses was offset by an increase of $0.3 million attributable to the growth of our wholesale long distance company and $0.2 million from the RLEC telephone companies we acquired in 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization from continuing operations decreased $4.6 million to $23.3 million for the six months ended June 30, 2002 from $27.9 million for the six months ended June 30, 2001. The decrease of $6.1 million attributable to the discontinuance of amortizing goodwill upon the implementation of SFAS No. 142 was offset by increases in depreciation of property, plant, and equipment consisting of $1.0 million attributable to the increased investment in our communications network by our RLEC telephone companies we acquired prior to 2001 and $0.5 million related to the companies we acquired in 2001. INCOME FROM OPERATIONS. Income from continuing operations increased $6.3 million to $37.7 million for the six months ended June 30, 2002 from $31.4 million for the six months ended June 30, 2001. Of this increase, $4.5 million was attributable to our earlier acquired RLEC telephone companies, $1.6 million was attributable to the RLEC telephone companies we acquired in 2001 and $0.2 million was attributable to our wholesale long distance company. OTHER INCOME (EXPENSE). Total other expense from continuing operations decreased $1.4 million to $39.1 million for the six months ended June 30, 2002 from $40.5 million for the six months ended June 30, 2001. The expense consists primarily of interest expense on long-term debt. Interest expense decreased $5.4 million to $38.5 million for the six months ended June 30, 2002, from $43.9 million for 20 the six months ended June 30, 2001 and is mainly attributable to the non-cash interest expense associated with SFAS No. 133. Due to the change in fair value of our interest rate swaps, for the six month period ended June 30, 2002, interest expense was reduced by $1.7 million compared to a non-cash increase of $3.0 million for the six months ended June 30, 2001. Undistributed earnings from equity investments increased $1.5 million to $3.6 million for the six months ended June 30, 2002, from $2.1 million for the six months ended June 30, 2001. The net gain (loss) on investments changed by $5.4 million and is primarily attributable to an "other than temporary" write-down of approximately $5.6 million in the value of our shares of Choice One stock during the period ended June 30, 2002. INCOME TAX EXPENSE. Income tax expense from continuing operations decreased $0.2 million to $0.4 million for the six months ended June 30, 2002 from $0.6 million for the six months ended June 30, 2001. The income tax expense relates primarily to income taxes owed in certain states. DISCONTINUED OPERATIONS. Income from discontinued operations for the six months ended June 30, 2002 was $18.3 million, of which $17.5 million was attributable to the gain recorded for the extinguishment of debt and settlement of interest rate swap agreements and $0.8 million was attributable to the gain recorded upon receipt of additional shares of Choice One stock as discussed in note 2 to the financial statements. Losses from discontinued operations for the six months ended June 30, 2001 were $73.2 million. NET EARNINGS (LOSS). Our net earnings were $16.6 million for the six months ended June 30, 2002, compared to a loss of $82.8 million for the six months ended June 30, 2001, as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES Our cash flow requirements include general corporate expenditures, capital expenditures, debt service and acquisitions. We expect that our RLEC telephone companies' cash flow from operations and our Credit Facility will fund our capital expenditures, working capital and debt service requirements for the foreseeable future. Historically, we have used the proceeds from institutional and bank debt, private equity offerings, and available cash flow to fund our operations. We may secure additional funding through the sale of public or private debt and/or equity securities or enter into another bank credit facility to fund future acquisitions and operations. If our operating results are below expectations, there can be no assurance that we will be successful in raising sufficient additional capital on terms that we consider acceptable, or that our operations will produce positive cash flow in sufficient amounts to meet our liquidity requirements. The failure to raise and generate sufficient funds may require us to delay or abandon some of our planned acquisitions or expenditures, which could have a material adverse effect on our growth. In November 2001, FairPoint Solutions announced its decision to discontinue its CLEC operations and announced the proposed sale of certain of its competitive communications assets. In December 2001, FairPoint Solutions completed these asset sales. In April 2002, FairPoint Solutions completed the process of transitioning customers to ATG, Choice One or alternative carriers. As a result of these transactions, FairPoint Solutions has completed the cessation of its competitive communications business operations. FairPoint Solutions' cash flow requirements include general corporate expenditures, expenses related to discontinued operations and expenses associated with the amendment and restatement of its credit facility. We expect FairPoint Solutions' cash flow requirements will be funded from available cash, the liquidation of its remaining assets, available cash flows from operations and from limited additional investments permitted under our Credit Facility and the indentures governing our senior subordinated notes. Our Credit Facility and the indentures governing our senior subordinated notes contain significant restrictions on the Company's ability to make investments in FairPoint Solutions. As of June 30, 2002, the Company could have invested up to 21 $25.0 million in FairPoint Solutions in compliance with such agreements. We believe these sources will be adequate to fund the complete discontinuation of the competitive communications business. FairPoint Solutions will continue to provide wholesale long distance services and support to our RLEC subsidiaries and other independent local exchange companies, which allows these customers to operate their own long distance communications services. Historically, the wholesale long distance business enterprise has been profitable and self-funding. On May 10, 2002, FairPoint Solutions entered into an Amended and Restated Credit Agreement with its lenders to restructure the obligations of FairPoint Solutions and its subsidiaries under the FairPoint Solutions Credit Facility. In connection with such restructuring, (i) FairPoint Solutions paid certain of its lenders $5.0 million to satisfy $7.0 million of the obligations under the FairPoint Solutions Credit Facility, (ii) the lenders converted approximately $93.9 million of the loans and obligations under the FairPoint Solutions Credit Facility into shares of the Company's Series A Preferred Stock having a liquidation preference equal to the amount of the loans and obligations under the FairPoint Solutions Credit Facility, and (iii) the remaining loans under the FairPoint Solutions Credit Facility and FairPoint Solutions' obligations under its swap arrangements were converted into $27.9 million aggregate principal amount of new term loans. In the second quarter, the Company recorded a gain in discontinued operations of approximately $17.5 million for the extinguishment of debt and settlement of its interest rate swap agreements. The gain represents the difference between the carrying value of $128.8 million of retired debt and related swap obligations and the sum of the aggregate value of the cash paid ($5.0 million) plus principal amount of new term loans ($27.9 million) plus the estimated fair value of the Company's Series A Preferred Stock issued (approximately $78.4 million). The converted loans under the new FairPoint Solutions Amended and Restated Credit Agreement consist of two term loan facilities: (i) Tranche A Loans in the aggregate principal amount of approximately $8.7 million and (ii) Tranche B Loans in the aggregate principal amount of approximately $19.2 million, each of which matures in May, 2007. Interest on the new loans is payable monthly and accrues at a rate of 8% per annum; provided, however, that upon an event of default the interest rate shall increase to 10% per annum. Interest on the Tranche A Loans must be paid in cash and interest on Tranche B Loans may be paid, at the option of FairPoint Solutions, either in cash or in kind. The principal of the Tranche A Loans is due at maturity and the principal of the Tranche B Loans is payable as follows: (a) $2,062,000 is due on September 30, 2004; (b) $4,057,000 is due on September 30, 2005; (c) $5,372,000 is due on September 30, 2006; and (d) the remaining principal balance is due at maturity. The loans under the new FairPoint Solutions Amended and Restated Credit Agreement are guaranteed by certain of FairPoint Solutions' subsidiaries and are secured by substantially all of the assets of FairPoint Solutions and its subsidiaries. The Company has not guaranteed the debt owed to the lenders under the new FairPoint Solutions Amended and Restated Credit Agreement nor does the Company have any obligation to invest any additional funds in FairPoint Solutions. Further, our Credit Facility and the indentures governing our senior subordinated notes contain significant restrictions on the Company's ability to make investments in FairPoint Solutions. Under a tax sharing agreement, the Company is obligated to reimburse FairPoint Solutions for any tax benefits it receives from net operating losses generated by FairPoint Solutions. Voluntary prepayments of the new loans may be made at any time without premium or penalty. FairPoint Solutions is also required to make mandatory prepayments of principal from certain sources including the net proceeds from asset sales and from excess cash flow generated by its long distance business. Upon an event of default under the new FairPoint Solutions Amended and Restated Credit Agreement and the acceleration of the loans thereunder, at the option of the relevant lender, such loans may be converted into the Company's Series A Preferred Stock pursuant to the terms of the 22 Amended and Restated Preferred Stock Issuance and Capital Contribution Agreement dated as of May 10, 2002 (the "Preferred Stock Issuance Agreement") by and among the Company, the Administrative Agent and the lenders. The Series A Preferred Stock issued to the lenders in connection with the debt restructuring, and any Series A Preferred Stock issuable pursuant to the Preferred Stock Issuance Agreement, is non-voting, except as required by applicable law, and is not convertible into common stock of the Company. The Series A Preferred Stock provides for the payment of dividends at a rate equal to 17.428% per annum. Dividends on the Series A Preferred Stock are payable, at the option of the Company, either in cash or in additional shares of Series A Preferred Stock. The Company has the option to redeem any outstanding Series A Preferred Stock at any time. The redemption price for such shares is payable in cash in an amount equal to $1,000 per share plus any accrued but unpaid dividends thereon (the "Preference Amount"). Under certain circumstances, the Company would be required to pay a premium of up to 6% of the Preference Amount in connection with the redemption of the Series A Preferred Stock. In addition, upon the occurrence of certain events, such as (i) a merger, consolidation, sale, transfer or disposition of at least 50% of the assets or business of the Company and its subsidiaries, (ii) a public offering of the Company's common stock which yields in the aggregate at least $175.0 million, or (iii) the first anniversary of the maturity of the Company's senior subordinated notes (which first anniversary will occur in May 2011), the Company would be required to redeem all outstanding shares of the Series A Preferred Stock at a price per share equal to the Preference Amount. CAPITAL EXPENDITURES Our annual capital expenditures for our traditional telephone operations have historically been significant. Because existing regulations allow us to recover our operating and capital costs, plus a reasonable return on our invested capital in regulated telephone assets, capital expenditures constitute an attractive use of our cash flow. For the period from July 1, 2002 through June 30, 2003, we expect capital expenditures to be approximately $41.5 million. For the three months and six months ended June 30, 2002, capital expenditures were $4.0 million and $10.0 million, respectively. DEBT FINANCING We have utilized a variety of debt instruments to fund our business, including: OUR CREDIT FACILITY. Our Credit Facility provides for two term facilities, one with approximately $65.9 million principal amount outstanding as of June 30, 2002 that matures on March 31, 2006 and the other with the principal amount of approximately $130.6 million outstanding as of June 30, 2002 that matures on March 31, 2007. Our Credit Facility also provides for a revolving facility with a principal amount of $85.0 million that matures on September 30, 2004 and a revolving acquisition facility with a principal amount of $165.0 million that also matures on September 30, 2004. As of June 30, 2002, $60.0 million was outstanding on the revolving facility and $95.3 million was outstanding on the revolving acquisition facility. The Credit Facility requires that we comply with certain financial covenants. As of June 30, 2002, these financial covenants limited the commitment availability under the revolving and revolving acquisition facilities to $89.2 million. We amended our Credit Facility in July 2002 to provide for a letter of credit sub-facility. The amendment will provide us with the ability to request letters of credit to support our obligations and/or obligations of our subsidiaries incurred in the ordinary course of business in an aggregate principal amount not to exceed $5,000,000 and subject to limitations on the aggregate amount outstanding under the Credit Facility. SENIOR SUBORDINATED NOTES AND FLOATING RATE NOTES ISSUED IN 1998. We have outstanding publicly held debt comprised of $125.0 million of aggregate principal amount of 9 1/2% senior subordinated notes and $75.0 million aggregate principal amount of floating rate notes. Interest on the senior subordinated 23 notes and floating rate notes is payable semi-annually in cash on each May 1 and November 1. Both series of notes mature on May 1, 2008. These notes are general unsecured obligations, subordinated in right of payment to all existing and future senior debt and effectively subordinated to all existing and future debt and other liabilities of our subsidiaries. SENIOR SUBORDINATED NOTES ISSUED IN 2000. In May 2000, we issued $200.0 million of aggregate principal amount of 12 1/2% senior subordinated notes. Interest on these notes is payable semi-annually in cash on May 1 and November 1 of each year. These notes will mature on May 1, 2010. These notes are general unsecured obligations and rank equally with all of FairPoint's other unsecured senior subordinated indebtedness and are subordinated in right of payment to all of FairPoint's senior indebtedness, whether or not secured, and effectively subordinated to all existing and future debt and other liabilities of our subsidiaries. FAIRPOINT SOLUTIONS CREDIT FACILITY. On May 10, 2002, FairPoint Solutions entered into an Amended and Restated Credit Agreement with its lenders to restructure the obligations of FairPoint Solutions and its subsidiaries under the FairPoint Solutions Credit Facility. In connection with such restructuring, (i) FairPoint Solutions paid certain of its lenders $5.0 million to satisfy $7.0 million of the obligations under the FairPoint Solutions Credit Facility, (ii) the lenders converted approximately $93.9 million of the loans and obligations under the FairPoint Solutions Credit Facility into shares of the Company's Series A Preferred Stock having a liquidation preference equal to the amount of the loans and obligations under the FairPoint Solutions Credit Facility, and (iii) the remaining loans under the FairPoint Solutions Credit Facility and FairPoint Solutions' obligations under its swap arrangements were converted into $27.9 million aggregate principal amount of new term loans. In the second quarter, the Company recorded a gain in discontinued operations of approximately $17.5 million for the extinguishment of debt and settlement of its interest rate swap agreements. The gain represents the difference between the carrying value of $128.8 million of retired debt and related swap obligations and the sum of the aggregate value of the cash paid ($5.0 million) plus principal amount of new term loans ($27.9 million) plus the estimated fair value of the Company's Series A Preferred Stock issued (approximately $78.4 million). The converted loans under the new FairPoint Solutions Amended and Restated Credit Agreement consist of two term loan facilities: (i) Tranche A Loans in the aggregate principal amount of approximately $8.7 million and (ii) Tranche B Loans in the aggregate principal amount of approximately $19.2 million, each of which matures in May, 2007. Interest on the new loans is payable monthly and accrues at a rate of 8% per annum; provided, however, that upon an event of default the interest rate shall increase to 10% per annum. Interest on the Tranche A Loans must be paid in cash and interest on Tranche B Loans may be paid, at the option of FairPoint Solutions, either in cash or in kind. The principal of the Tranche A Loans is due at maturity and the principal of the Tranche B Loans is payable as follows: (a) $2,062,000 is due on September 30, 2004; (b) $4,057,000 is due on September 30, 2005; (c) $5,372,000 is due on September 30, 2006; and (d) the remaining principal balance is due at maturity. The loans under the new FairPoint Solutions Amended and Restated Credit Agreement are guaranteed by certain of FairPoint Solutions' subsidiaries and are secured by substantially all of the assets of FairPoint Solutions and its subsidiaries. The Company has not guaranteed the debt owed to the lenders under the new FairPoint Solutions Amended and Restated Credit Agreement nor does the Company have any obligation to invest any additional funds in FairPoint Solutions. Further, our Credit Facility and the indentures governing our senior subordinated notes contain significant restrictions on the Company's ability to make investments in FairPoint Solutions. Under a tax sharing agreement, the Company is obligated to reimburse FairPoint Solutions for any tax benefits it receives from net operating losses generated by FairPoint Solutions. Voluntary prepayments of the new loans may be made at any time without premium or penalty. FairPoint Solutions is also required to make mandatory prepayments of principal from certain sources 24 including the net proceeds from asset sales and from excess cash flow generated by the long distance business. Upon an event of default under the new FairPoint Solutions Amended and Restated Credit Agreement and the acceleration of the loans thereunder, at the option of the relevant lender, such loans may be converted into the Company's Series A Preferred Stock pursuant to the terms of the Amended and Restated Preferred Stock Issuance and Capital Contribution Agreement dated as of May 10, 2002 (the "Preferred Stock Issuance Agreement") by and among the Company, the Administrative Agent and the lenders. The Series A Preferred Stock issued to the lenders in connection with the debt restructuring, and any Series A Preferred Stock issuable pursuant to the Preferred Stock Issuance Agreement, is non-voting, except as required by applicable law, and is not convertible into common stock of the Company. The Series A Preferred Stock provides for the payment of dividends at a rate equal to 17.428% per annum. Dividends on the Series A Preferred Stock are payable, at the option of the Company, either in cash or in additional shares of Series A Preferred Stock. The Company has the option to redeem any outstanding Series A Preferred Stock at any time. The redemption price for such shares is payable in cash in an amount equal to $1,000 per share plus any accrued but unpaid dividends thereon (the "Preference Amount"). Under certain circumstances, the Company would be required to pay a premium of up to 6% of the Preference Amount in connection with the redemption of the Series A Preferred Stock. In addition, upon the occurrence of certain events, such as (i) a merger, consolidation, sale, transfer or disposition of at least 50% of the assets or business of the Company and its subsidiaries, (ii) a public offering of the Company's common stock which yields in the aggregate at least $175.0 million, or (iii) the first anniversary of the maturity of the Company's senior subordinated notes (which first anniversary will occur in May 2011), the Company would be required to redeem all outstanding shares of the Series A Preferred Stock at a price per share equal to the Preference Amount. SUMMARY OF CONTRACTUAL OBLIGATIONS The tables set forth below contain information with regard to disclosures about contractual obligations and commercial commitments. The following table discloses aggregate information about our contractual obligations and the periods in which payments are due:
PAYMENTS DUE BY PERIOD ------------------------------------------------------- LESS THAN AFTER TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS CONTRACTUAL OBLIGATIONS: -------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS) Debt maturing within one year............ $ 6,070 $ 6,070 $ -- $ -- $ -- Long-term debt........................... 798,204 -- 311,147 272,601 214,456 (1) Operating leases....................... 20,978 4,840 8,436 5,639 2,063 Deferred transaction fee................. 8,445 -- -- -- 8,445 Non-compete agreements................... 1,159 824 335 -- -- -------- ------- -------- -------- -------- Total contractual cash obligations....... $834,856 $11,734 $319,918 $278,240 $224,964 ======== ======= ======== ======== ========
25 The following table discloses aggregate information about our commercial commitments. Commercial commitments are items that we could be obligated to pay in the future. They are not included in our Condensed Consolidated Balance Sheets.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ----------------------------------------------------------- TOTAL AMOUNTS LESS THAN AFTER COMMITTED 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS OTHER COMMERCIAL COMMITMENTS: --------- --------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) Financial guarantee............................. $2,368 $562 $1,806 $ -- $ -- ====== ==== ====== ========== ==========
The following table discloses aggregate information about our derivative financial instruments, the source of fair value of these instruments and their maturities:
FAIR VALUE OF CONTRACTS AT PERIOD-END ---------------------------------------------------------- TOTAL FAIR LESS THAN AFTER VALUE 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS SOURCE OF FAIR VALUE: ---------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) (2) Prices provided by external sources.......... $9,012 $1,581 $7,431 $ -- $ -- ====== ====== ====== ========= =========
- ------------------------ (1) Operating lease obligations represent amounts associated with the discontinued operations discussed in note 2 and are stated in this table at total contractual amounts. However, the Company intends to negotiate subleases on these properties to reduce the total obligation. (2) Fair value of interest rate swaps at June 30, 2002 was provided by the counterparties to the underlying contracts using consistent methodologies. CASH FLOWS Net cash provided by operating activities of continuing operations was $28.6 million and $11.0 million for the six months ended June 30, 2002 and 2001, respectively. Net cash used in investing activities from continuing operations was $5.1 million and $16.9 million for the six months ended June 30, 2002 and 2001, respectively. These cash flows primarily reflect net capital expenditures of $9.9 million and $18.0 million for the six months ended June 30, 2002 and 2001, respectively. Net cash used by financing activities from continuing operations was $11.6 million for the six months ended June 30, 2002. These cash flows primarily represent repayments of long term debt of $69.0 million and borrowings of $58.5 million. Net cash provided by financing activities from continuing operations was $81.1 million for the six months ended June 30, 2001. These cash flows primarily represent repayments of long term debt of $139.1 million and borrowings of $221.2 million. A majority of the proceeds received from financing activities during the six months ended June 30, 2001 was used to provide cash used in the operation of the discontinued competitive communications business of $74.6 million. NEW ACCOUNTING STANDARDS The FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which is effective January 1, 2003. This statement requires, among other things, the accounting and reporting of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The Company has not yet determined the impact of the adoption of this standard on its financial position, results of operations and cash flows. The FASB issued SFAS No. 145, RECISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS (SFAS No. 145). This statement eliminates the requirement that gains and losses from extinguishments of debt be required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. The statement requires gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet 26 the criteria in Accounting Priniples Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, which provides guidance for distinguishing transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. We adopted SFAS No. 145 in the second quarter of 2002. During 2002, we recognized a $17.5 million gain for the extingusihment of the FairPoint Solutions' debt and settlement of its interest rate swap agreements. This gain is classified within discontinued operations. INFLATION We do not believe inflation has a significant effect on our operations. ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At June 30, 2002, we recorded our marketable available-for-sale equity securities at a fair value of $3.1 million. These securities have exposure to price risk. A hypothetical ten percent adverse change in quoted market prices would decrease the recorded value by approximately $0.3 million. We have limited our exposure to material future earnings or cash flow exposures from changes in interest rates on long-term debt, since approximately 76% of our debt bears interest at fixed rates or effectively at fixed rates through the use of interest rate swaps. However, our earnings are affected by changes in interest rates as our long-term debt under our credit facilities have variable interest based on either the prime rate or LIBOR. If interest rates on our variable rate debt averaged 10% more, our interest expense would have increased, and our loss from continuing operations before taxes would have increased by approximately $1.1 million for the six months ended June 30, 2002. We have entered into interest rate swaps to manage our exposure to fluctuations in interest rates on our variable rate debt. The fair value of these swaps was approximately $(9.0) million at June 30, 2002. The fair value indicates an estimated amount we would have to pay to cancel the contracts or transfer them to other parties. In connection with our Credit Facility, we used six interest rate swap agreements, with notional amounts of $25.0 million each, to effectively convert a portion of our variable interest rate exposure to fixed rates ranging from 8.07% to 10.34%. The swap agreements expire from November 2003 to May 2004. In connection with our floating rate notes, we used an interest rate swap agreement, with a notional amount of $75.0 million to effectively convert our variable interest rate exposure to a fixed rate of 10.78%. This swap agreement expires in May 2003. FairPoint Solutions used two interest rate swap agreements with notional amounts of $25.0 million and $50.0 million to effectively convert a portion of its variable interest rate exposure under the FairPoint Solutions Amended and Restated Credit Agreement to fixed rates ranging from 9.09% to 10.59%. FairPoint Solutions was in default under these interest rate swap agreements as of April, 2002 and as part of the debt restructuring such swaps were terminated and FairPoint Solutions issued approximately $3.0 million of term loans under the new FairPoint Solutions Amended and Restated Credit Agreement in exchange therefor. 27 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAIRPOINT COMMUNICATION, INC. By: /s/ WALTER E. LEACH, JR. ----------------------------------------- Name: Walter E. Leach, Jr. Title: Senior Vice President and Chief Financial Officer
28 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Stock Purchase Agreement dated as of January 4, 2000 by and among FairPoint, Thomas H. Lee Equity IV, L.P., Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners, L.P. and certain other signatories thereto.(1) 2.2 Network Transition Agreement, dated November 7, 2001, by and among FairPoint Solutions, Choice One Communications Inc. and selected subsidiaries of Choice One Communications Inc.(9) 2.3 Asset Purchase Agreement, dated October 19, 2001, by and among FairPoint Solutions and Advanced TelCom, Inc.(10) 2.4 Asset Purchase Agreement dated June 14, 2001 between Illinois Consolidated Telephone Company and Odin Telephone Exchange, Inc.(8) 2.5 Stock Purchase Agreement dated as of May 7, 2001 by and among MJD Ventures, Inc., Scott William Horne, Susan Elaine Horne, Mona Jean Horne, Scott William Horne and Susan Elaine Horne being and as Trustees of Grantor Retained Annuity Trust created by Mona Jean Horne and Mona Jean Horne being and as Trustee of the Mona Jean Horne Revocable Trust and Marianna and Scenery Hill Telephone Company.(8) 3.1 Seventh Amended and Restated Certificate of Incorporation of the Company.(11) 3.2 By-Laws of the Company.(4) 3.3 Certificate of Designation of Series A Preferred Stock of the Company.(11) 4.1 Indenture, dated as of May 5, 1998, between FairPoint and United States Trust Company of New York, relating to FairPoint's $125,000,000 9 1/2% Senior Subordinated Notes due 2008 and $75,000,000 Floating Rate Callable Securities due 2008.(3) 4.2 Indenture, dated as of May 24, 2000, between FairPoint and United States Trust Company of New York, relating to FairPoint's $200,000,000 12 1/2% Senior Subordinated Notes due 2010.(4) 4.3 Form of Initial Fixed Rate Security.(3) 4.4 Form of Initial Floating Rate Security.(3) 4.5 Form of Exchange Fixed Rate Security.(3) 4.6 Form of Exchange Floating Rate Security.(3) 4.7 Form of 144A Senior Subordinated Note due 2010.(4) 4.8 Form of Regulation S Senior Subordinated Note due 2010.(4)
29
EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.9 Registration Rights Agreement dated as of May 19, 2000 between FairPoint and the Initial Purchasers named therein.(4) 4.10 Form of Series A Preferred Stock Certificate of the Company.(11) 10.1 Credit Agreement dated as of March 30, 1998 among FairPoint, various lending institutions, NationsBank of Texas, N.A. and Bankers Trust Company.(3) 10.2 First Amendment to Credit Agreement dated as of April 30, 1998 among FairPoint, NationsBank of Texas, N.A. and Bankers Trust Company.(3) 10.3 Second Amendment to Credit Agreement dated as of May 14, 1999 among FairPoint, NationsBank of Texas, N.A. and Bankers Trust Company.(4) 10.4 Amendment and Waiver dated as of January 12, 2000 among FairPoint, NationsBank of Texas, N.A. and Bankers Trust Company.(4) 10.5 Fourth Amendment and Consent dated as of March 14, 2000 among FairPoint, First Union National Bank, Bank of America, N.A. and Bankers Trust Company.(2) 10.6 Fifth Amendment and Consent dated as of October 6, 2000 among FairPoint, First Union, National Bank, Bank of America, N.A. and Bankers Trust Company.(5) 10.7 Sixth Amendment to Credit Agreement and First Amendment to Pledge Agreement dated as of March 30, 2001 among FairPoint, First Union, National Bank, Bank of America, N.A. and Bankers Trust Company.(7) 10.8 Seventh Amendment to Credit Agreement dated as of July 25, 2002 among FairPoint, Wachovia Bank, N.A., Bank of America, N.A., Deutsche Bank Trust Company Americas and various lending institutions.* 10.9 Amended and Restated Credit Agreement dated as of May 10, 2002 among FairPoint Solutions, various lending institutions, Bank of America, N.A., Deutsche Bank Trust Company Americas and Wachovia Bank, National Bank.(11) 10.10 Amended and Restated Preferred Stock Issuance and Capital Contribution Agreement dated as of May 10, 2002 among FairPoint and Wachovia Bank, National Association, and various lending institutions.(11) 10.11 Amendment to Security Documents dated as of May 10, 2002 by and among FairPoint Solutions, each of the Assignors party to the Security Agreement, each of the Pledgors party to the Pledge Agreement and Wachovia Bank, National Association.(11) 10.12 Amended and Restated Subsidiary Guaranty dated as of November 9, 2000 made by FairPoint Communications Solutions Corp. New York, FairPoint Communications Solutions Corp. Virginia and FairPoint Solutions Capital, LLC.(5) 10.13 Amended and Restated Pledge Agreement dated as of November 9, 2000 by and among FairPoint Solutions, the Guarantors, the Pledgors and First Union National Bank.(5) 10.14 Amended and Restated Tax Sharing Agreement dated November 9, 2000 by and among FairPoint and its Subsidiaries.(5) 10.15 Amended and Restated Security Agreement dated as of November 9, 2000 by and among FairPoint Solutions and First Union National Bank.(5) 10.16 Form of FairPoint Communications Solutions Corp. Tranche A Term Note.(11) 10.17 Form of FairPoint Communications Solutions Corp. Tranche B Term Note.(11) 10.18 Form of B Term Note.(3) 10.19 Form of C Term Note Floating Rate.(3)
30
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.20 Form of C Term Note Fixed Rate.(3) 10.21 Form of RF Note.(3) 10.22 Form of AF Note.(3) 10.23 Subsidiary Guaranty dated as of March 30, 1998 by MJD Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. for the benefit of Bankers Trust Company.(3) 10.24 Pledge Agreement dated as of March 30, 1998 among MJD Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., as pledgors, and Bankers Trust Company, as collateral agent and pledgee.(3) 10.25 Stockholders' Agreement dated as of January 20, 2000 of FairPoint.(1) 10.26 Registration Rights Agreement dated as of January 20, 2000 of FairPoint.(1) 10.27 Management Services Agreement dated as of January 20, 2000 by and between FairPoint and THL Equity Advisors IV, LLC.(1) 10.28 Amended and Restated Financial Advisory Agreement dated as of January 20, 2000 by and between FairPoint and Kelso & Company, L.P.(1) 10.29 Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of January 20, 2000 by and between FairPoint and JED Communications Associates, Inc.(1) 10.30 Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of January 20, 2000 by and between FairPoint and Daniel G. Bergstein.(1) 10.31 Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of January 20, 2000 by and between FairPoint and Meyer Haberman.(1) 10.32 Subscription Agreement dated as of January 31, 2000 by and between FairPoint and each of the Subscribers party thereto.(1) 10.33 Employment Agreement dated as of January 20, 2000 by and between FairPoint and John P. Duda.(1) 10.34 Employment Agreement dated as of January 20, 2000 by and between FairPoint and Walter E. Leach, Jr.(1) 10.35 Institutional Stock Purchase Agreement dated as of January 20, 2000 by and among FairPoint and the other parties thereto.(1) 10.36 Institutional Stockholders Agreement dated as of January 20, 2000 by and among FairPoint and the other parties thereto.(1) 10.37 FairPoint 1995 Stock Option Plan.(4) 10.38 FairPoint Amended and Restated 1998 Stock Incentive Plan.(4) 10.39 FairPoint 2000 Employee Stock Option Plan.(4) 10.40 Employment Agreement dated as of January 1, 2002 by and between FairPoint and Eugene B. Johnson.(10) 10.41 Succession Agreement dated as of December 31, 2001 by and between FairPoint and Jack H. Thomas.(10) 21 Subsidiaries of the Company.(10) 99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
31
EXHIBIT NO. DESCRIPTION - ----------- ----------- 99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
- ------------------------ * Filed herewith. (1) Incorporated by reference to the annual report of the Company for the year ended 1999, filed on Form 10-K. (2) Incorporated by reference to the amended annual report of the Company for the year ended 1999, filed on Form 10-K/A. (3) Incorporated by reference to the registration statement on Form S-4 of the Company, declared effective as of October 1, 1998. (4) Incorporated by reference to the registration statement on Form S-4 of the Company, declared effective as of August 9, 2000. (5) Incorporated by reference to the quarterly report of the Company for the period ended September 30, 2000, filed on Form 10-Q. (6) Incorporated by referenced to the annual report of the Company for the year ended 2000, filed on Form 10-K. (7) Incorporated by reference to the quarterly report of the Company for the period ended March 31, 2001, filed on Form 10-Q. (8) Incorporated by reference to the quarterly report of the Company for the period ended June 30, 2001, filed on Form 10-Q. (9) Incorporated by reference to the current report on Form 8-K, filed on November 18, 2001. (10) Incorporated by reference to the annual report of the Company for the year ended 2001, filed on Form 10-K. (11) Incorporated by reference to the quarterly report of the Company for the period ended March 31, 2002, filed on Form 10-Q. (b) Reports on Form 8-K On May 14, 2002, the Company filed a Current Report on Form 8-K announcing that its subsidiary FairPoint Solutions amended and restated its credit facility. On May 20, 2002, the Company filed a Current Report on Form 8-K announcing that certain of its executive officers participated in a high yield conference sponsored by Bank of America. 32 EX-10.8 3 a2086426zex-10_8.txt EXHIBIT 10.8 EXHIBIT 10.8 SEVENTH AMENDMENT TO CREDIT AGREEMENT SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as of July 25, 2002, among FAIRPOINT COMMUNICATIONS, INC. (f/k/a MJD Communications, Inc.), a Delaware corporation (the "Borrower"), the lenders from time to time party to the Credit Agreement referred to below (the "Lenders"), WACHOVIA BANK, NATIONAL ASSOCIATION (f/k/a First Union National Bank), as Documentation Agent (the "Documentation Agent"), BANK OF AMERICA, N.A. (f/k/a Bank of America National Trust and Savings Association, successor by merger to Bank of America, N.A. f/k/a Nationsbank, N.A. successor by merger to Nationsbank of Texas, N.A.), as Syndication Agent (the "Syndication Agent") and DEUTSCHE BANK TRUST COMPANY AMERICAS (f/k/a Bankers Trust Company), as Administrative Agent (the "Administrative Agent" and, together with the Documentation Agent and the Syndication Agent, collectively, the "Agents"). Unless otherwise indicated, all capitalized terms used herein and not otherwise defined shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H: WHEREAS, the Borrower, the Lenders and the Agents are parties to a Credit Agreement, dated as of March 30, 1998 (as amended, modified or supplemented to but not including the date hereof, the "Credit Agreement"); and WHEREAS, subject to the terms and conditions of this Amendment, the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: I. AMENDMENTS TO CREDIT AGREEMENT. 1. Section 1.01(c) of the Credit Agreement is hereby amended by inserting the text "that amount which, when added to such Lender's Percentage of Letter of Credit Outstandings at such time, equals" immediately preceding the text "the Revolving Commitment" in clause (iv) of said Section. 2. Section 1.03(b) of the Credit Agreement is hereby amended by (i) inserting the text "and the Letter of Credit Issuer" immediately following the first reference to the "Administrative Agent" in said Section, (ii) inserting the text "or the Letter of Credit Issuer, as the case may be," immediately following the second reference to the "Administrative Agent" in said Section, (iii) inserting the text "or the Letter of Credit Issuer's" immediately following the text "Administrative Agent's" in the second sentence of said Section and (iv) inserting the text "or the Letter of Credit Issuer, as the case may be" immediately preceding the period at the end of said Section. 3. Section 1.11(b) of the Credit Agreement is hereby amended by inserting the reference ", 1A.06" immediately following the reference to "1.11" in each instance where it appears in said Section. 4. Section 1.12 of the Credit Agreement is hereby amended by (i) inserting the reference ", 1A.06" immediately following the reference "1.10(c)" appearing in the first sentence of said Section and (ii) inserting the reference ", 1A.06" immediately following the reference to "Section 1.10" in the second sentence of said Section. 5. Section 1.13 of the Credit Agreement is hereby amended by (i) inserting the reference ", Section 1A.06" immediately following the reference to "Section 1.10(c)" appearing in clause (x) of said Section and (ii) deleting the proviso appearing in the first sentence of said Section and inserting the following text in lieu thereof: "provided that (i) at the time of any replacement pursuant to this Section 1.13, the Replacement Lender shall enter into one or more Assignment Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to said Section 11.04(b) to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the Commitments and outstanding Loans of the Replaced Lender and, in connection therewith, shall pay to (x) the Replaced Lender an amount equal to the sum of (A) an amount equal to the principal of, and all accrued and unpaid interest on, all outstanding Loans of the Replaced Lender, and of all Unpaid Drawings to the extent such Lender funded its share thereof as provided in Section 1A.05, and (B) an amount equal to all accrued and unpaid Fees owing to the Replaced Lender pursuant to Section 2.01, and (y) the Letter of Credit Issuer the portion, if any, of any payment made by it under any Letter of Credit that was required to be funded by the Replaced Lender if not reimbursed by the Borrower and not funded by the Replaced Lender and (ii) all obligations of the Borrower owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Lender by the Borrower concurrently with such replacement." 6. The Credit Agreement is hereby further amended by inserting the following new Section 1A immediately following the end of Section 1.14 thereof: "SECTION 1A. LETTERS OF CREDIT. 1A.01 LETTERS OF CREDIT. (a) Subject to and upon the terms and conditions herein set forth, the Borrower may request that a Letter of Credit Issuer at any time and from time to time on or after the Seventh Amendment Effective Date and prior to the date which is thirty Business Days prior to the AF/RF Maturity Date issue, for the account of the Borrower and in support of such obligations of the Borrower and/or its Subsidiaries that are incurred in the ordinary course of business or are acceptable to the Administrative Agent and, subject to and upon the terms and conditions herein set forth, -2- such Letter of Credit Issuer agrees to issue from time to time, irrevocable standby letters of credit (each such letter of credit, a "Letter of Credit" and, collectively, the "Letters of Credit") denominated in U.S. dollars and issued on a sight basis, in such form as may be approved by such Letter of Credit Issuer and the Administrative Agent. (b) Notwithstanding the foregoing, (i) no Letter of Credit shall be issued if after giving effect thereto (x) the Letter of Credit Outstandings would exceed $5 million or (y) the sum of all Letter of Credit Outstandings (less any portion thereof subject to Section 1A.01(c) Arrangements) and the then aggregate outstanding principal amount of all Revolving Loans made by Non-Defaulting Lenders would exceed the Adjusted Total Revolving Commitment at such time and (ii) each Letter of Credit shall have an expiry date occurring not later than one year after such Letter of Credit's date of issuance, provided that any such Letter of Credit may be extendible for successive periods of up to one year on terms acceptable to the Letter of Credit Issuer and in no event shall any Letter of Credit have an expiry date occurring later than ten Business Days prior to the AF/RF Maturity Date. (c) Notwithstanding the foregoing, in the event a Lender Default exists, the Letter of Credit Issuer shall not be required to issue any Letter of Credit unless the Letter of Credit Issuer has entered into arrangements satisfactory to it and the Borrower ("Section 1A.01(c) Arrangements") to eliminate the Letter of Credit Issuer's risk with respect to the participation in Letters of Credit of the Defaulting Lender or Lenders, which may include requiring that the Borrower cash collateralize such Defaulting Lender's or Lenders' Percentage of the Letter of Credit Outstandings. 1A.02 MINIMUM STATED AMOUNT. The initial Stated Amount of each Letter of Credit shall be not less than $100,000 or such lesser amount acceptable to the Letter of Credit Issuer. 1A.03 LETTER OF CREDIT REQUESTS; NOTICES OF Issuance. (a) Whenever it desires that a Letter of Credit be issued, the Borrower shall give the Administrative Agent and the Letter of Credit Issuer written notice (which may include by way of facsimile transmission) in the form of Exhibit M hereto prior to 1:00 P.M. (New York time) at least three Business Days (or such shorter period as may be acceptable to the Letter of Credit Issuer) prior to the proposed date of issuance (which shall be a Business Day) (each, a "Letter of Credit Request"), which Letter of Credit Request shall include any documents that the Letter of Credit Issuer customarily requires in connection therewith. (b) Each Letter of Credit Issuer shall, promptly after each issuance or amendment of a Letter of Credit by it, notify the Administrative Agent and the Borrower in writing of such issuance or amendment, and such notice shall be accompanied by a copy of such issuance or amendment. After receipt of such notice, the Administrative Agent shall notify each RF Lender, in writing, of such issuance or amendment, and if any RF Lender shall so request, the Administrative Agent shall provide such RF Lender with a copy of such issuance or amendment. -3- 1A.04 AGREEMENT TO REPAY LETTER OF CREDIT DRAWINGS. (a) The Borrower hereby agrees to reimburse the Letter of Credit Issuer, by making payment to the Administrative Agent at the Payment Office, for any payment or disbursement made by the Letter of Credit Issuer under any Letter of Credit (each such amount so paid or disbursed until reimbursed, an "Unpaid Drawing") immediately after, and in any event on the date on which the Borrower is notified by the Letter of Credit Issuer of such payment or disbursement with interest on the amount so paid or disbursed by the Letter of Credit Issuer, to the extent not reimbursed prior to 3:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but not including the date the Letter of Credit Issuer is reimbursed therefor at a rate per annum which shall be the Applicable Base Rate Margin plus the Base Rate as in effect from time to time (plus an additional 2% per annum if not reimbursed by the third Business Day after the date of such notice of payment or disbursement), such interest also to be payable on demand. (b) The Borrower's obligation under this Section 1A.04 to reimburse the Letter of Credit Issuer with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Letter of Credit Issuer, the Administrative Agent or any Lender, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit to conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of such drawing; provided, however, that the Borrower shall not be obligated to reimburse the Letter of Credit Issuer for any wrongful payment made by the Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Letter of Credit Issuer as determined by a final judgment issued by a court of competent jurisdiction. 1A.05 LETTER OF CREDIT PARTICIPATIONS. (a) Immediately upon the issuance by the Letter of Credit Issuer of any Letter of Credit, the Letter of Credit Issuer shall be deemed to have sold and transferred to each other RF Lender, and each such RF Lender (each, a "Participant") shall be deemed irrevocably and unconditionally to have purchased and received from such Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's Percentage, in such Letter of Credit, each substitute letter of credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto (although the Letter of Credit Fee shall be payable directly to the Administrative Agent for the account of the RF Lenders as provided in Section 2.01(g) and the Participants shall have no right to receive any portion of any Facing Fees) and any security therefor or guaranty pertaining thereto. Upon any change in the Revolving Commitments pursuant to Section 1.13 or 11.04(b), it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 1A.05 to reflect the new Percentages of the RF Lenders. (b) In determining whether to pay under any Letter of Credit, the Letter of Credit Issuer shall not have any obligation relative to the Participants other than to deter- -4- mine that any documents required to be delivered under such Letter of Credit have been delivered and that they substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by the Letter of Credit Issuer under or in connection with any Letter of Credit if taken or omitted in the absence of gross negligence or willful misconduct as determined by a final judgment issued by a court of competent jurisdiction shall not create for the Letter of Credit Issuer any resulting liability. (c) In the event that the Letter of Credit Issuer makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to the Letter of Credit Issuer pursuant to Section 1A.04(a), the Letter of Credit Issuer shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Participant of such failure, and each Participant shall promptly and unconditionally pay to the Administrative Agent for the account of the Letter of Credit Issuer, the amount of such Participant's Percentage of such payment in U.S. dollars and in same day funds; PROVIDED, HOWEVER, that no Participant shall be obligated to pay to the Administrative Agent its Percentage of such unreimbursed amount for any wrongful payment made by the Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Letter of Credit Issuer as determined by a final judgment issued by a court of competent jurisdiction. If the Administrative Agent so notifies any Participant required to fund an Unpaid Drawing under a Letter of Credit prior to 1:00 P.M. (New York time) on any Business Day, such Participant shall make available to the Administrative Agent for the account of the Letter of Credit Issuer such Participant's Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Participant shall not have so made its Percentage of the amount of such Unpaid Drawing available to the Administrative Agent for the account of the Letter of Credit Issuer, such Participant agrees to pay to the Administrative Agent for the account of the Letter of Credit Issuer, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Letter of Credit Issuer at the overnight Federal Funds Effective Rate. The failure of any Participant to make available to the Administrative Agent for the account of the Letter of Credit Issuer its Percentage of any Unpaid Drawing under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to the Administrative Agent for the account of the Letter of Credit Issuer its Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Administrative Agent for the account of the Letter of Credit Issuer such other Participant's Percentage of any such payment. (d) Whenever the Letter of Credit Issuer receives a payment of a reimbursement obligation (including interest on Unpaid Drawings) as to which the Administrative Agent has received for the account of the Letter of Credit Issuer any payments from any Participant pursuant to clause (c) above, the Letter of Credit Issuer shall pay to the Administrative Agent and the Administrative Agent shall promptly pay to each Participant which has paid its Percentage thereof, in U.S. dollars and in same day funds, an amount equal to such Participant's Percentage of the amount of the payment of -5- such reimbursement obligation, including interest paid thereon to the extent accruing after the purchase of the respective participations. (e) The obligations of the Participants to make payments to the Administrative Agent for the account of the Letter of Credit Issuer with respect to Letters of Credit shall be irrevocable and not subject to counterclaim, set-off or other defense or any other qualification or exception whatsoever (provided that no Participant shall be required to make payments resulting from the Administrative Agent's gross negligence or willful misconduct as determined by a final judgment issued by a court of competent jurisdiction) and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower or any of its Subsidiaries may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Letter of Credit Issuer, any Lender or other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or (v) the occurrence of any Default or Event of Default. (f) To the extent the Letter of Credit Issuer is not indemnified by the Borrower, the Participants will reimburse and indemnify the Letter of Credit Issuer, in proportion to their respective Percentages, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Letter of Credit Issuer in performing its respective duties in any way relating to or arising out of its issuance of Letters of Credit; provided that no Participants shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Letter of Credit Issuer's gross negligence or willful misconduct as determined by a final judgment issued by a court of competent jurisdiction. 1A.06 INCREASED COSTS. If at any time after the Seventh Amendment Effective Date, the adoption or effectiveness of any applicable law, rule or regulation, or any -6- change therein, or any change in the interpretation or administration thereof by any governmental authority, central Lender or comparable agency charged with the interpretation or administration thereof, or compliance by the Letter of Credit Issuer or any Participant with any request or directive (whether or not having the force of law) by any such authority, central Lender or comparable agency shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against Letters of Credit issued by the Letter of Credit Issuer or such Participant's participation therein, or (ii) shall impose on the Letter of Credit Issuer or any Participant any other conditions affecting this Agreement, any Letter of Credit or such Participant's participation therein; and the result of any of the foregoing is to increase the cost to the Letter of Credit Issuer or such Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by the Letter of Credit Issuer or such Participant hereunder (other than any increased cost or reduction in the amount received or receivable resulting from the imposition of or a change in the rate of taxes or similar charges), then, upon demand to the Borrower by the Letter of Credit Issuer or such Participant (a copy of which notice shall be sent by the Letter of Credit Issuer or such Participant to the Administrative Agent), the Borrower shall pay to the Letter of Credit Issuer or such Participant such additional amount or amounts as will compensate the Letter of Credit Issuer or such Participant for such increased cost or reduction. A certificate submitted to the Borrower by the Letter of Credit Issuer or such Participant, as the case may be (a copy of which certificate shall be sent by the Letter of Credit Issuer or such Participant to the Administrative Agent), setting forth the basis for the determination of such additional amount or amounts necessary to compensate the Letter of Credit Issuer or such Participant as aforesaid shall be conclusive and binding on the Borrower absent manifest error, although the failure to deliver any such certificate shall not release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1A.06 upon the subsequent receipt thereof." 7. Section 2.01 of the Credit Agreement is hereby amended by inserting the following new clauses (g), (h) and (i) immediately following clause (f) thereof: "(g) So long as any Letter of Credit is outstanding and has not been fully collateralized pursuant to Section 3.02(A)(a)(i) and/or Section 8, the Borrower agrees to pay to the Administrative Agent, for the account of each Non-Defaulting Lender, PRO RATA on the basis of their respective Percentages, a fee in respect of each Letter of Credit (the "Letter of Credit Fee") computed for each day at a per annum rate equal to the Applicable Eurodollar Margin for RF Loans on such day multiplied by the Stated Amount of all Letters of Credit outstanding on such day (less any amount thereof as to which Section 1A.02 arrangements are in place). Accrued Letter of Credit Fees shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter. (h) So long as any Letter of Credit is outstanding and has not been fully collateralized pursuant to Section 3.02(A)(a)(i) and/or Section 8, the Borrower agrees to pay to the Letter of Credit Issuer a fee in respect of each Letter of Credit issued by it (the "Facing Fee") computed for each day at the rate of 0.25% per annum on the Stated Amount of all such Letters of Credit outstanding on such day provided that there will be a minimum Facing Fee per year for each Letter of Credit of $500 (which is not an -7- additional fee). Accrued Facing Fees shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter. (i) The Borrower agrees to pay directly to the Letter of Credit Issuer upon each issuance of, payment under, and/or amendment of, a Letter of Credit such amount, if any, as shall at the time of such issuance, payment or amendment be the administrative charge which the Letter of Credit Issuer is customarily charging for issuances of, payments under or amendments of, letters of credit issued by it." 8. Section 3.02(A)(a)(i) of the Credit Agreement is hereby amended by (i) inserting the text "and the Letter of Credit Outstandings (less any amount thereof as to which Section 1A.01(c) Arrangements are in place)" immediately following the first reference to "Non-Defaulting Lenders" in said Section and (ii) inserting the following new sentence at the end of said Section: "If, after giving effect to such repayment, the Letter of Credit Outstandings (less any amount thereof as to which Section 1A.01(c) Arrangements are in place) exceeds the Adjusted Total Revolving Commitment then in effect, the Borrower shall pay to the Collateral Agent an amount in cash and/or Cash Equivalents equal to such excess and the Collateral Agent shall hold such payment as security for the obligations of the Borrower in respect of Letters of Credit pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Collateral Agent (which shall permit certain investments in Cash Equivalents reasonably satisfactory to the Collateral Agent, until all proceeds are applied to such secured obligations or until all Letters of Credit so secured expire undrawn, at which time such amount shall be returned to the Borrower)." 9. Section 4.03 of the Credit Agreement is hereby amended by (i) inserting the text ", and of the Letter of Credit Issuer to issue Letters of Credit," immediately preceding the text "is subject" appearing in the introductory clause of said Section; (ii) inserting the text "and the issuance of each such Letter of Credit" immediately following the text "the making of each such Loan" appearing in said introductory clause; (iii) inserting the text "or a Letter of Credit Request meeting the requirements of Section 1A.03" immediately preceding the period at the end of clause (a) of said Section; (iv) inserting the text "and/or the issuance of each Letter of Credit" immediately after the text "each Loan" in the penultimate sentence of said Section; and (v) inserting the text "and all Letters of Credit" after the text "(in the case of all Loans" in said penultimate sentence. 11. Section 8 of the Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (ii) of the paragraph at the end of said Section and (ii) and inserting the following text immediately preceding the period at the end of said paragraph: "(iv) terminate any Letter of Credit which may be terminated in accordance with its terms; and (v) direct the Borrower to pay (and the Borrower hereby agrees upon receipt of such notice, or upon the occurrence of any Event of Default specified in Section 8.05 in respect of the Borrower, it will pay) to the Collateral Agent at the Payment Office such additional amounts of cash and/or Cash Equivalents, to be held in a cash collateral account as security for the Borrower's reimbursement obligations in respect of Letters of -8- Credit then outstanding equal to the aggregate Stated Amount of all Letters of Credit then outstanding (less any amount thereof as to which Section 1A.01(c) Arrangements are in place)." 12. The definition of "Lender Default" appearing in Section 9 of the Credit Agreement is hereby amended by (i) inserting the text "or a reimbursement of an Unpaid Drawing" immediately following the text "incurrence of Loans" appearing in clause (i) of said definition and (ii) inserting the reference "or 1A.05" immediately following the reference to "Section 1.01" appearing in clause (ii) of said definition. 13. Section 9 of the Credit Agreement is hereby further amended by (i) deleting the definition of "BTCo" and (ii) inserting the following new defined terms in the appropriate alphabetical order: "DBTCA" shall mean Deutsche Bank Trust Company Americas. "Letter of Credit" shall have the meaning provided in Section 1A.01(a). "Letter of Credit Fee" shall have the meaning provided in Section 2.01(g). "Letter of Credit Issuer" shall mean (i) DBTCA or, if designated by DBTCA, any of DBTCA's Affiliates and (ii) each other Lender, if any, as requested by the Borrower to the extent agreed by such other Lender and the Administrative Agent. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section 1A.03(a). "Percentage" shall mean at any time for each RF Lender, the percentage obtained by dividing such Lender's Revolving Commitment by the Total Revolving Commitment provided that if the Total Revolving Commitment has been terminated, the Percentage of each RF Lender shall be determined by dividing such RF Lender's Revolving Commitment immediately prior to such termination by the Total Revolving Commitment immediately prior to such termination. "Section 1A.01(c) Arrangements" shall have the meaning provided in Section 1A.01(c). "Seventh Amendment" means the Seventh Amendment to this Agreement, dated as of July 25, 2002. "Seventh Amendment Effective Date" shall have the meaning provided in the Seventh Amendment. -9- "Stated Amount" shall mean, with respect to any Letter of Credit at any time, the maximum available to be drawn thereunder at such time (regardless of whether any conditions for drawing could then be met). "Unpaid Drawing" shall have the meaning provided in Section 1A.04. 14. The Credit Agreement is hereby further amended by deleting each reference to "BTCo" contained therein and inserting "DBTCA" in lieu thereof. 15. The Credit Agreement is hereby further amended by adding new Exhibit M thereto in the form of Exhibit M attached hereto. II. MISCELLANEOUS PROVISIONS. 1. In order to induce the Lenders to enter into this Amendment, the Borrower hereby represents and warrants that: (a) no Default or Event of Default exists as of the Seventh Amendment Effective Date, both before and after giving effect to this Amendment; and (b) all of the representations and warranties contained in the Credit Agreement or the other Credit Documents are true and correct in all material respects on the Seventh Amendment Effective Date, both before and after giving effect to this Amendment, with the same effect as though such representations and warranties had been made on and as of the Seventh Amendment Effective Date (it being understood that any representation or warranty made as of a specific date shall be true and correct in all material respects only as of such specific date). 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent. 4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 5. This Amendment shall become effective on the date (the "Seventh Amendment Effective Date") when the Borrower, the Required AF/RF Lenders and the Required TF Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at its Notice Office. -10- 6. From and after the Seventh Amendment Effective Date, all references in the Credit Agreement and each of the other Credit Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as modified hereby. * * * -11- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. FAIRPOINT COMMUNICATIONS, INC. (f/k/a MJD Communications, Inc.) By: /s/ TIMOTHY W. HENRY -------------------------------------- Name: Timothy W. Henry Title: Vice President of Finance & Treasurer DEUTSCHE BANK TRUST COMPANY AMERICAS (f/k/a Bankers Trust Company), Individually and as Administrative Agent By: /s/ ANCA TRIFAN -------------------------------------- Name: Anca Trifan Title: Director BANK OF AMERICA, N.A., Individually and as Syndication Agent By: /s/ PAMELA S. KURTZMAN -------------------------------------- Name: Pamela S. Kurtzman Title: Principal WACHOVIA BANK, NATIONAL ASSOCIATION (f/k/a First Union National Bank), Individually and as Documentation Agent By: /s/ NICHOLAS A.J. HAHN -------------------------------------- Name: Nicholas A.J. Hahn Title: Vice President COBANK, ACB By: /s/ RICK FREEMAN -------------------------------------- Name: Rick Freeman Title: Vice President MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By: -------------------------------------- Name: Title: HELLER FINANCIAL, INC. By: /s/ KARL KIEFFER -------------------------------------- Name: Karl Kieffer Title: Duly Authorized Signatory UNION BANK OF CALIFORNIA, N.A. By: /s/ CRAIG CAPPAR -------------------------------------- Name: Craig Cappar Title: Assistant Vice President CENTURA BANK By: /s/ JOHN A. KRUSOL -------------------------------------- Name: John A. Krusol Title: Senior Vice President THE CIT GROUP/EQUIPMENT FINANCING, INC. By: -------------------------------------- Name: Title: FLEET NATIONAL BANK By: -------------------------------------- Name: Title: FORTIS CAPITAL CORP. (f/k/a MEESPIERSON CAPITAL CORP.) By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: SENIOR DEBT PORTFOLIO By: BOSTON MANAGEMENT AND RESEARCH, as Investment Manger By: /s/ SCOTT H. PAGE -------------------------------------- Name: Scott H. Page Title: Vice President THE TRAVELERS INSURANCE COMPANY By: /s/ ALLEN R. CANTRELL -------------------------------------- Name: Allen R. Cantrell Title: Investment Officer OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor By: /s/ SCOTT H. PAGE -------------------------------------- Name: Scott H. Page Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ KARL KIEFFER -------------------------------------- Name: Karl Kieffer Title: Duly Authorized Signatory U.S. BANK NATIONAL ASSOCIATION (f/k/a FIRSTAR BANK, N.A.) By: -------------------------------------- Name: Title: NATIONAL CITY BANK By: /s/ ELIZABETH A. BROSKY -------------------------------------- Name: Elizabeth A. Brosky Title: Vice President EATON VANCE SENIOR INCOME TRUST By: Eaton Vance Management as Investment Advisor By: /s/ SCOTT H. PAGE -------------------------------------- Name: Scott H. Page Title: Vice President EATON VANCE INSTITUTIONAL SENIOR LOAN FUND By: Eaton Vance Management as Investment Advisor By: /s/ SCOTT H. PAGE -------------------------------------- Name: Scott H. Page Title: Vice President GRAYSON & CO By: Boston Management and Research as Investment Advisor By: /s/ SCOTT H. PAGE -------------------------------------- Name: Scott H. Page Title: Vice President IBM CREDIT CORP. By: -------------------------------------- Name: Title: HIGHLAND LOAN FUNDING V LTD. By: Highland Capital Management, L.P. as Collateral Manager By: /s/ MARK K. OKADA, CFA -------------------------------------- Name: Mark K. Okada, CFA Title: Executive Vice President ELF FUNDING TRUST I By: Highland Capital Management, L.P. as Collateral Manager By: /s/ MARK K. OKADA, CFA -------------------------------------- Name: Mark K. Okada, CFA Title: Executive Vice President HIGHLAND LEGACY LIMITED By: Highland Capital Management, L.P. as Collateral Manager By: /s/ MARK K. OKADA, CFA -------------------------------------- Name: Mark K. Okada, CFA Title: Executive Vice President KZH PAMCO LLC By: /s/ SUSAN LEE -------------------------------------- Name: Susan Lee Title: Authorized Agent KZH HIGHLAND-2 LLC By: /s/ SUSAN LEE -------------------------------------- Name: Susan Lee Title: Authorized Agent MUIRFIELD TRADING LLC By: /s/ ANN E. MORRIS -------------------------------------- Name: Ann E. Morris Title: Assistant Vice President OLYMPIC FUNDING TRUST SERIES 1999-1 By: /s/ ANN E. MORRIS -------------------------------------- Name: Ann E. Morris Title: Assistant Vice President SEQUILS-CUMBERLAND I, LTD. By: -------------------------------------- Name: Title: JISSEKIKUN FUNDING, LTD. By: Pacific Investment Management Company as its Investment Advisor By: -------------------------------------- Name: Title: COLUMBUS LOAN FUNDING LTD. By: Travelers Asset Management International Company LLC By: /s/ ALLEN R. CANTRELL -------------------------------------- Name: Allen R. Cantrell Title: Investment Officer TRAVELERS CORPORATE LOAN FUND, INC. By: Travelers Asset Management International Company LLC By: /s/ ALLEN R. CANTRELL -------------------------------------- Name: Allen R. Cantrell Title: Investment Officer Exhibit M FORM OF LETTER OF CREDIT REQUEST Dated ___________ ____, 200_(1) Deutsche Bank Trust Company Americas as Administrative Agent under the Credit Agreement referred to below 31 West 52nd Street New York, New York 10019 Attention: __________________ [Insert Name and Address of Letter of Credit Issuer](2) Ladies and Gentlemen: The undersigned, FairPoint Communications, Inc. (the "Borrower"), refers to the Credit Agreement, dated as of March 30, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"; the capitalized terms defined therein being used herein as therein defined), among the Borrower, the lenders from time to time party thereto (the "Lenders") and Deutsche Bank Trust Company Americas, as Administrative Agent. The undersigned hereby requests that [insert name of Letter of Credit Issuer] issue a Letter of Credit for the account of the undersigned on _____________ ___, _____ (the "Date of Issuance") in the aggregate Stated Amount of $________. The beneficiary of the requested Letter of Credit will be _________________,(3) and such Letter of Credit will be in support of _____________________(4) and will have a stated expiration date of ____________.(5) - -------- (1) Shall be prior to 1:00 p.m. (New York Time) at least three Business Days prior to the proposed Date of Issuance (or such shorter period as may be acceptable to the Letter of Credit Issuer). (2) In the case of DBTCA as Letter of Credit Issuer, address is Global Loan Operations, Standby Letter of Credit Unit, 60 Wall Street, New York, NY 10005 - MS NYC 60- 2708 (3) Insert name and address of beneficiary. Exhibit M Page 2 The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the Date of Issuance: (A) the representations and warranties contained in the Credit Agreement and the other Credit Documents are and will be true and correct in all material respects, before and after giving effect to the issuance of the Letter of Credit requested hereby, as though made on the Date of Issuance, unless stated to relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects only as of such earlier date; and (B) no Default or Event of Default has occurred and is continuing, or would result after giving effect to the issuance of the Letter of Credit requested hereby. Copies of all documentation with respect to the supported transaction are attached hereto. FAIRPOINT COMMUNICATIONS, INC. By: ------------------------------ Name: Title: - -------- (...continued) (4) Insert description of the supported obligations, name of agreement and/or the commercial transaction to which this Letter of Credit Request relates. (5) Insert last date upon which drafts may be presented (which may not be later than the earlier of twelve months after the Date of Issuance or beyond the 10th Business Day preceding the RF/AF Maturity Date). EX-99.1 4 a2086426zex-99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FairPoint Communications, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eugene B. Johnson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Eugene B. Johnson - ------------------------------------ Eugene B. Johnson Chief Executive Officer, FairPoint Communications, Inc. August 13, 2002 EX-99.2 5 a2086426zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FairPoint Communications, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walter E. Leach, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Walter E. Leach, Jr. - ------------------------------------------------ Walter E. Leach, Jr. Chief Financial Officer, FairPoint Communications, Inc. August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----