Fairpoint Communications Reports Second Quarter 2008 Results Second Quarter 2008

 

Adjusted EBITDA Ahead of Plan Despite Higher Access Line Losses;Progress Made on Business Sales

 

CHARLOTTE, N.C. (August 7, 2008) -FairPoint Communications, Inc.(NYSE:FRP)("FairPoint" or the

"Company"), a leading provider of communications services to communities across the country, today

announced its financial results for its second quarter ended June 30, 2008. FairPoint completed its

merger with Northern New England Spinco Inc. ("Spinco"), an entity that held Verizon Communications'

landline and certain related operations in Maine, New Hampshire and Vermont (the "Northern New

England business") on March 31, 2008. As a result, the GAAP financial statements contained in this

earnings release consist of the following: (1) a statement of operations for the three months ended June

30, 2008 representing the operating results of the consolidated company; (2) a statement of operations

for the three months ended June 30, 2007 representing the operating results of the Northern New

England business only; (3) a balance sheet as of June 30, 2008 representing the consolidated company

balance sheet; and (4) the balance sheet as of December 31, 2007 representing the balance sheet of the

Northern New England business only as of such date. For comparison purposes, the Company is also

reporting combined pro forma results for the three months ended June 30, 2007 reflecting the operations

of both Spinco and FairPoint prior to the merger with Spinco ("Legacy FairPoint").

Commenting on the second quarter results, Gene Johnson, chairman and CEO of FairPoint

Communications stated, "With the merger now completed we're pleased with the integration of two strong

teams and are focused on making progress in operating metrics. For the quarter, Adjusted EBITDA was

better than expected, primarily the result of lower expenses. The underlying health of our balance sheet

and our ability to generate significant free cash flow enables us to continue to pay out a healthy quarterly

dividend while maintaining an appropriate leverage ratio. Operationally, we saw particular progress this

quarter in business sales which drove increases in special access revenues. While the overall economy

has had some impact on our operational results, we are introducing new product bundles and product

offerings in our Legacy FairPoint properties, and implementing balanced and measured win-back

programs. These efforts should provide improved operational results in the second half of 2008 and

beyond. We are executing our sales and marketing plans for the recently acquired assets in northern New

England and expect to significantly accelerate this effort after cutover."

Johnson, concluded, "We have made significant progress on the integration of the Verizon assets in

northern New England and we are working toward a November cutover. Since the July Cutover

Monitoring Status Report from Liberty Consulting Group was issued, we have made steady and

meaningful progress on all testing fronts and are working diligently on closing any remaining gaps in the

testing and other key areas of the cutover."

Page 2 of 5

Results for the Three Month Period Ended June 30, 2008 (presented on a GAAP basis which

compares the consolidated Company's results for the 2008 period to the results of the Northern

New England business only for the 2007 period)

Revenues for the second quarter of 2008 were $344.7 million, up 15.1% from the second quarter of 2007.

The merger and resulting acquisition of Legacy FairPoint, which closed on March 31, 2008, contributed

$67.0 million to total revenues in the three months ended June 30, 2008. Excluding the impact of the

acquisition, total revenues would have decreased $21.7 million over the prior year. The primary driver of

this revenue decline was a decline in local revenue due to increased competition and a decrease in

interstate access revenues. The rate of revenue decline is expected to abate, but meaningful

improvements will not take effect until after the transition off of the Transition Services Agreement (the

"TSA") with Verizon, expected to occur at the end of November 2008, at which time marketing programs

and other initiatives can be fully implemented.

The Company has seen solid results from its business sales team. Special access revenues have

increased over the prior year and early reports indicate that the anticipated opportunity to improve sales

to business customers is proceeding according to plan.

Cost of services and sales decreased $8.0 million to $133.9 million in the second quarter of 2008

compared to the same period in 2007. Legacy FairPoint contributed $23.7 million to cost of services and

sales expenses in the three months ended June 30, 2008. Also included in cost of services and sales for

the three months ended June 30, 2008 are $18.9 million of TSA expenses and $5.0 million of non-cash

pension and other post-employment benefit expenses. These costs were offset by the elimination of

allocated costs from other Verizon affiliates prior to close.

Selling, general and administrative ("SG&A") expenses increased $37.1 million to $102.3 million in the

second quarter of 2008 compared with the same period in 2007. Legacy FairPoint contributed $16.6

million to SG&A expenses in the three months ended June 30, 2008. Also included in SG&A expenses

for the three months ended June 30, 2008 are $30.6 million of TSA expenses, $10.0 million of one-time

merger related costs (which the Company is permitted to add back to EBITDA under its credit facility) and

$1.7 million of non-cash pension and other post-employment benefit expenses. These costs were offset

by the elimination of allocated costs from other Verizon affiliates prior to close.

Total operating expenses increased $40.7 million to $305.9 million in the second quarter of 2008

compared with the same period in 2007, primarily due to TSA expenses and costs contributed by Legacy

FairPoint partially offset by a decrease in allocated expenses from Verizon which were no longer incurred

as of March 31, 2008.

Total other expenses during the three months ended June 30, 2008 decreased $15.4 million to $1.7

million. The primary driver of this decrease was a non-cash gain recognized during the quarter of $43.1

million related to derivative instruments offset by a $27.1 million increase in interest expense. Interest

expense increased as a result of the new post-close capital structure.

Net income for the three months ended June 30, 2008 was $23.1 million, or $0.26 per share on a fully

diluted basis, compared with $10.3 million, or $0.19 per share for the same period in 2007. The variance

in the year-over-year comparison is a result of the items discussed above.

Pro Forma Financial Results

The pro forma statement of operations for the three months ended June 30, 2007 contained in this

earnings release excludes revenues or expenses that were not transferred to FairPoint in connection with

the merger, includes the combination of Legacy FairPoint and Spinco and includes the combined capital

structure of the Company post-merger. For more information about pro forma financial results, including

certain adjustments and assumptions, see the attachments to this press release.

Page 3 of 5

Adjusted EBITDA for the Three Month Period Ended June 30, 2008 (presented on a pro forma

basis)

Adjusted EBITDA (as defined herein) for the three months ended June 30, 2008 was $175 million,

compared with Adjusted EBITDA of $164 million for the same period in the prior year. The increase in

Adjusted EBITDA is primarily due to lower expenses partially offset by lower revenues.

Other Operating Metrics

High speed data (or "HSD") penetration for the combined Company increased to 19.3% of voice access

lines at June 30, 2008, compared with 16.5% at June 30, 2007. HSD penetration within Legacy FairPoint

increased to 31.7%, up from 26.3% at June 30, 2007, reflecting the continued success and momentum

Legacy FairPoint has consistently reported on a quarterly basis for the past several years. This is partly

the result of Legacy FairPoint's significantly higher percentage of homes capable of subscribing to the

Company's HSD offerings, which is a strategy that will be replicated in northern New England.

Voice access lines at June 30, 2008 were 1,525,895, down 10.4% from 1,703,429 reported at June 30,

2007. Legacy FairPoint's access lines decreased at a rate of 6.4%, compared with a rate of decline of

11.1% in northern New England.

Interstate long distance penetration for the combined company at June 30, 2008 increased to 43.0% of

voice access lines compared with 42.4% at June 30, 2007.

Total access line equivalents were 1,820,307 as of June 30, 2008. Total access line equivalents as of

June 30, 2008 decreased 8.3% compared with June 30, 2007 and decreased 2.4% compared with March

31, 2008. Total access line equivalents year-over-year for Legacy FairPoint declined 2.5% compared with

the 9.3% loss in northern New England.

Access Line Equivalents

6/30/2008 3/31/2008

6/30/2007

% change

6/30/07 to

6/30/08

Legacy FairPoint

Residential access lines 176,891 178,659 190,417 (7.1%)

Business access lines 54,619 54,692 56,945 (4.1%)

Wholesale access lines - - - -

Subtotal: access lines 231,510 233,351 247,362 (6.4%)

HSD subscribers 73,326 70,168 65,132 12.6%

Total access line equivalents 304,836 303,519 312,494 (2.5%)

Northern New England

Residential access lines 819,640 851,961 936,766 (12.5%)

Business access lines 358,014 365,307 383,203 (6.6%)

Wholesale access lines 116,731 119,550 136,098 (14.2%)

Subtotal: access lines 1,294,385 1,336,818 1,456,067 (11.1%)

HSD subscribers 221,086 225,410 215,454 2.6%

Total access line equivalents 1,515,471 1,562,228 1,671,521 (9.3%)

Combined total access line

equivalents 1,820,307 1,865,747 1,984,015 (8.3%)

Page 4 of 5

Conference Call and Webcast

As previously announced, FairPoint will host a conference call and simultaneous webcast to discuss its

second quarter results at 5:00 p.m. EDT on August 7, 2008. Participants should call (888) 253-4456

(US/Canada) or (706) 643-3201 (International) and request the FairPoint Communications second quarter

earnings call or Conference ID# 587-444-22. A telephonic replay will be available for anyone unable to

participate in the live call. To access the replay, call (800) 642-1687 and enter the confirmation code 587-

444-22. The recording will be available from August 7, 2008 at 6:00 p.m. (EDT) through August 14, 2008

at 11:59 p.m. (EDT).

A live broadcast of the earnings conference call will be available via the Internet at www.fairpoint.com

under the Investor Relations section. An online replay will be available beginning at 6:00 p.m. (EDT) on

August 7, 2008 and will remain available for one year.

During the conference call, representatives of the Company may discuss and answer one or more

questions concerning the Company's business and financial matters. The responses to these questions

may contain information that has not been previously disclosed.

Non-GAAP Financial Measures

EBITDA (as defined herein) and Adjusted EBITDA are non-GAAP financial measures (i.e., they are not

measures of financial performance under generally accepted accounting principles) and should not be

considered in isolation or as a substitute for consolidated statements of operations and cash flows data

prepared in accordance with GAAP. In addition, the non-GAAP financial measures used by FairPoint

may not be comparable to similarly titled measures of other companies. For definitions of and additional

information regarding EBITDA and Adjusted EBITDA, and a reconciliation of such measures to the most

comparable financial measures calculated in accordance with GAAP, please see the attachments to this

press release.

FairPoint believes EBITDA is useful to investors because EBITDA is commonly used in the

communications industry to analyze companies on the basis of operating performance, liquidity and

leverage. FairPoint believes EBITDA allows a standardized comparison between companies in the

industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies.

Certain covenants in FairPoint's credit facility and the indenture governing its senior notes and the

regulatory orders contain ratios based on Adjusted EBITDA and the restricted payment covenants in such

agreements regulating the payment of dividends on FairPoint's common stock are based on Adjusted

EBITDA. If FairPoint's Adjusted EBITDA were to decline below certain levels, covenants in FairPoint's

credit facility that are based on Adjusted EBITDA may be violated and could cause, among other things, a

default under such credit facility, or result in FairPoint's inability to pay dividends on its common stock.

While FairPoint uses these non-GAAP financial measures in managing and analyzing its business and

financial condition and believes they are useful to its management and investors for the reasons

described above, these non-GAAP financial measures have certain shortcomings. In particular, Adjusted

EBITDA does not represent the residual cash flows available for discretionary expenditures, since items

such as debt repayment and interest payments are not deducted from such measure. FairPoint's

management compensates for the shortcomings of these measures by utilizing them in conjunction with

their comparable GAAP financial measures.

The information in this press release should be read in conjunction with the financial statements and

footnotes contained in FairPoint's Quarterly Report on Form 10-Q to be filed with the Securities and

Exchange Commission. FairPoint's results for the quarter ended June 30, 2008 are subject to the

completion and filing with the Securities and Exchange Commission of its Quarterly Report on Form 10-Q

for such quarter.

Page 5 of 5

About FairPoint

FairPoint Communications, Inc. is an industry leading provider of communications services to

communities across the country. Today, FairPoint owns and operates local exchange companies in 18

states offering advanced communications with a personal touch including local and long distance voice,

data, Internet, television and broadband services. FairPoint is traded on the New York Stock Exchange

under the symbol FRP. Learn more at www.fairpoint.com.

This press release may contain forward-looking statements by FairPoint that are not based on historical

fact, including, without limitation, statements containing the words "expects," "anticipates," "intends,"

"plans," "believes," "seeks," "estimates" and similar expressions and statements. Because these forwardlooking

statements involve known and unknown risks and uncertainties, there are important factors that

could cause actual results, events or developments to differ materially from those expressed or implied by

these forward-looking statements. Such factors include those risks described from time to time in

FairPoint's filings with the Securities and Exchange Commission ("SEC"), including, without limitation, the

risks described in FairPoint's most recent Quarterly Report on Form 10-Q on file with the SEC. These

factors should be considered carefully and readers are cautioned not to place undue reliance on such

forward-looking statements. All information is current as of the date this press release is issued, and

FairPoint undertakes no duty to update this information.

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

Current assets:

Cash $ 11,150 $ -

Restricted cash 13,400 -

Accounts receivable, net 181,066 160,130

Other receivables 37,931 18,579

Materials and supplies 39,749 4,229

Other 50,420 21,180

Deferred income tax, net 22,093 9,730

Short term investments - 37,090

Total current assets 355,809 250,938

Property, plant, and equipment, net 1,884,847 1,628,066

Intangibles assets, net 227,536 2,019

Prepaid pension asset 69,977 36,692

Debt issue costs, net 28,144 -

Other assets 83,071 20,457

Investments 6,938 -

Goodwill 613,945 -

Total assets $ 3,270,267 $ 1,938,172

Current liabilities:

Current portion of long-term debt $ 9,190 $ -

Current portion of capital lease obligations 2,167 2,064

Accounts payable 188,606 175,866

Dividends payable 22,918 -

Accrued interest payable 18,758 -

Interest rate swaps 20,353 -

Other accrued liabilities 76,857 47,115

Total current liabilities 338,849 225,045

Long-term liabilities:

Capital lease obligations 8,196 9,936

Employee benefit obligations 179,882 408,863

Deferred income taxes 251,989 140,911

Unamortized investment tax credits 5,763 5,877

Other long-term liabilities 38,540 28,378

Long-term debt, net of current portion 2,206,777 -

Interest rate swap agreements 11,191 -

Total long-term liabilities 2,702,338 593,965

Minority interest 7 -

Stockholders' equity:

Common stock 890 538

Additional paid-in capital 777,825 484,383

Retained Earnings (470,917) 634,241

Accumulated other comprehensive loss (78,725) -

Total stockholders' equity 229,073 1,119,162

Total liabilities and stockholders' equity $ 3,270,267 $ 1,938,172

June 30,

(unaudited)

Liabilities and Stockholders' Equity

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets Under GAAP

Assets

(Dollars in thousands)

2008 (A)

December 31,

2007 (A)

2008 (A) 2007 (A) 2008 (A) 2007 (A)

Revenues $ 344,690 $ 299,407 $ 627,104 $ 597,356

Operating expenses:

Cost of services and sales, excluding depreciation and amortization 133,900 141,931 269,737 277,646

Selling, general and administrative expense, excluding depreciation and amortization 102,290 65,171 165,406 129,204

Depreciation and amortization 69,741 58,103 123,666 116,001

Total operating expenses 305,931 265,205 558,809 522,851

Income from operations 38,759 34,202 68,295 74,505

Other income (expense):

Interest expense (45,123) (18,026) (59,645) (35,819)

Gain on derivative instruments 43,123 - 43,123 -

Other 264 892 1,250 1,799

Total other expense (1,736) (17,134) (15,272) (34,020)

Income before income taxes 37,023 17,068 53,023 40,485

Income tax expense (13,909) (6,757) (20,366) (15,736)

Net income $ 23,114 $ 10,311 $ 32,657 $ 24,749

Weighted average shares outstanding:

Basic 88,725 53,761 62,077 53,761

Diluted 89,190 53,761 62,483 53,761

Earnings per share:

Basic $ 0.26 $ 0.19 $ 0.53 $ 0.46

Diluted $ 0.26 $ 0.19 $ 0.52 $ 0.46

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations Under GAAP

(Unaudited)

(Dollars in thousands)

Six months ended

June 30,

Three months ended

June 30,

(Dollars in thousands)

2007

Cash flows from operating activities:

Net income $ 32,657 $ 24,749

Adjustments to reconcile net income to net cash provided by

operating activities of continuing operations:

Deferred income taxes 24,489 (11,170)

Provision for uncollectible revenue 7,543 10,059

Depreciation and amortization 123,666 116,001

SFAS 106 post-retirement accruals 29,103 44,993

Gain on derivative instruments (43,123) -

Other non cash items (26,406) (51,673)

Changes in assets and liabilities arising from operations:

Accounts receivable and other current assets (91,970) 3,599

Accounts payable and other accrued liabilities 10,557 (19,142)

Other (16,221) -

Total adjustments 17,638 92,667

Net cash provided by operating activities of continuing operations 50,295 117,416

Cash flows from investing activities of continuing operations:

Acquired cash balance, net 11,552 -

Net capital additions (98,348) (75,437)

Net proceeds from sales of investments and other assets 235 19,489

Net cash used in investing activities of continuing operations (86,561) (55,948)

Cash flows from financing activities of continuing operations:

Loan origination costs (29,238) -

Proceeds from issuance of long-term debt 1,676,000 -

Repayments of long-term debt (687,491) -

Contributions from Verizon 344,629 (61,010)

Restricted cash (80,886) -

Repayment of capital lease obligations (1,637) (458)

Dividends paid to stockholders (1,173,961) -

Net cash provided by (used in) financing activities of continuing operations 47,416 (61,468)

Net increase in cash 11,150 -

Cash, beginning of period - -

Cash, end of period $ 11,150 $ -

Supplemental disclosure of cash flow information:

Non-cash equity consideration $ 316,290 $ -

Non-cash issuance of senior notes 551,000 -

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

(Unaudited)

(Dollars in thousands)

Condensed Consolidated Statements of Cash Flows Under GAAP

Six months ended

June 30,

2008

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Unaudited Pro Forma Combined Statement of Operations (Non-GAAP)

For the Three Months Ended June 30, 2007

(in millions, except per share data)

Northern New

England

business (A)

Legacy FairPoint

(B)

Merger Related

Costs

Pro Forma

Adjustments

Pro Forma

Results for

Combined

Businesses

Revenues $299 70 - (1) (C)$368

Operating expenses:

Cost of services and sales, excluding depreciation and amortization 142 12 (9) (C)(D) 145

Selling, general and administrative expense 65 32 8 (I) (10) (D)(J) 95

Depreciation and amortization 58 12 4 (F) 74

Total operating expenses 265 56 8 (15) 314

Income from operations 34 14 (8) 1 4 54

Other income (expense):

Interest expense (18) (10) - (22) (E)(H) (50)

Interest and dividend income - - - -

Loss on derivative instruments - - - -

Other nonoperating, net 1 49 - (48) (G) 2

Total other expense (17) 39 - (70) (48)

Income before income taxes 17 53 (8) (56) 6

Income tax (expense) benefit (7) (14) 3 (L) 1 9 (L) (2)

Net income $10 39 (5) (37) $4

Basic weighted average shares outstanding 53.8 34.8 88.6

Diluted weighted average shares outstanding 53.8 34.9 88.7

Basic earnings per common share:

Continuing operations $0.19 $0.05

Diluted earnings per common share:

Continuing operations $0.19 $0.05

The accompanying notes are an integral part of these unaudited pro forma combined condensed financial statements.

4

Pro forma

June 30, June 30,

2008 2007

EBITDA (1)

Net Income 23 4

Depreciation and amortization 70 74

Interest expense 45 50

Income taxes 14 2

EBITDA 152 130

(Gain) loss on derivatives(43)-

Estimated quarterly cost savings (3) - 28

Transition services agreement 49 -

Non-cash pension and OPEB 7 6

Other one-time items 10 -

Adjusted EBITDA (2) $ 175 $ 164

(1) EBITDA is defined as net income (loss) before interest expense, provision (benefit) for income taxes,

depreciation and amortization.

(2) Adjusted EBITDA is defined as EBITDA adjusted to exclude unusual or one-time non-recurring items,

non-cash items and other adjustments and to include anticipated cost savings related to the merger

and other adjustments.

(3) Represents the quarterly run-rate cost savings as a result of the merger, which FairPoint expected to achieve

following the termination of the Transition Services Agreement which is expected to occur in November 2008.

These cost savings relate to the elimination of approximately $390 million (based on

full year 2007 results) in annual costs and expenses, primarily consisting of shared corporate expenses allocated to the Northern

New England business by Verizon. FairPoint believes that it can perform the corporate services provided by Verizon at a cost that is

substantially less than that which was historically allocated to the Northern New England business. These costs will be

replaced by (i) certain increased costs of approximately $254 million annually, (ii) the elimination of $18 million of annual

revenue as a result of rate adjustments in Maine and (iii) the elimination of $6 million of annual revenue as a result of

anticipated reductions in access charges in the future if a proceeding that is currently before the New Hampshire Public

Utilities commission is decided adversely. There can be no assurances that these or any other cost savings will actually be realized.

Three Months Ended

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Unaudited Reconciliation of Net Income under GAAP to Pro Forma Adjusted EBITDA (Non-GAAP)

(in millions)

Pro Forma Pro Forma

Three months Three months

Three Months Ended Ended

Ended March 31, 2008 June 30, 2007

June 30, 2008 (A) (A)

Local calling services $ 141,803 $145,316 $ 156,357

Interstate access 84,885 87,187 89,979

Intrastate access 14,613 16,007 16,989

Long distance services 49,090 48,624 51,205

Data and Internet services 30,552 30,653 28,928

Universal Service Fund high-cost loop 9,692 9,682 10,059

Other services 14,055 12,372 14,786

Total revenue $ 344,690 $ 349,841 $ 368,303

(A) Pro forma revenues for the three months ended March 31, 2008 and June 30, 2007 assume the acquisition

of Legacy FairPoint occurred on January 1, 2007. Legacy FairPoint revenues are not included in the total

revenue reported under GAAP for the three months ended March 31, 2008, which period was prior

to the consummation of the merger.

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES

Revenue Detail (unaudited)

(in thousands)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

STATEMENTS AND UNAUDITED PRO FORMA COMBINED FINANCIAL

STATEMENTS

(A) On March 31, 2008, FairPoint completed a merger with Spinco, pursuant to which Spinco

merged with and into FairPoint with FairPoint continuing as the surviving corporation for

legal purposes. Spinco was a wholly-owned subsidiary of Verizon and prior to the merger

Verizon and its subsidiaries transferred certain specified assets and liabilities of the local

exchange business of Verizon New England in Maine, New Hampshire and Vermont and the

customers of the related long distance and Internet service provider business in those states to

subsidiaries of Spinco. The merger was accounted for as a "reverse acquisition" and,

therefore, Spinco is treated as the acquirer for accounting purposes. As a result, for the three

months ended June 30, 2008, the statement of operations and the financial information

derived from the statement of operations as reported under GAAP reflects the financial

results of FairPoint beginning April 1, 2008 and of the Northern New England business for

the six months ended June 30, 2008. The balance sheet and financial information derived

from the balance sheet reflect the combined assets and liabilities of Legacy FairPoint and

Spinco at June 30, 2008. Certain assets and liabilities of the Northern New England business

(principally related to pension, other post-employment benefits and associated deferred taxes)

were not distributed to Spinco in the merger and were effectively contributed back to

Verizon. The statement of operations as reported under GAAP may not be indicative of

Spinco's and FairPoint's future results (after giving effect to the merger).

All results presented herein prior to March 31, 2008 represent the historical financial results of

the Northern New England business and represent special-purpose combined financial

statements prepared to present the balance sheets, statement of operations and cash flows of the

Northern New England business in contemplation of a proposed merger with Legacy FairPoint

and related transactions. These special-purpose combined financial statements were prepared in

accordance with U.S. generally accepted accounting principles. Prior to March 31, 2008, these

financial statements were prepared using specific information where available and allocations

where data was not maintained on a state-specific basis within the Northern New England

business' books and records.

The special-purpose combined financial statements include the wireline-related businesses,

Internet access, long distance and customer premises equipment services provided by the

Northern New England business to customers in the states of Maine, New Hampshire and

Vermont. All significant intercompany transactions have been eliminated. These specialpurpose

combined financial statements also included the assets, liabilities and expenses related

to employees who support the Northern New England business, some of whom remained

employees of Verizon following the merger.

(B) To reflect operating results recognized by FairPoint for the three months ended June 30, 2007

as if the merger had occurred as of January 1, 2007.

(C) This adjustment reflects revenues and related expenses associated with VoIP and wireless

directory assistance services which were not transferred to Spinco. For the three months

ended June 30, 2007, the Northern New England business recorded approximately $1 million

in revenue and $1 million in expenses, associated with VoIP and wireless directory assistance

services. In addition, it reflects certain revenues and related expenses associated with

customers of VSSI-CPE that were not transferred to Spinco.

(D) This adjustment reflects the reduction in pension and OPEB expense of $10 million for the

three months ended June 30, 2007 for the Northern New England business, determined using

an actuarial study of employees to eliminate the pension and OPEB expenses that were not

transferred to Spinco. Of the $10 million adjustment for the three months ended June 30,

2007, $8 million was included in cost of services and sales and $2 million was included in

selling, general and administrative expenses.

(E) This adjustment reflects the removal of allocated interest expense of $18 million recorded by

the Northern New England business during the three month period ended June 30, 2007

associated with affiliate notes payable and long-term debts held by Verizon.

(F) This adjustment reflects the amortization of the finite-lived identifiable intangible assets

recorded in this transaction. The weighted average estimated life of FairPoint's customer

relationships is estimated to be 9.7 years and amortization expense is $4 million for the three

months ended June 30, 2007.

(G) This adjustment to other non-operating income includes the $2 million elimination of

FairPoint's equity in net earnings of investors in the Orange County - Poughkeepsie Limited

Partnership and the associated gain on the sale of the investment. In April 2007, FairPoint

sold this investment to Verizon Wireless and another third party for $55 million.

(H) This adjusts reported interest expense to the pro forma interest expense to be recognized on

the debt structure of the combined company following the spin-off and merger. The

adjustment considers (1) the interest expense for the three months ended June 30, 2007

recognized on the newly issued debt of the combined company, (2) the amortization of

capitalized debt issuance costs associated with the newly issued debt, and (3) the elimination

of interest expense and amortization of debt issuance costs related to the debt of Legacy

FairPoint that was repaid upon consummation of the merger.

(I) This adjustment is to separate certain merger related costs incurred by Legacy FairPoint prior

to the merger. These costs consist of various transition and transaction related costs required

to close the merger, hire new employees and begin the transition process.

(J) This adjustment is to eliminate the merger related costs discussed in (I) above of $8 million

incurred by Legacy FairPoint prior to the consummation of the merger during the three

months ended June 30, 2007 which were directly related to the merger and related

transactions.

(K) This adjustment consists of fees and charges incurred in connection with the closing of the

spin-off and merger, principally including investment banking fees, write-off of debt issuance

costs on Legacy FairPoint's old credit facility and other costs incurred at the closing of the

merger.

(L) This adjustment reflects the income tax impact on adjustments described above.