-----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, TYcR1e6liJvirOfZUpkJwELltr2Dj2AbnHx+LoIww1IT9t4ThrOjwGpVi8x7n3eo OGB/E+TjtCCOG++GDGY3tg== 0001104659-07-080291.txt : 20071106 0001104659-07-080291.hdr.sgml : 20071106 20071106171449 ACCESSION NUMBER: 0001104659-07-080291 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20071102 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20071106 DATE AS OF CHANGE: 20071106 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-32408 FILM NUMBER: 071218867 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 8-K 1 a07-28563_18k.htm 8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported ) November 2, 2007

FairPoint Communications, Inc.

(Exact name of registrant as specified in its charter)

Delaware		333-56365		13-3725229
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)


521 East Morehead Street,
Suite 250,
Charlotte, North Carolina		28202
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (704) 344-8150

N/A
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On November 2, 2007, FairPoint Communications, Inc. (the “Company”) issued a press release reporting the financial results for its third quarter ended September 30, 2007 (the “Earnings Announcement”). A copy of the Earnings Announcement is attached to this Current Report as Exhibit 99.1 and is incorporated herein solely for purposes of this Item 2.02 disclosure.

On November 2, 2007, the Company held a conference call to discuss the financial results of the Company for its third quarter ended September 30, 2007 (the “Earnings Call”). A copy of the transcript (the “Transcript”) of the Earnings Call is attached to this Current Report as Exhibit 99.2 and is incorporated herein solely for purposes of this Item 2.02 disclosure. The Transcript has been selectively edited to facilitate the understanding of the information communicated during the Earnings Call.

Item 7.01 Regulation FD Disclosure.

A copy of the Earnings Announcement is being furnished by being attached hereto as Exhibit 99.1.

Item 9.01 Financial Statements and Exhibits.

Exhibit Number		Description
99.1		Earnings Announcement
99.2		Transcript

The information in this Current Report, including the exhibits attached hereto, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of such section. The information in this Current Report, including the exhibits, shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any incorporation by reference language in any such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

FAIRPOINT COMMUNICATIONS, INC.


By:	/s/ John P. Crowley
	Name:	John P. Crowley
	Title:	Executive Vice President and
		Chief Financial Officer

Date: November 2, 2007

EX-99.1 2 a07-28563_1ex99d1.htm EX-99.1

Exhibit 99.1

FOR IMMEDIATE RELEASE

FAIRPOINT REPORTS THIRD QUARTER 2007 RESULTS

HSD Penetration Reaches 27.6%

Verizon Wireline Merger in Maine, New Hampshire and Vermont Remains on Track

Company Earns Support for Merger from Key Interveners

CHARLOTTE, N.C. (November 2, 2007) – FairPoint Communications, Inc. (NYSE:FRP) (“FairPoint” or the “Company”), a leading provider of communications services to rural and small urban communities across the country, today announced its financial results for the third quarter ended September 30, 2007.

• Revenues for the third quarter of 2007 increased $5.0 million, or 7.1% over the third quarter of 2006. Revenues increased $3.0 million or 4.4% compared with the third quarter of 2006, excluding the impact of operations acquired in the last twelve months.

• Adjusted EBITDA (as defined herein) for the third quarter of 2007 was $34.6 million, compared with $33.4 million for the same period last year. The increase in Adjusted EBITDA is principally due to an increase in intrastate access revenues of $2.8 million, partially offset by a $2.1 million reduction in distributions from investments due to the sale of the Company’s investment in Orange County-Poughkeepsie Limited Partnership in April 2007.

• Loss per share for the third quarter of 2007 was $0.15, compared with earnings per share on a fully diluted basis of $0.17 in the third quarter of 2006. The decrease in earnings per share is principally the result of expenses related to the Company’s pending merger with Verizon’s wireline operations in Maine, New Hampshire and Vermont and a non-cash loss of $5.7 million related to certain interest rate swap agreements.

“Our third quarter results demonstrate our ability to maintain our focus on our business and particularly on our customers,” said Gene Johnson, Chairman & CEO of FairPoint. “Our financial results for the quarter are indicative of the hard work our team has put forth while undertaking our proposed acquisition of Verizon’s wireline operations in Maine, New Hampshire and Vermont. We continue to focus on driving the top-line, managing costs, maintaining a sound balance sheet and, most importantly, understanding the needs of our customers.”

Mr. Johnson, continued, “While we are experiencing substantial resistance to our merger proposal in the region, we have earned the support of many interveners. Our culture is to acknowledge objections and work diligently to satisfy them in the best interests of our shareholders, customers and employees. We believe we have made a great case for the merger with considerable investments in infrastructure, a plan for 675 new positions and significant broadband expansion throughout Northern New England to meet the needs of the residents and businesses of these three states for today, tomorrow and into the future. While there can be no assurance that we will receive satisfactory approval orders on a timely basis, we continue to anticipate all regulatory approvals will be received by the end of December, allowing the transaction to close on January 31, 2008.”

Results for the three month period ended September 30, 2007

Operating Revenues

Consolidated revenues for the three months ended September 30, 2007 were $75.7 million, an increase of $5.0 million or 7.1%, compared with the three months ended September 30, 2006. Operations acquired in the last twelve months accounted for approximately $2.0 million of the increase in total revenues. Excluding the impact of operations acquired in the previous twelve months, revenues increased approximately $3.0 million, or 4.4% compared with the third quarter of the prior year. Items contributing to the increase in revenues were increases in intrastate access revenue of $2.8 million (principally due to the settlement during the quarter of certain previously disputed access charges totaling $4.4 million), data and internet service revenue of $1.4 million, long distance revenue of $1.1 million and local service revenue of $0.2 million. These increases were partially offset by decreases in interstate access revenue of $1.5 million and other revenue of $0.9 million.

Operating Expenses

Operating expenses (excluding depreciation and amortization) increased to $54.8 million compared to $40.4 million in the third quarter of 2006. Excluding the impact of operations acquired in the last twelve months, operating expenses increased $13.0 million. The primary drivers of this increase were merger related expenses of $12.5 million and cost of goods sold of $0.6 million (principally related to high speed data (“HSD”) and long distance services), bad debt expense of $0.6 million, materials and supplies expense of $0.3 million and audit and tax services of $0.3 million. These increases were partially offset by decreases in employee related costs of $0.6 million, billing expenses of $0.5 million and contract services of $0.4 million.

Included in operating expenses are costs associated with stock based compensation which are non-cash expenses. Total stock based compensation expenses for the three months ended September 30, 2007 and September 30, 2006 were $1.0 million and $0.8 million, respectively. Depreciation and amortization expense decreased $0.2 million compared to the same period in 2006. Also, in the third quarter, the Company recorded a gain of $2.2 million on the sale of the operating assets of Yates City Telephone Company in Illinois, which had less than 500 access lines at the time of sale.

Net (Loss) Income and Earnings per Share

Net income (loss) decreased $11.2 million compared to the third quarter of 2006, resulting in a net loss of $5.2 million for the three months ended September 30, 2007. This decrease was primarily driven by higher expenses, principally related to the pending merger with Verizon’s wireline operations in Maine, New Hampshire and Vermont and a non-cash loss of $5.7 million related to certain interest rate swap agreements. The Company reported a loss per share of $0.15 for the three months ended September 30, 2007, compared with earnings per share on a fully diluted basis of $0.17 for the same period in 2006.

Net Cash Provided by Operating Activities from Continuing Operations

Net cash provided by operating activities from continuing operations for the nine months ended September 30, 2007 was $24.2 million, a decrease of $34.8 million compared with the nine months ended September 30, 2006. The primary driver of this decrease in net cash provided by operating activities from continuing operations was the $28.4 million of merger related expenses incurred during the nine months ended September 30, 2007. The remaining decrease is due to other changes in current assets and liabilities.

Adjusted EBITDA and Cash Available for Dividends

Adjusted EBITDA for the three months ended September 30, 2007 was $34.6 million, compared with Adjusted EBITDA of $33.4 million for the same period in the prior year. The increase in Adjusted EBITDA is principally due to the $2.8 million increase in intrastate access revenue partially offset by a

Page 2 of 8

$2.1 million reduction in distributions from investments. The Company incurred expenses of $12.5 million in the third quarter of 2007 related to the pending merger with Verizon’s wireline operations in Maine, New Hampshire and Vermont. The Company’s credit facility allows these expenses to be added back to calculate Adjusted EBITDA and merger related capital expenditures to be added back to Cash Available for Dividends, up to $72.85 million in the aggregate. Cash Available for Dividends (as defined herein) of $21.5 million was generated during the three months ended September 30, 2007. Cash Available for Dividends for the three months ended September 30, 2007 was up from the $12.1 million generated in the three months ended June 30, 2007 due to the increase in Adjusted EBITDA and gains recognized on the sale of assets of $5.2 million during the third quarter.

Operational highlights

• HSD penetration increased to 27.6% of voice access lines at September 30, 2007 compared to 22.7% at September 30, 2006.

• HSD average revenue per subscriber (“ARPU”) was $41.57 for the third quarter of 2007, consistent with previous quarters.

• Total HSD subscribers increased by 1,846 in the third quarter of 2007 to 66,978 at September 30, 2007.

• Interstate long distance penetration at September 30, 2007 increased to 53.7% of voice access lines compared to 45.6% at September 30, 2006, primarily as a result of the Company’s continuing efforts to sell a voice bundled offering consisting of local voice, long distance and enhanced calling services.

• Total access line equivalents were 309,857 as of September 30, 2007. Total access line equivalents as of September 30, 2007 increased 0.3% compared with September 30, 2006 and decreased 0.9% compared with September 30, 2006 including only lines owned for the full year.

• Voice access lines, excluding lines acquired or disposed of in the last twelve months, as of September 30, 2007 decreased 4.8% compared to September 30, 2006.

Page 3 of 8

Access Line Equivalents

	9/30/2007	6/30/2007	9/30/2006	% change 9/30/07 to 9/30/06
Access lines owned for full year(1):
Voice access lines	239,221	243,637	251,286	(4.8	)%
HSD subscribers	66,310	64,493	57,095	16.1	%
Subtotal: Access line equivalents	305,531	308,130	308,381	(0.9	)%

Access lines acquired or disposed of during the last twelve months(1)(2):
Voice access lines	3,658	3,725	477	N/A
HSD subscribers	668	639	—	N/A
Subtotal: Access line equivalents	4,326	4,364	477	N/A

Total access line equivalents	309,857	312,494	308,858	0.3	%

(1) In the third quarter of 2006, the Company began including access lines and HSD subscribers from its two competitive local exchange carrier (“CLEC”) companies. Historically, these access lines have not been included in the Company’s access line and subscriber counts. CLEC lines have been included in the line counts for all periods above for comparison purposes.

(2) Represents voice access lines and HSD subscribers for companies owned less than twelve months. The Company completed the acquisition of the assets of Cass County Telephone Company Limited Partnership in the third quarter of 2006, the acquisition of Unite Communications Systems, Inc. in the third quarter of 2006 and the acquisition of The Germantown Independent Telephone Company in the fourth quarter of 2006. The Company sold the operations of a subsidiary, Fremont Broadband, LLC, during the second quarter of 2006 and sold the operations of a subsidiary, Yates City Telephone Company, during the third quarter of 2007.

Cash Available for Dividends

The Company’s credit facility contains a covenant that limits its ability to pay cash dividends on its common stock to the amount of Cumulative Cash Available for Dividends that accumulates from April 1, 2005 through the end of the Company’s most recent fiscal quarter for which financial statements are available and a compliance certificate has been delivered (which, as of September 30, 2007, was the quarter ended June 30, 2007). Under this covenant, as of September 30, 2007, the Company had Cumulative Cash Available for Dividends of $43.6 million, from which it paid a dividend on October 16, 2007 of $13.9 million, resulting in a carryover of $29.7 million of Cumulative Cash Available for Dividends. In addition to this $29.7 million carryover, based on the Company’s financial performance through September 30, 2007 as described in this earnings release, the Company generated an additional $21.5 million of Cash Available for Dividends and as a result expects to have $51.2 million of Cumulative Cash Available for Dividends from which to declare and pay its next dividend. Cash Available for Dividends corresponds to the term “Available Cash” in the Company’s credit facility and Cumulative Cash Available for Dividends corresponds to the term “Cumulative Distributable Cash” in the Company’s credit facility.

Page 4 of 8

2007 Outlook

For the full year, FairPoint continues to anticipate revenues of $281 to $284 million. FairPoint continues to expect Adjusted EBITDA for the full year to be $123 to $125 million. Expected full year capital expenditures for 2007 remain unchanged at approximately $29 to $31 million, excluding expenditures related to the merger.

As previously disclosed, the Company expects to spend approximately $95 to $110 million on infrastructure and network systems integration and planning through January 31, 2008. We expect to continue to incur significant monthly cash expenditures related to the merger through the consummation of the merger. We currently expect the merger will close on January 31, 2008; however, the closing may be delayed if required regulatory approvals have not been obtained. We anticipate that we will have to rely on borrowings under our credit facility, in addition to cash generated from operations, to make these expenditures and satisfy our debt service and dividend and working capital requirements. If the closing is significantly delayed, these sources of funds may no longer be available to us. The Company’s accounting treatment of these expenditures may cause the financial statement impact of these expenditures to be different than the cash flow impact.

Merger Information and Update

The Company announced on January 16, 2007 that it had signed definitive agreements with Verizon Communications Inc. that will result in Verizon establishing separate entities for its local exchange and related business assets in the region, spinning off the capital stock of the parent of those new entities to Verizon’s stockholders, and merging the parent with and into FairPoint. FairPoint and Verizon are working to complete the merger as quickly as possible after receipt of applicable regulatory approvals. The merger was approved by FairPoint’s stockholders at its annual meeting on August 22, 2007 and, if regulatory approvals are timely received, FairPoint expects to complete the merger on January 31, 2008. For additional information on the merger and related agreements, please refer to the Current Reports on Form 8-K filed by the Company with the Securities and Exchange Commission on January 19, 2007, April 23, 2007, June 28, 2007 and July 9, 2007 and the Company’s definitive proxy statement dated July 16, 2007.

The regulatory approval process is proceeding. The Company has submitted pre-filed testimony, answered data requests, participated in technical conferences, presented testimony at hearings (which have concluded) and is preparing formal briefs and reply briefs. There can be no assurance that regulatory approval will be received or received on a satisfactory and timely basis. In addition, at the current time, it is unclear what restrictions, if any, on our operations, capital structure and/or our ability to pay dividends at the current level and/or what expenditure requirements, if any, may be imposed as part of any such regulatory approvals.

The Company has entered into settlement agreements with many intervening parties in all three states, including rural local exchange carriers, competitive local exchange carriers and other wholesale carriers and electric utilities. Many of these parties have announced their support of the merger. Settlement conferences with certain other interveners continue.

FairPoint also received approval from the Virginia State Corporation Commission and the Illinois Commerce Commission.

Page 5 of 8

Merger Integration Update

• First data extract of Verizon Northern New England data completed

• Data mapping rules completed

• Build II of systems integration completed

• Build III delivered to test groups, includes core functionality for over 65% of the functional components and 79% of the planned operational system support (OSS) interfaces

• Major systems and integrated interfaces are being tested with sample data from Verizon extracts

• Developed draft Cutover Readiness Plans

• Developed draft training plans for Close and Cutover releases

• Completed demonstration of the wholesale gateway to CLEC customers

Conference Call and Webcast

As previously announced, FairPoint will host a conference call and simultaneous webcast to discuss its third quarter results at 8:30 a.m. EDT on November 2, 2007. Participants should call (888) 253-4456 (US/Canada) or (706) 643-3201 (International) and request the FairPoint Communications third quarter earnings call. A telephonic replay will be available for anyone unable to participate in the live call. To access the replay, call (800) 642-1687 and enter the confirmation code 21399083. The recording will be available from Friday, November 2, 2007 at 1:00 p.m. (EDT) through Friday, November 9, 2007 at 11:59 p.m. (EDT).

A live broadcast of the earnings conference call will be available via the Internet at www.fairpoint.com under the Investor Relations section. An online replay will be available beginning at 1:00 p.m. (EDT) on November 2, 2007 and will remain available for one year. During the conference call, representatives of FairPoint may discuss and answer one or more questions concerning FairPoint’s business and financial matters. The responses to these questions, as well as other matters discussed during the conference call, may contain information that has not been previously disclosed.

Non-GAAP Financial Measures

EBITDA (as defined herein), Adjusted EBITDA and Cash Available for Dividends are non-GAAP financial measures (i.e., they are not measures of financial performance under generally accepted accounting principles) and should not be considered in isolation or as a substitute for consolidated statements of operations and cash flows data prepared in accordance with GAAP. In addition, the non-GAAP financial measures used by FairPoint may not be comparable to similarly titled measures of other companies. For definitions of and additional information regarding EBITDA, Adjusted EBITDA and Cash Available for Dividends, and a reconciliation of such measures to the most comparable financial measures calculated in accordance with GAAP, please see the attachments to this press release.

FairPoint believes EBITDA is useful to investors because EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance, liquidity and leverage. FairPoint believes EBITDA allows a standardized comparison between companies in the industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies.

Certain covenants in FairPoint’s credit facility contain ratios based on Adjusted EBITDA and the restricted payment covenant in FairPoint’s credit facility regulating the payment of dividends on its common stock is based on Adjusted EBITDA. If FairPoint’s Adjusted EBITDA were to decline below

Page 6 of 8

certain levels, covenants in FairPoint’s credit facility that are based on Adjusted EBITDA may be violated and could cause, among other things, a default under such credit facility, or result in FairPoint’s inability to pay dividends on its common stock.

FairPoint believes Cash Available for Dividends is useful to investors as a means to evaluate FairPoint’s ability to pay dividends on its common stock. However, FairPoint is not required to use such cash to pay dividends and any dividends are subject to declaration by FairPoint’s board of directors and compliance with Delaware law and the terms of its credit facility.

While FairPoint uses these non-GAAP financial measures in managing and analyzing its business and financial condition and believes they are useful to its management and investors for the reasons described above, these non-GAAP financial measures have certain shortcomings. In particular, Adjusted EBITDA does not represent the residual cash flows available for discretionary expenditures, since items such as debt repayment and interest payments are not deducted from such measure. FairPoint’s management compensates for the shortcomings of these measures by utilizing them in conjunction with their comparable GAAP financial measures.

The information in this press release should be read in conjunction with the financial statements and footnotes contained in FairPoint’s quarterly report to be filed with the Securities and Exchange Commission.

About FairPoint

FairPoint is a leading provider of communications services to rural and small urban communities across the country. Incorporated in 1991, FairPoint’s mission is to acquire and operate telecommunications companies that set the standard of excellence for the delivery of service to rural and small urban communities. Today, FairPoint owns and operates 30 local exchange companies located in 18 states offering an array of services, including local and long distance voice, data, Internet and broadband offerings. FairPoint is traded on the New York Stock Exchange under the symbol “FRP”.

This press release may contain forward-looking statements by FairPoint that are not based on historical fact, including, without limitation, statements containing the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions and statements. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements. Such factors include those risks described from time to time in FairPoint’s filings with the Securities and Exchange Commission (“SEC”), including, without limitation, the risks described in FairPoint’s most recent Annual Report on Form 10-K on file with the SEC. These factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. All information is current as of the date this press release is issued, and FairPoint undertakes no duty to update this information. FairPoint’s results for the quarter ended September 30, 2007 are subject to the completion and filing with the Securities and Exchange Commission of its Quarterly Report on Form 10-Q for such period.

FairPoint has filed, and the SEC has declared effective, a registration statement in connection with the proposed merger. FairPoint urges investors to read this document and other materials filed and to be filed by FairPoint relating to the proposed merger because they contain and will contain important information. Investors can obtain copies of the registration statement, as well as other filed documents containing information about FairPoint and the proposed merger, at www.sec.gov, the SEC’s website. Investors may also obtain free copies of these documents and FairPoint’s other SEC filings at www.fairpoint.com under the Investor Relations section, or by written request to FairPoint

Page 7 of 8

Communications, Inc., 521 E. Morehead Street, Suite 250, Charlotte, NC 28202, Attention: Investor Relations.

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

Source: FairPoint Communications, Inc. www.fairpoint.com

Investor Contact: Brett Ellis (866) 377-3747, bellis@fairpoint.com

Media Contact: Rose Cummings (704) 602-7304; rcummings@fairpoint.com

# # #

Attachments

Page 8 of 8

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	September 30,			December 31,
	2007			2006
	(unaudited)
	(Dollars in thousands)
Assets
Current assets:
Cash	$	8,842		$	3,805
Current receivables, net	49,349			28,533
Other current assets	11,965			13,184
Deferred income tax, net	8,387			33,648
Total current assets	78,543			79,170
Property, plant, and equipment, net	248,365			246,264
Investments	6,529			12,057
Goodwill	498,913			499,184
Deferred income tax, net	38,162			23,830
Deferred charges and other assets	20,260			24,725
Total assets	$	890,772		$	885,230

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	26,270		$	14,337
Dividends payable	13,953			13,908
Current portion of long-term debt	743			714
Demand notes payable	260			312
Accrued interest payable	712			560
Other accrued liabilities	21,234			16,017
Liabilities of discontinued operations	475			486
Total current liabilities	63,647			46,334

Long-term liabilities:
Long-term debt, net of current portion	607,294			607,272
Deferred credits and other long-term liabilities	16,176			6,897
Total long-term liabilities	623,470			614,169
Minority interest	7			8
Stockholders’ equity:
Common stock	353			352
Additional paid-in capital	491,325			530,536
Accumulated deficit	(285,990		)	(311,545		)
Accumulated other comprehensive (loss) income, net	(2,040		)	5,376
Total stockholders’ equity	203,648			224,719
Total liabilities and stockholders’ equity	$	890,772		$	885,230

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	*(Dollars in thousands)*						*(Dollars in thousands)*

Revenues	$	75,707		$	70,700		$	215,276		$	199,687
Operating expenses:
Operating expenses, excluding depreciation and amortization	54,846			40,362			155,716			112,242
Depreciation and amortization	12,624			12,839			37,873			39,826
Gain on sale of operating assets	(2,164		)	—			(2,164		)	—
Total operating expenses	65,306			53,201			191,425			152,068
Income from operations	10,401			17,499			23,851			47,619
Other income (expense):
Net gain on sale of investments and other assets	2,759			64			49,586			14,289
Interest and dividend income	294			211			805			3,138
Interest expense	(9,924		)	(9,969		)	(29,932		)	(29,514		)
Loss on derivative instruments	(5,669		)	—			(5,669		)	—
Equity in net earnings of investees	320			1,841			4,889			8,206
Total other (expense) income	(12,220		)	(7,853		)	19,679			(3,881		)
(Loss) income before income taxes	(1,819		)	9,646			43,530			43,738
Income tax expense	(3,372		)	(3,668		)	(17,974		)	(16,965		)
Minority interest	—			(1		)	(1		)	(2		)
Net (loss) income	$	(5,191	)	$	5,977		$	25,555		$	26,771

Weighted average shares outstanding:
Basic	34,770			34,651			34,736			34,618
Diluted	34,770			34,796			34,967			34,711

Earnings (loss) per share:
Basic	$	(0.15	)	$	0.17		$	0.74		$	0.77
Diluted	$	(0.15	)	$	0.17		$	0.73		$	0.77

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended
	September 30,
	2007			2006
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	25,555		$	26,771
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Deferred income taxes	19,411			15,159
Amortization of debt issue costs	1,159			1,200
Depreciation and amortization	37,873			39,826
Minority interest in income of subsidiaries	1			2
Income from equity method investments	(4,889		)	(8,206		)
Net gain on sale of investments and other assets	(49,586		)	(14,289		)
Gain on sale of operating assets	(2,164		)	—
Loss on derivative instruments	5,669			—
Other non cash items	2,963			1,403
Changes in assets and liabilities arising from operations:
Accounts receivable and other current assets	(21,399		)	2,838
Accounts payable and other accrued liabilities	12,771			(4,193		)
Income taxes	(1,274		)	(520		)
Other assets/liabilities	(1,942		)	(996		)
Total adjustments	(1,407		)	32,224
Net cash provided by operating activities of continuing operations	24,148			58,995
Cash flows from investing activities of continuing operations:
Net capital additions	(39,870		)	(25,636		)
Distributions from investments	2,640			7,901
Net proceeds from sales of investments and other assets	60,229			43,416
Acquisitions of telephone properties, net of cash acquired	—			(37,643		)
Other, net	265			(183		)
Net cash provided by (used in) investing activities of continuing operations	23,264			(12,145		)
Cash flows from financing activities of continuing operations:
Loan origination costs	(628		)	—
Proceeds from issuance of long-term debt	115,945			94,450
Repayments of long-term debt	(115,919		)	(99,583		)
Proceeds from exercise of stock options	—			24
Dividends paid to common stockholders	(41,763		)	(41,384		)
Net cash used in financing activities of continuing operations	(42,365		)	(46,493		)
Cash flows of discontinued operations:
Operating cash flows, net used in	(10		)	(957		)
Net increase (decrease) in cash	5,037			(600		)
Cash, beginning of period	3,805			5,083
Cash, end of period	$	8,842		$	4,483

FairPoint Communications, Inc.

Non-GAAP Financial Measures Reconciliation

For the Three and Nine Months Ended September 30, 2007 and 2006

	Three Months Ended				Three Months Ended
	09/30/07				09/30/06
	(Dollars in thousands)

Net cash provided by operating activities from continuing operations	$		(194	)	$	11,743

Adjustments:
Depreciation and amortization	(12,624			)	(12,839		)
Other non-cash items	(7,226			)	(2,493		)
Changes in assets and liabilities arising from continuing operations, net of acquisitions	14,853				9,566
(Loss) income from continuing operations	(5,191			)	5,977
Adjustments:
Interest expense	9,924				9,969
Provision for income taxes	3,372				3,668
Depreciation and amortization	12,624				12,839
EBITDA	20,729				32,453
Adjustments:
Net gain on sale of investments and other assets	(4,923			)	(64		)
Equity in net earnings of investees	(320			)	(1,841		)
Distributions from investments	30				2,161
Non-cash stock based compensation	971				752
Merger transaction and transition expenses	12,452				—
Other non-cash item	5,669				—
Deferred patronage dividends	(27			)	(13		)
Adjusted EBITDA	$	34,581			$	33,448

	Nine Months Ended			Nine Months Ended
	09/30/07			09/30/06

Net cash provided by operating activities from continuing operations	$	24,148		$	58,995
Adjustments:
Depreciation and amortization	(37,873		)	(39,826		)
Other non-cash items	25,992			4,731
Changes in assets and liabilities arising from continuing operations, net of acquisitions	13,288			2,871
Income from continuing operations	25,555			26,771
Adjustments:
Interest expense	29,932			29,514
Provision for income taxes	17,974			16,965
Depreciation and amortization	37,873			39,826
EBITDA	111,334			113,076
Adjustments:
Net gain on sale of investments and other assets	(51,750		)	(14,289		)
Equity in net earnings of investees	(4,889		)	(8,206		)
Distributions from investments	2,640			7,901
Non-cash stock based compensation	3,012			2,036
Merger transaction and transition expenses	28,444			—
Other non-cash item	5,669			(637		)
Deferred patronage dividends	(41		)	13
Adjusted EBITDA	$	94,419		$	99,894
Plus (minus):
Scheduled principal payments	(511		)	(485		)
Cash interest expense (adjusted for amortization and swap interest)	(29,133		)	(28,314		)
Capital expenditures and other	(21,501		)	(26,732		)
Investments	—			(112		)
Cash received on account of non-cash income excluded from Adjusted EBITDA	—			3,000
Gain on sale of investment/assets	5,313			14,498
Cash income taxes	(2,270		)	(2,284		)
Cash Available for Dividends	$	46,317		$	59,465

“EBITDA” means net income before income from discontinued operations, interest expense, income taxes, and depreciation and amortization.

“Adjusted EBITDA” is defined in FairPoint’s credit facility as (i) the sum of Consolidated Net Income (which is defined in FairPoint’s credit facility and includes distributions from investments), plus the following to the extent deducted from Consolidated Net Income: provision for taxes, consolidated interest expense, depreciation, amortization, losses on sales of assets and other extraordinary losses, certain one-time charges recorded as operating expenses related to the transactions contemplated by the Company’s Merger Agreement with Verizon Communications Inc. and certain other non-cash items, each as defined, minus (ii) gains on sales of assets and other extraordinary gains and all non-cash items increasing Consolidated Net Income.

“Cash Available for Dividends” means Adjusted EBITDA, minus (i) cash interest expense (adjusted for amortization and swap interest), (ii) scheduled principal payments on indebtedness, (iii) capital expenditures, (iv) investments, (v) cash income taxes, and (vi) non-cash items excluded from Adjusted EBITDA and paid in cash, plus (i) the cash amount of any extraordinary gains and gains realized on asset sales other than in the ordinary course of business, and (ii) cash received on account of non-cash gains or non-cash income excluded from Adjusted EBITDA.

FairPoint Communications, Inc.

Sequential Financial Information for the Quarters ending September 30, June 30, March 31, 2007, December 31, and September 30, 2006

(Dollars in thousands)	Three Months Ended September 30, 2007			Three Months Ended June 30, 2007			Three Months Ended March 31, 2007			Three Months Ended December 31, 2006			Three Months Ended September 30, 2006

Consolidated Results:
Revenues (1):
Local calling services	$	17,453		$	17,532		$	17,504		$	17,784		$	16,586
USF - high cost loop support	5,245			4,445			4,616			5,380			5,116
Interstate access revenue	18,360			18,134			18,404			18,774			19,402
Intrastate access revenue	13,541			9,606			9,725			9,328			10,545
Long distance services	7,843			7,542			7,121			6,155			6,694
Data and internet services	8,805			8,225			7,832			7,520			7,106
Other services	4,460			4,413			4,470			5,441			5,251
Total revenues	75,707			69,897			69,672			70,382			70,700
Operating expenses	65,306			63,948			62,171			56,631			53,201
Income from operations	10,401			5,949			7,501			13,751			17,499
Other income (expense)	(12,220		)	39,036			(7,137		)	(7,113		)	(7,853		)
Earnings from continuing operations before income taxes	(1,819		)	44,985			364			6,638			9,646
Income taxes	(3,372		)	(14,205		)	(397		)	(2,893		)	(3,668		)
Minority interest in income of subsidiaries	—			(1		)	—			—			(1		)
Income from discontinued operations	—			—			—			574			—
Net income (loss)	$	(5,191	)	$	30,779		$	(33	)	$	4,319		$	5,977

Cash Available for Dividends:
Adjusted EBITDA	$	34,581		$	29,904		$	31,394		$	33,271		$	33,448
Plus (minus):
Scheduled principal payments	(173		)	(170		)	(168		)	(166		)	(164		)
Cash interest expense (adjusted for amortization and capitalized interest)	(9,781		)	(9,705		)	(9,647		)	(9,780		)	(9,594		)
Capital expenditures and other	(6,849		)	(7,759		)	(6,893		)	(6,412		)	(8,100		)
Investments	—			—			—			—			—
Cash received on account of non-cash income excluded from Adjusted EBITDA	—			—			—			1,000			1,000
Gain on sale of investment/assets	5,165			75			73			350			59
Cash income taxes	(1,423		)	(263		)	(584		)	(85		)	(1,160		)
Cash Available for Dividends	$	21,520		$	12,082		$	14,175		$	18,178		$	15,489

Cumulative Cash Available for Dividends: (2)
Beginning Balance	$	43,637		$	45,504		$	45,246		40,964			39,331
Add:
Cash Available for Dividends generated during the quarter	21,520			12,082			14,175			18,178			15,489
Less:
Dividends declared and/or paid after July 30, 2005	(13,943		)	(13,949		)	(13,917		)	(13,896		)	(13,856		)
Cumulative Cash Available for Dividends	$	51,214		$	43,637		$	45,504		$	45,246		$	40,964


Other information:
Gross property, plant and equipment	$	869,999		$	856,999		$	837,221		$	829,234		$	815,543
Capital expenditures	16,295			15,832			7,743			6,354			8,100
Cash Interest expense (adjusted for amortization and swap interest)	(9,781		)	(9,705		)	(9,647		)	(9,780		)	(9,594		)
Access line equivalents (3)	309,857			312,494			310,180			311,150			308,858
Residential access lines	186,304			190,417			191,571			194,119			194,002
Business access lines	56,575			56,945			56,795			57,587			57,761
High Speed Data subscribers	66,978			65,132			61,814			59,444			57,095

DSL subscribers	61,548			59,880			56,851			54,752			52,655
Other HSD subscribers (Wireless and Cable modems)	5,430			5,252			4,963			4,692			4,440

(1)		During the second quarter of 2007, the Company re-categorized certain revenues to more accurately reflect the nature of those revenues. Total revenues did not change as a result of this re-categorization. Revenue categories for prior quarters have been re-classified to present on a comparable basis.

(2)		Cumulative Cash Available for Dividends means the amount of Cash Available for Dividends generated beginning on April 1, 2005, minus the aggregate amount of dividends paid after July 30, 2005, minus the aggregate amount of investments made after April 1, 2005 using such cash, plus the aggregate amount of distributions received from such investments (not to exceed the amount originally invested).

(3)		In the third quarter of 2006, the Company began including access lines and HSD subscribers from its two competitive local exchange carrier (CLEC) companies. Historically, these access lines have not been included in the Company’s access line and subscriber counts.

EX-99.2 3 a07-28563_1ex99d2.htm EX-99.2

Exhibit 99.2

FINAL TRANSCRIPT

Conference Call Transcript

FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

Event Date/Time: Nov. 02. 2007 / 8:30AM ET

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

CORPORATE PARTICIPANTS

Brett Ellis

FairPoint Communications, Inc. - IR

Gene Johnson

FairPoint Communications, Inc. - Chairman, CEO

Peter Nixon

FairPoint Communications, Inc. - President

John Crowley

FairPoint Communications, Inc. - CFO

Walt Leach

FairPoint Communications, Inc. - EVP, Corporate Development

CONFERENCE CALL PARTICIPANTS

Jonathan Chaplin

JPMorgan Chase & Co. - Analyst

David Barden

Banc of America Securities - Analyst

Tom Seitz

Lehman Brothers - Analyst

Simon Flannery

Morgan Stanley - Analyst

Barry Sine

Oppenheimer & Co. - Analyst

PRESENTATION

Operator

Good morning. My name is Darlene, and I will be your conference operator today. At this time I would like to welcome everyone to the FairPoint Communications third quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Brett Ellis, you may begin your conference.

Brett Ellis - FairPoint Communications, Inc. - IR

Good morning, everyone, and thank you for joining the FairPoint third quarter earnings conference call. Participating on today’s call are Gene Johnson, our Chief Executive Officer, John Crowley, Chief Financial Officer, Peter Nixon, our President, and Walt Leach, our Executive Vice President of Corporate Development.

Before we begin, I would like to remind you certain statements made during this conference call which are not based on historical fact, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events, or developments to differ materially from those expressed or implied by these forward-looking statements.

Such factors include those risks described from time to time in FairPoint’s filings with the Securities and Exchange Commission, including without limitations the risks described in FairPoint’s most recent Annual Report on Form 10-K, on file with the Securities and Exchange Commission.

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

All information is current as of the date of this earnings call, and FairPoint undertakes no duty to update this information. In addition, FairPoint’s results for the quarter ended September 30th, 2007, are subject to the completion and filing with the Securities and Exchange Commission of its quarterly report on Form 10-Q for such period.

Having said this, allow me to introduce Gene Johnson, our Chairman and CEO.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Thanks very much, Brett. Good morning, everyone. We have a lot to talk about today, and we have a number of positive developments we want to talk about, so let’s get right into it.

As we did last quarter I am going to focus my comments on reviewing the status of the transaction and providing a brief regulatory update, then Peter will provide more detail about the merger and the transition, and then John will conclude by discussing our financial results for the quarter. Walt is going to be available to answer any questions that you might have as well.

The operational results and the financial results that we reported today, we think once again demonstrate our ability to achieve both operational and financial success. I continue to be very, very pleased that we are running our business well, even while working our way through the regulatory process, and planning for the close of the transaction with Verizon. And I think the strong financial results we had this quarter, enable us again to add to our cumulative cash available for dividends and we are pleased about that as well.

We are knee deep, literally, and making real steady and significant progress in all areas needed to make the acquisition a success. And that includes, among others, the planning, design and building of the systems, preparing for the systems integration, testing the systems and the various processes we will be using, engineering our rollout of expanded broadband service and hiring many, many people for our team. We had outlined in detail our broadband expansion plans, responded to literally thousands of data requests by the Public Utility Commissions in the three states and have settled with many interveners who originally had concerns about transaction.

Just this week we completed the last of the public hearings in the region, and the public officials in all three states are diligently moving forward in the public interest. And while we are still experiencing significant resistance to the merger proposal from certain interveners, we have earned the support of many more and have received the endorsement of many groups across the region. We think we have made a very strong case for the transaction based on the merits we outlined from day one, including job growth and we have announced the creation of 675 new FairPoint jobs throughout the entire region. Of course, suppliers and vendors who will be supporting us will create many additional jobs in the region, so we think that is one of the real strong benefits for this transaction.

Broadband expansion, we previously discussed this at length. We are expanding the service in areas where broadband is currently offered, as well as offering service for the first time in more rural areas that currently are underserved. And I would also note that we have announced our plans for an advanced broadband network using IP and MPLS infrastructure in Maine, New Hampshire, and Vermont. That platform will create the platform really for large number of highly reliable, efficient business-class services, and will also be expandable and will provide the foundation for the growth of our broadband services.

We are also supporting economic development in the region through a number of initiatives, including strengthening collaborations between the public and private sectors, building demand-driven and broadband-enabled strategies, empowering local leadership to identify their region’s unique assets and resources and leverage them for economic benefit and global economy, and expanding local community economic development capacities through knowledge transfer. And we have announced or in the process of announcing, we have named anyway, our Senior Economic Development Officer in the region, a longtime FairPoint employee, and we will be announcing that publicly in the next few days.

As I previously said, we think we have presented a compelling case to regulators in northern New England. While there is no assurance concerning the regulatory approvals or their timing, we continue to anticipate the transaction will close on schedule on January 31st 2008.

So now I am going to ask Peter to discuss the progress in greater detail.

Peter Nixon - FairPoint Communications, Inc. - President

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

Thanks, Gene. I am going to update you on several topics related to the transition. The topics I would like to address today include system readiness, business readiness, conversion, and training partner readiness.

Let me start with system readiness. I would like to begin by providing a status of our Operational Support Systems, otherwise known as OSS. To date we have completed our third build, we have one more build remaining. All OSS applications associated with this build have been delivered to test groups, where extensive product and integration tests will be performed. Build 3 includes core functionality for over 65% of planned functional components, and 79% of planned interfaces.

Let me describe some examples of core business functions that our OSS must be capable of supporting that are in the process of being tested. We must have the ability to schedule technician appointments. This capability exists in our Build 3 environment and is supported through integration between our customer relationship management and workforce management systems. We must have the ability to monitor certain network elements and trigger faults and alarms, which will automatically generate trouble tickets. This too, exists within our Build 3 environment.

This capability is deployed through the integration of individual network elements to our network management and trouble ticketing systems. Build 3 introduces our ability to test automated provisioning for local service orders, which supports both our retail and our wholesale customers. The team is currently testing orders that flow between order management, activation, provisioning and inventory management.

In addition to our OSS, we have Business Support Systems, or BSS. We have also completed our third build with one build remaining for this. Our BSS is comprised of our billing and CRM systems. Build 3 represents the completion of roughly 65% of core functionality and planned interfaces. We are presently testing the ability for data to move unaided between our ordering, billing, and trouble ticket systems.

Let me move on to business readiness. We continue to be on-track for building our organization. We have hired over 85 new employees, comprising mostly of a Vice President and Director-level personnel, to assist in the identification of the desired system functionalities, development of the methods, procedures and practices and organizational planning and development. We have developed draft business cut-over readiness plans, which will prepare us for operating the business while utilizing Verizon systems, as well as operating under our new systems. And we have developed draft training plans for close and cut-over readiness.

Regarding conversion, we have received 158 of the planned first data extracts from Verizon. Per our agreed upon schedule, there are 10 remaining extracts remaining under evaluation at Verizon. Capgemini and FairPoint will determine if the data is necessary within our operating environment. Of the data we have received, we have successfully executed our conversion scripts to load 61% of the data extracts into our staging or landing databases.

More importantly, we have taken representative data from Verizon’s core systems now residing in FairPoint’s landing databases and have loaded it into our target systems. The Verizon source systems consisted of three ordering and billing systems, two finance and supply chain systems and two OSS systems. Data from eight systems successfully converted into FairPoint’s target systems, consisting of Siebel, Kenan, E-business suites, and Oracle suites respectively. This is not an easy task, and requires strong teamwork between FairPoint, Capgemini, and Verizon.

The teams are well organized and disciplined. Working together they have established processes to identify and resolve issues quickly. Recently, the teams met to review the processes used during the first data extract. This was the first of many planning sessions to continue to improve the process and determine the most efficient means to transition from Verizon systems to FairPoint’s.

And finally, training partner readiness. FairPoint conducted a demonstration of our wholesale gateway to the CLEC community. This demonstration enabled the CLECs to see the GUI interface which supports the order and trouble ticketing process. And we have also completed our first discussions with the CLECs, who will utilize electronic bonding, or e-bonding, to communicate with us.

That will conclude my portion of the call today. I would now like to turn the call over to John to discuss the financial and operational performance during the third quarter. John?

John Crowley - FairPoint Communications, Inc. - CFO

Thanks, Peter. Good morning everybody. I am pleased to report to you another good quarter ahead of guidance for classic FairPoint, with continued progress on the merger with Verizon New England.

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

I will walk you through the financial results for the third quarter first. Revenues were up 7.1% this quarter from the previous year to $75.7 million. Excluding the contribution from acquisitions, revenues were up 4.4% compared to the third quarter of 2006. The components of the revenue increase in the quarter, excluding acquisitions, were intrastate access revenues increased $2.8 million, data and Internet revenue increased $1.4 million, and long-distance revenue increased $1.1 million. These increases were partially offset by a decrease in interstate access revenue of $1.5 million, and a decrease in other miscellaneous revenue of $900,000.

Operating expenses excluding depreciation increased $13 million compared to the third quarter of 2006, excluding the impact of acquisitions. Of that, $12.5 million of the increase is due to the Verizon merger related expenses and therefore not core operations. The remaining increase is principally due to an increase of cost of goods sold, as the changing mix of our revenue occurs of $600,000. Bad debt expense of $600,000. Materials and supply expense of $300,000. These increases were partially offset by decreases in employee related costs of $600,000, and a decrease in billing expense of $500,000.

Adjusted EBITDA was $34.6 million for the quarter, after adding back the $12.5 million of merger related expenses, which is above the $29.9 million for the second quarter of ‘07 and ahead of the $33.4 million for the third quarter of the prior year.

There were two moving parts in the quarter relative to last year that I want to talk about. First, we had a large favorable settlement of intrastate access charges in the quarter in the amount of $4.4 million. As you probably know, disputes on access revenues are pretty common these days and while we routinely agitate for better access data, argue for more favorable traffic models and negotiate payments, this one was unusual, only for its size. Offsetting this was the decline in distributions of $2.1 million because of the sale in the second quarter of Orange-Poughkeepsie.

Net loss for the quarter was $0.15 on a per-share basis. The loss is principally a result of $12.5 million of merger-related expenses in the quarter. However, there was a non-operating item in the quarter, a $5.7 million loss on certain interest rate swaps that we entered into because of the merger. This is a non-cash item and relates to the January ‘08 financing. These swaps, which we have been entering into, are contingent upon the closing of the merger and therefore will not take effect until the merger is completed. Under GAAP, we are required to recognize the change in the fair market value of these particular swaps through the income statement.

Let me just explain the business activity behind the accounting. We had started to hedge the interest rates on the committed bank financing for next year. We did $200 million during the summer in contingent interest rate swaps at about 5.375%; those are the underwater swaps. Since that time, we have added $400 million of additional contingent interest rate swaps, at rates nearly 1% lower than the ones that we did back in July. We also have about $600 million in swaps on our existing debt that already get hedge accounting, and we will leave those in place after the merger. So we are making great progress on giving us a highly predictable capital cost upon the merger.

Before I get into a discussion of cash available for dividends, I want to remind everyone that because of the accounting treatment of the merger, the systems build out, the opex and capex impact recorded in the GAAP financials are different from the cash flow impact. The accounting expense, or the accounting costs rather, are slightly higher than the cash outlay.

In the quarter we generated cash available for dividends of $21.5 million. We declared a dividend of $13.9 million, so we added to the cash available for dividends cushion, as we had indicated earlier this year. We invested $16.3 million in the quarter in capital expenditures, of which only $6.8 million was deducted from cash available for dividends, because as you know under our credit agreement, merger-related cash capital expenditures are excluded from that calculation.

Also in the third quarter we recognized an additional gain of $2.7 million related to the release of the escrow account for the Southern Illinois Cellular Corporation investment, which we sold last year. In addition, during the third quarter we completed the sale of the Yates City Telephone for $2.5 million, resulting in a gain of $2.2 million. As we mentioned on last quarter’s call, Yates City Telephone had less than 500 access lines. At the end of the quarter, we had $51.2 million of cumulative cash available for dividends.

At the end of September our access line equivalents, which are access lines plus HSD subscribers but exclude video subscribers, were approximately 310,000, versus 309,000 last year. In the quarter, excluding acquisitions, we added over 1,800 high-speed data subscribers and our HSD ARPU remained consistent, in the $41 to $42 range. Voice access lines, excluding lines acquired or disposed of in the last 12 months, decreased 4.8% compared to September 30th of last year.

Regarding guidance for the rest of the year, we continue to expect revenues of $281 to $284 million, and continue to expect our adjusted EBITDA to be in the range of $123 to $125 million. We estimate the capital expenditures for the full year excluding the expenditures related to the merger will be approximately $29 to $31 million, as we have said all year.

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

As to the transition, as Gene and Peter have said, the work is progressing as planned. The transition is on budget and so through January 31 we are still expecting nearly $110 million in cash costs before the Verizon reimbursements for the new systems and the hardware. The total systems budget, that is the aggregate of the pre and post-close investment, is unchanged at approximately $200 million. There may be and in fact probably will be some timing differences, particularly as to what falls before or after the year end, but the overall budget doesn’t change.

As Gene said, we are very proud of the performance we have put in so far at Classic FairPoint. We are diligently preparing for the merger and the transition and we are looking forward to integrating these two businesses into a more successful, efficient systems-based, 21st century telecom company.

And now we are happy to take questions.

QUESTION AND ANSWER

Operator

At this time - [audio break]

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jonathan Chaplin.

Jonathan Chaplin - JPMorgan Chase & Co. - Analyst

Good morning, guys. Thanks for taking the question. I am wondering if you can give us a quick update of what the access line DSL trends were in the acquired properties this quarter, and then secondly, the comment that I saw in the press release around expected timing, said there was still a good prospect it was going to close, something along the lines of there is a good prospect it’s going to close before year end. I can’t remember, how you have discussed it in the past, just in terms of the language. Are you a little less convinced that it will close before year end? I am just wondering if you can give us an update of what the timing hurdles are between now and close? Thank you.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Jonathan, it’s Gene. I will take the second question first, as we often do. John will take the first question last. We think the regulatory approvals will all be in during December, but in most, there is generally a waiting period between the time you get the regulatory approval and the time you are allowed to close. And so, we still anticipate closing at the end of January, which is what we have said all along. We expect to close in the first quarter of next year. It clearly will not close during this year. We think it will close early in the first quarter, probably in January of next year.

Jonathan Chaplin - JPMorgan Chase & Co. - Analyst

Okay.

John Crowley - FairPoint Communications, Inc. - CFO

Jonathan, I hope will you permit me this quick joke. I assume when you ask about the acquired properties you are not talking about Germantown. You are probably talking about SpinCo. At this point, because we are reporting a little earlier this quarter, we only have access line information on Verizon New England or SpinCo.

SpinCo finished the quarter with 1,417,000 access lines, and 1,623,000 access line equivalents. They now have 206,000 DSL subscribers. So in percentage terms that is a 7.7% year-on-year decline in voice lines, and a 16.3% increase in DSL accounts. That gives them a 14.5% DSL penetration. So you know, as you can imagine, our marketing people are pretty excited about getting in there and expanding that pie.

I don’t have any third quarter financials yet. No revenue or ARPU figures. But I can, since we now have the second quarter numbers, I will just mention to you for the first half SpinCo did $190 million in EBITDA, which was up about 2% from the year before, in-line with a similar revenue

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

increase. If you pro forma their EBITDA for the retiree obligations that we aren’t taking, that is, the people who have already retired, the adjusted EBITDA was $211 million for the first half. Their obligation is to get us the third quarter’s by November 15th, so we don’t have those yet.

Jonathan Chaplin - JPMorgan Chase & Co. - Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of David Barden.

David Barden - Banc of America Securities - Analyst

Thanks, guys, and good morning.Kind of along similar lines, just Gene in terms of the process there were a lot more disclosures in this release about, just in case if things do take a little longer, we are going to have to draw on our credit facility, et cetera, et cetera. You kind of mentioned that you are seeing “substantial resistance.” It seems as though maybe we are not as far down the path as we would have liked at this stage, or maybe there is greater resistance at this stage of the game than was anticipated?

Other than just saying our target was January 30th, beginning of this process, so that is what it still is, why you feel like you have got that comfort level. Is it because you’ve gotten 60% or 70% or 80% of the interveners on your side, and you have got daylight to these negotiations with the staff from the regulators and everything seems to be shaking out pretty well? Because that is going to be just a real issue for people to try to get their arms around, I would appreciate some comment there.

Second, on the results this quarter it did look, I think, like here was this $4.4 million one-time revenue benefit in access that flowed down through the Adjusted EBITDA and into the CAPD this quarter. The guidance didn’t get adjusted for that, so the implication is that the back half of the year is actually looking marginally softer than you expected. Could you talk about how the economic effects you think are playing in your territories, and how that might be having any impact on your expectations for the acquired properties, or to be acquired properties? Thank you.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Thanks, Dave. I guess you kind of answered the question for me in the way you asked it, but basically, there has been tremendous progress with the interveners. I wish I could give you a percentage, but by far most of the interveners have settled the case. Many of those have come out publicly, not only settling the case, but publicly saying they are in favor of the transaction, and would like to see it go forward. So that is major change from the last time we talked publicly about this.

Secondly, we do see a path towards getting this deal done. The January date that I have given you is the date we have always had in mind. If that date, if we thought there was a reason to change that date, we would. Right now we feel very comfortable that the January date is still a good date.

Now, it’s difficult for me to get into any more discussion than that, because obviously we are at what I would call a delicate stage of the transaction with the Commissions, and there’s a path, a direction, a methodology for us to proceed, and we are doing that, and that is done in private and not in public. So I think I will stop at that point.

John Crowley - FairPoint Communications, Inc. - CFO

Hi, David. This is John. With regard to the remainder of the year guidance, we decided not to change that because it would not be particularly a material change but clearly, as you have indicated, we will come in at the very high end of guidance. We are really quite pleased with the operating results so far this year and we have every reason to think that will continue.

You ask a very interesting question about the economic effects. As we reported, our bad debt expense was slightly higher in the third quarter, and so I think, clearly that is one of the results of the current economic times. But as far as our access line changes, there were a whole bunch of moving parts in there.

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

One was that we had some account number cleanups in one of the recent acquisitions when we converted it to our billing system. It had never been converted to one of our billing systems. That represented probably 0.3 of a percent of the line loss. The non-pay disconnects was another piece. And then we had a very unusual seasonal pattern in the northwest this quarter. I am guessing that winter must have come early out there. And then finally, we had an increase in cable VoIP in one market in New York, which we will probably see, from what I am hearing, probably one other market where that will occur and then that probably should plateau.

Operator

Your next question comes from the line of Tom Seitz, Lehman Brothers.

Tom Seitz - Lehman Brothers - Analyst

As you currently understand the schedule, I understand things are in flux all the time, but can you tell us when you expect the PUC votes in the three states? Is it December broadly, or are there actual dates that we can look to to see if there is some news around? And then do you expect the FCC to wait until the PUCs have voted as requested by some members of Congress? My final question is, you now have your fingernails dirty, and at this point are you still comfortable with the synergy guidance that you have laid out before for the, not the Germantown transaction, but the SpinCo transaction? Thank you very much.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Sure, Tom, I will take. Then at the end my comments I will ask Walt to talk a little about the schedule and the three states. I think he has a better handle on those three dates than I do.

But as far as the FCC is concerned, I do not believe the FCC will wait until the states have issued their approvals before they act on this. I am quite hopeful that will happen before the states act on this.

As far as the guidance we have previously given on the savings, yes, we feel quite comfortable, now that our fingernails are quite dirty, and not only our fingernails are dirty, a lot more is dirty on this transaction. We have worked really hard on it. We feel increasingly confident that our savings projections are clearly in-line. With that, Walt, can you give us some sense of the schedule in the three states of when you expect to actually receive the approvals?

Walt Leach - FairPoint Communications, Inc. - EVP, Corporate Development

Sure. As it relates to the state approvals, all three states are pretty much on the same timeline and that is that we would expect an order from the two Commissions in New Hampshire and Maine and from the Board in Vermont some time in December. There is not a specific target date set up for each of those three Commissions. Based on what we are hearing, we expect all three would occur before Christmas, but some time in December.

As you heard earlier in the call there is typically a 30-day non-appeal period that we would wait to lapse before we would close, and that is why we are shooting for the end of January, based on everything that is in place today. On the FCC side, we do expect the FCC approval to occur prior to the state approval, probably some time in the last half of November or early December, based upon a recent meeting that we had with the FCC. So that is our view based on everything we know today.

Operator

Your next question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley - Analyst

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

Thanks a lot. Good morning. If we could talk about SpinCo a little bit more, you cited the low broadband penetration as a big opportunity. Do you have an updated sense of what the availability of broadband is in those markets from Verizon? And secondly, where are we on cable telephony overlapping those markets? Thanks.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Peter can answer the second question, Peter? Do you have the facts on that?

Peter Nixon - FairPoint Communications, Inc. - President

I have some information.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Okay. Between us we will see what we have to give you a direct answer. About roughly 62% of their service area in those three states is served by broadband to date. So we have announced plans to substantially increase the broadband investment over the MPLS network and to provide availability to a lot more customers. Peter, can you add anything on the cable overlay?

John Crowley - FairPoint Communications, Inc. - CFO

Let me talk about that because I have got some records on that, Simon. Here is what we have done on the cable overlay. You know, we and Verizon measure this separately. Because we are a small company, because we are in the communities, what have you, we actually measure where is there cable and we do secret callers. We will call the cable company and say, “Gee, can I get cable modem service on 25 Main Street?” and what have you.

So we have some statistics on that. And our experience is that we have about, let me look that up, we have 51% cable modem competition in our markets. So here is what we have assumed for Verizon. They use a different technique. They use what you might call the FCC technique, which is if a County has a cable operator, it is assumed to have blanket cable coverage and modem coverage.

What we have assumed is given that their access lines break out about 44% urban, and about 56% rural, and we define urban as a city of larger than Ellensburg, Washington, or contiguous to a city larger than Ellensburg, Washington, or a town with more than 15% CLEC market share. We have assumed in the urban areas that there is in fact 100% cable and cable modem competition, and in the rural areas we have assumed that the competition is comparable to ours, 51%. So, on a weighted average basis that implies about a high-60s cable modem competition in the markets.

Operator

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Barry Sine with Oppenheimer.

Barry Sine - Oppenheimer & Co. - Analyst

Good morning. Just going back on the merger process, the language in the press release seems a bit more cautionary than you have been in the past, but your verbal comments seem as optimistic as you have been. Is there any change in the outlook in terms of the acquisition?

The next question, I don’t know if you have the data on this, do you know the total number of interveners there have been in the three states? How many have you settled with? How many are there to go? And have you given up anything material in terms of your settlements with them?

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Broadly, we had interventions from the roughly 38 independent ILECs in the three states. We settled with all 38. We had interventions from the utility companies in the states. We have settled with all of them.

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Nov. 02. 2007 / 8:30AM ET, FRP - Q3 2007 FairPoint Communications, Inc. Earnings Conference Call

Peter Nixon - FairPoint Communications, Inc. - President

Most of them.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Most of them, Peter says. We settled with certainly the biggest ones, and the ones that were the most problematic. We had a number of CLECs that intervened. We settled with most of those and have announced those settlements. Let’s see, broadly, those are kind of the three groups, the main groups.

The other two groups of interveners would be the public advocates and the union, and I think I am going to stop at that point. I think for the most part we have settled with by far the largest majority, I would say off the top of may head, 80% to 90% of the interveners and there are a few left that we haven’t settled with at this point.

I would not make any further comments about the transaction. I think that unfortunately we live in a world of caution and so we are just being cautious in our comments. We think appropriately so. But I think you can tell that we believe still that this transaction will close on schedule and I think I will stop at that point, Barry.

Are there any other questions?

Operator

There are no further questions at this time.

Gene Johnson - FairPoint Communications, Inc. - Chairman, CEO

Good. Well, seeing nothing one else is in the queue, and our goal to get you off the phone so you can go participate in other of these calls today, I would like to thank you very much for participating in the call. Thank you for your support of the Company. And we look forward to talking to you on the next earnings call after the transaction is closed and we can give you an update hopefully at that time on exactly where we are in the integration. Thanks very much and have a great day!

Operator

This concludes today’s conference call. You may now disconnect.

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