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Press Release -- November 4th, 2010
Source: PAETEC
Tags: Consolidation, Equipment, Exchange, Expansion, Merger, Metro Fiber

PAETEC Holding Corp. Announces Third Quarter 2010 Results

FAIRPORT, N.Y.--(BUSINESS WIRE)-- PAETEC Holding Corp. (NASDAQ GS: PAET) today announced third quarter 2010 financial and operating results. “The third quarter marked solid growth for PAETEC,” said Arunas A. Chesonis, chairman and CEO. “In addition to sequential and year-over-year revenue growth, we opened two new data centers and announced the planned acquisition of Cavalier Telephone which will add over 17,000 new route miles of fiber to our network.” Financial results for third quarter 2010 included the following:

  • Revenue of $408.4 million;
  • Adjusted EBITDA* of $62.2 million;
  • Net loss of $14.8 million;
  • Free cash flow* of $28.2 million, which represented the 31st consecutive quarter in which PAETEC or its predecessor generated positive free cash flow;
  • Net cash provided by operating activities of $41.6 million; and
  • Cash, cash equivalents and short term investments of $125.3 million at September 30, 2010.

Quarterly Results – Third Quarter 2010 Compared to Third Quarter 2009

Revenue

  • Total revenue of $408.4 million increased 3.2% or $12.8 million for third quarter 2010 from third quarter 2009, primarily due to the inclusion of revenue from recently acquired companies.
  • Core network services revenue decreased 2.3% or $6.5 million to $280.6 million for third quarter 2010 from third quarter 2009 due to lower usage-based revenue and continued rate compression.
  • Core carrier services revenue for third quarter 2010 was relatively stable at $45.0 million compared to third quarter 2009.
  • Integrated solutions revenue of $37.5 million for third quarter 2010 increased $21.3 million over third quarter 2009, primarily due to the growth in equipment sales and energy services as a result of PAETEC's February 28, 2010 acquisition of U.S. Energy Partners and June 7, 2010 acquisition of Quagga Corporation.

Adjusted EBITDA and Margins

Adjusted EBITDA for third quarter 2010 declined 3.2% to $62.2 million from adjusted EBITDA of $64.2 million for third quarter 2009. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, decreased to 15.2% for third quarter 2010 from 16.2% for third quarter 2009.

Cost of goods sold for third quarter 2010 was $206.3 million, representing an increase of $11.8 million or 6.1% from third quarter 2009. The increase in cost of goods sold for third quarter 2010 was a result of an approximate $3.0 million increase in special access rates and associated unbundled network element ("UNE") migration costs, higher costs associated with equipment sales from Quagga, and substantially higher costs associated with the resale of energy services. As a result of higher costs, gross margin for third quarter 2010 decreased to 49.5% from 50.8% in third quarter 2009.

Selling, general, and administrative ("SG&A") expenses for third quarter 2010 were $142.5 million, including stock-based compensation of $2.7 million, which represents an increase of 1.2% or $1.6 million from third quarter 2009. The increase in cost was primarily due to higher staffing levels in PAETEC's sales force and the additional headcount from the Quagga acquisition. As a percentage of total revenue, SG&A expenses were 34.9% for third quarter 2010 compared to 35.6% for third quarter 2009.

Net Loss

Net loss for third quarter 2010 was $14.8 million compared to net loss of $6.5 million for third quarter 2009. The net loss for third quarter 2010 included $3.7 million of acquisition costs and $3.2 million of additional interest expense.

Interest expense for third quarter 2010 increased to $23.0 million from $19.8 million for third quarter 2009. The increase in interest expense was primarily due to higher weighted average interest rates following PAETEC’s January 2010 issuance of $300.0 million of additional 8 ⅞% senior secured notes due 2017.

Sequential Results - Third Quarter 2010 Compared to Second Quarter 2010

Revenue

  • Total revenue of $408.4 million for third quarter 2010 increased 3.1% or $12.3 million from second quarter 2010, primarily due to the full quarter inclusion of results from Quagga and the rapid growth in the resale of energy services.
  • Core network services revenue declined 1.5% or $4.2 million for third quarter 2010 from second quarter 2010 primarily due to a decline in usage-based revenue and the continued compression associated with IP conversion.
  • Core carrier services revenue of $45.0 million for third quarter 2010 was stable from second quarter 2010.
  • Integrated solutions revenue of $37.5 million for third quarter 2010 increased 64.8% or $14.8 million from second quarter 2010, primarily due to the inclusion of a full quarter of results from Quagga and growth in the resale of energy services.

Adjusted EBITDA and Margins

Adjusted EBITDA of $62.2 million for third quarter 2010 declined 4.5% or $2.9 million from $65.1 million for second quarter 2010. Adjusted EBITDA margin was 15.2% for third quarter 2010 compared to 16.4% for second quarter 2010, primarily due to higher cost of goods sold and SG&A expenses.

Third quarter 2010 cost of goods sold increased 4.9% or $9.6 million from second quarter 2010. The sequential increase in costs was associated with the increase in special access rates and UNE migration costs and the full quarter impact of costs associated with Quagga equipment sales. As a result of the higher costs, gross margin decreased to 49.5% for third quarter 2010 from 50.3% for second quarter 2010.

SG&A expenses for third quarter 2010 were $142.5 million, including stock-based compensation of $2.7 million, and increased 4.2% or $5.7 million from second quarter 2010. As a percentage of total revenue, SG&A expenses were 34.9% for third quarter 2010 compared to 34.5% for second quarter 2010. Increases in SG&A were primarily attributable to the recent acquisition of Quagga and additional staffing levels.

Net Loss

Net loss for third quarter 2010 increased to $14.8 million from a net loss of $7.5 million for second quarter 2010. The net loss for third quarter 2010 primarily reflected higher SG&A expenses and $3.7 million of acquisition costs.

Capital Expenditures

Capital expenditures for third quarter 2010 were $34.0 million, or 8.3% of total revenue, compared to $27.7 million, or 7.0% of total revenue, for third quarter 2009. Capital expenditures for third quarter 2010 were largely applied to PAETEC’s network, including investments in our fiber infrastructure and network enhancements in specific markets to support growth, facility improvements, and the continued expansion of PAETEC’s data center portfolio.

Capital expenditures for third quarter 2010 increased 8.3% or $2.6 million from $31.4 million for second quarter 2010, primarily due to timing of certain network investments. Capital expenditures as a percentage of total revenue for second quarter 2010 were 7.9%.

Cash Flow and Liquidity

PAETEC had cash, cash equivalents and short term investments of $125.3 million on September 30, 2010 compared to a June 30, 2010 balance of cash, cash equivalents and short term investments of $125.6 million. Cash flow provided by operations increased to $41.6 million in third quarter 2010 from $40.8 million in third quarter 2009. Free cash flow for third quarter 2010 was $28.2 million, which represented a $5.5 million decrease from second quarter 2010 and was the company's 31st consecutive quarter of positive free cash flow generation.

Indebtedness

At September 30, 2010, PAETEC had $950.0 million in debt outstanding under its senior notes, which was comprised of $650.0 million principal amount of 8⅞% senior secured notes due 2017 and $300.0 million principal amount of 9.5% senior unsecured notes due 2015.

At September 30, 2010, PAETEC also had a senior secured revolving credit facility under which no revolving loans were outstanding and under which PAETEC could obtain from time to time revolving loans of up to an aggregate principal amount of $50.0 million.

Common Stock Repurchase Program

PAETEC repurchased a total of 1,463,100 shares of common stock for an aggregate cost of $5.8 million, or $3.97 average cost per share, in third quarter 2010. Since August 2008, PAETEC has repurchased approximately 10.4 million shares of common stock for an aggregate price of approximately $2.75 per share under its current and previous stock repurchase programs.

Acquisition

On September 13, 2010 PAETEC announced its definitive merger agreement to acquire Cavalier Telephone Corporation, based in Richmond, Virginia, in an all-cash $460.0 million transaction. Cavalier is a privately held company with over 570 collocations and approximately 17,000 fiber route miles in PAETEC's existing service footprint. When completed, the transaction will make PAETEC one of the largest competitive communication providers in the U.S. Highlights of the transaction are the following:

  • The combined company will have over 37,000 fiber route miles, of which approximately 10,600 are metro fiber route miles.
  • The combined company will have nearly 1,178 collocations and have presence in 86 of the top 100 metropolitan statistical areas.
  • Expected synergies, which include expected annualized savings of $25.0 million in the first 12 months following the close of the acquisition and expected annual cost savings of $30.0 million beginning the first 12 months thereafter.

On a pro forma basis for PAETEC and Cavalier, assuming the acquisition had occurred on January 1, 2009, third quarter 2010 revenue would have been $500.4 million, an increase of 1.3% or $6.3 million over third quarter 2009 revenue of $494.2 million. Pro forma gross margin for third quarter 2010 would have been 50.8% compared to 51.8% for third quarter 2009. For third quarter 2010 pro forma adjusted EBITDA would have been $83.9 million, a decrease of 3.6% from third quarter 2009 pro forma adjusted EBITDA of $87.0 million. Pro forma net loss for third quarter 2010 would have been $19.0 million compared to third quarter 2009 pro forma net loss of $16.8 million.

On a pro forma basis for PAETEC and Cavalier, assuming the acquisition had occurred on January 1, 2009, third quarter 2010 revenue would have been $500.4 million, an increase of 2.4% or $11.5 million from second quarter 2010 revenue of $488.9 million. Pro forma gross margin for third quarter 2010 would have been 50.8% compared to 51.7% for second quarter 2010. For third quarter 2010 pro forma adjusted EBITDA would have been $83.9 million, a decrease of 4.6% from second quarter 2010 pro forma adjusted EBITDA of $87.9 million. Pro forma net loss for third quarter 2010 would have been $19.0 million compared to second quarter 2010 pro forma net loss of $12.8 million.

Full Year 2010 Outlook

“We reaffirm our full year 2010 guidance,” said Keith Wilson, PAETEC’s chief financial officer.

PAETEC’s revenue and adjusted EBITDA expectations for the full year 2010 assume, among other matters, that there is no further significant decline in economic conditions and that there are no significant changes in the competitive or regulatory environments. PAETEC’s revenue and adjusted EBITDA expectations for full year 2010 are as follows:

($ in millions)
Revenue $1,590 to $1,630
Adjusted EBITDA $260 to $275

Conference Call

As previously announced, PAETEC will host a conference call today at 9:00 a.m. ET to discuss third quarter 2010 results. Chairman and CEO Arunas Chesonis and Chief Financial Officer Keith Wilson will be participating. A live webcast and a replay of the call will be available on the Investors page at www.paetec.com.

Conference Call details are as follows:
US/Canada Dial in: (866) 783-2137
International: (857) 350-1596
Passcode: 71351853
Audio Webcast:
Replay details are as follows:
Replay Dates: November 5, 2010, 12:30 p.m. ET through November 18, 2010
US/Canada Replay Dial in: (888) 286-8010
International Replay Dial in (617) 801-6888
Replay Passcode: 69773066
Audio Replay Webcast:

Supplemental Information

A supplemental presentation of information complementary to the information presented in this release and that will be discussed on the conference call will be made available on the Investors portion of www.paetec.com prior to the conference call.

Forward-Looking Statements

Except for statements that present historical facts, this release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would,” or similar expressions. The financial guidance in this press release with respect to revenue and adjusted EBITDA for full year 2010 constitutes “forward-looking statements” and reflects PAETEC’s current analysis of existing trends and information. These statements represent PAETEC’s judgment only as of the date of this press release. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause PAETEC’s actual operating results, financial position, levels of activity or performance to be materially different from those expressed or implied by such forward-looking statements. The risks include those related to PAETEC's acquisition and integration of Cavalier, such as: PAETEC's ability to realize the anticipated benefits of the acquisition; PAETEC's ability to integrate the operations of Cavalier without greater than expected costs and burdens on management; PAETEC's receipt of required regulatory approvals without burdensome conditions; and PAETEC's ability to continue successfully to execute its acquisition strategy. Some of the other risks, uncertainties and factors are discussed under the caption “Risk Factors” in PAETEC’s 2009 Annual Report on Form 10-K and in PAETEC’s subsequently filed SEC reports. They include, but are not limited to, the following risks, uncertainties and other factors: general economic conditions and trends; the continued availability of necessary network elements at acceptable cost from competitors; changes in regulation and the regulatory environment; industry consolidation; PAETEC’s ability to manage its business effectively; competition in the markets in which PAETEC operates; failure to adapt product and service offerings to changes in customer preferences and in technology; PAETEC’s ability to integrate the operations of acquired businesses; PAETEC’s ability to implement its acquisition strategy; any significant impairment of PAETEC’s goodwill; future sales of PAETEC’s common stock in the public market and PAETEC’s ability to raise capital in the future; interest rate risks and compliance with covenants under PAETEC’s debt agreements; PAETEC’s ability to attract and retain qualified personnel and sales agents; PAETEC’s failure to obtain and maintain network permits and rights-of-way; PAETEC’s involvement in disputes and legal proceedings; PAETEC’s ability to maintain and enhance its back office systems; and effects of network failures, system breaches, natural catastrophes and other service interruptions. PAETEC disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

About PAETEC

PAETEC (NASDAQ GS: PAET) is personalizing business communications for medium-sized and large businesses, enterprise organizations, and institutions across the United States. We offer a comprehensive suite of IP, voice, data and Internet services, as well as enterprise communications management software, network security solutions, CPE, and managed services. For more information, visit www.paetec.com.

* Neither adjusted EBITDA nor free cash flow is a measurement of financial performance under accounting principles generally accepted in the United States, or "GAAP." Adjusted EBITDA, as defined by PAETEC for the periods presented, represents net loss before depreciation and amortization, interest expense, provision for (benefit from) income taxes, stock-based compensation, debt extinguishment and related costs, acquisition, integration and separation costs, sales and use tax settlement, and gain on non-monetary transaction. Free cash flow, as defined by PAETEC, consists of adjusted EBITDA less capital expenditures (purchases of property and equipment). See the accompanying tables for additional information as to PAETEC’s reasons for including these measures, for a quantitative reconciliation of adjusted EBITDA to net loss, as net loss is calculated in accordance with GAAP, and for a quantitative reconciliation of free cash flow to net cash provided by operating activities, as net cash provided by operating activities is calculated in accordance with GAAP.

PAETEC Holding Corp. and Subsidiaries
Consolidated Statements of Operations
(in thousands)
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2010 2010 2009 2010 2009
Revenue:
Network services revenue $ 305,799 $ 310,242 $ 315,859 $ 926,515 $ 945,881
Carrier services revenue 65,111 63,088 63,536 191,242 199,066
Integrated solutions revenue 37,524 22,770 16,257 76,828 45,116
Total revenue 408,434
396,100
395,652 1,194,585 1,190,063
Cost of sales (exclusive of operating items shown separately below) 206,339 196,784 194,532 595,872 590,374
Selling, general and administrative expenses (exclusive of operating items shown separately below and inclusive of stock-based compensation) 142,542 136,803 140,894 413,605 422,471
Acquisition, integration and separation costs 3,724 - - 3,724 -
Sales and use tax settlement - - - - (1,200 )
Depreciation and amortization 47,261 47,439 46,374 141,873 138,746
Income from operations 8,568 15,074 13,852 39,511 39,672
Debt extinguishment and related costs - - - 4,423 10,348
Other income, net (98 ) (150 ) (156 ) (360 ) (928 )
Interest expense 23,021 22,600 19,776 67,658 54,300
Loss before income taxes (14,355 ) (7,376 ) (5,768 ) (32,210 ) (24,048 )
Provision for (benefit from) income taxes 400 152 757 (389 ) 2,270
Net loss $ (14,755 ) $ (7,528 ) $ (6,525 ) $ (31,821 ) $ (26,318 )
Net cash provided by operating activities $ 86,373 $ 90,142
Net cash used in investing activities $ (121,081 ) $ (84,218 )
Net cash provided by (used in) financing activities $ 6,402 $ (28,923 )
PAETEC Holding Corp. and Subsidiaries
Adjusted EBITDA Reconciliation
(in thousands)
Adjusted EBITDA, as defined by PAETEC for the periods presented, represents net loss before depreciation and amortization, interest expense, provision for (benefit from) income taxes, stock-based compensation, acquisition, integration and separation costs, debt extinguishment and related costs, sales and use tax settlement, and gain on non-monetary transaction. PAETEC's adjusted EBITDA is not a financial measurement prepared in accordance with United States generally accepted accounting principles, or "GAAP." Adjusted EBITDA is used by PAETEC's management, together with financial measurements prepared in accordance with GAAP such as net loss and revenue, to assess PAETEC's historical and prospective operating performance. Management uses adjusted EBITDA to enhance its understanding of PAETEC's core operating performance, which represents management's views concerning PAETEC's performance in the ordinary, ongoing and customary course of its operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Overview — Adjusted EBITDA Presentation" in PAETEC's annual report on Form 10-K for the year ended December 31, 2009 for additional information regarding PAETEC's reasons for including adjusted EBITDA and for material limitations with respect to the usefulness of this measurement. The table below sets forth, for the periods indicated, a reconciliation of adjusted EBITDA to net loss, as net loss is calculated in accordance with GAAP:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2010 2010 2009 2010 2009
Net loss $ (14,755 ) $ (7,528 ) $ (6,525 ) $ (31,821 ) $ (26,318 )
Add back non-EBITDA items included in net loss:
Depreciation and amortization 47,261 47,439 46,374 141,873 138,746
Interest expense, net of interest income 22,914 22,453 19,628 67,331 53,499
Provision for (benefit from) income taxes 400 152 757 (389 ) 2,270
EBITDA 55,820 62,516 60,234 176,994 168,197
Stock-based compensation 2,651 2,593 4,022 7,706 14,583
Acquisition, integration and separation costs 3,724 - - 3,724 -
Debt extinguishment and related costs - - - 4,423 10,348
Sales and use tax settlement - - - - (1,200 )
Gain on non-monetary transaction - - (18 ) - (242 )
Adjusted EBITDA $ 62,195 $ 65,109 $ 64,238 $ 192,847 $ 191,686
PAETEC Holding Corp. and Subsidiaries
Expected Adjusted EBITDA Reconciliation
(in millions)
The table below sets forth, for the period indicated, a reconciliation of expected adjusted EBITDA to expected net loss, as net loss is calculated in accordance with GAAP:
Twelve Months Ending
Twelve Months Ending
December 31,
December 31,
2010 2010
Low End of Guidance
High End of Guidance
Expected net loss $ (43 ) $ (28 )
Add back non-EBITDA items included in expected net loss:
Depreciation and amortization 190 190
Interest expense, net of interest income 90 90
Provision for income taxes 5 5
Expected EBITDA 242 257
Stock-based compensation 13 13
Debt extinguishment and related costs 5 5
Expected adjusted EBITDA $ 260 $ 275
PAETEC Holding Corp. and Subsidiaries
Free Cash Flow Calculation and Reconciliation
(in thousands)
Free cash flow, as defined by PAETEC, consists of adjusted EBITDA less capital expenditures (purchases of property and equipment). Free cash flow, as defined by PAETEC, is not a financial measurement prepared in accordance with GAAP.
PAETEC has included data with respect to free cash flow because its management believes free cash flow provides a measure of the cash generated by PAETEC’s operations before giving effect to non-cash accounting charges, changes in operating assets and liabilities, acquisition-related items, tax items and similar items that do not directly relate to the day-to-day cash expenses of PAETEC’s operations, and after giving effect to application of capital expenditures. PAETEC’s management uses free cash flow to monitor the effect of PAETEC’s daily operations on its cash reserves and its ability to generate sufficient cash flow to fund PAETEC’s scheduled debt maturities and other financing activities, including potential refinancings and retirements of debt, and other cash items.
PAETEC’s management believes that consideration of free cash flow should be supplemental, however, because free cash flow has limitations as an analytical financial measure. These limitations include the following:
· free cash flow does not reflect PAETEC’s cash expenditures for scheduled debt maturities and other fixed obligations, such as capital leases, vendor financing arrangements and the other cash items excluded from free cash flow; and
· free cash flow may be calculated in a different manner by other companies in PAETEC’s industry, which limits its usefulness as a comparative measure.
PAETEC’s management compensates for these limitations by relying primarily on PAETEC's results under GAAP to evaluate its operating performance and by considering independently the economic effects of the foregoing items that are not reflected in free cash flow. As a result of these limitations, free cash flow should not be considered as an alternative to net cash provided by operating activities, investing activities, financing activities or changes in cash and cash equivalents as calculated in accordance with GAAP, nor should it be used as a measure of the amount of cash available for debt service or for the payment of dividends or other discretionary expenditures.
Following is a reconciliation of free cash flow to net cash provided by operating activities, as net cash provided by operating activities is calculated in accordance with GAAP:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
2010 2010 2009 2010 2009
Adjusted EBITDA (see previous page) $ 62,195 $ 65,109 $ 64,238 $ 192,847 $ 191,686
Purchases of property and equipment (34,013 ) (31,397 ) (27,737 ) (94,884 ) (84,914 )
Free cash flow, as defined 28,182 33,712 36,501 97,963 106,772
Purchases of property and equipment 34,013 31,397 27,737 94,884 84,914
Interest expense, net of interest income (22,914 ) (22,453 ) (19,628 ) (67,331 ) (53,499 )
Other (520 ) (228 ) (752 ) (1,928 ) (2,234 )
Acquisition, integration and separation costs (3,724 ) - - (3,724 ) -
Swap termination payment - - - - (4,531 )
Bad debt expense 2,964 2,985 3,805 10,090 13,548
Amortization of debt issuance costs 1,221 697 584 2,577 1,610
Amortization of debt discount 325 324 495 977 1,043
Changes in operating assets and liabilities 2,077 (9,513 ) (7,930 ) (47,135 ) (57,481 )
Net cash provided by operating activities $ 41,624 $ 36,921 $ 40,812 $ 86,373 $ 90,142
PAETEC Holding Corp. and Subsidiaries
Selected Financial and Operating Data
As of
As of
September 30, 2010 December 31, 2009
Financial Data (in thousands):
Cash and cash equivalents $ 124,582 $ 152,888
Short term investments $ 698 $ -
Accounts receivable, net $ 221,643 $ 201,308
Property and equipment, net $ 627,952 $ 619,048
Accounts payable $ 68,558 $ 63,528
Other accrued expenses $ 138,342 $ 146,781
Current portion of long-term debt and capital lease obligations $ 16,986 $ 4,786
Long-term debt and capital lease obligations $ 967,878 $ 921,271
Operating Data
Geographic markets served (1) 84 84
Number of switches deployed 122 122
Total digital T1 transmission lines installed 247,325 229,253
Total access line equivalents installed (2) 6,174,330 5,852,606
Total employees 3,792 3,693
(1) In the top 100 metropolitan statistical areas
(2) Includes Plain Old Telephone Service ("POTS"), which involves basic telephone services supplying standard single line telephones, telephone lines and access to the public switched network.
PAETEC Holding Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
(Based on combination of historical results of PAETEC and Cavalier) (1)
(in thousands)
Three Months Ended
September 30, June 30, September 30,
2010 2010 2009
Total revenue $ 500,412 $ 488,869 $ 494,156
Cost of sales (exclusive of operating items shown separately below) 246,169 236,288 238,259
Selling, general and administrative expenses
(exclusive of operating items shown separately
below and inclusive of stock-based
compensation) 173,065 167,306 173,171
Acquisition, integration and separation costs 1,728 134 -
Depreciation and amortization 66,374 66,614 67,460
Income from operations 13,076 18,527 15,266
Other income, net (126 ) (161 ) (141 )
Interest expense 31,763 31,342 31,467
Loss before income taxes (18,561 ) (12,654 ) (16,060 )
Provision for income taxes 400 152 757
Net loss $ (18,961 ) $ (12,806 ) $ (16,817 )
(1) The pro forma results for the periods presented above, give effect to PAETEC’s proposed acquisition of Cavalier as if it had occurred on January 1, 2009. The pro forma information is not necessarily indicative of what the combined companies’ results of operations actually would have been if the merger had been completed on the date indicated.
PAETEC Holding Corp. and Subsidiaries
Pro Forma Adjusted EBITDA Reconciliation
(in thousands)
Pro forma adjusted EBITDA, as defined by PAETEC for the periods presented, represents net loss before depreciation and amortization, interest expense, provision for income taxes, stock-based compensation, acquisition, integration and separation costs, and gain on non-monetary transaction. PAETEC’s adjusted EBITDA is not a financial measurement prepared in accordance with United States generally accepted accounting principles, or “GAAP.” Adjusted EBITDA is used by PAETEC’s management, together with financial measurements prepared in accordance with GAAP such as net loss and revenue, to assess PAETEC’s historical and prospective operating performance. Management uses adjusted EBITDA to enhance its understanding of PAETEC’s core operating performance, which represents management’s views concerning PAETEC’s performance in the ordinary, ongoing and customary course of its operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Adjusted EBITDA Presentation” in PAETEC’s annual report on Form 10-K for the year ended December 31, 2009 for additional information regarding PAETEC’s reasons for including adjusted EBITDA and for material limitations with respect to the usefulness of this measurement. The table below sets forth, for the period indicated, a reconciliation of pro forma adjusted EBITDA to pro forma net loss, as pro forma net loss is calculated in accordance with GAAP:
Three Months Ended
September 30, June 30, September 30,
2010 2010 2009
Pro Forma:
Net loss $ (18,961 ) $ (12,806 ) $ (16,817 )
Add back non-EBITDA items included in net loss:
Depreciation and amortization 66,374 66,614 67,460
Interest expense, net of interest income 31,637 31,187 31,309
Provision for income taxes 400 152 757
EBITDA 79,450 85,147 82,709
Stock-based compensation 2,687 2,628 4,303
Acquisition, integration and separation costs 1,728 134 -
Gain on non-monetary transaction - - (18 )
Adjusted EBITDA $ 83,865 $ 87,909 $ 86,994

Contact:

PAETEC
Media
Chris Muller, 585-340-8218
christopher.muller@paetec.com
or
Investors
Pete Connoy, 585-340-2649
peter.connoy@paetec.com

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