FairPoint Communications 2005 Annual Report Download - page 46

Operating Expenses
 Operating expenses increased $12.3 million to $141.1 million
in 2005 compared to 2004. Of the increase, $9.3 million is related to our existing operations and $3.0 million is related to expenses of the acquired operations in
2005. Consulting fees increased $1.8 million primarily related to preparation for compliance with Section 404 of the Sarbanes-Oxley Act. Expenses related to
high speed data and long distance services increased $2.3 million principally due to the increase in HSD and long distance subscribers. Bad debt expense was
$1.4 million higher in 2005 than 2004 due primarily to difficulties experienced in our billing conversion related to the delay of non-pay disconnect notices.
Billing costs have increased $2.0 million as we incurred costs associated with the conversion of our billing systems into an integrated platform and recurring
expenses from our outsourced billing service provider. The balance of the increase is attributable to smaller miscellaneous items.
 Depreciation and amortization from continuing operations increased $2.1 million to $52.4 million in 2005 from
$50.3 million in 2004. The Berkshire and Bentleyville acquisitions accounted for $1.0 million of the increase and the remaining increase was attributable to
the increased investment in our communications network for existing operations.
 For the year ended December 31, 2005, stock based compensation increased $2.3 million to $2.4 million in 2005
primarily due to the issuance of restricted stock and restricted units to certain key employees and directors under the 2005 Stock Incentive Plan.
 Income from operations decreased $6.5 million to $67.0 million in 2005 compared to 2004. This decrease is principally due
to the increase in expenses discussed above.
 Total other expense increased $24.2 million to $121.6 million in 2005 from $97.4 million in 2004. Interest expense decreased
$57.9 million to $46.4 million in 2005 mainly due to the transactions associated with the offering which substantially de-leveraged us and provided a
decrease in interest expense. In addition, in connection with the offering we repurchased our series A preferred stock (together with accrued and unpaid
dividends thereon) which eliminated dividends and accretion on our series A preferred stock for the twelve months ended December 31, 2005. The dividends
and accretion on our series A preferred stock were being reported as interest expense under SFAS 150. In connection with the offering, we also refinanced our
old credit facility and repurchased and/or redeemed the 9 2% notes, the floating rate notes, the 12 2% notes and the 11 8% notes, which resulted in
significant charges of $87.7 million due to fees and penalties paid on the repurchase/redemption and for the write-off of unamortized debt issuance costs.
Earnings from equity investments increased $0.4 million to $11.3 million in 2005. For the twelve months ended December 31, 2004, other non-operating
income (expense) includes the write-off of debt issuance and offering costs of $6.0 million associated with an abandoned offering of Income Deposit Securities.
 In 2005, income tax benefits of $83.1 million are primarily the result of the recognition of deferred tax benefits of $66.0 million
from the reversal of the deferred tax valuation allowance that resulted from our expectation of generating future taxable income following the recapitalization.
The income tax benefit for 2005 also includes deferred tax benefits of $29.3 million related to the extinguishment of debt and $1.6 million for an adjustment of
our net deferred tax assets to an expected federal income tax rate of 35% from 34%, in anticipation of higher levels of taxable income in subsequent periods.
These benefits were partially offset by income tax expense associated with taxable income generated following the recapitalization. During the twelve months
ended December 31, 2004, the income tax expense related primarily to income taxes owed in certain states.
 During the twelve months ended December 31, 2005 and 2004, we recorded a reduction to our liability associated with the
discontinuation of our competitive local exchange carrier
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